Meeting SummaryThe Chairperson noted with concern a statement by National Treasury on 31 August 2012 that the South African trade deficit had widened in July. The revenue from tax would have to increase as well as South Africa's exports. The country was losing a few hundred million rand a week because of tax avoidance schemes. South Africa needed sufficient revenue to fund key expenditure priorities and to ensure that public debt and debt service costs were contained.
National Treasury and the South African Revenue Service (SARS) briefed Members on the Rates and Monetary Amounts and Amendment of Revenue Laws Bill [B10-2012] (National Assembly – Section 77). This short but important Bill dealt only with changes to tax rates and monetary thresholds; most of the substantive and technical tax amendments would be included in the longer Tax Laws Amendment Bill 2012. This splitting of the taxation Bills into two parts was a change from last year. The 2012 tax proposals supported a sustainable fiscal framework over the medium term, while facilitating economic growth and a more competitive economy. Reforms would improve the fairness of the tax system, ensuring that income from capital was taxed more appropriately. Revenue trends, personal income tax brackets and rebates, medical tax credits, dividends withholding tax, capital gains tax, small business corporations, fuel taxes, electricity levy, and specific excise duties were reviewed.
The tax / GDP ratio at a national level, stood at around 25%. The three main taxes contributing to the revenue were personal income tax (PIT), value added tax (VAT), and corporate income tax (CIT). The other tax instruments, although numerous, contributed only a small proportion. Table 4.4 - impact of tax proposals on 2012/13 revenue (from the Budget Review 2012) gave a brief headline overview of the potential revenue gain and revenue losses as a result of the proposals. South Africa's PIT was one of the key instruments that provided for a progressive income tax system. Reforms to medical scheme contributions and other medical expenses, and the changes towards medical tax credits towards 2014/15 (not in this Bill) were explained. The tax credits would, as from 1 March 2014, apply to all taxpayers. The dividends withholding tax (DWT) came into effect on 1 April 2012, bringing an end to the secondary tax on companies (STC). This change was to align South Africa with the more familiar internationally DWT. Equally, listed companies preferred a DWT because the tax was on the shareholder, not on the company, and so changed the effective tax rate shown in the financial statements. Income tax exempt entities such as retirement funds and public benefit organisations would receive their dividends tax-free. It was therefore quite an expensive reform, as the number of exempt entities would increase quite substantially. It thus cost about R7.5 billion to make the change. For equity and revenue reasons the dividend withholding tax was set at 15%. Income from capital could be derived as interest income, dividends or capital gains, all of which should be taxed equitably. High-income individuals tended to receive a larger portion of their income in the form of dividends and capital gains. The higher rate would also help to mitigate some of the revenue losses when switching from the secondary tax on companies to the new tax. It was difficult to believe that not long ago South Africa had a 50% CIT rate. Now the rate was down to 28%. Collateral amendments as a result of the implementation of the new dividends withholding tax were explained. Given the current constraints and the need essentially to keep the ability to take profit either by way of selling a share or taking dividends out of it, at least reasonably on par, there was a proposal to increase the Capital Gains Tax inclusion rate. This meant that the effective rates for capital gains tax increased. To limit the impact of capital gains taxation on middle-income households, the exemption thresholds for individual capital gains and for primary residences would be adjusted significantly. Certain exemptions for individual capital gains were increased from 1 March 2012. Effective capital gains tax rates for long-term insurers and tax relief for small business corporations were explained. Part I and Part II of the Ninth Schedule to the Income Tax Act (No. 58 of 1962) was amended in respect of public benefit activities – low cost housing.
In real terms, using 2008 as a base year, fuel tax had actually decreased and had remained constant for quite a number of years, with a recent slight increase. Fuel tax, in real terms, in 2012, was more or less what it was in 1992. However, people obviously were sensitive to the nominal, as distinct from the real, increase, and reacted emotionally. Moreover, fuel taxes as a proportion of total revenue, had actually come down. Although an important source of revenue, fuel taxes were not a significant or a buoyant source of revenue. As South Africa's economy became more fuel efficient, the taxable base became smaller, and therefore generated less revenue. A new arrangement for the electricity levy would replace the current funding mechanism incorporated into Eskom's annual tariff application and the additional revenue would be used to fund energy-efficiency initiatives such as the solar water heater programme. It would enhance transparency and enable Government to use alternative agencies to deliver on energy-efficiency initiatives. The net impact on electricity tariffs should be neutral. The increases in excise duties on alcoholic beverages for this year ranged between 6 and 20%. The increase would complement broader measures to reduce alcohol abuse.
