Taxation Laws Amendment Bill; Tax Administration Laws Amendment Bill: consideration & adoption

NCOP Finance

19 November 2012
Chairperson: Mr C de Beer (ANC – Northern Cape)
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Meeting Summary

National Treasury and the South African Revenue Service (SARS), briefed the Committee on the Taxation Laws Amendment Bill and the Tax Administration Laws Amendment Bill after which the Committee reports on the Bills were adopted. This was followed by a brief submission from the Parliamentary Legal Advisor on the Medium Term Budget Framework (MTBF) after which the Committee’s report on the MTBF was adopted. Lastly the Committee discussed an approach made by the Minister to the Committee Chairperson to delay the ATC’ing of the Committee’s report on Limpopo province which had been adopted on Friday 16 November. . The Chairperson had agreed to hold back the report until today’s meeting. However, the Committee insisted on following parliamentary process and not delay the ATC’ing of the report [that is, publish the report in the publication, “Announcements, Tablings & Committee Reports”].

Taxation Laws Amendment Bill [B34 – 2012]
The Treasury outlined the process the Bills had followed since the budget speech in 2012 and the release of the budget review and then spoke to the underlying themes of the Amendment Bills which sought to preserve revenue by closing tax avoidance schemes, assist business by removing tax anomalies and find ‘win-win’ situations where possible.

The presentation covered the standardisation of Medical Credits which would become effective from 1 March 2014. Non-deductible contributions for compulsory annuity income would be exempt from income tax for retirement interests. The ‘Clean Break’ Principle when dividing retirement interest in divorce would see the wife’s portion being allowed to grow and she would be taxed on that portion, while the husband’s portion would grow and he would be taxed on that portion. The timing for variable cash remuneration had been streamlined. The trigger for tax would not be accrual of funds as it would move to a cash basis and would be triggered when the funds were actually paid to the taxpayer. Relief had been given to employers who provided rented vehicles to employees which were used for business purposes. It had attempted to address the dichotomy of foreign shareholders whose dividends were subject to a 15% tax while capital or ordinary gains were tax-free which had led foreigners to convert the dividends into tax-free gains through a variety of conversion schemes which had now been closed. It also sought to prevent value mismatches where taxpayers were avoiding tax by hiding value through exchanges. This amendment sought to ensure that exchanges had to be of a value for value nature. Under current law, debt relief by creditors could give rise to revenue or capital gain which would trigger a tax. A compromise had been reached and SARS would give a tax relief for the amount that creditors had given debt relief.

Not all government grants had been exempt from tax. Treasury, in consultation with the Ministries, had created a list in Schedule 11 of the grants which would be exempt. When money was borrowed to finance the acquisition of a company it incurred interest payments. These would now be tax deductible directly, similar to section 45 acquisitions, but under restrained circumstances. Share for share type transactions would be tax-free. There was also a proposal that share recapitalisation should have rollover relief. There was a move to standardise the approach to property investment schemes. These schemes operated through collective investment either in the form of PUTs (Property Unit Trusts) or PLSs (Property Loan Stock). PUTs were regulated and were exempt from Capital Gains Tax (CGT). PLSs were unhappy and were disguising their shares as debt to eliminate the tax implications. A unified approach to property investment schemes would be adopted for financial, regulatory and tax purposes. REITs (real estate investment trusts) would treat investors as investors holding immovable property directly. Under the new regime all distributions would be tax deductible if the entity generated 75% or more through rental or similar income. Capital gains would be exempt. All REIT yields would be taxed as ordinary revenue. Securities Transfer Tax was 0.25% and was applied when a person acquired beneficial ownership of a share; however brokers were exempt from this tax. Brokers could also be the principal and hold the shares. Shares were then kept with the broker to avoid Securities tax. Banks had also become involved in the market and owned their own brokerages which promoted the derivatives market. SARS had picked up on the problem two to three years ago and was concerned. It could either kill the market or protect its tax base. It had decided to protect its tax base but the matter would be revisited. Insurers were taxed with collective income and had to allocate the tax to each policyholder investment and it had to do the allocation on a mark-to-market approach. This would be taxed at the realisation of the investment. Large financial institutions especially were judged mainly by the state of their financial books, in particular the liquidity of the shares or bonds etc. It was proposed that a deemed disposal and reacquisition approach be applied to all policyholder fund assets mimicking mark-to-market on the 29 February 2012 and that the gain or loss be spread across four years. There was a new deduction formula for long-term policyholder funds. The new formula would be taxable income plus dividends less withholding taxes plus capital gains (without partial inclusion) and would be effective from 2013. SARS did not like giving deductions for short-term insurer’s reserves, but insurance companies were compelled to keep reserves and needed to keep their funds liquid according to Financial Services Board regulations which wanted to keep reserves at a maximum. The biggest abuse here was to call something insurance when it was not. SARS would take its cue from the International Financial Reporting Standard as to whether something was an investment policy or not.

