Taxation Laws Amendment Bill: hearings; Financial Advisory & Intermediary Services Bill: adoption

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Finance Standing Committee

11 June 2002
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Meeting Summary

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Meeting report

FINANCE PORTFOLIO COMMITTEE
12 June 2002
TAXATION LAWS AMENDMENT BILL: HEARINGS; FINANCIAL ADVISORY & INTERMEDIARY SERVICES BILL: ADOPTION

Chairperson:
Ms Hogan (ANC)

Relevant Documents:
Taxation Laws Amendment Bill (Draft)
Explanatory Memorandum
Ninth Schedule (Public Benefit Activities)
New Clause 12H - Deduction in respect of learnership agreements - Appendix 1
Submission by the Non Profit Partnership
Submission by Cosatu - Appendix 2
Submission by SACOB - Appendix 3

Financial Advisory and Intermediary Services Bill: Version 21 November 2001
FSB Final Submission to the Portfolio Committee on Finance
Proposed Amendments by the FSB
FAIS Bill: Version 9 June 2002.

SUMMARY
Hearings on Taxation Laws Amendment Bill:
- The Non-Profit Partnership submitted that the approach to the non-profit sector is a substantial improvement but felt that the Bill was not ideal and made a few suggestions.
- COSATU's submission focussed on the wage incentive. Certain concerns that were raised in respect of the draft legislation were partly addressed and a few of the outstanding concerns were highlighted.
- SACOB in line with SAICA's submission wanted a moratorium on those taxpayers who transgressed exchange control and tax laws in the past so that they have an incentive to bring the money back to South Africa.

Finalisation of the FAIS Bill: The two outstanding issues were the Policyholder Protection Rules (PPR) and the Position of Health Brokers. The Final Submission by the FSB contains the main terms of the agreement reached by the FSB and the Medical Schemes Council and the approach taken in respect of the PPR. The Bill was adopted. Implementation is expected in August 2002.

MINUTES
Taxation Laws Amendment Bill
Non-Profit Partnership (NPP) submission
Ms Karen Nelson (NPP) said that the new approach is a substantial improvement. The provisions in the Bill that deal with the non-profit sector is a result of collaboration between the sector, National Treasury and SARS. She submitted that many concerns raised previously, especially around the public benefit activity list, had been addressed, and felt that the sector had been part of a democratic process in shaping the Bill. She said that at the same we should to be naïve and she submitted that the Bill is not a perfect one in terms of what the law should be. She handed over to Mr Rosenthal (Richard Rosenthal Attorneys) to go through the submission.

Mr Rosenthal said that many of the concerns relate to the specific wording of certain provisions. Many concerns are of a technical nature. There are a few concerns of a technical nature. The full submission is attached as Appendix 2. In the submission reference is made to 'Annexure A' It is not attached hereto as it is the prescribed fiscal conditions as envisaged in section 30(1) of the Income Tax Act as amended.

Discussion
Ms Taljaard (DP) referred to the submission that there are organisations that are not foreign states that do give donations via grants. The NPP was concerned that such organisations e.g. the European Union, is not covered in the definition of public benefit organisation. She asked if the NPP had any suggested wording.

Mr Rosenthal replied that as long as the principle is accepted then the wording can be devised.

The NPP was concerned that scholarships and bursaries are not included in Part 2 of the list as a allowable deduction. Ms Joemat (ANC) wanted SARS to comment on this issue. The member also referred to the submission that services provided to the PBO should also be part of exempt income. i.e. donations in kind.

Mr Louw (SARS) wanted to first have discussion before finally commenting on bursaries and scholarships. He added that if the funds go directly to schools or universities, then section 18A covers this. A problem exists if wider exemptions are granted as was previously done. SARS found that employers created funds and it was for the benefit of their children or senior employees. He said if this can be overcome, then the issue can be considered.

In respect of donations in kind Mr Louw said SARS has not considered how to determine its Rand Value but has no objection to the principle that donations in kind should be exempt.

Ms Taljaard asked if there is a policy decision that elements in Part 1 of the List are not in Part 2.

Mr Louw replied that Part 1 & 2 are different. Part 2 deals with the tax deductible donations that falls into the domain of the Minister of Finance who decides what activities to add each year.

COSATU submission
The submission focussed on the wage incentive and was presented by Ms Fiona Tregenna. A memorandum on the wage incentive draft legislation was provided. The memorandum highlights the main points of the submission. The full submission is attached as an Appendix 3.

Memorandum on the wage incentive draft legislation
COSATU raised the following main concerns specifically in relation to the draft legislation:
1. The subsidy should be targeted at job creation, i.e.
a. It should be targeted at people not already in employment.
b. The subsidy should not displace existing workers.
c. Mechanisms should be built in to promote retention of the learners after the learnership, in the interests of sustainable job creation.

2. The level of the proposed subsidy was too high, particularly relative to learnership wage rates.

3. COSATU proposes that the legislation should be written in a more simple and accessible manner.

In the revised draft legislation, some of these concerns have been partly addressed. Issues 1 .(a), 2. and 3. above have been addressed to an extent. The main outstanding concerns are as follows:
· No mechanisms seem to be built into the draft legislation to prevent the displacement of existing workers, or to provide for processes for the reinstatement of workers dismissed under these circumstances. COSATU has proposed the following mechanisms in this regard:
- that employers should have to sign a declaration to the effect that no existing jobs would be replaced;
- that stiff penalties multiple times the value of the learnership should be built in for non-compliance with this;
- that displacement of a worker by a learner funded by the wage incentive would be classed as an unfair dismissal; and
- that there should be an appeals procedure under which a worker displaced by a learner would be able to appeal their dismissal, including through the CCMA, if it is found that they were indeed displaced by a learner the employee would be immediately reinstated.

· The draft legislation also has no provisions to promote the retention of a learner after the period of the learnership. COSATU has proposed to government that a period should be stipulated (for example either double the period of the learnership or a fixed period of two years); and that an employer who benefits from a wage incentive should either employ a learner for that period after the learnership, OR could elect to repay the value of the learnership.

