National Treasury and the South African Revenue Service (SARS) briefed Members informally on the 2013 Draft Taxation Laws Amendment Bill and Draft Tax Administration Amendment Bill. These were the main set of Bills that gave effect to the tax proposals that the Minister announced each year in the Budget Speech. Given that tax was a market sensitive issue, National Treasury and SARS consulted extensively following the Minister's Speech. That process culminated around May or June and led to these draft Bills. The process for the Bills was explained, and other Bills, such as the Rates and Monetary Amounts and Amendment of Revenue Laws Bill, that gave effect to the Budget, were indicated. The Minister had noted that there would be an Employment Tax Incentive Bill. That Bill would be published shortly. The Waste Water Discharge Charge Bill was another Money Bill to be published this year, as well as the Merchant Shipping (International Oil Pollution Fund) Contributions and Administration Bill. Two other Bills, still outstanding, were the Gambling Tax Bill, to be processed next year, and the Carbon Tax Bill, which was still in the discussion stage. The Minister had also announced the broad objectives of the Tax Review Committee and the appointment of Judge Dennis Davis as its chairperson. The Tax Review Committee would hold its first meeting shortly.
National Treasury explained key issues in the draft Taxation Laws Amendment Bill, and pointed out that the Explanatory Memorandum was user-friendlier than the Bills themselves, and was also linked to the clauses. Thereafter the process and content was explained, with particular reference to Personal Income Tax and savings, retirement savings – harmonising contribution incentives, retirement savings, contribution incentives, valuation of fringe benefit for defined benefit fund purposes, provident fund post-retirement annuity alignment, bursaries or scholarships to employee relatives, alignment of the tax treatment of individual-based insurance policies, employer-provided accommodation – low cost housing, share schemes income recognition, business taxes, anti-avoidance provisions, debt versus shares / equity: key commercial features, debt versus shares: current general tax rules, hybrid debt instruments: background, hybrid debt instruments: proposal, hybrid debt instruments: exclusion from application of proposal, base erosion and profit shifting, acquisition debt and connected person debt interest limitations: proposal, deferral of incurred expenditure between taxable payer and exempt payee: proposal, removal of exemption for dividends applied against deductible financial instrument, ancillary components to pipelines – Section 12D, tenant construction and improvement of leased land – Section 12N, cross-issue of shares – Section 24B and 40CA, incentives, deductible donations of appreciated immovable property, deductible donations of appreciated immovable property: proposal, exemption of certified emission reductions, tax incentives for Special Economic Zones, refinement of the Research and Development regime proposal, financial institutions and products, retirement to investment policies disguised as short-term insurance policies, simplification of tax regime for collective investment schemes in non-property investments, deemed ordinary treatment in the case of certain disposals of participatory interest in collective investment scheme, international tax, international shipping transport entities – incentives, exit charge on interests in immovable property, currency rules for treasury management companies, refinement of participation exemption in respect of foreign dividends derived from non-equity shares, share issues in exchange for foreign shares as a means of corporate migration, controlled foreign companies and the working capital exemption, ring-fencing of net foreign trade losses, uniform cross-border withholding regime to prevent base erosion, transfer pricing relief for equity loans, indirect tax, simplification of Value-Added Tax registration, e-Commerce Value-Added Tax registration, and refinements to the Mineral and Petroleum Royalty Regime.
SARS presented on the Draft Tax Administration Laws Amendment Bill with reference to Acts amended by Tax Administration Laws Amendment Bill, Customs and Excise: duties and powers of officers (Clause 9), Customs and Excise: powers of officers related to criminal prosecutions (Clause 10), customs controlled areas in a special economic zone (Clause 11), Customs and Excise: accredited clients (Clause 12), Customs and Excise: currency conversion: imports and exports (Clauses 13 and 14), amendments to the Tax Administration Act Understatement Penalty (Clauses 61-64), amendment to Tax Administration Act regulation of tax practitioners (Clause 68), amendments to Tax Administration Act: extension of prescription period for reduced assessment (Clause 34),and amendments to Tax Administration Act: extension of prescription period in the event of delays (Clause 34).
National Treasury pointed out that the current system for contribution incentives for retirement savings was very complex, fragmented, and inequitable, as the current regime allowed some individuals and employees to benefit excessively. Three weeks previously the National Treasury had published the final retirement cost paper. This was available on the National Treasury's website. There had been a deep process of consultations with key stakeholders including the unions, industry, and the National Economic Development and Labour Council. The proposed legislative changes would not take place until 2015.
Base erosion and profit shifting was a topical issue internationally. The overall effect was to shift profits from the jurisdiction where they were made to another jurisdiction where tax rates were lower. This was to the detriment of the first jurisdiction's tax base.
The proposal to refine the Research and Development regime was to streamline the processing of applications and to tighten the definition of Research and Development. The oil and gas incentive had existed for many years. The original reason for the incentive was the huge cost of exploration and the intention was to keep this particular incentive for offshore oil.
An ANC Member asked National Treasury and SARS to give separate briefings on each Bill to assist the Committee to make proper recommendations as requested by the Minister. A second Member, however, appreciated the information that was of assistance in preparing for the formal proceedings that lay ahead. However, she was not quite sure about the practicality of the time frames, and asked what the provisions for small companies were in the context of the beneficial tax regime for companies in Special Economic Zones, what National Treasury and SARS intended to do differently in the consultations around retirement savings, was deeply worried at talk of government's considering phasing out the means-test for the old-age grant, stressed that it was important to encourage savings, and asked if South Africa was getting value for money for its imports, especially those for infrastructure projects, as these imports were very expensive. A third Member, with reference to customs and excise: duties and powers of officers, said that searching premises had been a contentious issue previously. How would one control the potential for abuse?