Tax upon cessation of residence was an increasingly difficult space to impose taxes so SARS was trying to become more competitive and making sure that the local tax base was protected (from being exported to off shore bases). If a South African company or person became a foreign company or person all gains/losses were subject to tax although there were exemptions to protect the middle class. However a ruling by the Supreme Court of Appeal had overturned the treaty (Luxembourg Double Taxation Agreement). The tax would apply the day before person left the country. Interest and royalty withholding taxes would be aligned and rationalised. South African multinationals were investing abroad and when there were company restructuring or equity takeovers, SARS preferred the rollover of gains/losses rather than granting exemptions. Many South African companies operated in countries where the tax rate was roughly the same as South Africa or even higher, yet were subject to anti avoidance rules which would clearly not benefit them and imposed an administrative burden on SARS for very little gain. This would give relief to local effective management of South African companies in countries in Africa with little or no infrastructure whose executives opted to operate from a South African base. In addition South African companies that lent low yield loans at a discount to subsidiary companies in African countries to subsidise its operations would also get relief. South Africa was the natural headquarters for companies investing in sub Saharan Africa because of its air transport links and its financial services industry. If foreign investment was put into South Africa first for transhipment to African countries, that money would not be subject to tax except for services rendered locally in South Africa as South Africa did not want to strip the tax base of other African countries. The use of local fund managers to manage foreign funds could trigger taxation of the fund through the “place of effective management” (POEM) test which would make South Africa unattractive as a gateway into Africa. The proposed legislation would create a carve out from the POEM test, but the South African fund manager’s fees would still be taxable in South Africa.

Tax Administration Laws Amendment Bill [B35 – 2012]
South Africa had entered into bilateral agreements with Mozambique and other countries on one-stop border posts in 2007 and legislation was necessary to implement and give force to these agreements. Dividends withholding tax refunds would be extended to foreign tax credit cases within a three-year period of the payment of dividends. Provisional tax estimates were dealt with in clauses 22-23. Retirement lump sum benefits would be subject to a separate tax table and would not be part of the provisional tax system.
Provisional tax penalties had been aligned and now all taxpayers who underestimated their tax were penalised which could be waived on appeal. Businesses which paid the correct amount by the end of the tax year incurred no penalties. SMMEs would be supported through six monthly filing intervals, including VAT filing, which was currently on two or four monthly cycles. Two phases had been proposed for the regulation of tax practitioners. The first phase sought to have a recognised controlling body in the Bills.  Phase two would be based on an evaluation of phase one. All tax practitioners had to fall under a listed regulator or recognised association from 1 July 2013. If a client brought a complaint then disciplinary action could be taken by the body against ‘cowboy’ practitioners. Requests for tax clearance certificates had seen an increase to over 600 000 per annum while it currently  took five days to process an application. The process needed improvement and the intention of the amendments was to make the process accessible electronically thereby making it quicker and information accessible in real time.

Meeting report

Treasury Briefing
Taxation Laws Amendment Bill [B34 – 2012]
Mr Keith Engel, Chief Director- Legal Tax Design at the National Treasury, spoke to the Taxation Laws Amendment Bill and outlined the process the Bills had followed since the budget speech in 2012 and the release of the budget review. He then spoke to the underlying themes of the Amendment Bills, namely uncertain global economic trends, flat economic growth and fiscal revenue, rising political demands on the budget, businesses seeing better growth opportunities elsewhere or holding capital as risk protection which all contributed to seeking amendments which would preserve revenue by closing tax avoidance schemes; would assist business by removing tax anomalies and would find ‘win-win’ situations.