Discussion
Ms Joemat (ANC) said that there are different types of learnerships. Those that are recognised and those that are not. She asked how all these courses were monitored.

Ms Bird (Chief Director in the Department of Labour) replied that there were no unrecognized learnerships. Learnerships are based on recognised qualifications. Only those are registered as learnerships. All the requirements of registration has to be fulfilled before a SETA will get exemption from SARS.

Ms Taljaard (DP) referred to the COSATU concern of displacement and said that the implementation of learnerships looks at people already in employment.

Mr Coleman (COSATU) said that it was COSATU's view that learnerships should also take into account the unemployed. This view has been taken up by SARS. Employers are given incentives to take up the unemployed. This principle is contained in the new amendments.

Ms Mahlangu referred to the submission that after the completion of the learnership that the learners should be retained. She asked if this would not lead to more inflexibility in he labour market.

Ms Tregenna replied that that proposal is that the placement is not permanent. The rationale is that there should be a balance between the needs of the learner and the employer who is getting a big benefit from entering into these agreements.

Mr Ralane (ANC) commented that there was a problem in monitoring learnerships. In his constituency he has found that there is preference given to the children of employees. He asked how this abuse can be prevented.

Ms Bird replied that the comment made is a labour market reality. The employees will try to push those who they have to support. She added that her Department is trying to ensure that the employer must utilise the its Labour Centres to recruit learners. The Department will have more influence over this if funds come from the National Skills Fund.

South African Chamber of Business (SACOB)
The presentation was presented by Mr Karl Muller, chairperson of the SACOB taxation committee, and Mr Ernie Lai King, a past chairman.

Mr Lai King submitted that SACOB supports efforts to increase compliance but suggested that SARS should have a more focussed attention on drafting a detailed taxpayers charter so that SARS and the taxpayer know what is expected. Following on from this submission SACOB suggests that consideration be given to adopting a sunset clause to oblige a defaulting party to concede after a period of time.

Another general comment made by SACOB is that they support the regulation of the tax advisory industry but it should not interfere with the right of the taxpayer to minimise tax liability within the law. Mr King said that there was a difference between tax avoidance and tax evasion. Tax avoidance is legal and the regulatory environment should not interfere with this.

More specific comments related to employee deductions, learnership agreements and the section 78 estimation on undisclosed taxable income.

SACOB submitted that the differentiation between salaried and other income earners is not justifiable. This results in salaried employees not being able to deduct legitimate expenses.

The deductions in respect of learnership agreements were supported but it was submitted that the fragile admin structures of the SETA's could compromise a good strategy due to poor implementation.

In respect of section 78 SACOB suggested a moratorium on past discretion's where people took money out of the country illegally and who have never disclosed the income derived therefrom.

The full submission is attached hereto. An annexure is attached to the SACOB submission that deals with Customs and Excise issues but it was not presented because the panel were not experts in that field.

Discussion
Ms Taljaard referred to the submission that highlighted the poor admin capacity of the SETA's and said that this needs to be addressed. The member was also concerned about the stages of the incentives and how the phasing and the timing relate to the incentives.

Mr Lai King replied that SACOB supports the effort to increase the level of human capital but questioned if it should be don through the Income Tax Act. he said that it was a good intention but it should not fall by the wayside because of bad implementation.

Ms Bird added that the problem with the capacity at the SETA as submitted by SACOB is in response to one media report about one SETA. She wanted to convey the message to the Committee that her Department is watching the SETA's closely. There are quarterly monitoring reports and annual reports. There is also a constant interaction and support. She said that all SETA's were not inherently weak and that many of them were doing excellent work. There is a rising number of programmes and learners being registered. If any trouble is picked up the Department moves in and this is what happened in the case that was covered in the media.

Ms Joemat referred to the wide discretionary powers of the Commissioner and the submission that that the discretionary powers should be subject to objection and appeal. She wanted a response from SARS.

Mr Louw replied that all discretionary powers that the rights of taxpayers are subject to objection and appeal. The only powers that are not subject are the ones that relate to procedural issues. an example is when the Commissioner decides to extend a time period.

Mr Moloto (ANC) referred to the designated country list and asked what was the purpose of the list and if the delay surrounding the list has any cost effects on business.

Mr Muller replied that the list would be applicable if a business owns a controlled foreign entity (CFE). The list says that if the CFE is situated in a listed country it is exempt from paying tax in South Africa. He said that if there are changes in the list there are resultant changes in the admin structure of business and to put a cost to that would be difficult. There has been talk sometime last year that the list was going to be changed and SACOB's concern is form what point in time the change will come into effect.

Mr Tomasek (SARS) said that there is a list in place and that SARS did make a commitment that any new list will have a prospective effect if there are any countries that are taken off the list.

Ms Taljaard commented that SARS are arguing that if the deductions are simplified into a specific list then the admin burden is lightened. She asked if there was not an argument that there would be an increase in the compliance burden because now all the receipts will have to be checked.

Mr Muller replied that there must be a balance between the admin efficiencies and compliance and said that it is always a burden to keep receipts. The main concern of SACOB however is that all deductions for salaried employees are removed.

Mr Ralane felt that the sunset clause was problematic and asked if it would address the problem. He felt that because SARS was becoming more efficient there would not be a need for this approach because taxpayers would be dealt with promptly. Secondly he referred to the suggested moratorium for those people who took out money illegally to bring it back and asked if SACOB did not think that SARS should do everything in their power to get the money back.

Mr King replied that the sunset clause is an attempt to address the long outstanding tax disputes. Lots of money and time is spent when SARS calls for information within 30 days and then the taxpayer waits for a long time before getting a response. On the opposite side of the coin taxpayers don't respond to requests from SARS. In both situations the sunset clause will oblige the defaulting party to concede after a stipulated time.

On the moratorium he said hat there is no incentive to bring the money back so taxpayers will chose not to disclose the assets and income derived therefrom.

Mr Louw advised that a new set of rules on court procedures went out for comment and more rigid time lines are built into it. To address the current backlogs special teams go around the country to attend to the backlogs.

Ms Taljaard asked if the regulation of tax advisors will be part of the legislation regulating the accounting profession.

