Tax Administration Amendment Bill [B35-2012]: National Treasury & SARS response to submissions

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Finance Standing Committee

05 November 2012
Chairperson: Mr T Mufamadi (ANC)
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Meeting Summary

The South African Revenue Service (SARS) presented its responses to comments raised in hearings on the Draft Administration Amendment Bill 2012. The Committee noted the important distinction between the Taxation Laws Amendment Bill and the Tax Administration Amendment Bill, as the Constitution mandated Parliament to process them separately. Many people wanted the special dispensation for taxpayers with a taxable income of more than R1 million to remain. SARS' response was that the proposal ensured that all provisional taxpayers were treated in the same way (Clause 15). SARS proposed to waive part or the entire penalty if satisfied that the taxpayer had taken reasonable care in preparing the estimate and had not deliberately or negligently understated taxable income. It was only when a taxpayer was outside the 20% margin that the penalty applied. Some commentators feared that the change would drive up costs, and asked that a turnover of R30 million, the threshold for monthly Value Added Tax (VAT) payments, be used in place of the current R1 million taxable income threshold. SARS disagreed and explained in detail. Using a VAT threshold in an income tax environment would have anomalous results. According to the 2012 Tax Statistics, the number of taxpayers with taxable incomes in excess of R1 million was quite modest.

The regulation of tax practitioners and a recognised controlling body (Clauses 23 and 55-59) was the aspect of the Bill that was most talked about. SARS proposed an effective date for membership in a recognised controlling body of 01 April 2013. SARS wanted to concentrate everyone's minds, and had already begun engaging with bodies on the steps to be taken for recognition. Recognition of the controlling bodies should be possible in early 2013. The deadline fell after the 2013 budget so unanticipated difficulties could be evaluated and taken into account if necessary. SARS used the word 'may' to indicate that it was the Commissioner who had the discretion to determine whether the requirements for recognition of a controlling body had been met. A commentator had pointed out that the Legal Practice Bill [B-2012] had not yet been enacted, so the reference to the South African Legal Practice Council (SALPC) was inappropriate. SARS had therefore removed the reference to the SALPC and replaced it with appropriate references in terms of the Attorneys Act (No. 53 of 1979) and the Admission of Advocates Act (No. 74 of 1964). There had been a comment that the Bill should be clear that the minimum qualification, experience and continuing professional education criteria should be tax specific. SARS explained its response in detail. It sought specifically relevant qualifications, experience and continuing professional education. Of course, the 'relevant' did not have to be confined to tax alone, but the focus should be on tax. SARS accepted the objection that the share of the cost of the panel of retired judges or persons of similar stature to decide on an issue on behalf of a controlling body might be unaffordable and had made an amendment to provide that the panel would be appointed only on request or if the Minister was satisfied that the relevant recognised body's disciplinary process was ineffective. Provision was made that one member of the panel might hear less contentious cases.

Commentators had pointed out that there were a number of countries in which a limited statutory privilege was extended to tax advice provided by tax advisers who were not lawyers. SARS' response was that there were not a great many countries that had legal privilege for tax practitioners. It was a complex and contentious issue. There were very serious policy considerations. Tax practitioners remained largely self-regulated and the success or otherwise of the model still had to be evaluated.

A DA Member was not sure if treating all taxpayers the same was desirable. If there was to be an automatic imposition of a penalty at the maximum tax rates, it should not apply to all taxpayers. The 01 April effective date for membership in a recognised controlling body left a very short time-frame. Many problems could be avoided by a later date. This Clause left too much discretion to the Commissioner. What was the time-frame for SARS evaluation of the self-regulation of tax practitioners? The process for tax clearance certificates was too onerous. It should be for SARS to follow-up on taxpayers.

SARS replied that it had now emphasised to its staff that five days remained the target for turnaround time, even if it was not always achievable, while 21 days was the longest period allowed by the law. The Medium Term Budget Policy Statement (MTBPS) made it clear that SARS was working to streamline the issuing of tax clearance certificates and to make it a completely electronic process. In essence the taxpayer would have control over his or her tax clearance status. They would be able to ensure that they were compliant.

Meeting report

Introduction
Mr D van Rooyen (ANC) acted temporarily as Chairperson until Mr T Mufamadi (ANC) arrived, having been delayed by the late arrival of his flight.

He noted the important distinction between the Tax Laws Amendment Bill and the Tax Administration Amendment Bill, as the Constitution mandated Parliament to process them separately.

Mr D Harris (DA) asked if it would be necessary to elect Mr Van Rooyen as Acting Chairperson.

Mr Van Rooyen replied that the Committee had already adopted a resolution that he would act as Chairperson in the absence of Mr Mufamadi. Moreover, today no decisions would be taken.

