Draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill, Draft Taxation Laws Amendment Bill & Draft Tax Administration Laws Amendment Bill : public hearings day 2

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Finance Standing Committee

27 August 2014
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

The Standing Committee on Finance received presentations presentations from Pricewaterhouse Cooper, Old Mutual, KPMG, The Motor Industry Bargaining Council, the African Farmers Association of South Africa and the SA Breweries Foundation at public hearings on the Draft Taxation Laws Amendment Bill (DTLAB) and the Draft Taxation Administration Laws Amendment Bill (DTALAB) of 2014.

 

Pricewaterhouse Cooper (PwC) welcomed the fact that the amendments were half the volume of amendments in previous years but said that the quality of the drafting and what was not in the legislation was at issue. Their presentation covered tax free investments legislation, section 23M,  the taxation of life insurance, the revision of small business tax relief proposals, transfer pricing proposals, the monetary cap on retirement savings, withholding taxes on service fees, the repeal of VAT zero rating of farming inputs and they commented on issues which had not been addressed.

 

Old Mutual (OM) gave a background as to how the funds operated. OM called for section 23M to be scrapped or for further consultation to take place as the impact of section 23(M) on Special Purpose Entities would be to significantly increase tax expenses.

 

KPMG presented the Committee with an overview of where South Africa was in terms of R&D globally. Issues raised were that there was no recourse mechanism in the legislation, that the ‘world-beating” requirement which had been removed from the 2013 proposed amendments was still being applied subjectively and that the composition of the adjudication committee was questionable.

 

The Motor Industry Bargaining Council (MIBCO) said they also represented a further six bargaining councils. Their concern was with the proposed amendment of section 12(l) of the VAT Act per Clause 89(1)(a) of the DTLAB. In particular, the covering of all the powers and functions as stipulated in section 28 of the Labour Relations Act, the commencement date of 1 April 2015 and funds such as Sick Pay, Leave Pay and Holiday Pay Funds.

 

The African Farmers Association of South Africa (AFASA) called for the repeal of the VAT zero-rating for agricultural inputs as it would negatively impact on the sustainability of the sector and national food security.

AFASA called for a 14% subsidy for smallholder farmers to be considered in order to level the playing field.

 

The SA Breweries Foundation (SAB Foundation) gave a background to the SAB Foundation and introduced Iyeza Express, one of the Foundation’s entrepreneurial enterprises. SAB Foundation was concerned about the wording “widely accessible to all” with regards to small business funding, the small business funding entity’s 25% distribution requirement, about small business funding entity’s holdings in non-listed entities, the lack of passive income exemption, capital gains tax as well as anticipated share for share swaps.

 

Members asked PwC whether there had been any engagement with SARS and the National Treasury on the quality of the drafting. What did KPMG suggest as alternative recourse mechanisms? Was PwC saying that the Davis Tax Review Committee (DTRC) process should be finished before amendments were made to the law?  Was there any engagement with Treasury on the huge problem of the cap on retirement funds?

 

Members asked whose interests were being safeguarded, was it citizens or big business’s interests. The interest of the public should be above interest of companies which had to be suppressed. Members inquired as to when companies like Old Mutual would consider deregistering from the European and American security exchanges so that the capital could benefit South Africa. Members asked what the implications were of an outflow of R&D capital from a small town to an R&D town. Implications like these needed to be looked at and guarded against. Members said that the VAT fraud issue in the farming sector should be addressed and what were the mechanisms for compliance. Would smallholding farmers pay 14% for VAT? This would be devastating on the emergence of small farmers. Would R&D tax incentives have an impact on the cash flow of businesses? What other alternatives were available?

Members asked if the Ombuds office had a role to play in the recourse mechanism. Members said the comments of the Committee members were not necessarily that of the Committee and still needed to be discussed before a position was taken. Members said SARS should also engage with the Department of Trade and Industry and the Department of Higher Education. Members wanted a response from SARS and Treasury on the implications of the SAB Foundation presentation and taking into account various other foundations similar to it.

 

Members said the AFASA presentation was important because the President had pronounced on rural development and food security. Why did the bargaining council want an exemption and to be treated the same way as the pension funds? Members said that more than 2m black families depended on communal farming systems. So there was a need for people to be taken back to land as this was a historical injustice where black people had been taken from the land. Members said AFASA’s call for the zero rating to be extended to black emerging farmers was a compelling case. Members wanted to know if the SAB Foundation intermediary companies were based locally or abroad in tax havens where base erosion and transfer pricing occurred. Members asked AFASA from which membership categories it recruited its membership? Members said getting smallholding farmers registered was a massive challenge. Members asked if AFASA had any relationship with SARS to assist members becoming compliant.

 

The Committee said AFASA should get its house in order and African farmers should get organised. What engagement between Treasury and industry had there been regarding retirement tax reform and the implementation was set for 1 March 2015. This implementation should be delayed for a year.

 

The Chairperson remarked that he would like to seek as much consensus as possible evolve and took the submissions seriously. Three major areas of concern were those affecting small business, emerging farmers and section 23M and also the drafting.