A DA Member found the Bill generally acceptable, but there were a number of matters of great concern. It was unfortunate that 25% of GDP went into the national fiscus. This was too high if South Africa was looking for foreign investment. There were many taxes which brought in a relatively small amount but had huge collection costs. Had there been any consideration to rationalising them? There was a very small group of taxpayers in this country, but a huge number of people who benefited from those taxes, and there was no ownership by the majority of South Africans as to how the tax was spent. He did not accept the argument of trying to equate corporate taxes with personal taxes. They were two different tax regimes. However, this was more of a political argument. If South Africa was seriously looking for foreign investment, it had to be competitive, and could not simply benchmark itself against other countries. It was an incredibly serious move to change the rate of DWT from 10 to 15%. To push up the DWT meant that the return for foreign investors was reduced. The DA believed that this was wrong. What was in the pipeline for the funding of roads? . The need to learn from other countries’ experience applied especially to the DWT. The Chairperson asked what the impact of the electricity levy was. Did South Africa impose higher or lower taxes on fuel compared with other economies? He asked for an explanation of some abbreviations. No other questions were asked.
The Committee adopted its report that it agreed to the Bill. The Chairperson ruled that the DA's concerns be noted in the minutes.
The Chairperson noted a statement by National Treasury on 31 August 2012. This had been reported in the newspapers. The contents of this statement had an impact on South Africa's fiscal situation, and the Committee's business of today fitted in with that picture. The South African trade deficit had widened in July. The trade shortfall had widened to R6.7 billion, from R5.7 billion in June. Exports rose by R1.8 billion, or 2.9%, to R63.5 billion in July, while imports increased by R2.8 billion, or 4.1% to R70.2 billion. The trade deficit grew to R57.3 billion from R6.9 million this time last year. This would result in a widening deficit on South Africa's current account for the rest of the year. The current account deficit widened to 4.9% of GDP in the first quarter from 3.6% in the previous quarter. So the revenue from tax would have to increase as well as South Africa's exports. The country was losing a few hundred million rand a week because of tax avoidance schemes. South Africa needed sufficient revenue to fund key expenditure priorities if one looked at the priorities listed in the National Development Plan, but also to ensure that public debt and debt service cost were contained. This was the challenge.
Rates and Monetary Amounts and Amendment of Revenue Laws Bill 2012 Presentation
National Treasury and the South African Revenue Service (SARS) briefed Members on the Rates and Monetary Amounts and Amendment of Revenue Laws Bill [B10-2012] (National Assembly – Section 77).
Mr Cecil Morden, National Treasury Chief Director: Economic Tax Analysis, explained:
• The 2012 tax proposals support a sustainable fiscal framework over the medium term, while facilitating economic growth and a more competitive economy.
• Reforms will improve fairness of tax system, ensuring that income from capital is taxed more appropriately.
These, together with revenue adequacy, were important aspects of the tax system.
• Meeting South Africa’s development challenges requires revenue to fund key expenditure priorities, while ensuring public debt and debt-service costs are contained, and avoiding overburdening taxpayers.
• This very slim, but important Bill dealt only with changes to tax rates and monetary thresholds; most of the substantive and technical tax amendments would be included in the longer Tax Laws Amendment Bill that was currently being processed, and would hopefully be tabled in the NCOP in September or October.
This splitting of the taxation Bills into two parts was a change from last year.
Tax / GDP (national tax revenue, excluding Unemployment Insurance Fund (UIF) and Road Accident Fund (RAF) (see Graph, slide 4)
Tax / GDP ratios (see Graph, slide 5)
Tax revenue as a % of GDP
The tax / GDP ratio had been stable for a large part of the decade from the 1990s to 2003/04. Then there was an increase from 2003/04 to 2007/08. Then after the global financial crisis South Africa was back to the position of the mid-1990s. So the tax / GDP ratio, at a national level, stood at around 25%.