Mr Mufamadi arrived soon after the start of the presentation and took the Chair.

SARS Response to submissions on Draft Administration Amendment Bill 2012
Documentation
Mr Franz Tomasek, SARS Group Executive: Legislative Research and Development, explained the rationale for the paragraph numbering of the ‘narrative’ [Detailed Response on the Draft Administration Amendment Bill 2012] draft - 6 November 2012. It would eventually be combined with the corresponding document for the Tax Laws Amendment Bill. Although these Bills were distinct, they were complementary. Also in the 'narrative', SARS answered a number of questions posed by commentators. It did not usually do this in a response document. The reason was that the Tax Administration Act was new, and many people had difficulty in grappling with how it worked. (See [Detailed Response] document.)
 
One stop border posts (Clause 1)
He responded to the comment that this provision should be inserted into the Customs and Excise Act 1964. SARS had not accepted this comment. This proposal extended beyond the Customs and Excise Act 1964 to other border control legislation. The proposed location of the provision had been cleared with the State Law Adviser.

Provisional tax penalties (Clause 15)
There was resistance to change, and many people wanted the special dispensation for taxpayers with a taxable income of more than R1 million to remain: in other words, for SARS to ask the question before imposing the penalty rather than imposing the penalty and allowing SARS to change it. (That is, the penalty might be levied if SARS was not satisfied that it was seriously calculated and would not automatically be levied at 20%).

SARS' response was that the proposal ensured that all provisional taxpayers were treated in the same way.

A commentator had complained that there was no opportunity for the taxpayer to request remission of the penalty, and asked that the remission of the penalty should be extended.

SARS' response was that the comment was misplaced: as part of the proposal, Clause 15(c) of the draft Bill amended paragraph 20(2) to permit SARS to waive part or all of the penalty imposed if satisfied that the tax payer had taken reasonable care in preparing the estimate and had not deliberately or negligently understated taxable income. (Slide 3)

He pointed out that there was a 20% margin for error here. So it was only when a taxpayer was outside the 20% margin that the penalty applied.

Some commentators feared that the change would drive up costs, and asked that a turnover of R30 million, the threshold for monthly Value Added Tax (VAT) payments, be used in place of the current R1 million taxable income threshold.

SARS disagreed. A tax payer had to supply the information in order for SARS to use its discretion if the tax payer was outside the 20% leeway. Whether the taxpayer provided the information before or after imposition of the penalty, the reality was that the taxpayer must provide the same information. As to the suggestion that SARS should change to a VAT threshold, the problem was that not everybody who was in the income tax system was also in the VAT system; and if the taxpayer was in the VAT system, he or she might have an assessed loss, so this particular provisional tax rule would not apply to him or her, but on this basis, the taxpayer would be subject to the rule because the taxpayer's turnover was over R30 million. Using a VAT threshold in an income tax environment would thus have anomalous results. He pointed out that, according to the 2012 Tax Statistics, the number of taxpayers with taxable incomes in excess of R1 million was quite modest. (See table, slide 5; see also paragraph 13.2).

Regulation of tax practitioners and a recognised controlling body (Clauses 23 and 55-59)
This was the aspect of the Bill that was most talked about.

One of the comments was that there was a risk that, if the Bill came into force immediately, there might be a period where there were no recognised controlling bodies, therefore people could not be a member of such a body, and so there was a need for some lead time.

SARS was proposing an effective date for membership in a recognised controlling body of 01 April 2013.

Unsurprisingly, commentators had said that the proposed date of 01 April 2013 was too early and 01 July 2013 or later would be preferable.

SARS' experience was that when setting a deadline, everyone tended to wait until the last week or two before rushing to comply. SARS, therefore, wanted to concentrate everyone's minds, and had already begun engaging with bodies on the steps to be taken for recognition, as phase I of the process, if the legislation was adopted. There was currently a meeting in progress in Pretoria on this very topic. Recognition of the controlling bodies should be possible in early 2013. The deadline fell after the 2013 budget so unanticipated difficulties could be evaluated and taken into account if necessary. It would be open to the Minister of Finance to propose a change to the date if such a change really was necessary. The Minister had always been amenable to reason in such matters.

A commentator had asked why SARS used the word 'may' in the provision that if the criteria for recognition of a controlling body were met, the Commissioner 'may' recognise a controlling body. The commentator wanted the law to indicate that the Commissioner must recognise the body.

SARS' response was that the use of the word 'may' served to indicate that it was the Commissioner who had the discretion to determine whether the requirements had been met. Clearly if a body felt that the Commissioner had exercised his or her discretion inappropriately, the body would be able to take the Commissioner's decision on a review.

