Taxation Laws Amendment Bill [B34-2012] 2012: public hearings

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Finance Standing Committee

21 August 2012
Chairperson: Mr D van Rooyen (ANC) (Acting)
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Meeting Summary

PricewaterhouseCoopers (PwC) presenting on legislative process, proposals welcomed, and its concerns about: legal privilege, hybrid debt, value mismatches, suspended interest and royalty deductions, participation exemption, and exit charge. It criticised the unrealistic time frame for taxpayers to respond to the Standing Committee on Finance and for the legislature to consider proposals. There was no opportunity for public review of National Treasury/South African Revenue Service (SARS) responses. PwC's concern had been recognised, but not yet addressed from previous years’ submissions. The situation was becoming worse. The increasing volume of retrospective technical corrections caused a constant state of uncertainty in South Africa's tax law. PwC welcomed: interest deductions for controlled company acquisitions; a unified system for taxing property investment vehicles; cross-border reorganisation proposals; relief from SA-tax-residence for high-taxed foreign subsidiaries; transfer pricing relief for high-taxed controlled foreign corporations (CFCs); and refinements to headquarter company regime. The regulation debate should not proceed without debate on legal privilege. As to hybrid debt, in principle it was sound and justified to treat debt as equity and interest as dividends, but the changes were far-reaching and complex, with significant unintended targets; there were several specific objections and uncertainties, and there would be a negative impact on funding; PwC recommended substantial further consultation and the current proposals should be excluded from 2012 Amendment Bill. Under the new proposals for suspended deductions for interest and royalties there would be no deduction until payment if recipient was exempt or non-resident; in principle, this was contrary to principles of equity and matching, but PwC acknowledged National Treasury's tax avoidance concerns; however, the change was far-reaching and complex with significant unintended targets: it was not the appropriate anti-avoidance tool and PwC recommended substantial further consultation and excluding the current proposals from the 2012 Amendment Bill. In principle, PwC acknowledged the possibility of abuse of value mismatches but recommended critical refinement and permitting the application of reorganisation rules. On participation exemption, PwC recommended that the exclusion of share consideration should be dropped or that there should be a rollover for all share-for-share disposals where exemption would otherwise apply; PwC noted that getting paid in shares was a normal way of doing transactions. PwC recommended that the exit charge proposal should be withdrawn as the proposals were substantially same as existing provision and there were elements of double tax, unclear implications and significant complexity.

The South African Constitutional Property Rights Foundation (SACPRIF) submitted its complaint that National Treasury had not properly engaged with it on its demand that Parliament amend the Income Tax Acts to permit National Treasury to replace all personal income taxes and Value Added Tax (VAT) with land rents. It argued that the resultant South African tax haven would attract investments from near and far and increase land settlements. The Constitution insisted that everyone had land. The future of South Africa was in the Committee's hands to lift the proletariat into the middle class: to get land to everyone so that they were free to walk away from a wage contract. That could only be done by replacing taxes with rates. There was no other sensible way.

An ANC Member asked exactly why PwC required substantial further consultation on hybrid debt, what led PwC to assert that the value mismatches provision was unworkable, and why PwC required exemptions for the foreign buyers in the exchange of shares. A DA Member asked what other bodies PwC envisaged would be established in the registration of tax practitioners and whether it was correct that there would be considerable problems in implementation. He was especially concerned that nearly 10 000 wealthy South Africans appeared wanting in tax compliance. If their compliance were enforced, South Africa could have had an income of about R50 billion. He agreed that the hybrid debt proposal needed further refinement, and agreed with PwC's other proposals, but time was of the essence. A COPE Member asked if in other countries where legal privilege had been given to tax practitioners there had been standalone legislation or amendments of tax law. He asked why PwC was against any change to the exit charge. The Acting Chairperson said that it was important for Members to be involved in National Treasury's debate on legal privilege for tax practitioners.

The South African Institute of Professional Accountants (SAIPA) said the proposed amendment to the definition of equity shares was now too limiting as it might lead to unintended consequences in Section 45. SAIPA appreciated the small business relief in the anti-hybrid debt instrument recharacterisation rules but the total gross asset value not in excess of R10 million was very low and failed to recognise different enterprise structures. SAIPA submitted, at length, that the addition to the provision on the correction of tax invoices was too broad; therefore, SAIPA proposed that paragraph (f) be limited.

The South African Institute of Tax Practitioners (SAIT) said it would not put forward technical amendments and changes that reflected the position of interest groups unless it had a social and general impact on the South African economy, the tax profession and society. SAIT expressed its concern on Clause 7 - Medical Expenses to Medical Tax Credit, that there would be negative effects on taxpayers 65 years and older or who were physically challenged. Taxpayers would be in a worse-off situation. It gave a practical example of the impact of the proposal. It also expressed concerns on Clause 22 – Employer Related Insurance Policy; Paragraph 1.2 - Retirement Exemption; Paragraph 3.3 - Real Estate Investment Trusts: SAIT noted the need to encourage savings; Paragraph 6.6 - VAT Relief of Political Parties: SAIT noted that equal treatment before the law and application of taxing statutes without fear or favour was the critical test to encourage broad-based tax compliance; Tax Administration Amendment Bill, Paragraph 15 - Provisional Tax Penalties; and Section 12E – Small Business Corporation: SAIT noted that there were very few amendment to expand the benefits of small business corporations: these were employment generators - the turnover threshold should be increased to R25 million.