Tax revenue by instrument as a % of GDP
This gave an indication of the three main taxes that were contributing to the revenue – personal income tax (PIT), value added tax (VAT), and corporate income tax (CIT). The other tax instruments, although numerous, contributed only a small proportion of revenue. (Table, slide 6)
Tax revenue as a % of National Budget Revenue: revenue by instrument as a % of National Budget Revenue (Table, slide 7)
Estimated revenue impact of 2012/13 tax proposals
The proposals were costed at the time of the budget. Table 4.4 Impact of tax proposals on 2012/13 revenue gave a brief headline overview of the potential revenue gain and revenue losses as a result of these proposals. (Table, slide 8)
Personal Income Tax Relief (estimated R9.5 billion)
Table 4.6 Personal income tax rate and bracket adjustments, 2011/12 – 2012/13 was very important and one of the core tables in the tax system. It was adjusted annually to provide at least fiscal drag, and, at certain times, real relief. This year fiscal drag and a small amount of real relief had been provided. At the bottom were the thresholds, which meant that people below 65 in the 2012/13 fiscal year would not pay any income tax for up to R63 000. For people 65 or over but younger than 75 the threshold was R99 000. For people aged 75 or over the threshold was R110 000.
South Africa's PIT was, as many analysts pointed out, was one of the key instruments that provided for a progressive income tax system. (Table, slide 9)
Distribution of individual taxpayers, taxable income, income tax payable & income tax relief
Table 4.5 - Estimates of individual taxpayers and taxable income, 2012/13 (Table, slide 10)
Medical Scheme contributions and other medical expenses - past reforms 2005/06:
An employer could contribute up to two-thirds of the member contribution as a tax-free fringe benefit
• 2006/07: 2/3rds tax-free provision was replaced by a monthly monetary cap (to encourage broader medical scheme coverage, extend tax benefit to self-employed individuals & achieve a more equitable tax treatment)
– Medical scheme contributions paid by taxpayers tax deductible (tax-free if the employer pays) subject to monthly caps (R500 first two beneficiaries % R300 for all other beneficiaries)
• 2007/08, 2008/09 & 2009/10: monthly caps increased: R530 & R320, and R570 & R345 and R625 & R380
• 2010/11- The tax-free fringe benefit for employer contributions was removed. However, employees can claim deduction for medical scheme contributions, whether made by employee or by employer on behalf of employee up to the cap. Impact on employees neutral.
• 2010/11 & 2011/12: monthly caps: R670 & R410, and R720 & R440
This was one of the key recent changes. This reform started in 2005/06, when monetary caps were introduced to make the system fairer. The most recent change was to convert those monetary caps into credits, which meant that the benefit that one received was not linked to the income level that one received, but was a fixed amount.
Medical tax credits: 2012/13
• Medical tax credits are a more equitable form of relief than medical deductions because the relative value of the relief does not increase with higher income levels.
• Income tax deductions for medical scheme contributions for taxpayers below 65 years will be converted into such credits.
• Monthly tax credits will be R230 for each of the first two beneficiaries and R154 for each additional beneficiary with effect from 1 March 2012.
• Taxpayers below 65 years may claim medical scheme contributions in excess of four times the total allowable tax credits plus out-of-pocket medical expenses as a deduction against taxable income. A 7.5%
threshold applies to the deduction except in the case of a taxpayer with a disability or a dependant with a disability.
• Taxpayers 65 years and older can claim all medical scheme contributions and out-of-pocket medical expenses as a deduction against their taxable income.
Medical tax credits: 2014/15 (Not in this Bill)
• The tax credits will, as from 1 March 2014, apply to all taxpayers.
• Additional medical deductions will be converted into tax credits at a rate of 25% for taxpayers aged below 65 years.
• Additional medical deductions will be converted into tax credits at a rate of 33.3% for taxpayers below 65 years with disabilities or dependants with disabilities.
• Taxpayers 65 years and older will be able to convert all medical scheme contributions in excess of three times the total allowable tax credits plus out-of-pocket medical expenses into a tax credit of 33.3%.
• Note that the 7.5% threshold will continue not to apply in the case of taxpayers 65 years and older and those with disabilities or dependants with disabilities.
• Employer contributions to medical schemes on behalf of ex-employees will be a taxable fringe benefit and such ex-employees will be able to claim the appropriate tax credits.