A COPE Member asked if the proposal on the valuation of fringe benefit for defined benefit fund purposes would have a negative effect on savings. South Africa had a poor track record on savings. Was this proposal good for savings, yes or no?
A DA Member asked if it would not be proper to refer the carbon tax issue to the Tax Review Committee for its input. The carbon tax was considered by business not only to be a tax but also as a penalty. He was very pleased with the proposals to strengthen retirement funds. While most individuals would be able to qualify for a higher deduction, should we not work towards all individuals, perhaps? He was concerned that the employee would be liable for the tax on his or her fringe benefits that were paid by the employer. A second DA Member asked how long the Tax Review Committee's review would take, was concerned that there were no tax practitioners on the Tax Review Committee, and expressed a general concern that it was an excuse for adopting a new approach to squeeze more tax out of tax payers. He feared that the registration for value-added tax by foreign e-commerce suppliers could force some vendors such as Amazon to stop supplying to South Africa. The registration for value-added tax by foreign e-commerce suppliers would have to be done multilaterally. Otherwise SARS would spend much time chasing up individual vendors all around the world, presumably at a higher cost than the tax that would be brought in. It did not seem to be a race that South Africa could win. The simplified value-added tax registration process was not really a simplification, it was just a defensive move to protect SARS from fraud. How much was SARS losing to justify the tightening of the definitions of R&D? Was there a time frame for the Organisation of Economic Cooperation and Development action plan base erosion and profit shifting? Surely if one wanted to make it cheaper for investors to extract shale gas, one could not simply limit the tax break to offshore resources. It was necessary to reflect the new reality of energy today. He feared that a customs and excise search could be done on the expectation that a warrant might have been given. Surely there was a risk of a court challenge.
The Acting Chairperson feared that the restricted definition of R&D would hamper South Africa's efforts to promote indigenous inventions or maybe the creation of items that might be competitive only locally or in the continent of Africa. In the regulation of e-commerce transactions, it was necessary to ensure capacity.
The Acting Chairperson welcomed the National Treasury and SARS delegation.
Draft 2013 Taxation Laws Amendment Bill: National Treasury and SARS presentation
Mr Ismail Momoniat, National Treasury Deputy Director-General: Tax and Financial Sector Policy, said that the TLAB and the TALAB were really the main set of Bills that gave effect to the tax proposals that the Minister announced every year with the Budget Speech. Following the Budget Speech, there were many Bills that followed up. Given that tax was a market sensitive issue, after the Minister's announcement there were still many active meetings with people that National Treasury and SARS thought could contribute to the Bills or with those who were affected by it. That process culminated around May or June and led to these draft Bills.
He reminded Members of the process for the Bill (See slide 4).
The other Bills that gave effect to the Budget included the Rates and Monetary Amounts and Amendment of Revenue Laws Bill, which had been tabled and on which the Committee was originally supposed to have hearings that day. However, only two comments had been received. Largely that Bill just focused on the [tax] rate changes and the bank [rate] adjustments. Of course, the Minister had noted that there would be an Employment Tax Incentive Bill. That Bill would be published shortly, hopefully in the next month or two. The Waste Water Discharge Charge Bill was another Money Bill that would also be published this year, as well as the Merchant Shipping (International Oil Pollution Fund) Contributions and Administration Bill.
Two other Bills, which were outstanding, were the Gambling Tax Bill, which was to be processed next year, and, of course, the Carbon Tax Bill, which was still in the discussion stage.
Tax Review Committee
The Minister had also announced in his Budget Speech the broad objectives of the Tax Review Committee and the appointment of Judge Dennis Davis as its chairperson. The Minister had announced on 17 July the appointment of a further seven members and two ex officio members. The ex officio members were Mr Kosie Louw, SARS Director: Tax and Legal Services, and Mr Cecil Morden, National Treasury: Chief Director: Economic Tax Analysis. The Tax Review Committee would hold its first meeting shortly. (See slide 5)
Key issues in the draft 2013 TLAB
The TLAB did not include the rates and threshold announcements as the Rates and Monetary Amounts Bill covered these. (See slides 6 and 8, and Explanatory Memorandum contained in the media statement.
He pointed out that the Explanatory Memorandum was more user-friendly than the Bills themselves, and was also linked to the clauses.
Process for 2013 TLAB and TALAB (See slide 7)
Content of TLAB (See slides 9-10)
Personal Income Tax (PIT) and savings
Retirement savings – harmonising contribution incentives
Mr Momoniat said that current system was very complex, fragmented, and inequitable, as the current regime allowed some individuals and employees to benefit excessively from this incentive. So Government had launched the retirement reform proposals with the 2012 budget and the Minister had expanded on it in the 2013 budget. Three weeks previously the National Treasury had published the final retirement cost paper. This was available on the National Treasury's website. There had been a deep process of consultations. Key stakeholders certainly included the unions and industry, and the constituency in the National Economic Development and Labour Council (Nedlac). The proposed legislative changes would not take place until 2015. (See slide 12)
Retirement savings, contribution incentives
Ms Beatrie Gouws, National Treasury Director: Legal Tax Design, explained. (See table, slide 13)
Valuation of fringe benefit for defined benefit fund (DB) purposes
Ms Gouws explained. (See slide 14)
Provident fund post-retirement annuity alignment
Ms Gouws explained. Mr Momoniat commented. (See slides 15-16)
Bursaries or scholarships to employee relatives
Ms Gouws explained. (See slide 17)
Alignment of the tax treatment of individual-based insurance policies
Ms Gouws explained. (See slide 18)
Donations to qualified public benefit activities (See slide 19)
Employer-provided accommodation – low cost housing
Ms Gouws explained. (See slide 20)
Removal of dividend character overlap (See slide 21)
Share schemes income recognition
Ms Gouws explained. (See slides 22-23)
Mr Kgaugelo Bokaba, National Treasury Director: Business Taxes, explained incentives, general provisions, incentives, and financial institutions and products. (See slide 24)
Debt versus shares / equity: key commercial features
Mr Bokaba gave some background on some of the instruments used for funding. Debt usually had a fixed claim on cash flows. It had a fixed maturity and was redeemable, whereas shares had variable claims on the cash flows depending on profits and were not redeemable. (See slide 26)
Debt versus shares: current general tax rules
Mr Bokaba explained. (See slide 27)
Hybrid debt instruments: background
Mr Bokaba explained. (See slide 28)
Hybrid debt instruments: proposal
Mr Bokaba explained that the proposal focused on the nature of the debt instrument itself. (See slide 29)
Hybrid debt instruments: exclusion from application of proposal
Mr Bokaba explained. (See slide 30)
Mr Momoniat commented that this was a big issue and would probably remain so. There had been an interim measure and National Treasury had introduced draft legislation in May over and above the normal process in order to obtain quick comments. He hoped that National Treasury had now 'got it right'.