A COPE Member asked why SAIPA wanted an amendment to make it more difficult to change a tax invoice (Clause 22). An ANC Member asked SAIT if it believed that the Committee and SARS were not doing enough and what the basis of its argument on equal treatment was. A DA Member asked SAIPA to explain further its particular issue identified pertaining to BEE transactions in respect of the tax treatment of preference shares. SAIT had suggested that for small business a better threshold might be R25 million. What would SAIPA think was correct? Where would it set the threshold? Why did SAIPA oppose making the correction of tax invoices easier? He asked SAIT if the relief for political parties applied to both membership income and donations, or to membership income alone. What about other income? A second DA Member commented that the real estate investment trust was very important in the promotion of savings.

The South African Institute of Chartered Accountants (SAICA) presented on its concerns on retrospective effective dates, additional medical expenses tax credit, fringe benefits (employer provided motor vehicle), debt reductions for less than full consideration, fair value and market-to-market, international tax, sundry and other issues. SAICA noted that the additional medical expenses tax credit did not recognise the expected increase in the cost of medical care. It was not clear how it would apply where the individual turned 65 during a year of assessment in cases of superannuation, ill-health or other infirmity, and the impact on payroll systems was not clear. The capital gains legislation provided relief for liquidating companies in certain instances. The debt reduction regime should provide similar relief. The International Financial Reporting Standards (IFRS) might change and could affect tax legislation. The regulation of tax practitioners was addressed in the Draft Tax Administration Amendment Bill and provided for the introduction of controlling bodies and the regulatory body. Other matters raised in the SAICA submission were the final dividend cycle and the STC credits, corporate rules, interest incurred in acquisition transactions, and fringe benefits.

The Motor Industry Bargaining Council (MIBCO) submitted that omissions in the Income Tax Act 1990 be corrected prospectively and retrospectively to protect all income streams of bargaining councils from possible liability to capital gains tax. This had particular reference to the transfer of properties to MIBCO on account of MIBCO's replacing the previous industrial council. Such properties were solely for operational purposes and were not investment properties.

A DA Member asked SAICA to clarify its views on the change from medical deductions to credits. Others had suggested that taxpayers over the age of 65 would be worse off, while SAICA suggested that everybody would be worse off.

Meeting report

Introduction
In the continued absence of Mr T Mufamadi (ANC) on special matters of national importance, Mr D van Rooyen (ANC) was Acting Chairperson.

PricewaterhouseCoopers (PwC) submission
Professor Osman Mollagee, PwC Partner and Director: Tax Technical and Associate Professor, University of the Western Cape (UWC), Mr Kyle Mandy, PwC Director: Tax Technical, and Mr David Lermer, PwC Global Tax Leader: Africa, who was the firm's regional head in Africa and responsible for intentional tax and transfer pricing, gave the Submission.

Prof Mollagee’s Submission covered eight items:
• Legislative Process
• Proposals welcomed
• Legal privilege
• Hybrid debt
• Value mismatches
• Suspended interest & royalty deductions
• Participation exemption
• Exit charge

Legislative Process
PwC had the same annual message. It criticised the unrealistic time-frame:
- for taxpayers to respond to the Standing Committee on Finance (SCF)
- for SCF / legislature to consider proposals.

• There was no opportunity for public review of Treasury/SARS responses
• PwC's concern had been recognised, but not yet addressed from previous years’ submissions (2008)

Prof Mollagee pointed out that the situation was becoming worse. He observed a trend of decreasing time available from the initial draft Bills to the final National Assembly (NA) introduction and from the initial draft Bills to the National Treasury (NT) workshops (see slide 2[b] for figures).

There was a constant state of uncertainty in South Africa's tax law, with:
• Increasing volume of retrospective technical corrections
• In the meantime, business must carry on with uncertain tax law

He commended National Treasury for its March release of technical amendments. However, the number of amendments might increase next year. Mr Lermer emphasised the increasing volume of technical corrections. Treasury needed to table fewer amendments and only those that were critically necessary.

Proposals welcomed
PwC welcomed:
• Interest deductions for controlled company acquisitions
• Unified system for taxing property investment vehicles
• Cross-border reorganisation proposals
• Relief from SA-tax-residence for high-taxed foreign subsidiaries
• Transfer Pricing relief for high-taxed CFCs
• Refinements to headquarter company regime
Mr Lermer welcomed the proposals. Prof Mollagee added his comments.

Legal Privilege
• Regulation of tax practitioners – Back in focus
• Regulation debate should not proceed without debate on legal privilege
Mr Mandy explained further.

Hybrid Debt
In principle it was sound and justified to treat Debt as equity & Interest as dividends
BUT ...
• Far-reaching & complex
• Significant unintended targets
• Several specific objections / uncertainties
- Interpretation, Convertibility, etc.
• Negative impact on funding

PwC recommended:
• Substantial further consultation required
• Current proposals should be excluded from 2012 Amendment Bill

Mr Mandy emphasised that the changes on hybrid debt were far-reaching and complex. There would be a negative consequence on the funding of business. PwC wanted them withdrawn.

Suspended deductions for interest & royalties
Under the new proposals there would be no deduction until payment
• if recipient is exempt or non-resident

In principle:
• this was contrary to principles of equity and matching
• but PwC acknowledged National Treasury's tax avoidance concerns
BUT the change was ...
• Far-reaching and complex
• There were significant unintended targets
• It was not the appropriate anti-avoidance tool

PwC recommended
• Substantial further consultation was required
• Current proposals should be excluded from 2012 Amendment Bill

Prof Mollagee said that deductions might be suspended. The proposal was attacking so many unintended targets.