Deductions vs. Credit – illustration of the higher “subsidy” for individuals with higher marginal rate under the deduction regime – illustration based on 2011/12 deductions (Table, slide 14)
Dividends withholding tax
Mr Franz Tomasek, SARS Group Executive: Legislative Research and Development, explained:
Dividend withholding tax came into effect on 1 April 2012, bringing an end to secondary tax on companies. The STC was quite an uncommon tax internationally. Most investors were familiar with the DWT. Equally, listed companies preferred a DWT because the tax was on the shareholder, not on the company, and so changed the effective tax rate shown in the financial statements.
• Income tax exempt entities such as retirement funds and public benefit organisations will receive their dividends tax-free. It was therefore quite an expensive reform, as the number of exempt entities would increase quite substantially. It thus cost about R7.5 billion to make the change.
• For equity and revenue reasons the dividend withholding tax was set at 15%. Initially it was thought that perhaps there would be no need to make any changes, but, as times were tough, it was necessary to change the rate at which DWT was imposed from 10% to 15%. This change brought in about R5.5 billion.
• Income from capital can be derived as interest income, dividends or capital gains, all of which should be taxed equitably. High-income individuals tend to receive a larger portion of their income in the form of dividends and capital gains.
• The higher rate will also help to mitigate some of the revenue losses when switching from the secondary tax on companies to the new tax.
• The estimated net loss as a result of these changes will be R1.9 billion.
Headline corporate income tax rates (CIT) and dividend tax rates (Secondary Tax on Companies (STC) & Withholding Dividends Tax (WDT): 1991 to 2012
It was difficult to believe that not long ago South Africa had a 50% CIT rate. Now the rate was down to 28%. STC had earlier been at 15%, had increased to 25%, and was now at 15% once more in the form of the DWT.(Table, slide 16)
Collateral amendments as a result of the implementation of the new dividends withholding tax
Now that this change had been made, a set of other changes would need to be made. One of them was for foreign companies that did business in South Africa by way of a branch rather than a subsidiary. The dividends withholding tax necessitates the following collateral adjustments:
• Removal of the 33% rate for foreign companies: Our treaties provided for an additional 5% to be charged in those cases because of the existence of STC (above the standard CIT rate of 28%); if STC fell away the justification for that additional charge fell away.
• Removal of the 33% rate for personal service providers: Personal service providers are similarly subject to a 33% rate, which will also be reduced to 28%.
• Removal of the higher gold formula rate: Gold companies have the choice of two gold formula rates – the standard formula or the higher formula. Companies choosing the higher formula are exempt from the secondary tax on companies. With the repeal of the secondary tax on companies, the higher formula will be removed as superfluous.
• Removal of the proposed passive holding company regime: Government initially proposed a passive holding company regime to come into effect with the implementation of the dividend withholding tax to correct potential arbitrage between different tax rates. With the dividend withholding tax coming into effect at a 15% rate, these arbitration concerns are greatly reduced. The initially proposed passive holding company regime will be dropped.
• Shortened period for transitional credits: The dividends tax contains transitional credit relief stemming from the pre-existing secondary tax on companies. These credits are set to last for up to five years into the new regime. However, given the delayed implementation of the dividends tax (and the fact that the new regime has a higher rate), the transitional credit period will be reduced to three years.
[He referred to the recent Media Statement for more details.]
Capital Gains Tax
Given the constraints faced at the moment and the need essentially to keep the ability to take profit either by way of selling a share or taking dividends out of it, at least reasonably on par, there was a proposal to increase the CGT inclusion rate. This meant that the effective rates for capital gains tax increased.
• Capital gains tax was introduced in 2001 at relatively modest rates and has remained unchanged for the past 10 years. Internationally South Africa was not particularly high or especially low. This reform has helped to ensure the integrity and progressive nature of the tax system.
• To enhance equity, effective capital gains tax rates will be increased:
– The inclusion rate for individuals and special trusts will increase to 33.3% (from 25%), shifting their maximum effective capital gains tax rate to 13.3% (from 10%).
– The inclusion rate for other entities (companies and other trusts) will increase to 66.6% (from 50%), raising the effective rate for companies to 18.6% (from 14%) and for other trusts to 26.7% (from 20%).
• To limit the impact of capital gains taxation on middle-income households, the exemption thresholds for individual capital gains and for primary residences will be adjusted significantly.