Base erosion and profit shifting (BEPS)
Mr Bokaba explained that this was a topical issue internationally. The Group of 20 countries (G20) finance ministers called on the Organisation of Economic Cooperation and Development (OECD) to develop an action plan to address BEPS. He explained that the overall effect of BEPS was to shift profits from the jurisdiction where they were made to another jurisdiction where tax rates were lower. This was to the detriment of the first jurisdiction's tax base. (See slide 31)
BEPS: OECD Report
(See slide 32)
Acquisition debt and connected person debt interest limitations
(See slide 33)
Acquisition debt and connected person debt interest limitations: proposal
Mr Bokaba explained. (See slide 34)
Deferral of incurred expenditure between taxable payer and exempt payee
(See slide 35)
Deferral of incurred expenditure between taxable payer and exempt payee: proposal
Mr Bokaba explained. (See slide 36)
Removal of exemption for dividends applied against deductible financial instrument
Mr Bokaba explained the background, reasons for change, and the proposal. (See slide 37)
Ancillary components to pipelines – Section 12D
Mr Bokaba explained the background, reasons for change, and the proposal. (See slide 38 and 39)
Tenant construction and improvement of leased land – Section 12N
Mr Bokaba explained. (See slide 40)
Cross-issue of shares – Section 24B and 40CA
Mr Bokaba explained. (See slide 41)
Deductible donations of appreciated immovable property
Mr Cecil Morden, National Treasury, explained. (See slide 43) He also said that this slide should be read in conjunction with slide 19.
Deductible donations of appreciated immovable property: proposal
Mr Morden explained. (See slide 44)
Exemption of certified emission reductions
Mr Morden explained the background, reasons for change, and the proposal. (See slide 45)
Tax incentives for Special Economic Zones (SEZs)
Mr Morden explained the background and the proposal. (See slide 46)
Refinement of the Research and Development (R&D) regime
Mr Morden explained. (See slide 47)
Refinement of the Research and Development (R&D) regime: proposal
Mr Morden explained that the proposal was to streamline the processing of applications and to tighten the definition of R&D. (See slide 48)
Oil and gas incentive: Tenth Schedule to Income Tax Act
Mr Morden explained the background, reason for change, and the proposal. There had been an incentive for many years. Previously it was part of the rules of the then Department of Minerals and Energy. It was now incorporated into the Income Tax Act. The original reason for the incentive was the huge cost of exploration and the intention was to keep this particular incentive for offshore oil. (See slide 49)
Financial institutions and products
Retirement to investment policies disguised as short-term insurance policies
Mr Charles Makola, National Treasury Director: International Tax, explained. (See slide 51)
Simplification of tax regime for collective investment schemes in non-property investments
Mr Makola explained the background, reason for change, and the proposal. (See slide 52)
Deemed ordinary treatment in certain disposals of participatory interest in collective investment scheme
Mr Makola explained the background, reason for change, and the proposal. (See slide 53)
International shipping transport entities - incentives
Mr Makola explained the current position, reason for change, and the proposal. (See slide 55)
Exit charge on interests in immovable property
Mr Makola explained. (See diagram and text, slide 56)
Currency rules for treasury management companies
Mr Makola explained that this was part of the headquarters (HQ) regime that tried to promote South Africa as a base for treasury management companies. (See slide 57)
Refinement of participation exemption in respect of foreign dividends derived from non-equity shares
(See slide 58)
Share issues in exchange for foreign shares as a means of corporate migration
Mr Makola explained. (See diagram and text, slide 59)
Controlled foreign companies and the working capital exemption
(See slide 60)
Ring-fencing of net foreign trade losses
Mr Makola explained. (See slide 61)
Uniform cross-border withholding regime to prevent base erosion
Mr Makola explained. (See slide 62)
Transfer pricing relief for equity loans
Mr Makola explained. (See slide 63)
Removal of source focus for copyright authors
(See slide 64)
Simplification of Value-Added Tax (VAT) registration
Mr Morden explained. (See slides 66-68)
E-Commerce VAT registration
Mr Morden explained. (See slides 69-71)
Other VAT amendments
(See slides 71-72)
Refinements to the Mineral and Petroleum Royalty Regime
Mr Morden explained. (See slide 73)
Mr Momoniat acknowledged that there were too many changes in the taxation legislation every year and these created problems. He paid tribute to Professor Keith Engel, former Chief Director: Legal Tax Design, who had left the National Treasury for pastures new and had contributed greatly to South Africa's tax legislation. He also apologised for Mr Franz Tomasek, SARS Group Executive: Legislative Research and Development, who was unable to attend.