Mr Louw replied that the position of tax advisors are being investigated and researched and it would be too early to comment fully. He said that the Income Tax Act will probably provide a broad enabling provision. There will probably be a regulating body that will receive applications for registration and the final regulations will be promulgated by the Minister.

There were no further questions. The meeting was adjourned until 15H00 when the Committee formally considered the Financial Advisory and Intermediary Services Bill.

Financial Advisory and Intermediary Services Bill
The FSB was represented by Mr Van Rooyen, CEO, Mr Van Zyl, Head of Research, Mr Wessels, Legal Department and Mr Andersen.

Mr Wessels said that there were just two outstanding matters to deal with. One was the issues of the health brokers and the other was the Policyholder Protection Rules. He advised that Proposed Amendments contained in the document provided were from the State Law Advisors and are technical in nature.

In respect of the PPR it was decided to go the route of clause 44(5) in the new draft Bill. The full recommendation is contained in annexure A of the final submission. The proposed draft notice will clearly spell out which parts of the PPR financial service providers and representatives will be exempt from.

Health brokers will be subject to FAIS as far as market conduct is concerned but the accreditation of the brokers are done by the Medical Schemes Council (MSC). The accreditation is done in terns of the fit and proper requirements of the FAIS Bill. Mr Wessels submitted that there is now a perfect dovetail between the Medical Schemes Act and the FAIS Bill. The terms of the agreement between the FSB and the MSC is contained in Annexure C to the Final Submission.

In reply to Ms Hogan asking if the FSB was sure that the MSC was happy with all the amendments, Mr Wessels confirmed this.

Mr Van Rooyen added that the FSB has also seen the amendments to the Medical Schemes Act (MSA) and they are happy with it.

MS Taljaard wanted to know if the drafters were satisfied that the entry point for accreditation is the MSA.

Mr Wessels replied that the new MSA amendments makes it clear.

Ms Hogan asked if industry had seen the amendments.

Mr Wessels replied that he was not aware of anyone who had not had the opportunity to look at the new amendments.

Ms Hogan asked if the problem of arbitrage as a result of dual regulation was resolved.

Mr Wessels replied that he had no doubt that the problem is solved. He added that the brokers are accredited in terms of the MSA on the basis of the fit and proper requirements in FAIS. Once accredited, FAIS regulates the market conduct. There is no possibility of arbitrage and uneven playing fields.

Ms Hogan asked how far was all the regulations.

Mr Wessels replied that currently there are 13 pieces of subordinate legislation. These are the bulk of what is required. On the 6th May the second drafts were ready and the interested parties have until 15 July to make inquiries. In Mid august the final drafts would be complete. He advised that proceedings have started on setting up the Ombud. A budget was prepared and offices are being sought. The Ombud still had to be appointed. Full operation of the Ombud is expected in February 2003.

Mr Andersen advised that all the systems are being put in place to have full FAIS operation from August 2002.

As there were no further questions, Ms Hogan read out the motion of desirability and the committee report. The Committee agreed to the amended Bill.

Ms Hogan added that Ms Taljaard was not able to vote because her party caucus had not been briefed and therefore had no mandate to express an opinion.

The meeting was adjourned.

Appendix 1
Insertion of section 12H in Act 58 of 1962

18.
(1) The following section is hereby inserted in the Income Tax Act, 1962, after section 12C:

Deduction in respect of learnership agreements

12H.
(1) Subject to subsection (3), there shall be allowed to be deducted from the income derived by any employer during any year of assessment, an allowance determined in accordance with subsection (2), where -

(a) that employer during that year of assessment in the course of any trade carried on by that employer entered into a registered learnership agreement with a learner; or

(b)
a learner during that year of assessment completes any registered learnership agreement entered into by that employer with that learner during that year or any previous year of assessment in the course of any trade carried on by that employer.

(2) For purposes of subsection (1), the amount of the allowance in respect of -

(a) a registered learnership agreement entered into by that employer, as contemplated in subsection (1)(a), with a learner who at the time of entering into that agreement -
was employed by that employer or associated institution in relation to that employer, is an amount equal to the lesser of -

(aa) 70 per cent of the annual equivalent of the wage of
that learner stipulated in the agreement of
employment between that learner and employer; or

(bb) R17 500; or

(ii) was not employed by that employer or any associated institution in relation to that employer, is an amount equal to the lesser of

(aa) the annual equivalent of the wage of that learner stipulated in the agreement of employment between that learner and employer; or
(bb) R25 000;

(b)
the completion of any registered learnership agreement as contemplated in subsection (1)(b), is an amount equal to the lesser of -
(i) the annual equivalent of the wage of that learner stipulated in the agreement of employment between that learner and employer; or
(ii) R25 000.

(3) No deduction shall made by an employer under this section, unless that employer has provided to the Commissioner -
(a) the name of the SETA with which the learnership agreement is registered;
(b) the title and code of the learnership allocated and issued by the Director-General: Department of Labour in terms of regulation 2(3) of the Learnership Regulations, 2001;
(c) the full names and identification number of the learner contemplated in the registered learnership agreement; and
(d) proof that the employer has complied with all the requirements of the Skills Development Levies Act, 1999 (Act No.9 of 1999).

(4) The provisions of this section shall not apply -
(a) in respect of the substitution of any employer which is party to an existing registered learnership agreement by any other employer, as contemplated in regulation 5(1) of the Learnership Regulations, 2001;
(b) where an employer enters into a registered learnership agreement with a learner as a result of the substitution of an existing registered learnership agreement, as contemplated in regulation 5(2) of the Learnership Regulations, 2001; or
(c) where an employer enters into a registered learnership agreement with a learner, where a deduction is or was allowable to that employer during any year of assessment in respect of any other registered learnership agreement entered into by that employer with that learner in respect of the same learnership registered by the Director General of Labour, as contemplated in regulation 3(3) of the Learnership Regulations.

(5) Where -

(a) in the determination of the taxable income of an employer for any year of assessment an amount is or was allowed as a deduction in respect of any registered learnership agreement entered into by that employer with any learner, as contemplated in subsection (1)(a); and
(b) that registered learnership agreement is terminated for any reason other than the death of that learner or the dismissal of that learner due to his or her incapacity as a result of ill-health or injury,
that amount so allowed as a deduction shall, for the purposes of section 8(4)(a), be deemed to have been recovered or recouped by that employer.