Value mismatches
Assets paid for with shares or debt
• Mismatch between asset value and share/debt value
In principle: PwC acknowledged the possibility of abuse
BUT ...
• Limitation to “market value” ignores arm’s length negotiations
• Results in double tax
• Poor coordination with other provisions
• Ignores internal group restructures

PwC recommended
• Critical refinements required
• Application of reorganisation rules should be permitted

Mr Mandy said that the provisions in current form were unworkable. There was also poor coordination. The Schedule had a deemed consideration clause. There were certain critical requirements.

Participation exemption
Disposal of foreign shares: Removal of tax relief if selling price received in shares
In principle: Exclusion not supported

• Disposal of shares in exchange for shares was a common commercial arrangement
• Rollover treatment proposed in limited circumstances
• Significant gap between existing provisions and proposed

PwC recommended:
• Exclusion of share consideration should be dropped
OR
• Rollover for all share-for-share disposals where exemption would otherwise apply
Prof Mollagee gave the example of Mark Shuttleworth. Getting paid in shares was a normal way of doing transactions.

Exit charge
New exit charge on cessation of residence
In principle: Need for amendment not supported
• The tradehold decision was the result of anomalies in the law at the time and poor handling of the case
• Proposals substantially same as existing provision ― and not distinguishable from Tradehold “concern”
• Elements of double tax, unclear implications and significant complexity
PwC recommended that the proposal should be withdrawn.

Mr Mandy said that these provisions were not needed.

South African Constitutional Property Rights Foundation (SACPRIF) submission
Mr Peter Meakin, SACPRIF Management Committee Chairperson, pointed out that SACPRIF's submission was the same as its previous submission on the Rates and Monetary Amounts and Amendment of Revenue Laws Bill (B10-2012). He maintained that National Treasury did not properly engage with SACPRIF and insisted the Bill was the wrong place to discuss a new generation of taxes which would drive unusual economic growth whilst making the purchase of a hectare of arable land as simple as buying a car, and affordable too.

Action had to be taken today to bring about the most agreeable conditions for investors to create jobs. Provision must then simultaneously be made for citizens to settle on land of their own, close to South Africa’s cities, towns and villages, so that they could look forward to a prosperous and dignified life of being self-employed.

Parliament must amend the Income Tax Act to permit National Treasury to replace all personal income taxes and Value Added Tax (VAT) with land rents - a big rates and taxes charge. The resultant South African tax haven would attract investments from near and far and increase land settlements.

He quoted from the Constitution, that 'the state must take reasonable legislative and other measures, within its available resources, to foster conditions which enable citizens to gain access to land on an equitable basis'. No constitutional changes were needed here and no nationalisation without compensation was necessary because this tax remedy made all land affordable without any compensation being awarded: no expropriation had taken place. The recompense to owners of unused land was not State compensation but enrichment from other investments in buildings, cash, bonds, stocks and shares when their revenues were freed of tax.

SACPRIF affirmed that it was not asking for the Income Tax Act to be repealed, simply that the approximately eleven million householders who now paid an average of R3 700 per month in income tax and VAT depending on their skill, energy, age and health were gradually relieved of those burdens; while the occupiers of 187 million square metres of commercial and industrial buildings in South Africa who now paid R210 billion in taxes on their profits, would be offered a thirteen times higher rates bill instead.

Landowners would contribute to SARS depending on the benefits that their land enjoyed from the free gifts of nature and location as well as community spending on infrastructure and services, and the benefits of population increase and good governance. He argued that rates and [land] taxes were a land-use charge which, at 100 per cent, lowered land costs.

This was entirely different from income tax and VAT which were claims on wages, capital, interest, and consumption, and raised land costs. Also the 100% tax on land revenues was only possible because the area of land remained the same no matter how earnestly it was taxed. That was why economists called the supply of land inelastic.

Rates and land tax bills on the other hand replace all these costs and reduce land prices to a monthly, not capital payment. That is, the average residential land price in South Africa was now R485 000 but would become R3 800 per month and subject to review every so often when income taxes were finally repealed.

People were not free men and women unless they could walk away from an unwanted (even life threatening) job and return to their landed estate. When one was utterly dependent for one’s living on a job then one was no longer free: one's constitutional right to freedom had been molested. By insisting that everyone had land the Constitution ended the proletarian condition where working men and women had only their labour to hire. The Constitution demanded they must have land.

The future of South Africa was in the Committee's hands to lift the proletariat into the middle class: to get land to everyone so that they were free to walk away from a wage contract. That could only be done by replacing taxes with rates. There was no other sensible way.

Mr Rob Small, SACPRIF Consultant Horticulturist, said that it was better to support small and micro farming rather than a big system about to crash.

Discussion
Ms Z Dlamini-Dubazana (ANC) asked Prof Mollagee exactly what PwC meant in saying that it required substantial further consultation on hybrid debt.

Ms Dlamini-Dubazana asked Prof Mollagee what led PwC to assert that the value mismatches provision was unworkable.

Ms Dlamini-Dubazana asked Prof Mollagee to clarify his views on National Treasury's not giving exemptions for the foreign buyers in the exchange of shares. PwC was saying that one must also give exemptions for the foreign shares in exchange, and, if National Treasury could not give an exemption, there would be a problem for PwC. Exactly why did PwC require such an exemption?