Draft Tax Administration Laws Amendment Bill (TALAB) 2013: National Treasury and SARS
Acts amended by Tax Administration Laws Amendment Bill (See slide 3)
Customs and Excise: duties and powers of officers (Clause 9)
Mr Kosie Louw, SARS said SARS was aware that these powers were too wide. (See slides 4-5)
Customs and Excise: powers of officers related to criminal prosecutions (Clause 10)
Mr Louw explained. (See slide 6)
Customs controlled areas in a special economic zone (SEZ) (Clause 11)
Mr Louw explained that to a large extent this was a consequential amendment. (See slide 7)
Customs and Excise: accredited clients (Clause 12)
Mr Louw said that this was a simple change. (See slide 8)
Customs and Excise: currency conversion: imports and exports (Clauses 13 and 14)
Mr Louw explained that the existing law applied only to imports. (See slide 9)
Customs and Excise: currency conversion (continued) (Clauses 13 and 14)
Mr Louw explained that Instead of a daily rate, there would now be a weekly rate for currency conversion.(See slides 10-11)
Amendments to the Tax Administration Act Understatement Penalty (USP) (Clauses 61-64)
Mr Louw explained that SARS had 'switched' the penalty system. Previously it had been called an additional tax. The table on page 39 of the draft Bill provided much more certainty. (See slide 12)
Amendment to Tax Administration Act regulation of tax practitioners (Clause 68)
Mr Louw explained. (See slide 13)
Amendments to Tax Administration Act: extension of prescription period for reduced assessment (Clause 34)
Mr Louw explained. (See slide 14)
Amendments to Tax Administration Act: extension of prescription period in the event of delays (Clause 34)
Mr Louw explained. (See slide 15)
Amendments to Tax Administration Act: other proposed amendments
(See slide 16)
Ms Z Dlamini-Dubazana (ANC) preferred that National Treasury and SARS presented the TLAB first and allow the Committee to complete its deliberations on it, before presenting the TALAB. This would put the Committee in a better position to make proper recommendations as requested by the Minister. She felt that the presentation was rushed and did not provide enough detail. She accepted that this was an informal briefing, but requested another presentation. She asked what key variables the National Treasury used in determining its proposals. The Committee had to base its recommendations on facts, not on assumptions. What did National Treasury mean by 'assist' in the sentence 'When employers assist their employees with housing'? (National Treasury Draft 2013 Taxation Laws Amendment Bill (TLAB) and Tax Administration Laws Amendment Bill (TALAB) Presentation, slide 20). 'Let the Department give us facts!' Ever since she had joined the Committee, National Treasury had been talking about amending the provisions for dividends. It seemed that as one did these changes one failed to identify the proper instrument to make the proper changes. She criticised the sentence 'The reason for change is that any confusion that as to which provision should apply where dividends are received to be eliminated to that there is no potential overlap.' (Slide 21) Did this mean that the instrument that was used before to remove that confusion was ineffective? What was that instrument? What instrument did National Treasury prefer to use now? If the Committee was at a loss to know what instrument was referred to, how could it assist the Minister and make proper recommendations? She pleaded that Mr Momoniat and his team, when they returned, give a separate briefing on the TLAB and then on the TALAB so that the Committee could do justice to the Bills.
Ms J Tshabalala (ANC) appreciated the presentation, long though it might be. She appreciated the information that was of assistance in preparing for the formal proceedings that lay ahead. However, she was not quite sure about the practicality of the time frames. This was something that National Treasury and SARS needed to examine, given that they were proposing so many measures.
She asked what informed the beneficial tax regime for companies that located in Special Economic Zones approved by the Minister of Finance (National Treasury Draft 2013 Taxation Laws Amendment Bill (TLAB) and Tax Administration Laws Amendment Bill (TALAB) Presentation, slide 6). What were the provisions for small companies in this context?
She asked about 'severance tax', as she had seen references to it elsewhere, but not in the documents presented.
She asked about the deep process of consultations around retirement savings (slide 12). What was it that National Treasury and SARS intended to do differently in this process of consultation, keeping in mind the time frames? What was the methodology?
She asked about the provident fund post-retirement annuity alignment (slide 16). The second bullet point spoke about protecting the vested rights of existing members above 55 years (remaining in the fund) by not requiring them to annuitise any retirement savings in that provident fund and by not requiring annuitisation in respect of any accumulated savings as at 01 March 2015 and any growth thereof (irrespective of whether the member remained in the fund. She was deeply worried at talk of government's considering phasing out the means test for the old-age grant (slide 16, fourth bullet point). She was also concerned about this in view of the forthcoming elections. She stressed that it was important to encourage savings. She wanted more explanation about this proposal.
She was passionate about issues of currency (National Treasury Draft Tax Administration Laws Amendment Bill (TALAB) 2013 Presentation, slide 11, and third bullet point). 'Commercial practice is that the selling rate is used for imports and the buying rate is used for exports to determine the amount of money that is exchanged by the banks for import and export transactions.' She asked if one could add that one needed to account on accruals on the activity or loss that one suffered, whether one was talking about imports or exports. It had to be asked if South Africa was getting value for money for its imports, especially those for infrastructure projects, as these imports were very expensive.
