The Standing Committee on Finance heard presentations from the Banking Association of South Africa, the SA Institute of Tax Practitioners, the SA Institute for Chartered Accountants, Ernst and Young, Agri-SA and Broadreach Capital at public hearings on the Draft Taxation Laws Amendment Bill (DTLAB) and the Draft Taxation Administration Laws Amendment Bill (DTALAB) of 2014.
The Banking Association of South Africa (BASA) presentation covered the 2014 DTLAB and its impact on the economy, the 2013 tax changes which had not been actioned yet, the DTALAB and the way forward.
The SA Institute of Tax Practitioners (SAIT) presentation focused on the termination of agricultural zero VAT rate, on import VAT timing , on electronic service enterprise, their views on the definition of ‘relevant material’ and on small businesses.
The SA Institute for Chartered Accountants (SAICA) presentation covered the intention to remove lower tax rates for small businesses, the repeal of zero rate for goods acquired by farmers, pensions acquired from a foreign source, section 23M, insurance, provisional tax, the definition of ‘relevant material’ and tax clearance certificates.
The Ernst and Young presentation commented on employer provided residential accommodation, on cross border retirement saving, on tax free savings accounts, on third party backed shares, on section 23N and 23M, on Real Estate Investment Trusts (REIT) unbundling, on the definition of risk policies, on the R&D tax incentives, on manufacturing plant depreciation allowances, on public private partnerships, on small business funding entities, on small business relief and on transfer pricing.
The Agri-SA put forward their comments on section 11(1) (g) on the proposed repeal of the zero rating of agricultural inputs and proposed alternative solutions. It noted the role of agriculture in terms of the NDP, job creation, rural economic development and on food security.
The Broadreach Capital presentation focussed on calling for an extension of section 12J to successfully stimulate investment in small and medium enterprises.
During the discussion that followed the presentations, Members asked SAIT what alternate solutions it had to the issue of the removal of the zero rating of agricultural inputs. Members asked what had been done to ensure that there was no fraud in the system.
Members said VAT fraud and compliance should be looked at rather than penalising the sector. Members said they was concerned on the timing of the tax reforms, while the economy was contracting, and that it affected small business also. Members asked whether the problem of non-compliance was a systems issue, an enforcement issue one that needed legislative reform. Members asked what the non-compliance percentage was of the sector. Members felt small business tax, at 28% was high. Members asked if small business was subjected to the same tax arrangements as foreign suppliers of goods. Members questioned how small business was supposed to expand through the tax reforms. Members asked if there had been opportunities to engage with SARS or Treasury prior to the meeting. Members asked whether the office of the ombud was something that could be used to resolve disputes. Members asked for clarity on the question of clearing agents receipts. Members asked what Treasury and SARS’s response was on the matter of section 23M. Members saw the interventions in small business and farming as being more punitive than corrective. What impact, in percentage terms, did zero rating have on the economy? What was the impact of venture capital, in percentage terms, in the South African context? What was Broadreach saying SARS or Treasury should do? Members said there was a need to get full disclosure on illicit and unethical business behaviour regarding tax base erosion and profit shifting and a need to find out how South Arica had been deprived of an eroded tax base. Members found it strange that Agri-SA claimed it supported free market systems yet did not want to do away with the zero rating.
Banking Association of South Africa (BASA) Briefing
The BASA presentation covered the 2014 Draft Taxation Laws Amendment Bill (DTLAB) and its impact on the economy, the 2013 tax changes which had not yet been implemented, the Draft Taxation Administration Laws Amendment Bill (DTALAB) and the way forward.
Mr Leon Coetzee, Chairperson: BASA Tax Committee, said the key issues were with section 23M and unnecessary anti avoidance which disrupted commercial transactions, with section 12T on whether the tax free savings incentive achieved its objective and with section 24JB on the application of fair value taxation to insurance groups. He also outlined its impact on the economy.