(6) For purposes of this section associated institution' in relation to an employer means an associated institution as defined in paragraph 1 of the Seventh Schedule;
'employer' means
(a) in the case where a group of employers is party to a registered learnership agreement, the employer which is identified in that agreement as the lead employer; or
(b) in any other case, the employer which is party to a registered learnership agreement;
'learner' means
(a) a learner who is party to a registered learnership agreement; or (b) an apprentice in a contract of apprenticeship contemplated in
paragraph (b) of the definition of learnership agreement'; 'Learnership Regulations, 2001' means the Regulations concerning the Registration of Intended Learnerships and Learnership Agreements (Government Notice No. R. 330 published in Gazette No.22197 of 3 April 2001), made by the Minister of Labour in terms of section 36, read with sections 16(d) and 17(3) and (6) of the Skills Development Act, 1998; 'registered learnership agreement' means -
(a) a learnership agreement entered into between a learner and an employer before 1 October 2006, which has been registered with a SETA, as contemplated in section 17(3) of the Skills Development Act, 1998; or
(b) a contract of apprenticeship registered with the Department of Labour in terms of section 18 of the Manpower Training Act, 1981 (Act No.56 of 1981),

'SETA' means a sector education and training authority established in terms of the Skills Development Act, 1998;

'Skills Development Act, 1998' means the Skills Development Act, 1998 (Act No.97 of 1998).".
(2) Subsection (1) shall be deemed to have come into operation on 1 October
2001, and shall apply in respect of -
(a) any registered learnership agreement entered into on or after that date; or
the completion by a learner on or after that date of any registered learnership agreement.

Appendix 2
COSATU Submission on Wage Incentives Draft Bill

1. Introduction
COSATU welcomes the opportunity to comment on the draft legislation on wages incentives/subsidies. This initiative was announced by the Minister of Finance in his 2001 Budget Speech, and was to have been introduced by 1 October 2002. Since the initial announcement, we have always indicated our wish to be involved in the formulation of policy proposals around wage subsidies.

In this submission we start out by setting out our conceptual approach to wage subsidies in the context of the unemployment crisis, and discuss what we believe employment subsidies should and should not do. We do believe that wage subsidies, if correctly designed, can be part of a package of measures to create jobs. However, they do not address the major structural causes of unemployment in South Africa and hence cannot be expected to create jobs on a sufficient scale in the absence of a more holistic strategy.

In section 3 of this submission we discuss some of our concerns with the proposal as contained in the draft legislation. These include the resources allocated to the programme; ensuring that it leads to net new job creation; the fact that the 'subsidy' seems to be higher than the relevant wage levels; the funding of the subsidy; and that the legislation is not clearly written. These concerns are of a nature that demands a substantive reworking of the draft legislation, as opposed to just rewording of specific clauses, and for this reason actual reformulations are not included in the submission at this stage.

We also raise process concerns around our lack of consultation up to this point and specifically the fact that the proposal has not gone to Nedlac. Nedlac is a particularly appropriate forum for discussion of an issue such as the wage subsidy. In the light of both these process and substantive concerns, we are proposing that at this point the issue be referred to Nedlac for meaningful engagement and, where appropriate reworking of the draft legislation. Further, if the route of reworking the legislation is accepted, we would make ourselves available to participate in a task team to look at redrafting.

Summary of the proposal of the draft legislation
Government's proposal takes the form of an insertion into the Income Tax Act. It situates the wage incentive initiative within the learnership programme and the National Qualifications Framework (NQF). The Draft Bill provides, at section (1)12H(2)(a), for the employer's taxable income to be reduced by R25 000 on registration of a learnership agreement between the employer and a learner. Sections (1)12H(2)(b) and (c) provide for a further R25 000 reduction on either completion of the learner of a level of the NQF during that year, and commencement and completion of further levels of the NQF. Section (1)12H(3) to (5) go on to set out various provisions that should be met under the scheme. Section (2) stipulates that learnerships which were entered into on or after 1 October 2001 will qualify for the proposed incentive.

2. Overall approach to wage subsidies
2.1 Addressing unemployment in South Africa
COSATU has consistently drawn attention to the unemployment crisis facing South Africa. The extent of unemployment is devastating in terms of the lack of income to people; the impact on poverty and inequality; the wasted human resources and economic productive capacity; the effects on people's dignity, self-worth, and future employment potential; and the myriad of social problems associated with lack of work. Such a crisis clearly demands an urgent and comprehensive response, which links all aspects of economic policy to the retention and creation of jobs.

COSATU does believe that wage subsidies, if properly designed and implemented, can be one of a package of measures to promote job creation. However, it is important to note that a wage subsidy can never be a panacea nor can it be expected to create jobs on anywhere near the scale needed.

An assessment of appropriate measures to combat unemployment should derive from an analysis of the causes of unemployment. A proposal for a wage subsidy moves from the premise that the underlying problem is the (wage and non-wage) costs of hiring workers, and hence attempts to mitigate these costs through a wage subsidy.

COSATU does not believe that the level of wages of South African workers is one of the major factors that have contributed to the hemorrhaging of jobs over the past few years. International comparisons have demonstrated that our wage levels are not high by international standards - excepting those at executive level which are inordinately high. Job losses in the past decade have been particularly prevalent in sectors such as agriculture, mining and domestic labour, which tend to have the lowest wage levels and the most flexible labour markets.

COSATU believes that the root causes of unemployment are related to structural problems of the economy which have developed over a period of time, but in some cases have intensified in recent years. These include the continued dominance of gold mining, which is both relatively capital intensive and in decline; the warped income distribution in the domestic market, which limits domestic demand; the decline in employment in the public sector and agriculture; and in this context investment which is both inadequate in scale and misdirected. The crisis was exacerbated by policies pursued by government in the late 1990s, including contractionary fiscal and monetary policies - notably exceptionally high interest rates and major cuts in government spending - privatisation and tariff liberalisation.