Mr D Ross (DA) noted that there was a raft of new legislation, together with slower growth in the South African economy. Also there was the uncertainty in the business sector because of the carbon tax. He noted the terms of reference of the Tax Review Committee. Was it not proper also to refer the carbon tax issue to the Tax Review Committee for its input? He noted an article in the Business Report on the concerns of the business sector on the carbon tax, which was considered not only to be a tax but also as a penalty. He agreed with Mr Morden that it was an unfortunate time to impose a new tax, given slow growth and the problem of redundant workers in the energy intensive industry that would be especially affected by the carbon tax.
He was very pleased with the proposals to strengthen retirement funds. This was a job well done. He agreed that most individuals would be able to qualify for a higher deduction. However, should we not work towards all individuals, perhaps? The two components - defined contribution fund and defined benefit fund - were still very complex and needed to be simplified. He was concerned that the employee would be liable for the tax for his or her fringe benefits that were paid by the employer.
The Acting Chairperson asked Mr Ross to which slide he was referring.
Mr Ross replied that he was referring to National Treasury Draft 2013 Taxation Laws Amendment Bill (TLAB) and Tax Administration Laws Amendment Bill (TALAB) Presentation, slide 13.
Mr N Koornhof (COPE) referred to slide 14, on the valuation of fringe benefits for defined benefit fund. Was this not an incentive that would have a negative effect on savings? South Africa had a poor track record on savings. Was this proposal good for savings, yes or no?
Mr T Harris (DA) would save most of his huge list of questions for the public hearings.
On the Tax Review Committee, there had been some response from the industry and from the public. The responses were around three questions, on which he thought that the Standing Committee would appreciate answers.
Firstly, the time frames. There had been speculation that it might take years. How long would the review process take?
Secondly there was concern that there were no tax practitioners on the Tax Review Committee, notwithstanding the fact that it consisted of very competent individuals. Surely, however, one would want somebody who was an industry-insider?
Thirdly there was a generalised concern that it was an excuse for adopting a new approach that squeezed more tax out of taxpayers. This was a concern raised in the media.
He accepted the fact that the National Treasury and SARS had showed the Bill to the Tax Review Committee to consider whether one was taking the right approach in tabling these large Bills every year to close loopholes. He would argue that one needed an ideologically different approach - one that prioritised simplicity and put faith in South Africa's competitiveness and trust in the benefits that investors would bring to the country.
He had five questions on the TLAB.
Firstly on the registration for VAT by foreign e-commerce suppliers. He could see why this was a priority but was not sure if National Treasury and SARS had thought through the practicalities. Was there not a risk that Amazon might decide not to supply to South Africa? Then the big losers would be South African consumers.
Secondly, the registration for VAT by foreign e-commerce suppliers would have to be done multilaterally. Otherwise SARS would spend much time chasing up individual vendors all around the world, presumably at a higher cost than the tax that would be brought in. It did not seem to be a race that South Africa could win.
Thirdly, on the simplified VAT registration process, one was indeed protecting SARS on the new start-ups that emerged simply to do VAT reclaims, but when it came to existing companies the registration procedures had not changed at all. So it was not really a simplification, it was just a defensive move to protect SARS from fraud.
Fourthly, on R&D, there had been some pushback from the public on this. It did seem that there was some merit in what members of the public were saying. He understood that one had really tightened up the definitions here. How much was SARS losing to justify the tightening? Surely there was concern that South Africa was already spending less than 1% of gross domestic product (GDP) on R&D, when science and technology was committed to a figure of around 2%. Did National Treasury agree with that figure of 2%? How did tightening this loophole contribute to achieving that higher spend on R&D?
Lastly, as to base erosion and profit shifting. Was there a time frame for the OECD action plan?
As to defining the tax break for offshore finds of oil and gas, surely most of the really exciting stuff that was changing geopolitical realities in energy was actually on land – it was shale gas. Surely if one wanted to make it cheaper for investors to extract some of that gas, one could not simply limit the tax break to offshore resources. It was necessary to reflect the new reality of energy today.
On the TALAB, these new narrow circumstances for a search did not seem very narrow to Mr Harris. If a person was registered as a tax practitioner, one could simply search and seize without a warrant. Moreover, the search could be done on the expectation that a warrant might have been given. Surely there was a risk of a court challenge.
Mr E Mthethwa (ANC) asked about customs and excise: duties and powers of officers (continued) (National Treasury Draft Tax Administration Laws Amendment Bill (TALAB) 2013 Presentation, slide 5). The fourth paragraph said that requirements were provided for the conduct of officers when they entered and searched premises. This had been a contentious issue in the Committee's previous discussion on this subject, However, here there were Clauses with a similar connotation, whereby one gave people a benefit of a doubt. This Clause might be abused by people who did not go through the right channel. How would one control the potential for such abuse?
The Acting Chairperson asked about the definition of who qualified for an R&D incentive? Was it linked to the definition of the Department of Science and Technology? He raised this question amid the current discussion around the fact that only those innovations that were internationally competitive would qualify for such incentives. He thought that this restriction would hamper South Africa's efforts to promote indigenous inventions or maybe the creation of items that might be competitive only locally or in the continent of Africa. How did National Treasury and SARS define these R&D inventions?
The Acting Chairperson, as much as he concurred that it was very difficult to regulate e-commerce transactions, felt that, if one legislated, it was necessary to address the issue of capacity. He was not sure what steps National Treasury and SARS had taken to ensure such capacity.
The Acting Chairperson asked National Treasury and SARS to give direct answers.
Mr Momoniat agreed, and said that, to save time, he would group responses.
The process this year was no different from that of last year. However, he understood Members' concerns at the complexity of the proposals. Tax was not a simple issue. Prior to 2008 the advanced economies were not interested in cooperation in tax matters. At the same time they were benefiting from e-commerce, transfer pricing, and tax havens, Subsequent to the global economic crisis, however, there was much more interest in cooperation to ensure that companies paid their due. Unfortunately it was hard to find a simple approach.