A commentator had pointed out that the Legal Practice Bill [B-2012] had not yet been enacted, so the reference to the South African Legal Practice Council (SALPC) was inappropriate.

SARS acknowledged that this comment was correct, and had removed the reference to the SALPC and replaced it with appropriate references in terms of the Attorneys Act (No. 53 of 1979) and the Admission of Advocates Act (No. 74 of 1964).

There had been a comment that the Bill should be clear that the minimum qualification, experience and continuing professional education criteria should be tax specific.

SARS' response was that SARS was specifically looking for relevant qualifications, experience and continuing professional education, and, since one was talking about tax legislation, 'relevant' would refer to qualifications, experience and continuing professional education that was tax-related. Of course, the 'relevant' did not have to be confined to tax alone; qualifications, experience and continuing professional education could include accounting and broader legal issues; but the focus should be on tax. Relevance must be judged in the context of this provision appearing in the Tax Administration Act (No. 28 of 2011) and being administered by the Commissioner.

It was objected that the share of the cost of the panel of retired judges or persons of similar stature to decide on an issue on behalf of a controlling body might be unaffordable for smaller associations, even though the body concerned would share the costs on a 50:50 basis with SARS.

SARS accepted this objection. It had made an amendment to provide that the panel would be appointed only on request or if the Minister was satisfied that the relevant recognised body's disciplinary process was ineffective.

He said that the question might arise, if the controlling body was not doing its work, why should SARS not simply remove the association as a recognised controlling body. However, it must be remembered that there was a period of notice before this could happen, and an opportunity to correct the situation. There also remained the issue of what was to be done in the interim. This amended provision was to ensure that there remained an effective disciplinary process in the interim.

Provision was made that one member of the panel might hear cases. This would apply in the case of less contentious issues. This should also help reduce costs. (See also Detailed Response document, paragraph 13.8.)

Professional privilege for tax practitioners
This was the issue in which tax practitioners were most interested.

Commentators had pointed out that there were a number of countries in which a limited statutory privilege was extended to tax advice provided by tax advisers who were not lawyers. In view of the fact that tax practitioners were now being regulated by law, such a limited statutory privilege should be granted now.

SARS' response was that there were not a great many countries that had legal privilege for tax practitioners (see table at end of paragraph 13.9 in the [Detailed Response] document.) Moreover, it was a complex and contentious issue with mixed international precedent at best. There were very serious policy considerations. Arguments for extending privilege must be balanced against strong policy reasons for not extending it. Tax practitioners remained largely self-regulated and the success or otherwise of the model still had to be evaluated.

He referred to the case of R (on the application of Prudential plc and another) (Appellants) v Special Commissioner of Income Tax and another (Respondents). This case was being heard in the United Kingdom Supreme Court from 5 - 7 November 2012. The issue was whether, at common law, legal professional privilege ('LPP') applied to communications between a client and an accountant seeking and giving legal advice on tax law. (
www.supremecourt.gov.uk/index.html ; then follow link http://news.sky.com/info/supreme-court for a live web cast.)

The above case showed that it was not an easy matter to decide. SARS view was that if one was to decide to give some kind of statutory privilege, it would best be given to a regulated industry, in the way that attorneys and advocates were regulated. The time to look at the matter was when one moved in the direction of that model. SARS did not accept the argument of some commentators that phase II would never be reached, that phase I would be so successful that phase II would not be needed. Equally, SARS would ask why it should consider legal privilege when it was not sure that it was a success or not. The right decision, in SARS view, was to wait until the move to phase II, or until SARS had found that the move to phase II was unnecessary, and then consider, how in the South African context, the policy considerations emerged.

(See also [Detailed Response] document, especially for SARS' responses to comments on the effective date for new research and development rules (Clause 22) [paragraph 13.3]; definition of a SARS official (Clause 23) [paragraph 13.4]; Extension of time to respond to a query (Clause 32) [paragraph 13.5]); estimated assessments (Clause 39) [paragraph 13.6]; remission of understatement penalty (Clause 48) [paragraph 13.7])

Discussion
Provisional tax penalties (Clause 15)
Mr N Koornhof (COPE) thought that PricewaterhouseCoopers (PwC), which was normally most diligent, had not adequately addressed the provision that the automatic penalty was not open to review by SARS. For the automatic penalty not to be capable of being reviewed would be 'draconian'.

Mr Harris was not sure if treating all taxpayers the same was something towards which one should be striving. In a progressive tax system, one surely wanted more onerous restrictions on those with greater capacity to handle the 'red tape'. The justification of equal treatment was not good enough. If there was to be an automatic imposition of a penalty at the maximum tax rates, it should not apply to all taxpayers. There should be more differentiation.