The above brief analysis suggests that the response to South Africa's unemployment crisis needs to be decisive and comprehensive. As indicated earlier, we do not see the cost of labour as a key obstacle to employment creation and hence, would not see the wage subsidy as an adequate or primary policy response to unemployment.

Having said this, we do believe that a properly structured wage subsidy can, as part of an overall strategy, make some contribution to employment creation. It can also fit into a broader redistributive strategy in favour of workers and the poor.

2.2 Considerations in designing a wage subsidy
As discussed above, we do not see wage costs as the central obstacle to employment creation. Notwithstanding this, it is clearly one of the factors which an employer/potential employer takes into consideration. There would be a marginal point at which an employer would decide whether or not to hire additional workers.

Whether or not the additional labour is hired may make little economic difference either way to the employer at the marginal point - but would make a huge difference to the potential worker as well a having positive externalities for the economy and society at large. This is where the wage incentive has a potentially useful role to play; not in subsiding workers whom employers would have hired anyway, nor in paying the full cost (or more than the full cost) of workers who would certainly not otherwise have been employed.

There are positive externalities of employment creation which accrue outside of the directly contracting parties - for example, the positive contribution of additional jobs to economic growth and investment, savings levels, social stability, and so on. Because these benefits are not directly captured by the individual employer, however, the market has an inherent tendency to create employment below the level which would be optimal for the economy at large. The wage subsidy can play a useful role in bridging this gap and making it economically viable for individual employers to take on additional labour.

If the wage subsidy is targeted only at new workers, it creates new jobs without pressure to lower wages more generally. Even a fairly small wage subsidy should induce business to hire some new workers. Both business and labour (on aggregate) would benefit from this: workers as a whole, in terms of the total amount of wages transferred to all the new workers; and business in terms of the subsidy received. Provided the employment subsidy is financed through corporate (but not payroll) taxation or progressive income taxes on upper income earners, the net effect should be redistributive.

Riders to the above argument would include the following:

· If business just uses the subsidy to lower the labour costs of workers that it would have employed even without the subsidy, or simply to subsidise existing employees - and both of these scenarios are compatible with the Draft Bill - the subsidy would represent a net transfer from the fiscus to business and a boost to their profits.
· If the subsidy is not financed through progressive measures as set out above, its effect would not necessarily be redistributive.

As discussed in the following section, the Draft Bill would need major reworking to ensure that the negative effects are mitigated and potential positive effects maximized.

A further potential benefit of the wage subsidy could be in exposing people who have never worked, or who have been unemployed for a long time, to some labour market experience. This could mean that, even after the subsidy is exhausted, their possibilities of retaining their job or finding a new one would be increased.

As with any item of expenditure or foregone revenue, the wage incentive has opportunity costs in terms of what the money could otherwise have been spent on. Its introduction must be able to be justified, therefore, in terms of the "value for money" of jobs created for the resources invested in the programme.

A reasonably comparable programme in terms of objectives, for example, would be a large-scale public works programme. Were the resources allocated to the wage incentive to be directed to public works programmes, the money which government would be transferring to companies as an incentive to take on learners could instead be used to employ workers directly, using them to build infrastructure and address social backlogs. The R600m allocated for the wage subsidy is about double this year's budget allocation for the National Public Works Programme.

A comparative advantage of jobs funded through the public works programme is that government is able to determine what employees should do, and ensure that these further national developmental priorities. In contrast, when subsiding employees of private business, government has no direct control and does not reap direct benefits.

This is not to argue that public works programmes are necessarily preferable to a wage subsidy. Rather, to point out that in formulating policy options alternatives need to be closely examined to ensure that optimum use is made of limited resources. There should thus be demonstrable benefits to channeling resources into the wage incentive rather than into other such comparable expenditure programmes.

The above discussion sets out COSATU's conceptualization of some of the positive employment-creating and redistributive effects which can arise from a wage subsidy. We do not, however, believe that the wage subsidy as it is proposed in the Draft Bill will be able to meet these objectives. Our concerns around the proposal are set out in the following section.


3. Comments on the draft legislation
3.1 Concerns around process
Our impression is that the wage subsidy was announced in the 2001 Budget Speech without adequate thought and prior consideration. The Minister made a commitment that the incentive would be introduced by 1 October 2001, and that draft legislation would be released by the end of 2001 for stakeholder consultation.

The draft legislation, which was eventually circulated for stakeholder comment in February 2002, does not seem to be well thought through. Despite our calls after the announcement of the wage subsidy in the 2001 Budget to be closely involved in the development of the proposal, COSATU was not consulted at all until the release of the Draft Bill.

We are also concerned that the draft legislation has not gone to Nedlac, despite clearly being of a socio-economic nature. Nedlac would be the ideal institutional vehicle for formulating a viable proposal on the wage incentive, given the direct impact of the proposed incentive on the Nedlac constituencies.

Given these process concerns, and the major substantive problems with the current draft as outlined below, we are thus proposing that the issue should be referred to Nedlac for consultations and negotiations. On the basis of agreement at Nedlac, a revised draft could be circulated for public comment and referred to Parliament for processing. Furthermore, it may be advisable to set up a task team to look at some reworking of the legislation even before this stage. We would be happy to participate in such a process. Further background research which we have on the issue, including international experiences of wage subsidies and similar programmes, could also productively be fed into such a process.

3.2 Targeting the subsidy at employment creation
The primary purpose of a wage subsidy, as discussed in section 2.2 above, should be the creation of new jobs. A major concern with the wage subsidy as proposed in the Draft Bill is that there are no features of the Bill which restrict the subsidy to new employees, or even focus the wage subsidy towards newly created jobs.

It is quite possible, in terms of the Draft Bill, that employers would benefit from the subsidy for existing employees who register for learnerships. While this may have a benefit in terms of promoting some skills development, this is not the primary objective of the policy. Subsidising existing jobs would simply provide a windfall gain to business without creating any new jobs.