In many of the other approaches, what National Treasury and SARS sought to do was to recognise that the tax laws were just an outcome of the process. National Treasury had already briefed the Committee on retirement reform. There had been a big initiative on savings, and there were research papers to substantiate this. It had to be asked to what extent there should be joint hearings on such matters as the Special Economic Zones and the carbon tax. This afternoon, he and Mr Morden would be explaining carbon taxes to the Portfolio Committee on Energy. The proposals for the carbon tax were in line with the White Paper on mitigation. However, other departments and other parts of government drove many such proposals. He understood Members' difficulties. Unsecured credit was another issue that might usefully be discussed in joint meetings, as it affected the Financial Services Board (FSB) and the Department of Justice and Constitutional Development as it involved garnishee orders. He wanted to brief the Committee much more often.
For additional explanations and solutions, he referred to the Explanatory Memorandum, which gave more detail than the presentations. At the same time, it would raise more questions than answers, as these were complex issues.
He said that the Tax Review Committee should look at the process, as National Treasury accepted that there was too much complexity.
The Tax Review Committee was free to look at any set of issues.
There was certainty that government would implement the carbon tax in line with the White Paper. The rate was so low initially, while the economic cycles were up and down. He conceded that it would be important to assess the impact. However, the Committee would make the final decision. It was still a long way from finality.
Judge Davis had talked of an interim report from the Tax Review Committee at the end of this year. However, Mr Momoniat had no doubt that that the work of the Tax Review Committee could last many years.
Mr Momoniat denied that the slide said that there was a phasing-out of old-age grants. There would be a revolution if one tried to do that. It talked of doing away with the means test for the grant. So that if one earned a certain income today, one did not qualify for the old-age grant. Members of a provident fund might not qualify for an old-age grant if they had a certain income level or level of assets. This meant that people would rather spend their pensions so that by the time they were of age for an old-age grant, they would qualify for it according to the means test. If the means test were abolished, and everyone in that age group qualified, there would be no perverse incentive for people to use up their pension funds before they got old. This was a proposal that was in the budget review.
Mr Momoniat offered to give another briefing on the retirement reforms. National Treasury had attended many meetings and workshops as part of the consultation process in order to obtain a consensus. National Treasury's aim was to nudge people to save more.
Mr Momoniat replied to Mr Koornhof (slide 14) that National Treasury was, for sure, balancing various things. If one had those caps, there were fewer incentives. So certain people might save less in those vehicles. It did not mean that they might not save through other vehicles. He pointed out that there was a question of equity. Obviously, richer people did save more, and for them the tax deduction was higher. Whether or not to have caps was an issue for the Committee to examine. However, one was looking at different objectives with which one was trying to deal.
Mr Momoniat replied that National Treasury and SARS were not looking at the general issues around the currency. Instead they were looking at very specific issues.
Mr Louw asked if the questions on currency were more related to the Customs and Excise Act provisions – the ones that he had touched upon?
Members' silence indicated agreement.
As Mr Louw had explained, there were two things that SARS was trying to do here.
Firstly the law currently provided only for conversion rules as far as currency was concerned in respect of imports. It was necessary to have a conversion rule for imports, as, if the prices were listed in foreign terms, they would have to be converted into rands in order to calculate the duty. All that SARS sought to do was to bring more certainty to traders as to what conversion rates they should apply. At the moment SARS published these rates daily. This might be more accurate as far as conversion rules were concerned, but businesses had complained that it caused a big problem for them. On the basis of research, it appeared that European Union (EU) countries gave traders more warning. This was a balance that one had to strike to make the administration of the laws easier for both SARS and traders, and to achieve accuracy. Hence the conversion rates would now be announced on a Wednesday and apply for one week. This would give more certainty.
Also SARS had now extended this provision also to exports in order to achieve much more accurate trade data. Customs also played a role in VAT administration, by ensuring that, if goods were for export, they actually left the country.
There were some questions on search and seizure. The reason for current unhappiness about the search and seizure provisions was that those who complained said that it infringed on their right to privacy (Section 14 of the Constitution). Under the Constitution, privacy extended beyond a person's private dwelling. Of course, all the rights in the Constitution were subject to the limitation 'clause' in Section 36. The Court, in the judgement in this particular case, had applied the limitation rules. The Court had taken into account five factors. He read a short extract from the judgement, to the effect that the right to privacy weakened as one moved away from the inviolable core of one's home. In particular, businesses had a lower expectation of privacy in regard to the disclosure of information. The more regulated the business, the more attenuated its rights to privacy. The Court had given SARS some guidelines on how to structure this interim Clause. The Court had said that routine searches without warrants were justifiable under the Act in respect of business premises of persons registered in terms of a number of Sections of the Act, or persons licenses in terms of a number of Sections of the Act, 'or of persons who operate on pre-entry facilities'. Thus there was no need for a warrant to search a business premises. Similarly for licensed operators and 'pre-entry facilities'. The Court had also said that where the problem really came in was with non-routine searches of business premises or homes. For such searches a warrant was required and must be obtained beforehand. However, under certain circumstances, searches without judicial warrant were justifiable, if the officer on reasonable grounds believed that the warrant would be issued in terms of the relevant sub-section if the officer applied for the warrant, but that delay in obtaining the warrant might defeat the objects of the search. SARS had gone through these debates with the Committee on the Tax Administration Act also. There were 14 or 15 other pieces of legislation that had similar exclusions. However, one had to use these exclusions very sparingly, and searches under these exclusions could be authorised only by senior persons.