Mr D Ross (DA) asked Prof Mollagee on legal privilege for tax practitioners and what was required to register with a controlling body. He quoted the proposed amendment. What other bodies did PwC envisage would be established? He quoted from an article which he had read on the considerable problems in implementing this amendment. Was this correct?

He asked about the lack of tax compliance, and quoted from a press statement originally in Afrikaans. A certain 9 300 South Africans failed to be tax compliant. Each one of these had assets of more than R75 million and an annual income of more than R7 million a year. 7 000 of them were not registered at all. If they were registered South Africa could have had an income of about R50 billion. If one considered Eskom's needs of about R350 billion for capital expansion, for which the interest alone would amount to about R35 billion per annum based on a 10% calculation, one could see the benefit of making such people comply. It would enable ordinary South Africans to obtain better electricity prices.

He was concerned at the possibility for abusive transactions whereby the value of shares could be manipulated to gain tax advantages, referred to in PwC's very complicated and rather technical submission. He knew that there was a very well-informed gentleman who was not compliant with tax regulations. He agreed that the hybrid debt proposal needed further refinement.

He agreed with all PwC's proposals, but time was of the essence and it had to be asked if one could stop non-compliance.

Mr N Koornhof (COPE) as a lawyer was not keen on giving away easily legal privilege to tax practitioners. In other countries where legal privilege had been given to these practitioners, was it a stand-alone bill or part of tax legislation?

He asked why PwC was against any change to the exit charge, which PwC maintained was badly argued by the lawyers, of SARS in this instance, and was not necessary. Would it make the legislation worse and too technical? Was it not a precautionary step by the National Treasury to ensure that, even if it had bad lawyers in court, it would not lose again?

The Acting Chairperson knew that the amount to which Mr Ross had referred was quite substantial. It was really needed to develop the country.

It was important for Members to be involved in National Treasury's debate on legal privilege for tax practitioners.

Responses
Prof Mollagee gave some examples of hybrid debt. In the current economic environment most investors or businesses which wanted to fund transactions were looking for finance but in the present circumstances the banking industry was known to be tight-fisted and reluctant to provide funds. Some of the biggest funders at the moment were the big institutions like pensions funds and insurers. They, typically because pension funding in South Africa was exempt for the purposes of their beneficiaries, would be exempt entities. So if they loaned money to anyone who wanted to start a business or do a deal, this then tainted that particular transaction. This was because the person who was borrowing from them said that he or she was paying them interest and this was an expense against which he or she wanted to reduce liability for income tax. However, because the lender did not pay tax on the receipt, the person would be denied the deduction. The result of this was that these funding deals would simply dry up, or at least be severely impacted, since obtaining finance would be much more expensive if one had this uncertainty in the legislation.

PwC's purpose today was not to oppose these proposals in principle, but to support that all should pay their fair share and abusive tax avoidance should be targeted. However, PwC wanted to prevent hitting innocent victims, who were not supposed to be targeted by these measures.

PwC's specific reference to value mismatches being unworkable might have been a technical reference. The Income Tax Act had ten schedules and the eighth schedule dealt with Capital Gains Tax (CGT). The new provision, which PwC considered to be technically unworkable, was an amendment to the main body of the Act, and no one really knew how to fit it into the tax computation. This was the kind of uncertainty that PwC referred to when it used the word 'unworkable'.

The beneficiary of the participation exemption in the disposal of foreign shares was not a foreigner but the South African seller. If one was a South African and had some foreign shares that one was selling, the current law said that if one sold those shares one did not pay South African tax. There were various policy reasons for that.

The proposal with which PwC was dealing was that if one was a South African selling foreign shares but if the foreign purchaser said that he or she was not offering cash but other shares instead, why should that be different? This was the example of Mark Shuttleworth.

Mr Mandy explained the current position that if one had a 10% share holding and one sold to a non-resident, regardless of the nature of the consideration, one would qualify for that exemption. What was proposed additionally was a rollover treatment, where one sold shares in exchange for other foreign shares. What now transpired was that there was a significant gap between what qualified for the rollover treatment, and what currently qualified for the exemptions? The result was a significant element of transactions that would no longer qualify either for the exemption or rollover treatment. PwC preferably wanted the exemption, because taxpayers preferred them. If not the exemption, PwC at least wanted rollover treatment for all those transactions.

Mr Lermer said that it was important to note that, as Prof Mollagee had said, this was a normal business transaction. In today's world, finding cash was actually difficult. One would normally be given shares as opposed to cash. This went back to the original points about anti-avoidance legislation. Such legislation had to be very targeted and very specific, and had to cut out the core. The reason for anti-avoidance legislation was usually and quite properly because somebody had identified where tax had been lost to the fiscus. Where that had been done, and SARS had gathered all the facts, targeted legislation was very easy to write. The problem in practice was if one did not have all the facts and started taking a much wider scope. PwC could talk only about the printed version. Where there was wide legislation, one was concerned about unknown implications of that legislation. PwC knew that, in this example, it was a day-to-day business transaction, and that the proposed amendment would do more harm than good. Where one had hybrid legislation and one did not intend to implement it until 01 January 2014, it had to be asked why one should do more harm now, rather than reconsider it and replace it with more focused legislation than proceed with legislation that was too wide and bad for business on a day-to-day basis.