An apparent rationale from the side of the drafters for not restricting the wage subsidy to new jobs is not wanting to displace existing employment. COSATU agrees that a wage subsidy should be structured in such a way as to avoid creating "new' jobs at the expense of existing ones, which would be a waste of taxpayers money and would defeat the purpose of the initiative. It should thus be structured in a way that targets new job creation - to avoid subsidising existing jobs - but in a way that avoids displacement.

One way of achieving this would be to specify that the wage subsidy is only for new jobs, and further to build in a condition to recipients of the subsidy that no existing jobs may be replaced with newly created ones. Consideration would need to be given to a way in which this can be monitored and enforced without unduly inflating the overall costs of the programme.

One way would be for employers to sign a declaration to the effect that no existing jobs would be replaced. Stiff penalties, multiple times the value of the subsidy, should be built in for non-compliance with this. Promoting greater awareness of the programme within affected workplaces could also be conducive to a situation where workers displaced in favour of new subsidised workers, or their colleagues, would be able to raise the issue as grounds for unfair dismissal. The proposed Nedlac process could give attention to further ways of ensuring that subsidised positions are indeed net new jobs and not simply replacing existing ones.

A concern is that there does not seem to any way under this Act to stop employers from firing people the moment they complete the learnership and hiring someone else. That is a major problem, since it means the subsidy gives employers an incentive to have learners on a rotating basis, rather than creating permanent positions. The high level of the subsidy could further encourage such a practice. This would undermine the very purpose of the programme: to create sustainable jobs by integrating new labour market entrants into the workforce.

3.3 Level of the subsidy
A second key concern for us is that the value of the wage subsidy may in many cases exceed the wages of the employee. The employer's taxable income would be reduced by at least R50 000 per employee, more if further qualifications are completed. This amounts to a direct transfer of R15 000 where the employer is registered as a company, R20 000 in the case of a trust, and varying up to R20 000 where the employer is an individual or trust.

This needs to be assessed in the context of the prescribed minimum learnership wages/allowances For learnerships at all levels of the NQF, weekly allowances start at just R120 per week. Even if the learner works all 52 weeks of the year, the wage subsidy is still more than double this. In some cases, the learnership takes under a year to complete or a learner does not work and is not paid throughout the year

Further, the wage subsidy is in addition to the cash grant which an employer can access from a SETA to fund a learnership. These are generally in the order of about R15 000, sometimes higher and sometimes lower. This grant would tend to fund many of the costs directly associated with the training, and even some wage costs as well. Combined with the proposed wage subsidy, this would be a sizeable effective transfer to employers.

The proposed wage incentive thus cannot be regarded as a subsidy it would actually be paying the wages of someone employed by private business or even paying business a handout on top of these wages. This strange scenario would result in a double windfall for business - free labour and a net profit at the expense of the fiscus.

If the entire cost of an employee's wages were to be funded from the public purse, government could as well directly benefit from the expenditure. The money could be used to fund either a worker in a public works programme, or public servants' salaries. If government pays the entire wage cost of an employee of a private company, it means that the benefits are privatised while the costs are borne socially - a net transfer in favour of business.

A related concern with the subsidy as proposed in the draft legislation is that a high subsidy (relative to wages) would be allocated to a fairly small group of employees. We believe that the resources could be better utilised by allocating a somewhat smaller subsidy to a greater number of employees. As discussed in section 2.2 above, the role of the subsidy should be in relation to marginal employment decisions, making the creation of additional jobs economically viable, not to provide windfall gains to employers.

3.4 Budget for the wage incentive
If the wage incentive were properly structured, in order for it to make a significant dent in the unemployment crisis the allocated R6OOm would be insufficient. It would reach only a small proportion of the jobs being lost every year, let alone the backlog of those already unemployed. Were employees to undertake additional levels of the NQF, the number of people who could benefit from the programme would fall lower.

The budgeted R600m compares unfavourably with the various tax breaks and incentives given to business, and for example is only a fifth of the R3b allocated to the strategic industrial incentives programme. Should the wage incentive be restructured to take account of the concerns raised in this submission, we would argue that considerably more resources would need to be dedicated to the rollout of the wage incentive on a scale which would have a meaningful impact in terms of job creation.

3.5 Funding of the wage subsidy
As discussed in section 2.2 above, for the wage subsidy to serve a broadly redistributive purpose it should be funded through corporate taxation (excluding payroll taxation), or progressive income tax on upper-income earners. If, for example, the wage subsidy is effectively funded (or compensated) by increasing regressive taxation such as VAT or income tax on upper income earners, the overall effect could be a transfer from the poor to business. We would obviously oppose this, given that it would further deepen poverty and inequality in South Africa.

The sources of the subsidy/compensation for foregone revenue are not spelt out either in the draft legislation or in the Budget Review. We propose that this should be explicitly specified.

3.6 Drafting of the legislation
The intentions of the Draft Bill are not always readily apparent from the actual text. Overall, the Draft bill is written in a fairly technical and inaccessible style. We propose that a redrafted Bill should set out more clearly the objectives, mechanisms, and conditions of the subsidy.

While our proposal in section 3.3 above around reducing the level of the subsidy and increasing the number of people reached would increase the maximum number of jobs which would be created, the R600m budget would still be inadequate for a large-scale impact.

Appendix 3
Taxation Laws Amendment Bill - SACOB
Memorandum of Comment

Introduction
SACOB represents some fifty Chambers of Business/Commerce, forty Trade Associations, and one hundred and fifty large corporations. In total, close to 350 000 businesses are represented by and through the Chamber structures belonging to SACOB. The Bill includes areas of taxation and of customs interest. The points raised in the commentary below address the taxation issues covered in the Bill. A separate Annexure is attached which provides commentary on the customs aspects of the Bill. The oral representations to be made before the Portfolio and Select Committees will only deal with the taxation elements of the Bill.

2. Compliance
As a prelude to this commentary, SACOB fully supports the endeavours of the authorities to ensure that all taxpayers fulfill their tax obligations and commends SARS on some recent high profile successes. While these measures will reassure law abiding taxpayers, SACOB recommends that focused attention be given to drafting a detailed Taxpayer/SARS Charter setting out the aspirations and expectations of both parties. Too often enthusiasm on the part of a tax collector is interpreted by the taxpayer as harassment and unreasonableness, while delays on the part of the taxpayer, caused by often unavoidable practical problems (e.g. staff turnover and disposal of businesses) are
interpreted as uncooperative behaviour by SARS. SACOB would want to avoid the acrimonious relationship which was prevalent between SARS and business in the early and mid 80's and would wish for the current spirit of cooperation and dialogue to continue.