Ms Tracy Brophy, of BASA and Head: Tax Risk Management FirstRand Bank, gave specific examples of section 23M and of section 12T.
Ms Mardelle Kelbrick, of BASA and Head of CIB Tax Standard Bank, gave specific examples of section 24JB.
Mr Coetzee touched on issues not yet addressed and the way forward.
SA Institute of Tax Practitioners (SAIT) Presentation
Mr Stiaan Klue, Chief Executive of SAIT, said their presentation would only focus on technical matters.
Mr Job Kabochi, SAIT VAT Committee Member, explained their views on the termination of agricultural zero VAT rate, on import VAT timing, on electronic service enterprise.
Mr Lesedi Seforo, Tax Technical Assistant, explained their views on the definition of ‘relevant material’.
Mr Erich Bell, Acting Head: Tax Technical explained their views on small business.
Mr Klue said that perhaps further engagement with the Minister of Small Business was necessary.
SA Institute for Chartered Accountants (SAICA) Presentation
Mr Piet Nel, Project Director: Tax, gave SAICA’s view on clause 19(1)(a) on the intention to remove lower tax rates for small businesses, on clause 100 on the zero rating of agricultural inputs, on clause 13(1)(c) on pensions from a foreign source, on clause 34 dealing with Section 23M and on clause 44 on how long term insurers were taxed.
On the DTALAB, he gave SAICA’s comments on clause 1 and clauses 7-12 on provisional tax, on clause 44 on the definition of ‘relevant material’ and on clause 57 on tax clearance certificates.
Dr D George (DA) asked SAIT what alternate solutions it had to the issue of the removal of the zero rating of agricultural inputs. He also asked what had been done to ensure that there was no fraud in the system.
Mr D Ross (DA) said he had raised the issue previously about the time taken for VAT refunds to be issued and that it had been clarified to be six months and this would have an impact on farmers cash flow. R100b was collected from farmers while fraud accounted for R600m, so compliance should be looked at, rather than penalising the bigger sector.
Dr M Khoza (ANC) said she was concerned on the timing of the tax reforms, while the economy was contracting, and that it affected small business also.
Mr Cecil Morden, National Treasury, explained that it was largely an administrative issue but that there was a policy element and that when VAT was introduced the zero VAT rating on agricultural inputs was an exception to the rule. SA Revenue Service (SARS) was of the view that the administrative burden on farmers was not as much now as it was then 20 odd years ago. SARS would confirm that most farmers were operating on a one/two month cycle and not on a six month basis. Most farmers were using a more regular refund system than the six month cycle which was consequently not an issue. There had been a presentation previously on the extent of the fraud.
Mr Prenesh Ramphal, Senior Manager Tax Research and Development at SARS, said it was a misnomer that category D was the problem. Most farmers including smaller and medium sized farms prefer the two monthly cycle. 53% were issued in zero days with the balance going out in 3.85 days. Less than 10% of farmers were flagged because of non-compliance. SARS had had intense discussions with DAFF and industry consultants. It was moving to a more scientific approach to determining the financial cost. The financial costs would not be in perpetuity only for short period of time. It was not advocating for implementation in the following year. SRAS wanted a long term solution as VAT was not designed to be a cost to any business. There was no long term plan to kill or reform the industry. It believed the fraud was occurring because of gaps in the legislation.
Dr Khoza asked whether the problem of non-compliance was a systems issue, an enforcement issue one that needed legislative reform.
Mr Ramphal said enforcement was always a challenge and that R4b VAT was leaking from the agricultural industry in 2013/14 and this was more than in other industries. This sectors VAT fraud compared to other industries was much more.
Mr Ross asked what the non-compliance percentage was of the sector.
The Chairperson flagged the matter for a fuller response from Treasury and SARS.
Dr Khoza asked if there was a sectoral perspective to small business tax thresholds.
Mr Ross said small business was taxed at 28%, which he felt was high, and on the rebate sliding scale proposals.