Individuals, Employment and Savings
Medical Credits - Insertion of Section 6B (p10 of Taxation Laws Amendment Bill)

Medical credits through the insertion of Section 6B (p10 of Taxation Laws Amendment Bill) had been standardised with a R230 per month tax credit for the taxpayer and the first dependant and a R154 per month credit for each additional dependant.  25% of the amount for excess medical scheme fees could be deducted where the aggregate of the medical scheme fees exceeded four times the credit and 25% of the amount for all qualifying medical expenses could be deducted where these expenses exceeded 7.5% of the taxpayer’s taxable income. This law would be effective from 1 March 2014.

Exemption For Compulsory Annuity Income From Non-deductible Retirement Contributions - Section 10C 
Non-deductible contributions would be exempt from income tax for retirement interests, whether withdrawn as a lump sum or as an annuity and also irrespective of whether the annuity was bought from the retirement interest entirely or only two thirds was used to purchase it. The exemption would apply on a first come first serve basis.

Completion Of The ‘Clean Break’ Principle When Dividing Retirement Interest In Divorce - Definition Of ‘Formula C’ In Paragraph 1 Of The 2nd Schedule.
In the past, people who divorced received separate retirement packages at retirement. The wife received a portion that did not grow while the husband received a portion that grew but he had to pay the tax on the wife’s portion. In line with the clean break principle, this would change and the wife’s portion would grow but she would pay tax on that portion, while the husband’s portion would grow and he would pay tax on that portion.

Streamlined Timing For Variable Cash Remuneration - Sections 7B And 23E
The Treasury was looking for a ‘win-win ‘situation in streamlining the timing of variable cash remuneration. Currently the trigger for tax was the receipt or accrual of funds. Accrual could be in the form of commissions or bonuses for example, but the exact amount might not be known at the time. It was proposed that there be a move to a cash basis system, and then the trigger for tax would be when the commission was actually paid to the taxpayer.

Rented Employer Provided Vehicles - Paragraph 7 Of The 7th Schedule
If an employee was given a car and it was used for private use, the car was regarded as a fringe benefit. However some companies, instead of buying a car, rented a car from an independent company.  The amendment sought to bring relief to companies that rented cars for their employees as the formula for the fringe benefit assumed that the employee owned the car. If the rented car was only used for business purposes then no tax would be incurred, if it was also used for private purposes then fringe benefit tax would be incurred.

Business (General)
Foreign Shareholder Dichotomy

Dividends received by foreign shareholders were subject to a 15% tax but capital or ordinary gains were tax free, leading foreigners to convert the dividends into tax-free gains. Internationally, foreigners who sold local shares were generally not taxed except in the United Kingdom. India had attempted to impose a tax but people had then invested in places such as Mauritius.

Mr Franz Tomasek, of the Legal and Policy Department of the South African Revenue Service (SARS), said foreigners were not taxed on the sale of business shares or fixed property but were taxed on the dividends of those shares.

Closure of Conversion Schemes – Section 64EB
Mr Engel said that foreigners were selling the rights to the dividends to a company before they (the shareholder) received the dividends by means of cession schemes, share lending, repurchase agreements and share derivatives. In this way SARS had lost a fortune as these deals were worth R100m or more.

Value Mismatches – Section 24BA
Taxpayers were avoiding tax by hiding value through exchanges, where R100 000 of value was exchanged for R20 for example. This amendment sought to ensure that exchanges had to be of a value for value nature.

Debt Reduction/Cancellations – Section 19 And Paragraph 12A Of The 8th Schedule
Under current law, debt relief by creditors could give rise to revenue or capital gain which would trigger a tax.  Theoretically the taxpayer was better off but not in actual fact and SARS wanted to provide relief in these instances. A compromise had been reached and SARS would give a tax relief for the amount that creditors had given debt relief. He said internationally, the United States of America and a few other countries provided this type of relief but that in most countries the taxpayer was liable for the full amount.