Prof Mollagee emphasised that there were far more compliant taxpayers than abusive schemers. One should go after the latter, but look after the compliant taxpayers as well.

PwC was so opposed to new Section 9H, the exit charge and trade hold, because, for taxpayers it was a nightmare. PwC wished that National Treasury had more time to deal with the critical issues. This was a non-critical issue and was unnecessary. He knew of no one who would be willing to challenge SARS on the basis of a trade hold judgement.

Mr Mandy said that the new exit charges would have no impact whatsoever. A deemed disposal was subject to the same relief in terms of double tax treaties as actual disposal. The provision in essence was identical to the current exit charge, would not address the concerns of some commentators, and was unnecessary.

Mr Mandy said that legal privilege for tax practitioners was a statutory privilege embedded in the tax legislation of the United States and New Zealand.

Mr Mandy said that approved controlling bodies of tax practitioners would include such bodies as SAICA, SAIT and the law societies These were professional bodes required to have codes of ethics, continuing professional education, minimum qualification standards, and disciplinary procedures.

The problem of implementation was that the requirement to register with a controlling body would come into force upon promulgation. However, one needed a period in which these controlling bodies could apply to be approved as recognised controlling bodies.

South African Institute of Professional Accountants (SAIPA) submission
Mr Ettiene Retief, Chairperson, SAIPA National Tax Committee, comment on the Bill were with a particular reference SAIPA's client base of small to medium-sized businesses. He referred Members to SAIPA's written submission. He also alluded to a separate submission on the TAAB (not available).

Definition of equity shares
SAIPA agrees with the change of the definition of equity share as it is also of the opinion that the previous definition was linked to the Companies Act 61 of 1973 and the new Companies Act 71 of 2008 does not define equity shares. However the proposed amendment to the definition is now too limiting as it may lead to unintended consequences in Section 45 where shares are sold as redeemable preference shares that do specify the redemption period, but has a fixed dividend rate to their Black Economic Empowerment (BEE) partners. The proposed definition may lead to these entities regrouping their instruments to fit into this definition. (Slide 3)

Anti-hybrid Debt Instrument Recharacterisation Rules
Section 8F(1)(d) - SAIPA appreciates the Small business relief on the hybrid recharacterisation rules. However the total gross asset value not in excess of R10million is very low and fail to recognise different enterprise structures. A service provider has a different asset structure and need from that of a retail or manufacturing enterprise. (Slide 4)

Correction of Tax Invoices
Section 159 of the draft TLAB to amend section 21 of the Value-Added Tax Act: SAIPA agrees that debit note and credit note should be used to correct a previously issued tax invoice and the amendments are necessary. However, the addition of (f) allowing for when error or omission has occurred in respect of the particulars required under section 20(4) or (5) to be contained in a tax invoice is too broad. (Slide 5)

The debit note or credit note is intended to record the altering of a supply or consideration related to the supply (discount, consideration amount, return of goods, and cancellation of supply). Section 21 should not detract from the vendor’s requirement to issue a tax invoice as required in terms of section 20.

A document issued as a ‘tax invoice’ should have at least a minimum requirement, and the credit or debit note must refer to such tax invoice, and as such the original tax invoice as issued in terms of section 20 should be at least in the currency of the republic, express “tax invoice” in a prominent place, have an individual serialized invoice number (important for auditing and referencing purposes) and the suppliers address and vat registration number. If these are not present, then the document issued is merely an ‘invoice’ as defined, and should not be regarded as a ‘tax invoice’ issued in terms of section 20.

If the ‘tax invoice’ has not been issued, the provisions of section 21 cannot apply. Therefore, we propose that paragraph (f) be limited to read “an error or omission has occurred in respect if the particulars required under section 20(4)(c), (4)(e), (4)(f), (4)(g), (5)(d), or (5)(e) to be contained in a tax invoice,”

Mr Retief emphasised that the definition of equity shares was too wide. One needed a better understanding of the recharacterisation rules. In the correction of tax invoices, which was a manual process, SAIPA was quite supportive of a debit or credit note but had a problem with the present wide proposal in the Bill as it allowed amendment of the entire invoice, and allowed for secondary documents to substitute for the primary document essential for auditing. The provision must be limited. There must always be a tax invoice meeting some basic minimum requirements issued in terms of Section 20 before a correction could be made. One could not fix something that did not exist.

South African Institute of Tax Practitioners (SAIT) submission
Mr Paul Gering, SAIT Director, and Mr Alton Netshivhungululu, SAIT Deputy CEO gave the submission.

General comments
Mr Gering was honoured to be present as his late father had presented to the Finance Committee 12 years previously on the Bills of Exchange Act.

General Remarks
Draft Bill issued – 5 July 2012
• Comments required by National Treasury – 31 July 2012
• Workshops with National Treasury – 1-2 August 2012
• Notice for Comment for Parliament – 12 August 2012
• Written submissions required – 17 August 2012
• Oral Submission – 22 August 2012

He endorsed PwC's contention, and, alluding to Julius Caesar's words 'Gallia est omnis divisa in tres partes' [Gaul, taken as a whole, is divided into three parts], emphasised that it must be said, and said again until finally it was hammered home, that if there was to be a consultation process, it must be done properly and meaningfully, and enough time must be allowed.

It was important to note that there were two Bills. It would have been better to deal with them separately.