Mr Morden replied on VAT registration. He assured Members that the new provisions were much simpler than the old from both the perspective of SARS and the vendor. Currently, if one was a vendor with a turnover of less than R50 000, one could not register at all currently. However, it was necessary to accept the need to protect the VAT base from fraudulent refunds. That provision was a small backup. National Treasury and SARS would have to review the comments from experts or the tax practitioners. However, he thought that they would welcome this proposal.
The digital economy was a challenge to the tax authority, not only in South Africa, but worldwide. It had been identified by the OECD as an issue. It had also been identified as an issue in the USA. This was National Treasury's and SARS' attempt to address the issue. It had been done also in the EU. There were multilateral discussions, and it was expected that the exchange of information could be used at a later stage to provide for this particular type of information. However, it was early days to contemplate this.
As to R&D, the tax incentive was just one small element towards National Treasury's and SARS' attempt to enhance R&D expenditure. R&D expenditure was driven by various factors, not only tax. However, tax played a small role. There had been an R&D incentive for a few years, and it had made a marginal contribution that National Treasury and SARS hoped it would continue to make. National Treasury and SARS were in constant discussion with the Department of Science and Technology. That Department was the custodian of the adjudication committee, on which National Treasury and SARS sat. National Treasury and SARS would discuss comments received with the adjudication committee. Perhaps there was room to review the definition, but in consultation with the Department of Science and Technology. What National Treasury and SARS wanted to avoid were activities that were clearly not R&D, like ordinary improvements in computer software.
National Treasury and SARS could send the Committee a copy of the OECD ambitious list of activities on BEPS. The OECD wanted to do something over the next 18 months. South Africa was an observer to the OECD tax committees and the Minister had received a formal letter for South Africa to participate in this process. National Treasury and SARS would give feedback to the Committee and would also share it with the Tax Review Committee.
It was necessary to remember from where the oil and gas incentive originated. It was introduced because of the huge expenses in exploring for offshore oil and gas. South Africa did not have huge known deposits. In the case of onshore resources, the story was completely different. One probably did not need an incentive for something that was highly profitable. Moreover, it was undesirable to incentivise something and then later impose windfall profits.
Mr Morden noted Mr Harris' concerns on the carbon tax. Some of the articles in the press were one-sided and misguided, and completely ignored all the existing incentives for renewable energy sources. They also ignored all the revenue recycling initiatives that National Treasury and SARS was presenting for discussion, and also the proposal for the energy efficiency savings incentive which National Treasury and SARS thought could help quite a large number of companies with their energy concerns. National Treasury and SARS were mindful of all these comments and would have to take them into account before moving ahead. Hence National Treasury and SARS were offering an extended comment period and would return to the Committee with a response to all those comments.
Ms Gouws replied that there was nothing new specifically on severance benefits, which was income that a person received when retrenched by his or her employer. The current dispensation was that it was taxed as part of the person's retirement tax table. So the person basically obtained the benefit of having the retirement tax table applied on that particular amount as if he or she had taken early retirement, irrespective of the fact that it came from an employer and not a retirement fund. This provision had basically been in place since 2011. R315 000 was tax-free. Above that the rate was 18% up to the level of R630 000, and above that the rate was 27%.
There was a concomitant deduction for an employee who had been taxed on the employer's contribution to a fund. So if an employer paid R20 000 into an employee's fund, and if that employee had an income of R20 000, that employee would also be eligible for a deduction of R20 000 leaving a net of zero to be taxed. The only time that this would not match exactly would be if the employee's total contribution (the employee's and the employer's together) to the fund would exceed R350 000 or 27.5% of the employee's total taxable income or remuneration. This was the only cut-off. Otherwise, most people would be better off in the sense that they had a bigger pot from which to contribute and from which to obtain a bigger deduction.
Mr Momoniat referred Mr Koornhof to National Treasury's paper in which it defined what the retirement base was. There was just a shift in the point at which it was taxed. The employee would not actually feel any difference. He or she would still obtain the amount. It was just the way it was taxed that was dealt with in respect of the cap. Moreover, the cap was generous for most people and most people should benefit from it.
The Acting Chairperson thought that Members were now prepared in terms of understanding the issues to be covered in this process. He urged Members to study the briefing documents in their own time, in conjunction with the detailed documentation submitted together with that available on the relevant websites.
The Acting Chairperson adjourned the meeting.
[Apologies: Apart from the Chairperson, Mr T Mufamadi (ANC) who was delayed but arrived later, the only apology was from Dr Z Luyenge (ANC) who was a member of an electoral observation mission in Zimbabwe].
Minister Gordhan announces further detail on the Tax review Committee
17 July 2013, Pretoria - The Minister of Finance, Pravin Gordhan, has today announced members of the Tax Review Committee as well as the committee’s terms of reference.
Today’s announcement gives effect to the Minister’s announcement in February when he tabled the 2013/14 budget that government will initiate a tax review this year “to assess our tax policy framework and its role in supporting the objectives of inclusive growth, employment, development and fiscal sustainability”.
Members of the Tax Review Committee
Judge Dennis Davis will chair the Tax Review Committee. The other members are:
1. Professor Annet Wanyana Oguttu,
2. Professor Matthew Lester,
3. Professor Ingrid Woolard,
4. Ms. Nara Monkam,
5. Ms. Tania Ajam,
6. Professor Nirupa Padia, and
7. Mr Vuyo Jack
A National Treasury official, Mr. Cecil Morden, and a South African Revenue Service (SARS) official, Mr. Kosie Louw, will be ex-officio members, providing technical support and advice to the committee. In addition, a team comprised of National Treasury and SARS officials will provide secretarial support to the committee. SARS will provide office accommodation and logistical support to the committee.