Mr T Chaane (ANC-North West) asked what the implications of this were for Government.

Mr Tomasek replied that Government would have a loss but that it would not be a revenue loss as it was not money that had been collected and that the loss was to assist the business. However if the debt was cancelled entirely, then it was regarded as a gain.

Exemption For Government Grants – Insertion Of Section 12P And The 11th Schedule
Mr Engel said that not all government grants had been exempt from tax. Now government grants would be exempt except a few problem cases. Treasury, in consultation with the Ministries had, had created a list of the grants which would be exempt in Schedule 11.

Debt Financed Acquisitions – Section 24O And Section 23K
When money was borrowed to finance the acquisition of a company it incurred interest payments. These would now be tax deductible directly, similar to section 45 acquisitions, but under restrained circumstances.

Substitutive Share For Share Transactions – Section 43
Share for share type transactions would be tax-free. There was also a proposal that share recapitalisation should have rollover relief.

Business (Financial Intermediaries And Vehicles
Real Estate Investment Trusts (REIT) – Section 1 (definition) and Section 25BB

There was a move to standardise the approach to property investment schemes. These schemes operated through collective investment either in the form of PUTs (Property Unit Trusts) or PLSs (Property Loan Stock). PUTs were regulated and were exempt from CGT. PLSs were unhappy and were disguising their shares as debt to eliminate the tax implications.
 
REIT Proposal
A unified approach to property investment schemes would be adopted for financial, regulatory and tax purposes. REITs would treat investors as investors holding immovable property directly. Under the new regime all distributions would be tax deductible if the entity generated 75% or more through rental or similar income. Capital gains would be exempt. All REIT yields would be taxed as ordinary revenue. The removal of dual linked shares would begin in 2013. Unlisted property funds were set to be reviewed in 2013.

Securities Transfer Tax – Section 8
The tax was 0.25% and was applied when a person acquired beneficial ownership of a share; however brokers were exempt from this tax. In the 90’s the problem began to grow when brokers were also the principals and held the shares. Shares were kept with the broker to avoid tax. Banks had also become involved in the market and owned their own brokerages which promoted the derivatives market. SARS had picked up on the problem two to three years ago and was concerned. It could either kill the market or protect its tax base. It had decided to protect its tax base but the matter would be revisited.

Mark To Market Of Long Term Policyholder Funds – Section 29B
Insurers were taxed with collective income and had to allocate the tax to each policyholder investment and it had to do the allocation on a mark to market approach. This would be taxed at the realisation of the investment. Large financial institutions especially were judged mainly by the state of their financial books, in particular the liquidity of the shares or bonds etc. It was proposed that a deemed disposal and reacquisition approach be applied to all policyholder fund assets mimicking mark to market on the 29 February 2012 and that the gain or loss be spread across four years. The annual mark to market system was pending a larger review.

New Deduction Formula For Long Term Policyholder Funds – Section 29A
SARS was getting rid of the old formula for income generating assets. The new formula would be taxable income plus dividends less withholding taxes plus capital gains (without partial inclusion) and would be effective from 2013.

Short Term Insurer’s Reserves – Section 28 And Section 23L
SARS did not like giving deductions for reserves but Insurance companies were compelled to keep reserves and needed to keep its funds liquid according to Financial Services Board regulations which wanted to keep reserves at a maximum. He said the biggest abuse was to call something insurance when it was not, so as to benefit from it being tax deductible. SARS would take its cue from the International Financial Reporting Standard as to whether something was an investment policy.

Mr S Montsitsi (ANC Gauteng) commented that insurance was a type of saving and that the country wanted to promote savings.

Mr Tomasek said that the more income a person made, the more tax would be paid. The people who saved the most were rich people and he acknowledged that income tax did contradict savings.

International
Tax Upon Cessation Of Residence: Overturning The Tradehold Decision – Section 9H

Mr Engel said that this was an increasingly difficult space to impose taxes so SARS was trying to become more competitive and making sure that the local tax base was protected (from being exported to off shore bases). If a South African company or person became a foreign company or person all gains /losses were subject to tax although there were exemptions to protect the middle class. However a ruling by the Supreme Court of Appeal had overturned the treaty (Luxembourg Double Taxation Agreement). The tax would apply the day before person left the country. 