In regard to long outstanding disputes between SARS and the taxpayer, many of which have remained unresolved for years, SACOB submits that the principle of a "sunset" clause be considered, such that after a predetermined period the party at fault must concede the matter. By way of example, should SARS require information in respect of a dispute and such information is not supplied, within say 2 years of the tax query being raised, the taxpayer must concede. Similarly should the taxpayer have supplied all the relevant information to SARS or submitted an objection in respect of an assessment and SARS has not, within the stipulated period, supplied reasonable grounds for settling the matter, SARS must concede. Admittedly further thought is required on the administration and implementation of such a proposal but the principle is placed before the Committee for consideration.

Although mention was made in the Budget speech that consideration will be given to regulating the tax consultancy sector, no mention is made in the current Bill. SACOB in principle is not unsupportive of such regulation but wishes to emphasize that our courts have always recognized the right of the taxpayer to organize his affairs such that the latter does not pay a greater amount of tax than he is legally obliged to do, in terms of the Income Tax Act ("the Act"). In brief, tax avoidance must not be confused with tax evasion. The latter is illegal, the former legal. SACOB therefore requests that the fiscus, when drafting the proposed regulations, remains mindful of the taxpayer's rights, as recognized by our courts, to legally plan his/her affairs within the parameters set by the Act. SACOB would be concerned if the regulations were perceived to interfere with this right.

3. Limitation of Employee Deductions
There appears to be a distinction made between 'salaried' and other income earners when determining allowable tax deductions. SACOB submits that there is no cogent argument as to why the deductions relating to expenditure incurred in the production of income of 'salaried' individuals should be limited.  The 2002 Budget Review (page 94, Table 2) reveals that the category "Persons and individuals" bears 61% of the total gross tax revenue budgeted for 2002/2003. But account should be taken of VAT, tax on retirement funds, estate duty. Thus, bearing in mind that other taxes like customs duties, import surcharges and transfer duties are eventually passed on to the individual, the individual bears an even higher proportion of total gross tax revenue.   The proposed amendments place inequitable limitations on salaried individuals, who as a category may be perceived as "soft targets" and SACOB records its objections to the proposed amendments.  To disallow legitimate deductions where employees incur bona fide expenses in the course of carrying on their trade is to nullify the relief granted by SARS to these individuals, through the lowering their marginal rates of tax.

By way of example, consider the premiums paid on 'income continuation" insurance policies, which are deductible in terms of section 11(a) and condoned as such in the SARS Income Tax Practice Manual.  To disallow the deductibility of such premiums will cause undue hardship on policyholders, as premiums will not be deductible while the benefits will still be fully taxable. To penalize 'salaried' employees who make provision for their own disablement is surely not in line with Revenue's precept that taxpayers should strive to become self-reliant.

4. Employee Deductions - Interpretation Problems - ss 23(m)
4.1 Main body of the proposal
Sub-section 23(m) is intended to limit the deductions available to 'salaried' employees.  The sub-section refers to " ….any expenditure, loss or allowances which relates to any employment of, or office held by, any person in respect of which he or she derives any remuneration….'  Although this wording has been imported from section 11(u) (ii), relating to entertainment expenditure where employees received a reimbursement allowance, the words 'any employment' can relate to any employee.  The terms 'employee' and 'remuneration' are defined in the Fourth Schedule, and if the words 'which relates to any employment of' applies to 'employees' as defined in the Fourth Schedule, the impact of sub-section 23 (m) will extend to all types of employees and not just the so-called 'salaried' employees referred to in section 11(u)(ii).  It appears that the provision will extend to unintended categories of "employee".

The sub-section furthermore refers to the persons as 'he' and 'she', implying that the provision may relate only to natural persons i.e. personal service companies and personal service trusts may be excluded, while other employees such as individual labour brokers and directors of private companies may fall within the ambit of the provision.

It is proposed that the scope of sub-section 23(m) be limited and that the 'salaried' employees (as mentioned in the Budget Review 2002) be defined. 

Sub-section 23 (m) (iii)
The proposed sub-section 23(m) (iii) provides that 'agents' and 'representatives' that derive their remuneration mainly in the form of commissions based on sales or turnover will be allowed deductions in terms of section 11(a), (c), (e), (i), (j), (k) and (n).

The Budget Review specifically states,  " This limitation {relating to salaried employees} will come into effect on 1 March 2002.  It will not apply where an employee's remuneration is wholly or mainly derived in the form of commissions based on sales or turnover."     It is clear from the Budget that the intention was not to impose any limitations on those employees deriving remuneration wholly or mainly in the form of commission.  Revenue now seeks to limit the deductions.

'Agents' and 'representatives', even though considered 'employees' for purposes of the Fourth Schedule, very often run their own offices, employ their own employees and will often claim deductions in terms of section 11(m), (l) and (w). In terms of the interpretation above, these will no longer be allowed.

The term 'mainly' referred to in sub-section 23 (m)(ii) also requires clarification.

Deductions in respect of Learnership Agreements (Section 12 H)
Principle
In principle, SACOB fully supports efforts designed to increase the level, extent and quality of human capital. The incentives to achieve this objective are set out in the Bill and are geared to ultimately increase the Republic's GNP per capita growth rate. SACOB is concerned over the capacity of the instruments (namely the twenty five sector SETAs) to give effect to this ambitious programme, and procedures are required to monitor the efficacy of the training being provided. To this end, reference is made to a media statement issued by the Department of Labour (2 June) threatening to take over the administration of the POSLEC SETA. Reports on the operations of certain other sector SETAs indicate the extremely fragile nature of their administrative structures. The allocation of resources into commendable education and training activities must not be dissipated through administrative shortcomings and an admirable strategy must not be compromised by poor implementation

Text Clarification
Section 12H provides for a wage incentive of R25 000, by way of an allowance in relation to the registration, completion and commencement of further qualifying 'learnership agreements'.