• The following exemptions for individual capital gains are increased from 1 March 2012:
– The annual exclusion from R20 000 to R30 000
– The exclusion amount on death from R200 000 to R300 000
– The primary residence exclusion from R1.5 million to R2 million
– Exclusion amount on a small business disposal when a person is over 55 from R900 000 to R1.8 million
– The maximum market value of assets allowed for a small business disposal for business owners over 55 years increases from R5 million to R10 million.
Capital Gains Tax – Long Term Insurers - Effective capital gains tax rates
• Long-term insurers have four sets of policyholder funds for tax purposes:
1. Individual policyholder fund
2. Company policyholder fund
3. Untaxed policyholder fund
4. The corporate / shareholder fund
• The effective capital gains tax rate for individual policyholder funds will increase from 7.5% to 10% (the new 33.3% inclusion rate as applied to a tax rate of 30%).
• The effective capital gains tax rate for company policyholder funds will increase from 14% to 18.6% (the new 66.6% inclusion rate as applied to a tax rate of 28%).
• Untaxed policyholder funds remain fully exempt from the payment of income and capital gains tax.
Capital Gains Tax – Long Term Insurers
• The changes took effect for all disposals of assets from 1 March 2012 without regard to the years of assessment at issue.
• Any change in effective capital gains tax rates for policyholder funds creates complications for insurers.
• In order to remedy the misallocation of additional capital gains tax among policyholders in an administratively viable manner, it is proposed that a deemed disposal and re-acquisition be applied to all policyholder fund assets.
• Under this approach, Long-term insurers would recognise all unrealised gains and losses arising before the 1 March 2012 effective date of the increased capital gains inclusion rates for policyholder funds (i.e. on the close of 29 February 2012). The new higher inclusion rates will then apply only from 1 March 2012 onwards.
• In order to mitigate any cash-flow constraints from this change, all gains and losses will be spread over a four-year period.
Tax relief for small business corporations
• To encourage the growth of small incorporated businesses, the tax-free threshold for such firms is increased from R59 750 to R63 556.
• Taxable income up to R300 000 is taxed at 10%; this threshold is now increased to R350 000 and the applicable rate reduced to 7%.
• For taxable income above R350 000, the normal corporate tax rate of 28% applies.
• These amendments came into effect for years of assessment ending on or after 1 April 2012.
Small business corporations
Mr Morden explained:
Current thresholds: Rates of Tax
• Taxable income up to and including an amount of R59 750 : 0%
• Taxable income between R59 751 and R300 000: 10%
• Taxable income exceeding R300 000: 28%
Proposed thresholds: Rates of Tax
• Taxable income up to and including an amount of R63 556: 0%
• Taxable income between R63 557 and R350 000: 7%
• Taxable income exceeding R350 000: 28%
Public Benefit Activities – Low Cost Housing
• Part I and Part II of the Ninth Schedule to the Income Tax Act is amended to read as follows:
“The development, construction, upgrading, conversion or procurement of housing units for the benefit of persons whose monthly household income is equal to or less than [R7 500] R15 000 or any greater amount
Determined by the Minister of Finance by notice in the Gazette after consultation with the Minister of [Housing] Human Settlement.’’.
Fuel taxes (by way regulations)
The following amendments were linked to the Customs and Excise Act (No. 91 of 1964):
The general fuel levy and Road Accident Fund (RAF) levy was increased by 20c/l and 8c/l respectively with effect from 4 April 2012.
Table 4.7 Total combined fuel taxes on petrol and diesel, 2010/11 – 2012/13 (Table, slide 25)
Fuel levy – petrol 1987 to 2012 (Table, slide 26)
Fuel levy – petrol cents / litre (nominal and real = 2008 prices) 1987-2012 (Table, slide 27)
Fuel levy as % of budget revenue: 1983/84 to 2011/12 (Table, slides 28)
Fuel levy as % of GDP: 1983/84 to 2011/12 (Table, slide 29)
Fuel sales, litres – million 1985-2011 (Table, slide 30)
Real GDP and fuel sales 1985-2011 (Table, slide 31)
Fuel – litres per real GDP '000 1985-2011 (Table, slide 32)
He noted that, in real terms, using 2008 as a base year, fuel tax had actually decreased and had remained constant for quite a number of years, with a recent slight increase. Fuel tax, in real terms, in 2012, was more or less what it was in 1992. However, people obviously were sensitive to the nominal, as distinct from the real, increase, and reacted emotionally.
