The Committee heard submissions from accounting firms KPMG and PricewaterhouseCoopers and from the Banking Association of South Africa (BASA) as well as a submission from Kalahari.com.
KPMG focused its submission on the research and development tax breaks. It said that the research and development legislation could be tightened to avoid abuse by companies. It felt that, while there had been an increase in the number of companies taking up this tax break prior to the draft legislation, there was now resistance as the new proposed legislation was seen as a disincentive. The problem with the draft legislation was that it was retrospective. Other challenges were that the research and development had to be world leading research to qualify which would make it impossible to comply as so many patents applications were filed. Another challenge was that there was a special dispensation for the pharmaceutical industry and the information technology industry. In conclusion KPMG did not support the amendments and industry needed to be consulted. Policy changes should apply prospectively and not retrospectively.
PricewaterhouseCoopers said that the time frame in which tax legislation was discussed was decreasing over time while at the same time the law was becoming more complex. The increasing volume of retrospective changes that resulted was creating uncertainty amongst taxpayers and retrospective legislation should be the exception and not the norm it had become. PricewaterhouseCoopers felt that the Tax Administration Act, which was meant to decrease red tape, had resulted in an increase in red tape because of a growing administrative burden. PricewaterhouseCoopers was opposing a monetary cap on retirement savings. PricewaterhouseCoopers said South Africa should not follow the Organisation of Economic Cooperation and Development blindly on base erosion and profit shifting and should await the Tax Review Committee report. PricewaterhouseCoopers felt the draft amendments were riddled with anomalies and inconsistencies. PricewaterhouseCoopers was calling for a deferral of the implementation of value-added tax on e-commerce as significant issues like enforcement had not been addressed and there should be discussion papers and consultation. It felt the research and development amendments rendered the incentives ineffective as most of the research and development spend was on enhancements of existing products rather than innovative and unique new products.
The Banking Association of South Africa said that banks had concerns over Sections 8F and 8FA, Section 23K and Section 23N. It also had concerns over the taxation of dividends, Section 8C and Section10B. It said that banks spent a lot on research and development and the retrospective nature of the legislation was not working out. The Banking Association of South Africa said that the hedge fund regulatory framework was still in draft form and yet draft tax legislation was being formulated for the industry. It said that the Section 24JB legislation should be phased in over four years. It said that the Section 8C employee share options schemes should be reviewed. It said that banks needed to engage in further consultation on the Tax Administration Act through an appropriate forum.
Kalahari.com said there was an uneven value-added tax playing field. It wanted to address the timing of the introduction of value-added tax being applicable to e-commerce (of foreign based companies) on 1 January 2014 to be brought forward to 1 November or 1 December 2013.
Members asked whether the draft was a sloppy, rushed job and whether workshops around research and development had been held. Members asked for examples of claims of misuse of the tax incentive and for further detail on the unconstitutionality of retrospective law. Was the previous law on research and development satisfactory or had there been problems. On what taxpayers rights did retrospective and prospective law touch. Should the government wait two years for the Organisation of Economic Cooperation and Development to resolve base erosion and profit shifting? Members told kalahari.com that its request appeared to be protectionist. Members said Kalahari should join the campaign for the value-added tax on books to be zero-rated. Members asked how the implementation date of 1 January would influence the industry. Members said that National Treasury had not fully worked through the ramifications of the implementation of value-added tax on e-commerce yet and had reservations about the enforcement of the Act. Was the increasing administrative burden about an increase in paperwork or about finding information? Could Sections 8F and 8FA be clarified? Was Parliament the only forum where bodies met to review tax issues? To what extent should the rules on incentives be relaxed? Members asked for clarification on inflation targeting and on the taxing of hedge funds. What position did research and development play in the National Development Plan? Had PricewaterhouseCoopers been able to consult with National Treasury and the South African Revenue Service regarding Eskom and the National Energy Regulator of South Africa?