Rationalising Interest And Royalty Withholding Taxes – Parts 1A And IVA
Foreigners had to pay local taxes. Non-residents would be subject to withholding tax when receiving royalties, interest and dividends. Royalty and interest withholding taxes would be aligned.

Cross Border Re-Organisation - Section 41-47 And Paragraph 64 Of The 8th Schedule
South African multinationals were investing abroad and when there were company restructuring or equity takeovers, SARS preferred the rollover of gains/losses rather than exemption

Comparable Country Tax Relief Section 1 (Definition Of A Resident) And Section 31
Many South African companies operated in countries where the tax rate was roughly the same as South Africa or even higher, yet were subject to anti avoidance rules which would clearly not benefit them and imposed an administrative burden on SARS for very little gain. This would give relief to local effective management of South African companies in countries in Africa with little or no infrastructure whose executives opted to operate from a South African base. Normally if management were based in South Africa then it would be subject to local taxes and that had been waived. In addition South African companies that lent low yield loans at a discount to subsidiary companies in African countries to subsidise its operations would also get relief.

Further Refinements To HQ Regime – Section 91
South Africa was the natural headquarters for companies investing in sub Saharan Africa because of its air transport links and its financial services industry. If foreign investment was put into South Africa first for transhipment to African countries, that money would not be subject to tax except for services rendered locally in South Africa. South Africa did not want to strip the tax base of other African countries.

SA Fund Managers Of Foreign Investment Funds – Section 1
The use of local fund managers to manage foreign funds could trigger taxation of the fund through the POEM test which would make South Africa unattractive as a gateway into Africa. The proposed legislation would create a carve out from the POEM test, but the South African fund manager’s fees would still be taxable in South Africa.

Tax Administration Laws Amendment Bill [B35 – 2012]

One Stop Border Posts – Clause 1

South Africa had entered into bilateral agreements with Mozambique and other countries on one stop border posts in 2007 and legislation was necessary to implement and give force to these agreements.

Dividends Withholding Tax Refunds – Clauses 15-17
The refunds would be extended to foreign tax credit cases within a three-year period of the payment of dividends.

Provisional Tax Estimates – Clause 22-23
The provisional tax estimates were dealt with in clauses 22-23. Retirement lump sum benefits would be subject to a separate tax table and would not be part of the provisional tax system.

Provisional Tax Penalties - Clause 23
Currently tax payers with a taxable income of more than R1m who underestimated their tax were given concessionary treatment, in that it was discretionary whether a tax penalty was imposed on them, yet the penalty was compulsory for those with a taxable income under R1m. This inconsistent treatment would be ironed out and all would be treated the same with a penalty being imposed which could be waived on appeal. Businesses which paid the correct amount by the end of the tax year incurred no penalties.

Six-Monthly Filing For Micro –Businesses Clause 26 And Clause 30
SMMEs would be supported through six monthly filing intervals, including VAT filing, which was currently on two or four monthly cycles.

Regulation Of Tax Practitioners 
Two phases had been proposed for the regulation of tax practitioners. The first phase sought to have a recognised controlling body in the Bills.  Phase two would be based on an evaluation of phase one.

Recognised Controlling Body – Clause 36 And Clauses 80-84
All tax practitioners to fall under a listed regulator or recognised association from 1 July 2013. A recognised association had to be given notice and an opportunity to take corrective action if it did not meet the requirements for it to be recognised as a tax practitioner association. The Minister may appoint a panel of retired judges or similar persons to handle disciplinary matters.  If a client brought a complaint then disciplinary action could be taken by the body against ‘cowboy’ practitioners.

Mr B Mashile (ANC - Mpumalanga) asked how taxpayers were protected from unscrupulous practitioners. Would they have recourse to the associations to get their money back?

Mr Tomasek replied that they would have to get their money from the tax practitioner.

Mr Montsitsi asked what recourse taxpayers had, if employers claimed that they had paid tax deductions to SARS, but had kept the money for three or four years.