The Explanatory Memorandum states the following:

 

"Employers will be allowed an additional tax allowance when a learnership agreement is signed with a learner.  A further tax allowance is granted when the learner successfully completes the learnership covered by the learnership agreement.  Specific provision is made for multi-level learnerships and the completion of each level and commencement of a new level will be regarded as completion of a learnership agreement and the commencement of a new agreement."

It is clear from the Explanatory Memorandum that employers should be entitled to an allowance in any year of assessment in respect of any of the following: -

Any registered learnership agreement entered into;
The completion in that year of any level of the NQF; and
The commencement of a further level of the NQF.

It would appear from the current draft of section 12H that provision is made for only one such allowance in any year of assessment. It does not take into account that in any one year of assessment, learners may be entering into learnership agreements, completing them, and furthering their levels of NQF. 

Perhaps consideration could be given to the following wording:-

"12 H (2) Subject to subsection (3), there shall be allowed to be deducted from the income derived during any year of assessment by any employer from carrying on any trade, an allowance equal to R25 000 in respect of: --

any registered learnership agreement entered into by that employer with any learner during that year in the course of that trade;

the completion by a learner during that year of any level of the (NFQ) National Qualifications Framework contemplated in any registered learnership agreement entered into by that employer with that learner during that year or any previous year of assessment in the course of that trade;
[or] and

the commencement by any learner during that year of a further level of the National Qualifications Framework in terms of a registered learnership agreement after completion of any level by that learner in terms of that agreement, as contemplated in paragraph (b)."

Waiving of Claims against a taxpayer - (107B): Commissioner's discretion
Whilst the intention behind this amendment is supported, SACOB believes that appropriate checks and balances, to be agreed with representative bodies should be incorporated in order to preclude any misapplication of such waiver decisions. We share the concerns expressed by members of the Portfolio and Select Committee, and other organizations, at the increasing tendency to grant wide discretionary powers to the Commisioner. Preferably the 'circumstances to be prescribed by the Minister of Finance' should be set forth in the Bill rather than being left to a regulation. In short, waiver decisions must be suitably managed, transparent, free from subjective judgment, and accountable.

Section 78
Apart from clarifying the percentage - set at the "official rate of interest" - to be applied to undisclosed foreign assets - in order to estimate undisclosed taxable income, the proposed amendment does not appear to take the existing powers available to SARS, under the present section 78, any further. SACOB submits that the percentage to be applied should be in line with foreign nominal rates of return, which are invariably far lower than our official rate of interest. The proposed amendment is to operate from 1 January 2003, presumably to allow taxpayers a period of grace to rectify their past misdemeanours. It is difficult to anticipate that taxpayers would take advantage of this period of grace, in the absence of a tax and exchange control moratorium on past indiscretions. If they are presently exposed to SARS and the Reserve Bank they will continue to be so exposed after 1 January 2003. If they have borne the risk so far there appears little incentive to now amend their ways. SACOB proposes that consideration be given to such a moratorium.

Other matters
Designated country list
SACOB urges that the new designated country list, which was to have been released in January this year, be finalized in consultation with representative business bodies, without delay. The uncertainty caused by the delay in its release is a source of much concern to international and multinational companies.

Conclusion
The major tax reforms that have been introduced in recent years have been remarkable in that they have been introduced without the accompanying Commissions of Inquiry. There may be a lesson to be learnt from such a process. However, the impact of those reforms has yet to be tested. As a broad observation on the taxation measures introduced, SACOB believes that there been a marked emphasis on the redistributive powers of taxation. Insufficient attention has been given to the potential affect - adverse or otherwise - those measures have had on economic growth.

SACOB wishes to thank the Portfolio and Select Committees for allowing it to make input into the deliberations on this Bill.

Johannesburg June 2002

Annexure
Comment on the Customs and Excise sections the Taxation Laws Amendment Bill
In general the amendments appear to be in line with the need to tighten control over customs and excise issues. However, there are some concerns relating to the provisions. These include:

The Commissioner is given extensive powers, amongst others, to:
Delegate powers to any officer. (Clause 40, Amendment of Section 3 of Act 91 of 1964.) It is considered necessary that any officer given power should be adequately qualified to carry out any duties or activities conferred by the power.

Prescribe by rule any (other) matter that the Commissioner may consider necessary or useful for the efficient and effective administration of such (special customs and excise) warehouse. (Clause 42, Amendment of Section 21 of Act 91 of 1964.) While it is understandable that the purposes, the goods and activities, the requirements to be complied with by applicants, procedures and rules of conduct should be prescribed, the operator should take responsibility for efficient and effective administration of the warehouse. SACOB contends that administration is a normal business activity that does not need to be subject to rules prescribed by the Commissioner.

Require the applicant licensee to furnish such security as the Commissioner may require. (Clause 46, Amendment of Section 60 of Act 91 of 1964.) SACOB believes that there should be parameters according to which security requirements are determined.

In terms of the same Clause the Commissioner may at any time require that the form, nature or amount of security shall be altered or renewed in the manner as he may determine. SACOB suggests that such amendments be related to the performance of the operator and/or conditions that may require such amendment.

The power given to an officer to detain any goods to ascertain whether such goods are counterfeit goods as contemplated in the Counterfeit Goods Act, Act 37 of 1997 (Clause 50, Amendment of Section 113A of Act 91 of 1964) is very wide, and open to possible abuse. SACOB advocates that goods should not be detained unless there is reasonable evidence to suggest that they may be counterfeit.

SACOB accepts that it is the norm for customs and excise duties as amended in the annual budget to come into force before legislation and regulations are promulgated (Schedule 2), particularly since these are announced in the budget speech. However, the organisation is opposed in principle to the retroactive coming into force of such legislation and regulations. The chamber therefore does not support the implementation of Clause 47 (Amendment of Section 64D of Act 91 of 1964) with effect from 1 March 2002, nor the implementation of Clause 49 (Amendment of Section 93A of Act 91 of 1964) with effect from 20 February 2002.


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