Mr Tomasek replied that there was an addition, of Clause 15(b). This was important, because it was this provision that allowed the discretion. However, it was not the clearest example of drafting, when read as an amendment. However, when the legislation was consolidated, it made more sense. Perhaps there was an oversight here in the drafting.

At present, the largest tax payers had, broadly, the less onerous treatment. He explained how the provisional tax system worked. For people on incomes of R1 million and below, taxpayers must do their estimates at 90% of actual or on their basic amount (which was an amount that SARS would give them as calculated by law). So such people must be within 90% or they had a legislative safe harbour. Taxpayers with incomes over R1 million, must be within 80% of the final taxable income. For them there was no legislative safe harbour, but there was a bigger margin for error. The way in which it had always worked was that for the people with incomes of R1 million and below, there was an automatic penalty of 20%, but the taxpayer could ask SARS to reduce it; while for the people with incomes over R1 million, it was SARS who asked the taxpayer if a penalty should be imposed. So it was the taxpayers with incomes over R1 million who had the more generous treatment. Essentially SARS was proposing that there should be the same rule – which was that a penalty should be imposed once a taxpayer was outside the boundaries, but if a taxpayer had made a reasonable estimate and demonstrated making a reasonable effort then the penalty would be 'reduced away' completely. 20% was actually quite a large margin for error. The country would be in a difficult situation if SARS own estimates were out by such a large magnitude. This was precisely because there was difficulties in getting there that there was discretion if the taxpayer showed that he or she had made a serious effort take the relevant factors into account and that it were not a deliberate or negligent underestimate.

Regulation of tax practitioners and a recognised controlling body (Clauses 23 and 55-59)
Mr Harris thought that the 01 April effective date for membership in a recognised controlling body left a very short time-frame. Many problems could be avoided by a later date. This Clause left too much discretion to the Commissioner. He did not understand the logic.

Mr Tomasek replied that SARS hoped to have the bodies recognised by the end of January. This would allow tax practitioners two months to come forward and be registered. Once the hard work of recognition had been accomplished, it was merely a matter of applying to the relevant body. He emphasised that SARS anticipated tiered membership within bodies.
He added that one had to look at the word 'relevant' in its context, which was tax. However, other issues, besides tax, could be involved. Perhaps accounting might be relevant too. He was reluctant to follow the 'tax specific route' because of the reaction to SARS discussion paper on regulation of tax practitioners some years previously. It had been pointed out that some of the most respected tax practitioners did not have a tax specific qualification. If one specified only 'tax specific' and did not recognise prior experience, there might be problems for some existing practitioners who were already doing a good job.

Mr Harris asked what the time-frame for SARS evaluation of the self-regulation of tax practitioners was.

Mr Tomasek replied that the time-frame was 18 months. Afterwards SARS would review the situation and see if phase I had worked. If phase I was successful, SARS could begin examining if privilege made sense. If phase I was not working, then SARS would have to begin thinking about an independent regulator.

He noted that internationally, tax practitioners were often regulated by the tax administration. However, this was not something that SARS had ever proposed. It had always favoured an independent regulator, if one were to be appointed. Also, in the case of an appointment of an independent regulator, it would have to be considered if legal privilege made sense in that context.

Tax clearance certificates
Mr Harris said that the process was too onerous. It should be for SARS to follow-up on taxpayers.

Mr Tomasek acknowledged difficulties in the tax clearance certificate process. He had taken up with his operational colleagues that it had been raised to the Committee that SARS staff were treating the 21 days provided for in the Tax Administration Act as a target. His colleagues had re-emphasised to staff that five days remained the target for turnaround time, even if it was not always achievable, while 21 days was the longest period allowed by the law. The Medium Term Budget Policy Statement (MTBPS) made it clear that SARS was working to streamline the issuing of tax clearance certificates and to make it a completely electronic process. In essence the taxpayer would have control over his or her tax clearance status. They would be able to ensure that they were compliant. Once they were compliant, they would be able to obtain one user personal identification number (PIN) that they would be able to pass onto the entity that was requesting the tax clearance certificate and then that would give the entity access to a 'live tax clearance certificate' for that particular taxpayer. In order to underpin that, SARS had proposed some further amendments in the Taxation Laws Amendment Bill 2012.

The Chairperson asked if any other Members had questions. If not, it appeared that it would be an exceptionally short meeting.

There were none.

The Chairperson adjourned the meeting.

Apologies
Ms J Tshabalala (ANC), who was writing examinations; Mr D Ross (DA), who was in a meeting in Bloemfontein; and Ms Z Dlamini-Dubazana (ANC), who was attending a conference for the whole week.

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