Mr Tomasek replied that it could not happen for three or four years, as it would be picked up. However even if it was assumed to be for one year, it was a criminal offense and charges could be laid. If employees could prove that the money had been deducted, then that amount would be credited to them, but they would not be given a refund

Tax Clearance Certificates – Clause 89
Requests for tax clearance certificates had seen an increase to over 600 000 per annum. The maximum 21-day turnaround time was therefore inadequate in light of this volume although currently it took five days to process an application. The process needed improvement and the intention of the amendments was to make the process accessible electronically thereby making it quicker and information accessible in real time. SARS wanted it done by April next year.
 
Mr R Lees (DA, KwaZulu-Natal) said that one difficulty encountered with the SARS systems was that a certificate might be turned down on a minor issue but the process to correct the issue became a nightmare as the SARS systems were not linked and one had to jump in and out of the SARS systems to access information or input information.                   

Mr Tomasek replied that SARS had legacy problems regarding its computer infrastructure. It was attempting to overcome the problems mentioned by building middleware, which operated above all the SARS systems in an attempt to integrate it. A seamless computer infrastructure however was a long-term project, which would require massive investment to reconfigure the existing infrastructure.

The Committee reports on the Taxation Laws Amendment Bill and the Tax Administration Laws Amendment Bill were adopted by the Committee.

Briefing by the Parliamentary Legal Advisor
The Chairperson said that he had interacted with Mr Frank Jenkins, Senior Parliamentary Legal Advisor, on clarifying uncertainty that had arisen from the meeting held on Friday 16 November regarding the Medium Term Budget Framework (MTBF).

Mr Jenkins said that the MTBF consisted of a revised fiscal framework for the current financial year and for the outer years according to section 6.5. Section 6 only dealt with provincial fiscal frameworks. The Committee’s Report went to the House and it could make recommendations. This was the only stage where provinces could give an input to the MTBF. It had a thirty-day period in which to do this and the Minister had to respond to the inputs. In the other part of the MTBF, the Minister of Finance could, for various reasons such as natural disasters or world economic trends revise the budget.

Discussion
Mr Montsitsi asked if the Committee was still within the thirty-day period to make an input.

The Chairperson replied that National Treasury had sent officials to the provinces for the provincial budget briefings and that the thirty-day period had lapsed on Sunday the 18th of November.

He then tabled the Committee report on the MTBF which was adopted by the Committee.

Other Matters
The Chairperson said that an important meeting would be held the following day, which was the second part of a briefing on the interventions made in Limpopo province. He added that the Minister had contacted him on Sunday 18 November and requested that the ATC’ing of the Committee’s Limpopo report be held back as the Committee’s report had been leaked and the story had run in two newspapers. He had agreed to hold back the report until the meeting on Wednesday 20 November. He said the Committee’s recommendations would assist it to make a contribution at the meeting because it had done an oversight visit to the area.

Mr D Bloem (COPE - Free State) voiced his disagreement with the Chairperson’s decision to suspend the ATC’ing of the Limpopo report as it interfered with the legislative process. He said the Minister did not have the right to block the report from being ATC’d. He added that the document was not a leaked document as the report was a public document. He had no problem meeting with the Minister but the legislative process was the correct way to proceed.

Mr Mashile said the Committee’s report was adopted by the Committee and had to follow the parliamentary process. He asked what the intention was behind the request not to ATC the report.

The Chairperson said the report’s content would remain as it was.

Mr Jenkins said that the report was controlled by the Committee until it was ATC’d, at which point it belonged to the House and could only be amended through another report.
 
Mr Lees said parliamentary process had to be followed.

Mr Montsitsi said that the fact that the report was not ATC’d was not a problem as the Minister could not change the content of the report.

Mr Bloem said the Minister’s input could be tabled in the form of an amended report by the Committee.

The Chairperson said that he had tried for a long time to interact with the Ministers. The report would remain as it was. He said the meeting the following day with the Ministers should have taken place a long time ago.  He added that there would be a short debate in the House on the following Tuesday on the Limpopo matter.

The meeting was adjourned.

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