Moreover, fuel taxes as a proportion of total revenue, had actually come down. Although an important source of revenue, fuel taxes were not a significant or a buoyant source of revenue. As South Africa's economy became more fuel efficient, the taxable base became smaller, and therefore generated less revenue.
Electricity levy (by way of regulations)
• The electricity levy generated from non-renewable sources will be increased by 1c/kWh to 3.5c/kWh as from 1 July 2012.
• The additional revenue will be used to fund energy-efficiency initiatives such as the solar water heater programme.
• This arrangement will replace the current funding mechanism that is incorporated into Eskom’s annual tariff application.
• It will enhance transparency and enable government to use alternative agencies to deliver on energy-efficiency initiatives.
• The net impact on electricity tariffs should be neutral.
Specific excise duties: tobacco products & alcoholic beverages
• The excise duties on tobacco products are determined in accordance with a targeted total tax burden (excise duties plus VAT) of 52% of the retail price. Increases in excise duties on tobacco products of between 5 and 8.2% are proposed.
• The current targeted total tax burdens (excise duties plus VAT) on alcoholic beverages are 23, 33, and 43% of the weighted average retail selling price of wine, clear beer and spirits respectively.
• It is proposed to retain the current benchmark for wine but to increase the targeted benchmark tax burdens for beer and spirits to 35 and 48% respectively.
• These increases will be phased in over two years. The resulting increases in excise duties on alcoholic beverages for this year range between 6 and 20%. The increase will complement broader measures to reduce alcohol abuse.
Specific excise duties
Table 4.8 on slide 35 - Changes in specific excise duties from 2012/13 shown for malt beer, traditional African beer, unfortified wine, fortified wine, sparkling wine, ciders and alcoholic fruit beverages, cigarettes, cigarette tobacco, pipe tobacco, cigars, and spirits.
The Chairperson referred to page 47 of the Budget Review 2012. It was very important to have that background.
Mr A Lees (KwaZulu-Natal, DA) said that generally the Bill was acceptable, but there were a number of matters of great concern. It was unfortunate that 25% of GDP went into the national fiscus. This was too high if South Africa was looking for foreign investment. He was not sure that National Treasury and SARS needed to comment on this, but this was his opinion.
South Africa's tax regime had a whole range of tax products which brought in a relatively small amount. Had the Department of Finance considered dropping a whole range of these taxes, which had huge collection costs, and rationalising them?
The question of personal income tax relief: there was a view that every citizen who earned some money should pay tax in order to obtain ownership of the tax regime, and that there should, in fact, be no threshold. Of course, the amount collected, and the cost of collection, then fed back into his first question. Had that ever been considered? At the moment there was a very small group of taxpayers in this country, but a huge number of people who benefited from those taxes, and there was no ownership by the majority of South Africans as to how the tax was spent.
He did not buy into the argument on corporate taxes and trying to equate them with personal taxes. They were two different tax regimes. However, this was more of a political argument. If South Africa was seriously looking for foreign investment, it had to be competitive, and could not simply benchmark itself against other countries. It was an incredibly serious move to change the rate of DWT from 10 to 15%. One understood that the net loss to the fiscus was around R2 billion given the increase from 10 to 15% versus the losses on the dividends tax free payment. However, the reality was that South Africa needed to attract investment. To push up the DWT meant that the return for foreign investors was reduced. The DA believed that this was wrong.
What was in the pipeline for the funding of roads? [42m 09s / 1h 08m 29s] There was a proposal for an additional fuel levy in respect of e-tolling in Gauteng. A number of amendments had been proposed in the budget, and now one was seeing more amendments. The kind of amendments proposed here and in the budget had been done in other countries; however, it had to be asked why South Africa was not learning from other countries, so that one got things right the first time. Why was there a need for amendments? Was the Department just not able to contend with these changes? The Department surely had the required high level of skills. He referred to the media statement and the reaction to it, that the homework had not been done and hence the need for these amendments. The need to learn from other countries’ experience applied especially to Dividend Tax and problems that the Department was experiencing.
Was the electricity levy going to be controlled by Eskom? Did Eskom fund the solar water heaters? Or did the levy go into the general fiscus or general account and was then given to municipalities or other implementation agents? Here there was a political aspect as the levy might be used to encourage people to vote for particular parties. He thought he should know the answer to this question, but did not.