KPMG Proposed Amendments to Research and Development Tax Incentives Presentation
Mr Mohammed Jada, KPMG Tax Partner, said South Africa (SA) was the only country in Africa with a research and development (R&D) regime because it generated inventiveness and competitive enhancement. However he noted that the R&D talent pool was very mobile. R&D tax breaks would attract multinationals and retain skilled, talented people from leaving the country. He said if the legislation was being abused, it could be tightened. He said that the South African Revenue Service (SARS) was no longer the overseer of R&D as it fell under the Department of Science and Technology (DST). There had been an increase in the number of companies taking up this tax incentive, but there had been resistance since the new draft legislation had been published because it was seen as a disincentive. This, while SA was aiming to move from a figure of 0.9 % of gross domestic product (GDP) spend on R&D to 2%. The problem with the draft legislation was that it was retrospective. This would result in the DST having to revisit all already completed applications as the applications were based on the current legislation. Another challenge was that the research and development had to be world-leading research; that is, if some technology was already developed then companies would not qualify to receive the incentive. It would be impossible to comply, as no one knew what was happening in the world as so many patents applications were filed. The pharmaceutical industry and the information technology (IT) industry had been given special dispensation. No reasons were given why they were given this dispensation and how they would be regulated had not been disclosed. This had occurred without consultation. Another challenge was that to qualify for the tax break, the research and development products had to be made available to the general public. The armaments industry, for example, could not disclose the research and development to the general public. The Clause limited a company’s ability to qualify; automotive vehicle designs for example were sold to dealers not to the public. The legislation also called for the R&D to be innovative but there was no definition or guidance on what the word meant. Similarly the requirement that it ‘make significant improvement’ was not defined and in any case by its very nature R&D had failures but these failures lead to the elimination of certain avenues of investigation. The legislation would restrict the planning of capital expenditure on, for example, a pilot plant because pilot plants would not qualify. The new anti-avoidance section where methodology of research was not deemed to be in South Africa was confusing and the wording of the legislation was at issue. New subjective criteria had been introduced using words like “novel”, “innovative”, “unique”, “add substantial value to the industry”. Eskom, for example, had an underground coal gasification project, which should qualify for tax breaks that could lead to lower electricity process. In conclusion he said they did not support the amendments and industry needed to be consulted. Policy changes should apply prospectively and not retrospectively.
PwC Draft Taxation Laws Amendment Bill 2013 Presentation
Professor Osman Mollagee, PwC Director: Tax Services, said that the time frame in which tax legislation was discussed was decreasing over time while at the same time the law was becoming more complex. The bulk of the changes were fixing the errors of two years previously and more time was required to do the job correctly. He said the increasing volume of retrospective changes that resulted was creating uncertainty. Retrospective legislation should be the exception and not the norm it had become. The Tax Administration Act was meant to decrease red tape but the growing administrative burden resulted in an increase in red tape. He was opposed to a monetary cap on retirement savings as it should be encouraging savings. It should be a percentage-based cap. On base erosion and profit shifting (BEPS), he said a lot of proposals were steeped in BEPS where jurisdictions were concerned about double non-taxation. The legislation was premature and should be deferred. He said that the Organisation of Economic Development and Cooperation (OECD) pronouncements had an overarching concept of not acting unilaterally. He believed that South Africa should not follow the OECD blindly and the Tax Review Committee (TRC) was reviewing the tax law and so one should await its report. He said that the actual draft amendment was riddled with anomalies and inconsistencies. PwC was calling for a deferral of value-added tax (VAT) on e-commerce as significant issues like enforcement had not been addressed and there should be discussion papers and consultation. The R&D amendments rendered the incentives ineffective as most of the R&D spend was on enhancements of existing products rather than innovative and unique new products. He asked if clarity could be given on whether the Tax Administration Act of October 2012 could be applied to instances prior to that date. He said that there was an increase in the withholding of tax interest and now service fees and that this generated very little revenue but a lot of paperwork. He called for the withdrawal of a monetary cap on retirement savings and said that new legislation on BEPS should be deferred pending the TRC and OECD reports on BEPS.
Banking Association of South Africa DTLAB and DTALAB 2013 Presentation
Mr Leon Coetzee, Head: Group Tax Services, FirstRand, who attended in his capacity as Banking Association of South Africa (BASA) representative, said that banks had concerns over Sections 8F and 8FA, Section 23K, and Section 23N. It also had concerns over the taxation of dividends, Section 8C and Section10B. He said that banks spent a lot on R&D and the retrospective nature of the legislation was not working out.
Ms Tracy Brophy, Head: Tax Risk, FirstRand, who attended in her capacity as BASA representative, wanted to highlight 8F and 8FA as being problematic. It dealt with interest paid on hybrid debt instruments which was being treated as a dividend in specie. To identify owners would be administratively extremely difficult and onerous as these instruments were frequently traded. BASA recommended that the listed debt instruments be excluded. Basel III capital adequacy regulations meant that all banks would be issuing new capital instruments. These were new instruments and banks needed flexibility to issue them. The new instruments would be highly regulated. Banks would be forced to track these instruments and incur the high costs associated with this. Section 10B would result in foreign dividend exemption no longer applying to non-equity shares and banks wanted exemption when parent or partner companies were the holders to facilitate their funding requirements. The limitation had the anomaly of putting a limitation on parent companies but not on foreign third party companies.
Ms Mardelle Kelbrick, Head of Tax, Standard Bank, who attended in her capacity as BASA representative, said that the deletion of Section 23K was welcomed but now taxpayers did not know what applied or whether Section 23N was in force. BASA felt that taxpayers be given the choice whether to stick with 23K or with 23N.