Policy Statement
The Institute adopted a policy during July 2012 not to be a lobby group but to comment on broader themes and tax policy only. The Technical Committee is of the view that technical amendments and changes that reflect the position of interest groups will not be advanced, unless it has a social and general impact on the South African economy, the tax profession and society.

Clause 7: Medical Expenses to Medical Tax Credit
Mr Netshivhungululu explained its concern:
- Negative effects on taxpayers who are 65 years and older
- Negative effects on taxpayers who are physically challenged
- Taxpayers would be in a worse off situation

• Proposed Solution
- Conversion provisions apply only to higher income levels
- Current legislation apply to lower income levels
- Alternatively: Tax credits be increased
A practical example of the impact of the proposal was given (see Slide 9).
 
Clause 22 – Employer Related Insurance Policy
• Concern:
- Changes do not cover cases where there is loss due to :
Death, Disability or Severe Illness.
-Employees need for life cover same for against accident at work.
- Definition of “solely” not clear.

•  Proposed solution:
SARS issue an Interpretation Note for clarity. (Slide 10)

Para 1.2 - Retirement Exemption
Mr Gering continued:
• The proposal to allow the unutilised contributions as a deduction against the annuity is most welcomed.
• Consideration should be given to allow the exempt portion to be utilised either as a lump sum or against the annuity. (Slide 11)

Para 3.3 - Real Estate Investment Trusts
We need to encourage savings
•  At present natural persons investing in property loan stock are able to take advantage of the exemption whilst investing in a growth asset
• The proposed change does not incorporate this benefit
•  The interest exemption should be broadened (Slide 12)

Para 6.6 - VAT Relief of Political Parties
•  The change to exempt membership income from VAT will only be effective on promulgation of the Act
•  This is similar to the plight of the property developer where relief only came last year
•  Prior to the relief they were audited and assessments were raised
• Equal treatment before the law and application of taxing statutes without fear or favour is the critical test to encourage broad-based tax compliance (Slide 13)

He gave special emphasis to equal treatment before the law, here quoting Juvenal - 'Quis custodiet custodes?' [Who will guard the guards themselves?] Representatives of political parties must ensure that there was equal treatment and that they did not benefit themselves over and above the interests of others. One knew now that there would be a change in the law to take the membership income of political parties outside of the VAT net. However, that would only apply from a future date. In the period prior to this amendment there should be equal application of the law, as this was the expectation of the public.

Tax Administration Amendment Bill - Para 15 - Provisional Tax Penalties
The proposed amendment to automatically impose a penalty for underestimation on taxpayers with a taxable income over R1 million has not been made due to a principle but to expedite the correction of a flaw in the current tax programme. (Slide 14)

He submitted that this penalty was too low. Perhaps a secondary test should be turnover over R30 million, as covered by VAT legislation. Moreover, one might argue that this R1 million should be amended on an annual basis.

Section 12E– Small Business Corporation
• In contrast to the many amendments proposed by lobby groups for national corporations covering even cross border rollover relief there are very few amendment to expand the benefits of small business corporations
• These are employment generators and the beginning of an entrepreneur spirit
• The turnover threshold should be increased to R25 million (Slide 15)

He said that small business did not have big lobby groups, but was important if one wanted to create jobs. As indicated in the previous Submission, one should aim to expand this definition. This Committee should give some direction to the drafting team in this regard.

He emphasised the need for equal treatment in the proposal for the registration of tax practitioners. Surely those who had previously worked for SARS and thereafter moved into commerce needed a regulated format to ensure that members of the public were advised by someone who understood the law, and, in the case of SARS employees, was implementing it correctly. He again repeated 'equal treatment before the law'. Moreover, staff of National Treasury and Members of this Committee were making inputs on taxation. Did they not need some grounding and training in tax in order to be able to do so? If the idea was protection, protection from one's commercial adviser was one thing; but people needed protection from SARS and poor drafting, at times, of the law.

Discussion
Mr Koornhof said that it was the first time that anyone had proposed an amendment to make it more difficult to change a tax invoice (Clause 22). For a smaller person who struggled with VAT every day it was already a burden. Why did SAIPA want this change? Was it to make SAIPA's work easier?

Mr E Mthethwa (ANC) asked Mr Gering if he believed that the Committee and SARS was not doing enough or did not know what they were doing. He did not understand Mr Gering's issue of equal treatment. What was the basis of his argument?

Mr T Harris (DA) asked SAIPA to explain further about the tax treatment of preference shares and the particular issue that it had identified pertaining to BEE transactions. However, he understood that the changes in the treatment of such shares might apply also more broadly to banks.

SAIT had suggested that for small business a better threshold might be R25 million. What would SAIPA think was correct? Where would it set the threshold?

Why did SAIPA oppose making the correction of tax invoices easier?

He asked SAIT if the relief for political parties applied to membership income and donations, or to membership income alone. What about other income, such as donations and MPs' constituency allowances?

Mr Ross commented that the real estate investment trust was a very important issue in the promotion of savings. With the Presidential Infrastructure Coordinating Committee, in terms of investment needed on the bigger scale, there could be some incentives to encourage people to invest in this kind of investment. To make it more attractive would be of huge benefit to the country.