The Chairperson asked what the impact of the electricity levy was.
Did South Africa impose higher or lower taxes on fuel compared with other economies?
The Chairperson asked for an explanation of the abbreviations in slide 16.
Mr Morden replied that other countries had higher rates of fuel tax. Many developed countries had rates in the range the high thirties or even the forties in percentage terms. Developing countries were in the high teens. Such countries struggled to collect taxes and had concerns as to the efficiency of their tax collection systems. So it was very hard to compare the tax / GDP ratio without comparing the issues.
Mr Morden replied that South Africa was doing well on the range of taxes. There were the three main taxes – PIT, VAT and CIT. Some of the smaller taxes had primary objectives other than raising revenue, for example, the taxes on tobacco. Though formerly intended to raise revenue, it was now a primary instrument to try to change people’s behaviour. To some extent this applied also to the electricity levy and to the fuel levy. Thus there was a combination of reasons. However, one had to bear in mind the cost of collection, and there were efforts to reduce that cost.
Mr Morden replied that the PIT was an important issue. He referred to an estimate of the number of personal income tax payers. In the first column there was a figure of 6.2 million. These were people more or less above the income tax threshold. Then there was another five million people who were also earning income of some sort but were below the threshold. This was a reflection of distribution of income in the country. This distribution was significantly skewed, and there were attempts to deal with it.
However, those below the threshold paid other taxes such as VAT, so were not completely out of the tax system. The fact that they were below the threshold was a reflection of their low level of taxable income. However, they were contributing to the fiscus in general, by paying all the other taxes, including property rates, VAT and excise taxes. So it was important to see the situation in context. Moreover, as people's income increased, they would move into the PIT system.
The Chairperson spoke inaudibly.
Mr Morden replied that there were 6 million PIT payers. However, if one looked at the tax system holistically, PIT made up only 30% of the total taxes collected. 70% of tax revenue came from other sources.
The fuel levy was an important source of revenue, but it also served other objectives. However, it was not a buoyant source of revenue. One could not over-rely on the fuel tax.
There was a challenge with the Road Accident Fund (RAF). Because of the fuel efficiency in the economy, the base on which the money was collected was not expanding fast enough, which meant that not enough money was generated. Thus there was a debate around finding alternative sources of revenue.
As to the financing of roads, the amount of money allocated to roads (see Budget Review 2012) far exceeded the revenue collected from the fuel levy.
The changes this year in the electricity levy were small, and had the aim to make more transparent what had been hidden in the Eskom tariff. That money - R1.9 billion – would be allocated both to the municipalities but primarily to Eskom to fund the roll-out of solar water heaters. The change in the tariff was basically neutral.
Fuel taxes were slow compared to those in Europe and other countries. In France it was as high as 50%. In the United Kingdom it was as high as 58%. In Australia the tax was about 35 %. In Chile it was between 25 and 40% for petrol and diesel. The only developed country that had very low fuel taxes was the USA, with fuel taxes around 13 or 14%. Many developing countries were at south Africa's level – around 25 to 30%. Many developing countries, especially oil producing countries, had very low fuel taxes, or even subsidised their fuel prices, and were now experiencing significant difficulties as a result. Some people argued that there was scope to increase South Africa's fuel taxes further, but, as mentioned earlier, one must not overestimate the revenue potential from fuel taxes, because as motor vehicles became more fuel efficient, the revenue base would become smaller. The other challenge with revenue from that source was that there were many initiatives to switch towards more energy-efficient motor transport, for example, cars powered by gas or electrically-fuelled engines. This was in the future, but would impact on revenue. Already in Gauteng there was a couple of taxis which used liquid petroleum gas (LPG) and displayed stickers to this effect, and paid no fuel taxes currently.