Mr Coetzee said that banks were concerned over the wording in paragraph (hh) of Sub-section 10(1)(k)(i) and needed further consultation with National Treasury. Its impact would be predominantly on domestic entities and banks and would encourage the movement of business to outside the country.
On the Section 10B participation exemption requirement regarding the funding of subsidiaries which would no longer apply, Ms Kelbrick said this Clause should not be included.
Ms Brophy said that BASA would be having meetings with National Treasury on hedge funds. The hedge fund regulatory framework was still in draft form and yet draft tax legislation was being formulated for the industry.
Ms Kelbrick said the Section 24JB legislation should be phased in over four years.
Mr Coetzee said that the Section 8C employee share options schemes should be reviewed. He said that banks needed to engage in further consultation on the Tax Administration Act through an appropriate forum.
MIH Group Submissions on the draft Taxation Laws Amendment Bill 2013 presented by Kalahari.com
Ms Alexia Christie, MIH Internet Africa (Pty) Ltd (“MIHIA”) Head: Legal, representing Kalahari.com, an online retailer, said there was an uneven VAT playing field for her company and that it was a global problem, acknowledging that there was not a perfect solution. She wanted to address the timing of the introduction of VAT being applicable to all e-commerce (of foreign-based companies) on 1 January 2014. She felt this was too late as it would not cover the Christmas shopping period when approximately 25% of annual book sales took place. There would be big losses for the industry. The e-book market had increased 300% from the previous years and was expected to continue to grow at this rate. In addition this growth would eat into physical book sales. She called for the implementation date to be brought forward to 1 November or 1 December 2013.
Mr T Harris (DA) asked KPMG whether it thought the draft was a sloppy, rushed job and whether there had been workshops on R&D. He asked for examples on claims of misuse of the tax incentive and for further detail on the unconstitutionality of retrospective law. He asked whether the previous law on R&D was satisfactory or whether there had been problems. He asked PwC whether the government should wait two years for the OECD to resolve BEPS. He asked BASA whether any country was implementing tax law retrospectively. He told Kalahari that their request appeared to be a request for protection that might be good for the company but queried whether it was good for the consumers. He felt that National Treasury had not fully worked through the ramifications of the implementation of VAT on e-commerce yet.
Ms Z Dlamini-Dubazana (ANC) asked KPMG whether it was not supporting the whole amendment Bill or only the R&D portion and asked about whether wider consultation by Parliament and the Treasury was required. She asked PwC how taxpayers’ rights were impacted by retrospective and prospective law. She asked whether the administrative burden that appeared to be increasing was about an increase in paperwork or about finding information. She asked BASA for clarification of Sections 8F and 8FA.
Mr N Koornhof (COPE) asked KPMG whether the R&D law was working. He asked PwC whether companies were happy with the time given for them to respond to the draft amendments or whether they wanted more workshops. He said Kalahari should join the campaign for the VAT of books to be zero-rated.
Dr Z Luyenge (ANC) asked whether this was the only forum where bodies met to review tax issues. He said that they should be meeting even before the formal parliamentary meetings.
Ms J Tshabalala (ANC) asked KPMG to what extent the rules on incentives should be relaxed. She asked how harmful the word ‘innovative’ was. She asked BASA for clarification on inflation targeting and on the taxing of hedge funds.
Mr D Ross (DA) asked KPMG what position R&D played in the National Development Plan (NDP). Had PwC been able to consult with National Treasury and SARS regarding Eskom and the National Energy Regulator of South Africa (NERSA). He asked PwC whether retirement funds rates were too high and what PwC’s views were on the tax of micro-businesses. He asked BASA whether the SARS forum was broken. Was it a problem of capacity? He asked Kalahari its views on finding a balance and how the problem could be solved.
Ms F Adams (ANC) asked how the implementation date of 1 January would influence the industry. She asked Prof Mollagee's views on KPMG’s concerns over the wording in the Amendment Bills.
The Chairperson said he had reservations about the enforcement of the Act (regarding VAT). He asked if it would be challenged if forced through. He asked PwC for its comments on the administrative burden given that SARS had been receiving awards for expeditious tax returns.