Terms of Reference of the Tax Review Committee
The terms of reference for the Tax Review Committee are to inquire into the role of the tax system in the promotion of inclusive economic growth, employment creation, development and fiscal sustainability. The committee will in its work take into account recent domestic and global developments and, in particular, the long term objectives of the National Development Plan (NDP).
The committee will make recommendations to the Minister of Finance. Any tax proposals arising from these recommendations will be announced as part of the normal budget and legislative processes. As with all tax policy proposals, such proposals will be subject to the normal consultation and Parliamentary oversight.
The committee should evaluate the South African tax system against the international tax trends, principles and practices, as well as recent international initiatives to improve tax compliance and deal with tax base erosion.
The following aspects should receive specific attention from the committee:
1) An examination of the overall tax base and tax burden including the appropriate tax mix between: direct taxes, indirect taxes, provincial and local taxes. An analysis of the sustainability in the long-run of the overall tax-to-GDP ratio, and the tax-to-GDP ratio for each of the three major tax instruments, personal income tax (PIT), corporate income tax (CIT) and VAT should be undertaken. This in essence requires an evaluation of the economic and social impact of the tax system and an assessment of whether the current tax structure is able to generate sufficient and sustainable revenues to fund government’s current and future expenditure priorities.
2) The impact of the tax system in the promotion of small and medium size businesses, including analysis of tax compliance costs, the possible further streamlining of tax administration and simplification of tax legislation.
3) A review of the corporate tax system with special reference to:
- the efficiency of the corporate income tax structure;
- tax avoidance (e.g. base erosion, income splitting and profit shifting, including the tax bias in favour of debt financing);
tax incentives to promote developmental objectives; and the average (and marginal) effective corporate income tax rates in the various sectors of the economy.
4) As noted in the 2013 Budget Review, the committee will consider
a) Whether the current mining tax regime is appropriate, taking account of:
- the agreement between Government, Labour and Business to ensure that the mining sector contributes to growth and job creation, remains a competitive investment proposition, and all role players contribute to better working and living conditions; and
- the challenges facing the mining sector, including low commodity prices, rising costs, falling outputs and declining margins, as well as to its current contribution to tax revenues.
b) Various elements of taxation within the financial sector, namely the taxation regime of long term insurers (BR, page 55), the taxation of hedge funds (BR, page 56), the taxation of various innovative financial instruments (BR, page 63), and the VAT treatment of financial services and VAT apportionment within the financial sector (BR, page 63).
5) Value added tax with specific reference to efficiency and equity. In this examination, the advisability and effectiveness of dual rates, zero rating and exemptions must be considered.
6) The impact of e-commerce (especially the use of digital delivery of goods and services) upon the integrity of the tax base, in particular upon value added tax and corporate income tax revenues.
7) The progressivity of the tax system and the role and continued relevance of estate duty to support a more equitable and progressive tax system. In this inquiry, the interaction between capital gains tax and the estate duty should be considered.
8) An evaluation of proposals to fund, for example, the proposed National Health Insurance (NHI) and long term infrastructure projects to boost the growth potential of this economy.
9) An evaluation of the legislative process with a view to both enhancing simplicity and ensuring the protection of the tax base and to recommend how to improve the current process.
The Committee is mandated to study any further tax issues which, in the Committee’s view, should be addressed in order to promote inclusive economic growth, employment creation, development and fiscal sustainability. The Committee is required to submit interim reports and a final report which will be published on dates to be determined after consultation between the Committee and the Minister of Finance.
Objectives of South African tax system
The committee should take into account the following broad tax policy objectives:
a) Revenue-raising to fund government expenditure is the primary objective of taxation
b) Social objectives, building a cohesive and inclusive society can be met partially through a progressive tax system and by raising revenue in order to redistribute resources.
c) Market failures can be corrected by applying a tax on production and/or consumption to internalise negative externalities, e.g. pollution or consumption of harmful products.
d) The tax system can influence behavioural changes by encouraging certain actions (e.g. savings) and discouraging others (e.g. smoking).
e) Taxes and tax incentives are sometimes used in targeted ways to encourage higher levels of investment to help facilitate economic growth.
f) International competitiveness is important, although the tax system is not the main driver of international competiveness. Innovation and productivity improvements are far more important. We should guard against the ‘race to the bottom’ in our efforts to strive for a “competitive tax system”.
Background to the Review
The South African tax system has changed significantly since the recommendations of the last tax commission (The Katz Commission). The changes to the system include the establishment of an independent tax and customs administration (the South African Revenue Service), the broadening of the tax base, and the lowering of marginal tax rates. These and other changes have contributed to the development of a relatively robust and competitive tax system. Today South Africa’s tax policy and tax administration compares favourably with those of many developed and emerging economies.
However, given the pace of globalisation, the relatively modest economic growth after the 2008/09 economic recession, and the significant social challenges such as persistent unemployment, poverty and inequality, there is a need to review what role the tax system can play as part of a coherent and effective fiscal policy framework in addressing these challenges. There is also a need to address concerns about base erosion and profit shifting, especially in the context of corporate income tax, as identified by the OECD and G20.
The email address for the Tax Review Committee is: email@example.com. Other contact details will be announced shortly.
1) Terms of Reference
2) Tax Review Committee brief biographies
Issued by: Ministry of Finance
17 July 2013
- Tax Administration Laws Amendment Bill
- Taxation Laws Amendment Bill
- Draft 2013 Taxation Laws Amendment Bill (TLAB) and Tax Administration Laws Amendment Bill (TALAB)
- Draft Tax Administration Laws Bill (TALAB) - 2013
- Minister Gordhan Announces Further Details of Tax Review Committee and Terms of Reference
- We don't have attendance info for this committee meeting
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