Responses
Mr Retief replied that SAIPA was not trying to make it more difficult to remedy the current issues of issuing proper documentation. His concern was that documentation was core to proper investigation of fraud and to testing of and supporting transactions. That input deduction was essentially a credit of pulling it back from the fiscus. It should be no different from a certificate. This was why the bar had been set so high in the beginning as to what should be in that document. Without all the relevant requirements, such as both parties VAT numbers for an invoice greater than R3 000, there was a risk to the fiscus. Currently, if one had to implement as the proposal stood, one could quite literally write out what purported to be an invoice on a napkin and thereafter issue a second document, without even being able to reference to the napkin because the latter did not even have an invoice number on it, to correct it. This was absurd. The obligation of a vendor to issue a proper tax invoice should never be taken away. The vendor's details, including address and VAT number, and particulars of the sale, must always be on the original document. What might be fixed would include the buyer's VAT number, address, or description of the goods. SAIPA did not want an amendment that would allow fixing a fraud, where a vendor had failed to issue a tax invoice as prescribed. Under the amendment, Section 21 would override the basic prescriptive obligations of Section 20. There would be a risk to the fiscus and an opportunity for fraud.

Mr Retief replied on equity shares that his constituency catered greatly for the small to medium sized business, and he could not predict exactly how the amendment would affect business and transactions. So SAIPA tried to predict how the amendment would the type of transactions affecting its clients, typically BEE transactions, in which there were redeemable preference shares. SAIPA had determined that current BEE transactions would be adversely affected. SAIPA's intention was not to limit the intention of the law, but believed that the net was cast a little too wide. Because of the limitations of time, SAIPA had not explored the implications for the banks.

It was difficult for SAIPA to propose a threshold. The fundamental problem was not the threshold, but who should be included to participate. In a previous submission to the Committee, SAIPA had submitted that the definition of small business corporation was restrictive in terms of personal services to the extent that if one provided services on was not a small business and therefore could not obtain the incentives needed to grow. One had to be in retail manufacturing or similar types of business to take advantage of the concession. Yet worldwide the largest portion of growth would come from small and emerging businesses, mainly in the service sector. There had been recent court cases in which the extent to which personal services should be included had been challenged. He recommended reconsidering what should be considered a personal service and to what extent this should be made available to small and medium businesses. Once there was a more inclusive range of businesses which could be included, it would be worthwhile to consider the threshold. Such a threshold would be quite different for a service business than it would be for a manufacturing or retail business, as a retailer would have higher turnover but smaller margins. A service business would have smaller turnover, but higher margins.

Mr Gering's comment's main thrust was that the regularisation of tax practitioners should apply equally to SARS officials and to tax practitioners in private business. There should be the same code of ethics and disciplinary conduct.

He suggested that the small business threshold levels escalate on an annual basis, or be linked to the threshold of the monthly rendition of a VAT return, this being the R30 million level. At this stage it was difficult to argue that one was small.

The VAT relief for political parties would cover all their receipts and accruals. The primary point would be not what might happen in the future but what had happened in the past. If legislators were making the change in the law to exclude themselves from something in which they were before - the very need for that exclusion, one must make sure that the law as it stood then was applied to the legislators or that they took the necessary steps to ensure their compliance with the law. Here one knew that there was a law that did apply, and one must make sure that it was applied equally.

Follow-up question and response
Ms Dlamini-Dubazana asked if it was not in the articles of association document where one defined, according to the Companies Act (No. 71 of 2008), the allocation of shares. Was SAIPA saying that making that definition at that time would contradict what the National Treasury was now saying? If so, what were the consequences?

Mr Retief replied that the previous Companies Act had a definition of equity share. In the new Companies Act 2008, there was no clear definition. In this Act the whole principle of what was a share had changed. The company defined its share structure. The structure of share allocation was essentially determined in the memorandum of incorporation. With a BEE transaction there was often an underlying complex structure to facilitate the transaction. Typically there would be redeemable preference shares that specified a redemption period. There would be a fixed dividend rate for the BEE partner. If one had to apply those facts to the proposed amendment, in terms of the Section 45 provisions, it would require that there be a de-grouping because of that structure. This might have consequences because a party might not want to participate in that type of transaction. He suggested a grandfather period where one could make an election on whether one wanted to participate in a de-grouping structure or not. Currently there was no option. This kind of legislation, and its consequences, was not expected when those BEE transactions were formulated. Perhaps the transitional processes could be considered.

South African Institute of Chartered Accountants (SAICA) submission
Mr Piet Nel, SAICA Project Director, and Mr Wessel Smit, SAICA Tax Committee member presented.

Mr Nel explained their concerns:
• Retrospective effective dates
• Additional medical expenses tax credit
• Fringe benefits
- Employer provided motor vehicle
• Debt reductions for less than full consideration
• Fair value and market-to-market
• International tax
• Sundry and other issues

Retrospective proposed dates of commencement
Rates and Monetary Amounts and Amendment of Revenue Laws Bill
• The effective date of the increase in the dividends tax rate and other related amendments

Draft Taxation Laws Amendment Bill, 2012
• Amendments to the dividends tax legislation – 1 April 2012
• Hybrid equity – 1 April 2012

Draft Tax Administration Amendment Bill, 2012
• Dividends declared by listed companies (dividends tax) (Slide 3)

Additional medical expenses tax credit [SAICA submission, pages 3-4]
Mr Smit explained:
•  It does not recognise the expected increase in the cost of medical care
•  For taxpayers under 65 (25% and 7.5%) limited instances where deduction will be available
•  Not clear how it will apply
- where the individual turns 65 during a year of assessment
- in cases of superannuation, ill-health or other infirmity
•  Impact on payroll systems: Pay As You Earn (PAYE) (Slide 4)