Mr S Matiase (EFF) asked if small business was subjected to the same tax arrangements as foreign suppliers of goods. He questioned how small business was supposed to expand through the tax reforms. How was small business expanding the local industries? If the reforms were not headed in this direction it should be treated with a measure of suspicion.
Mr Morden said the small business proposals came from the Davis Tax Review Committee (DTRC) and the Minister was presently considering the proposal. The cost to the fiscus was R1.5b and instead of using the money on a lower tax rate but was used as credits for to support all businesses. Most of the comments received had been to retain the small business tax regime but then it would be hard to retain the compliance rebates additionally. Treasury was open on the issue and had not taken a firm view.
Mr D Van Rooyen (ANC) asked if there had been opportunities to engage with SARS or Treasury prior to the meeting. On the issue of unilateral determination of relevancy, was the office of the ombud something that could be used to resolve disputes. He asked for clarity on the question of a clearing agents receipt.
The Chairperson wanted clarity on the clearance receipts SAIT talked about.
Mr Cas Saloojee said that BASA was in regular contact with Treasury and SARS and brought any difficulties (in reaching consensus) to the attention of the Finance Committee.
Mr Bell said one could go the route of the Tax Ombud but that it was a long and slow process red tape process.
Mr Ramphal said the import proof of receipt amendment went through the previous year’s legislative cycle. The Amendment had been passed already and no comments had been received at the time. Issues of clarity were being tackled with the SA Freight Forwarders industry.
The Chairperson asked what Treasury and SARS response was on the matter of section 23M.
Mr Morden said it was an important proposal and was in line with what was happening in the world like in Germany for example. Over many years the tax system had incentivised debt over equity because interest was a deductible business tax whereas dividends were not tax deductible. One was dealing with excessive debt and excessive interest being claimed. The argument that other sections of tax law was dealing with the issue in Treasury’s view was not true was true because those sections dealt with something else. Internationally the BEPS (base erosion and profit shifting) program and this issue was a sub component of that. Some amendments were enacted the previous year. Technical issues like the guarantees issue was still being considered but Treasury would like to retain the principle.
Ms P Kekana (ANC) said small business and farming had been identified as important in successful countries. She saw the interventions as being more punitive than corrective.
Ernst and Young Presentation
Mr Paul Daniels, Tax Manager at Ernst and Young, commented on employer provided residential accommodation, on cross border retirement saving, on tax free savings accounts, on third party backed shares, on section 23N and 23M, on Real Estate Investment Trust (REIT) unbundling, on the definition of risk policies, on the Research and Development tax incentives, on manufacturing plant depreciation allowances, on public private partnerships, on small business funding entities, on small business relief and on transfer pricing.
Mr Dawie Maree, Senior Economist at Agri-SA, said he was also representing TAU SA and Potatoes SA. He put forward their comments on section 11(1) (g) on the proposed repeal of the zero rating of agricultural inputs. He touched on the seasonality of agriculture and therefore cash flow considerations and on compliance and other costs. He noted that inputs accounted for 45% of intermediate goods and services. He said farmers were already 30% indebted and stringent NCA rules limited additional access to credit. He proposed alternative solutions (see slide 17). He also noted the role of agriculture in terms of the NDP, job creation, rural economic development and on food security.
Broadreach Capital Presentation
Ms Roanna Verinder, COO, said Broadreach Capital was a financial services provider providing venture capital funds to small start-up businesses that were perceived as being a higher risk. The venture capital funds were used in longer term investments of between five and seven years and therefore a favourable tax regime was necessary. Broadreach welcomed the amendments and were requesting that the incentives in section 12J be extended to successfully stimulate investment in small and medium enterprises.