Mr Tomasek replied that there had been a switch to dividend withholding tax because it was more understandable for foreign investors, and because South Africa's tax treaties applied to it. Because of the way in which secondary tax on companies was structured as a tax on the company, there was no limitation on it in terms of South Africa's tax treatises. So if one was a foreign investor, and one invested into South Africa, STC was payable on dividends paid out to that foreign investor at the rate of 14%. On the other hand, if one was a non-portfolio investor, in other words, a significant investor with investment of 15 or 20% or higher in the South African company, tax treaties would generally start to limit the amount of DWT that could be imposed. In South Africa's case it could go as low as five%. The treaty then said that if one was a foreign direct investment (FDI) investor and making significant investments into South Africa one could take out one's dividends at a much lower DWT of five%. In fact, from a foreign investor's perspective, the switch was attractive, and the increase to 15% did not have an impact on the investor because the treaty limitation applied and capped it at five%. However, treaties with some countries set the cap at 7.5%. At the same time, South Africa was willing to negotiate treaties for a lower rate in respect of FDI.
The view of some commentators that South Africa was reinventing the wheel in respect of amendments was somewhat to be disputed. Such commentators were using their international networks to best advantage, and obscure tactics used by their colleagues offshore, and they expected the authorities to have perfect knowledge of what their colleagues were doing offshore. SARS had its own international networks, but it was doubtful whether SARS had quite the centralised databases of interesting tax planning opportunities that some of those international firms had. Some of the international groupings such as the Organisation of Economic Cooperation and Development (OECD) were trying to build such databases. Unfortunately SARS did not have access to some of them.
He apologised for the unexplained abbreviations – corporate income tax (CIT), secondary tax on companies (STC), and withholding dividends tax (WDT) (Slide 16).
The Chairperson pointed out that these explanations were needed to assist those writing the report.
Mr Lees felt that his question on e-tolling had not been answered.
The effective rate of capital gains tax had been increased quite significantly. It also had a direct impact on direct foreign investment. How much extra revenue would it bring in?
Mr Morden replied that the extra yield from CGT was R1.2 billion extra. On individuals it was about R800 million. So it was about R2 billion altogether. (Slide 8).
The Chairperson noted that the issue of e-tolling was before the courts.
Mr Morden would be reluctant to response on e-tolling and thanked the Chairperson for intervening.
Mr Lees said that his question had nothing to do with the courts, but whether National Treasury had been asked to do any modelling on e-tolling or not.
Mr Morden replied that the National Treasury had done a range of modelling and shared the results with the Presidential Task Team chaired by the Deputy President. In due course the results would be made public.
The Chairperson invited National Treasury to present, in due course, the results as made public.
Rates and Monetary Amounts and Amendment of Revenue Laws Bill: adoption
The Chairperson read the Committee's Report that the Committee had agreed to the Bill without amendments.
The DA agreed to the Bill but asked that its concerns be noted.
The Chairperson ruled that the DA's concerns would be noted and recorded in the minutes.
Mr T Chaane (North West, ANC) proposed adoption of the Report. Mr D Bloom (Free State, COPE) seconded.
Committee minutes: adoption
The Committee adopted its minutes of 29 August 2012.
The Chairperson expected Members to read the Municipal Financial Misconduct Regulations gazetted on 13 July 2012. The Regulations had been circulated to Members on Friday 31 August 2012. This was homework for the party caucuses and study groups.
The meeting scheduled for 05 September with the Special Investigating Unit (SIU) was postponed to 14h00 on 13 September as agreed with the SIU. The Chairperson and Mr Chaane had met with the Minister of Finance last week, and the Committee was awaiting feedback from him on the meeting of the ministerial task team dealing with the provincial intervention in Limpopo. This would be in the first two weeks of October. The Committee was also waiting for feedback from the House leadership on the Committee's submission and application to make a follow-up visit to Limpopo regarding the intervention in terms of Section 100(2)(c), that the intervention be reviewed regularly. Latest information on the pre-visit to the Northern Cape in respect of taking Parliament to the People was that it would be in the week of 08 to 12 October.
Mr B Mashile (Mpumalanga, ANC) who was in hospital, and Mr M Makhubela (Limpopo, COPE). The Committee Secretary had been injured in a road traffic accident the previous day on his way to work, and the Chairperson wished him a speedy recovery, while thanking Ms Estelle Grunewald, who was temporarily Acting Committee Secretary.
The Chairperson welcomed back to the Committee's meetings Adv Mongana Tau, who had been seconded for other duties from his position as the Appropriations Select Committee's Content Adviser: the Finance Select Committee and the Appropriations Select Committee were one family, the Chairperson noted.
At the same time, the Chairperson noted that a Content Adviser had now been appointed specifically for the Finance Select Committee.
The meeting was adjourned.
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