Employer provided motor vehicle [SAICA submission, pages 6-12]
•  Operating lease
- The definition of such a lease (as defined in the Income Tax Act (No. 58 of 1962), Section 23A, is too narrow: 'the actual cost to the employer incurred under that operating lease'.
It is not clear what this must include.
The treatment of the cost of fuel is not clear. (Slide 5)

Debt reductions for less than full consideration [SAICA submission, page 27]
Mr Nel explained:
Reduction in base cost of assets
The link with the capital gain provisions must be made (paragraph 20(3)(b))
The interaction between Sections 19 & 24J(4A) where debt reduction relates to a financial instrument
The capital gain legislation provided relief for liquidating companies in certain instances
The debt reduction regime should provide similar relief (Slide 6)

Fair value and market-to-market [SAICA submission, pages 30-42]
Mr Smit explained:
Complex legislation
Proposed effective date of 31 December 2012 to be reconsidered
Impact of fair-value accounting on previous global financial crisis
International Financial Reporting Standards (IFRS) might change and could effect tax legislation
A definition of 'hedge' or 'hedging' needs to be included in the legislation
Expanded definition of 'covered pensions' (Slide 7)

International tax [SAICA submission, pages 45-52]
Definition of resident
Effective management – 75% rule
The post-transaction requirement for cross-border asset-to-share transactions – the law does not give effect to the intention as expressed in the Memorandum. (Slide 8)

Sundry issues
Clarification of date of registration for value-added tax purposes
- Mentioned in budget – not addressed in the draft legislation

Provisional tax
- Addressed in the Draft Tax Administration Amendment Bill
- Introduction of compulsory (automatic) penalty questioned

Regulation of tax practitioners
- Addressed in the Draft Tax Administration Amendment Bill
- Introduction of controlling bodies and the regulatory body (Slide 9)

Other matters raised in the SAICA submission
Mr Nel explained:
• The final dividend cycle and the STC credits
• Corporate rules
• Interest incurred in acquisition transactions
• Fringe benefits
• Residential – stand alone submission (Slide 10)

Motor Industry Bargaining Council (MIBCO) submission
Mr Fourie gave a submission based on the letter from Mr Robert Kaiser, MIBCO General Secretary.

The Income Tax Act 1990 omitted the specific exemption of all income streams for bargaining councils from income and capital gains tax. Furthermore, a result of a legislative omission in the previous Industrial Councils Act, industrial councils were not permitted to own property in their own capacity. This omission was corrected in the current Labour Relations Act and bargaining councils were now permitted to own property. However, as a result of this omission relating to the previous Industrial Councils Act, the industrial councils were required to find creative means of acquiring operational premises. The National Industrial Council for the Motor Industry thus established several property companies to act as legal vehicles to hold these operational properties. These properties were acquired purely for conducting operational activities and never as investment properties.

As these properties were now being transferred to MIBCO, the legal entity that now replaced the previous Industrial Council, SARS might perceive that MIBCO might possibly be liable for capital gains tax.

MIBCO requested that the above omissions be corrected prospectively and retrospectively for all income streams of bargaining councils, as the sole beneficiary of such capital gains was the bargaining council and, by implication, the employees in the industry (see submission document for full details).

Discussion
Mr Harris understood the principle of changing from a medical deduction to a credit, as this made things more equitable, but SAICA's approach was to talk about how the taxpayers under the age of 65 could also be worse off. If this was true, the only winner was SARS. He asked SAICA to clarify the point that others were making that taxpayers over the age of 65 were worse off too.

Secondly, how would SAICA classify someone as tax resident, if it did not think that 75% would work?

Thirdly, he had failed to find in the Minister speech a commitment on the period to obtain a VAT number. He asked SAICA what commitment he had given, and where it should be in the legislation.

Responses
Mr Smit replied that taxpayers older than 65 would receive a credit at a level of 33.3%. He agreed that they received a lower benefit. However, he explained in detail why some of them might be better off. At the same time, there was a category of persons who would be worse off, but not necessarily to the extent to which they would be worse off under the original proposal, on which he had commented to the Committee two years previously. In this regard there was a big improvement. If left at 40%, which was a policy decision, many taxpayers would win, because all the taxpayers below R630 000 would then obtain that benefit at a 40% level. This was the only way in which nobody would lose.

As far as the tax payer younger than 65, if one considered the level of medical expenditure it had to be considered if the tax benefit that they received was sufficient. He agreed that even under the old legislation this was not sufficient. It still had to be asked if there was sufficient assistance to tax payers younger than 65 without disability.

The date of liability for VAT registration was clarified as 21 days (page 24 of the Tax Proposals: Budget 2012) It would probably be 'fixed' by an amendment to Section 23 of the Value Added Tax Act (No 89 of 1991) to give some relief in respect of that 21-day period.

Mr Nel replied that SAICA's submission was that the requirement that the tax payable must enter into the definition of the resident was superfluous. If the company had a permanent establishment in the foreign country, and all its requirements located outside South Africa, it should not be treated as a resident. The term effective management, in that instance, should not 'bring it back as a resident in South Africa'.

The Acting Chairperson thanked those who submitted for enriching the Bill and noted that National Treasury would consolidate its response and submit it by 5 September. On 11 September the Committee would consider the Bill and adopt it. The Committee's next meeting would be on 29 August. He adjourned the meeting.

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