Ms T Tobias (ANC) wanted clarity on why development banks should be paying 50%. She said Agri- SA had made an example of the success of incentives in the EU. She said one could not compare South Africa and these countries such as Denmark. What impact in percentage terms did zero rating have on the economy? When the impact of venture capital was presented it did not discuss its impact, in percentage terms, in the South African context. What was Broadreach saying SARS or Treasury should do.
Mr Matiase, regarding Ernst and Young’s comments on transfer pricing, said there was a need to get a full disclosure on illicit and unethical business behaviour regarding tax base erosion and profit shifting and a need to find out how South Arica had been deprived of an eroded tax base . Regarding Agri-SA, he said he found it strange that it claimed it supported free market systems yet did not want to do away with the zero rating.
Ms Kekana felt that AFASA should have presented on the same day as Agri-SA.
Dr Khoza said there might be unintended consequences from the reforms and found Agri-SA arguments very persuasive.
With regard to 23M, Mr Kurt Engel, Director: Tax at Ernst & Young, said that the general rule was when banks loaned they had a ratio that was 50% of adjusted taxable income. The IDC and the Development Bank of SA (DBSA) went for riskier projects so their ratio would be higher. The difficulty of 23M was how taxpayers were separated. Their view was that 23M should at least soften so as not to be damaging to the DBSA and similar banks.
Mr Adam Bekker, Co-Founder of Broadreach Capital said it was widely recognised that SMME’s were the greatest private sector employers and to stimulate that sector would be of benefit to the economy. He acknowledged that reference Made to the UK and the US economies were different to South Africa’s but were used to show the success of SMME’s even in first world economies. He said harmonisation of the incentives with the timing of tax payments was the crux of their submission. Legislation in 12J and section 22 was fine it was just a practical issue sitting in the tax payment area that was a hurdle and he believed that it was inadvertent.
Mr Maree said making agriculture viable was one of Agri –SA major concerns and therefore wanted to see that the VAT zero rating be upheld and broadened to cover small scale farmers because they play an important role in the rural development of the country. The VAT zero rating had nothing to do with the biological industry, as he had referred to an industry that produced biological goods. Regarding AFASA, he said Agri-SA had been in discussions with them and other Agri-Sector Unity Forum (ASUF) members.
Mr Ramphal said its decisions should be based on empirical scientific evidence and there was a need to collate more data.
Mr Morden said the tax free saving incentive of R30 000 was reasonable in light of concurrent exemptions. The 40% penalty was a practical issue which they had grappled with. The UK method of dealing with it was much more complex and it was up to the individual to comply.
He said a lot of amendments had been made to 12J. The issue raised by Broadreach was an administrative issue and would need to speak to SARS on whether it was practically doable.
Regarding transfer pricing and illicit actions, he said a lot of work had been done on the issue and it was not going unattended.
Dr Khoza said she was not clear on the point made by SAIT on the negative knock on effect of section 27JB on insurance.
Ms Kelbrick said that banking groups sometimes had insurance companies who were being taxed as a banking group and not as an insurance group. Prior discussion with Treasury had made it clear that insurance groups would not be subject to this rule.
The meeting was adjourned.
- SAIT Comments on the Draft TLAB and TALAB 2014 presentation
- Submissions on Provisions of Draft Taxation Laws Amendment Bill, 2014 (“The Bill”) Dealing With Venture Capital Companie
- SAICA presentation
- SAICA Re: Call for Comments on Draft Taxation Laws Amendment Bill 2014
- SAICA Draft Taxation Laws Amendment Bill, 2014: Changes to Section 29A
- SAICA Submissions on Section 23M
- BASA: DTLAB & DTALAB 2014 - Presentation to the SCoF
- BASA: Comments on the draft 2014 Taxation Laws Amendment Bill
- BASA: Comments on the draft 2014 Taxation Laws Amendment Bill: Employees' Tax
- BASA: 2014 Annexure C: Proposals for Income Tax Legislative Amendments - Domestic Business
- EY presentation
- EY submission
- Agri SA Presentation
- Agri SA submission
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