Mr Jada said the introduction of the R&D amendments took the industry by surprise when they were introduced in July. KPMG was astounded by the extent of the changes and would have welcomed workshops and was still awaiting one. It had made detailed submissions on the amendments; some were supported but he felt the majority of the amendments were taking them backwards. There had not been sufficient consultation with the National Treasury and the Department of Science and Technology (DST). The pharmaceutical industry, however, had had consultations and had managed to carve out exemptions. Media releases talked of a 'carve out' for the information and communications technology (ICT) industry yet this was not reflected in the legislation. Long standing definitions had been deleted wholesale while in other areas reference was still made to them. Eskom was busy doing research in an area being undertaken in two other countries - Canada and Russia. It should qualify for a rebate and ultimately to lower prices to consumers but there was no direct correlation to NERSA. He said that KPMG was satisfied with legislation currently in place. Regarding the word ‘innovative” he said that KPMG’s concern was the definition of the word as it was open to interpretation. Similarly the words “world beating” would eliminate lots of companies form the advantages of the tax break. The NDP made reference to becoming more efficient and advance technology. Since July the uptake on the R&D incentives had not been great and, in other regions, for example Australia, countries even offered cash back as it recognised that start-ups might have funding issues. Here in South Africa only tax breaks were offered.
Regarding the matter of Base Erosion and Profit Shifting (BEPS), Prof Mollagee said that in fact what the OECD was doing should be ignored. He said that if BEPS were quoted then it should not be in the form of cherry picking because one wanted to avoid double taxation. He said SARS deserved its awards regarding revenue collection but that the question should now be whether SARS was measuring up to service delivery standards. He said the introduction of the Tax Administration Act of 2012 was a significant event. Regarding retrospectivity, he said that it was permissible but that it should be the exception rather than the rule. He said that SARS and the National Treasury were moving in the right direction regarding red tape impact on micro business. He felt the problem was more a matter of educating small business about the availability of the tax advantage. Regarding whether the increase in red tape was because of an increase in paperwork or an increase in finding out information, he said people were trying to disclose more and that there should be less paperwork especially it did not achieve extra revenue. Regarding the TRC, he said that there might be significant points emerging out of the TRC which needed to be kept in mind. He said there had not been enough time and he was concerned over the human resources (HR) resources at SARS and the National Treasury and felt that they were attempting to take on too much. It was better to do less and do it correct. Regarding retirement funds, he said the focus was not on the withdrawal from funds but rather the encouragement of savings. He was opposed to the dual system. He said he could not comment on the rates regarding withdrawals.
Ms Kelbrick said, regarding retrospectivity, that certainty was needed by companies about the tax consequences of their decisions. There should be more workshops and the period was too short and had not been able to meet with National Treasury prior to this meeting. BASA was struggling to set up a forum with Treasury on the Tax Administration Act. It was also unsure because it appeared that SARS was driving and enforcing the initiative.
On the preference of people to buy derivatives as opposed to equity, Mr Coetzee said this matter had been addressed to save on securities transfer tax. This matter had been addressed but his concern was regarding dividend payments made to offshore shareholders. As drafted it would have an impact on domestic banks and stockholders and further consultation was needed.
Ms Brophy said the application of 8F and 8FA should not apply on listed debt instruments because of the way in which the dividend and specie would have to be handled. In relation to Tier 1 and Tier 2 banks, they had been exempted but their remained a 5% limitation which would cause them to remain under 8F and 8FA anti avoidance provision. Tier 1 and Tier 2 should be entirely out of 8F and 8FA. On hedge funds it should be to the benefit of the investor. Legislation was distinguishing between retail hedge funds and restrictive hedge funds with the latter under a punitive tax. BASA’s view was that all those funds should be treated on the same basis.
Regarding the protectionist comment, Ms Christie said she felt it was the opposite and would be supportive of an open market. The company was not asking for assistance, foreign e-Commerce was charging a customer R100 for example while Kalahari.com had to charge R114 inclusive of VAT. The onus was on the customer to pay the VAT of R14 to SARS. The new legislation would mean that foreign e-commerce sites had to collect the VAT and pay it to SARS. She said that Kalahari.com would support the call for the zero rating of e-books or even all books. All it wanted was that the VAT playing field be level. The legislation was intended to be introduced on 01 January 2014 but Kalahari was calling for it to be implemented on 01 November or even 01 December to take advantage of the Christmas period. She acknowledged that implementation of this on foreign companies was challenging.
The meeting was adjourned.
- MIH Group Submissions on the draft Taxation Laws Amendment Bill 2013 presented by Kalahari.com
- MIH Internet Africa (Pty) Ltd (“MIHIA”) Submission
- Banking Association of South Africa DTLAB and DTALAB 2013 Presentation
- PwC Draft Taxation Laws Amendment Bills 2013 Presentation
- PwC Comments on the Draft Taxation Laws Amendment Bill 2013 (TLAB) and Draft Tax Administration
- KPMG Comments on Draft Taxation Laws Amendment Bill 2013 Proposed Changes to R&D Tax Incentive
- KPMG DTLAB 2013 Comments Proposed Amendments to R&D Tax Incentives Presentation
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