Meeting report

Presentation by Price Waterhouse Cooper (PwC)

Mr Kyle Mandy, Head of Tax Technical at PwC, welcomed the fact that the amendments were half the volume of amendments in previous years and said that what was at issue was the quality of the drafting and what was not in the legislation.

 

Mr Mandy said tax free investments legislation should be redrafted and made more attractive (see slide 4 of the PwC presentation).

 

Prof Osman Mollagee, Tax Partner at PwC, said section 23M should be withdrawn entirely as other legislation was already targeting what section 23M sought to do.

 

Mr Mandy said a comprehensive consultation process was required to consider proposed changes to the taxation of life insurance and that the revision of small business tax relief proposals should be reconsidered. He said transfer pricing proposals should be reconsidered and that the monetary cap on retirement savings should be withdrawn.

 

Prof Mollagee said withholding taxes on service fees should be repealed.

 

On the repeal of VAT zero rating of farming inputs, Mr Charles De Wet, Director of Tax Services, said that SARS should address the fraud through more stringent monitoring and compliance. He called for the scrapping or delay in implementation of the amendment.

 

Mr Mandy then commented on issues which had not been addressed (see slides 13-14)

 

Presentation by Old Mutual (OM)

Ms Christine Glover, Head of Development Input Funds at Old Mutual (OM), gave a background as to how the funds operated. It built schools and houses for the lower income groups by accessing development funds from pension funds like the Government Employees Pension Fund (GEPF).  She said the impact of section 23(M) on Special Purpose Entities would be to significantly increase tax expenses thereby lowering profits and thus lowering the investment returns for investors or alternatively increasing the school fees of students. It called for section 23M to be scrapped or for further consultation to take place.

 

Presentation by KPMG

Mr Mohammad Jada, Partner at KPMG, gave an overview of where South Africa was in terms of R&D globally. Issues he raised were that there was no recourse mechanism in the legislation, that the ‘world-beating” requirement which had been removed from the 2013 proposed amendments was still being applied subjectively and that the composition of the adjudication committee was questionable.

Discussion

With regard to the presentation by KPMG, Ms T Tobias (ANC) said her opinion was that intellectual property was an ability to create something different. What did KPMG suggest as alternative recourse mechanisms?

 

Dr D George (DA) asked PwC whether there had been any engagement with SARS and Treasury on the quality of the drafting. Was PwC saying that the Davis Tax Review Committee (DTRC) process should be finished before amendments were made to the law?  Was there any engagement with Treasury on the huge problem of the cap on retirement funds?

 

Dr M Khoza (ANC) said that PwC suggested that compliance incentives should not be provided. She said it was self-defeating and did not take into account the South African context.

 

Mr S Matiase (EFF) asked whose interests were being safeguarded, was it citizens or big business’s interests. The interest of the public should be above interest of companies which had to be suppressed.

 

Regarding Old Mutual and many other companies he said the question was when would they consider deregistering from the European and American security exchanges so that the capital could benefit South Africa?

 

Regarding KPMG and R&D, he asked what the implications were of an outflow of R & D capital from a small town to an R&D town. Implications like these needed to be looked at and guarded against.

 

Mr D Ross (DA) said, with regard to the zero rating of farmers that the fraud issue should be addressed and what were the mechanisms for compliance. Would smallholding farmers pay 14% for VAT? This would be devastating on the emergence of small farmers.

 

Would R&D tax incentives have an impact on the cash flow of businesses? What other alternatives were available?

 

Dr Khoza, regarding the Old Mutual presentation, said that investing in education for the future has not really worked. Her children had been at Crawford College and university fees were less than when at Crawford when taking into account the years spent at an institution. Her own view was that investing in education had little to do with education.

 

Mr D Van Rooyen (ANC) spoke to KPMG on the non-existence of a recourse mechanism and said the Ombuds office had not been cited. Did it play a role in the recourse mechanism?

 

He said the comments of the Committee members were not necessarily that of the Committee and still needed to be discussed before a position was taken.

 

The Chairperson affirmed that the meeting was an exploratory discussion.

 

Ms P Kekana (ANC) said the turnaround time should be a cause for concern to the Committee. She said SARS should also engage with the Department of Trade and Industry and the Department of Higher Education.

 

Regarding the tax free savings account and the quality of the drafting, Mr Mandy said the outcome of the drafting was not in line with the policy intention of Treasury.

 

Regarding the DTRC and small business proposals, he said it was a case of jumping the gun by including the proposal. Let the DTRC complete their report.

 

Regarding retirement fund capping, he said there had been significant consultations but no movement by the Treasury. PwC was suggesting that the Committee apply its own mind on the matter.

 

Regarding incentive compliance regarding rebates, he said it was not appropriate to reward clients to fulfil an obligation. SARS should be making it easier to comply and to educate taxpayers.

 

Prof Mollagee said SARS’ success had not been on clients paying but on not punishing someone when they wanted to pay. Paying someone for obeying the law was unprecedented in South Africa.

 

Regarding section 23M, he had not suggested that the principal should be abandoned. Section 23M as a tool should be abandoned.

 

Mr De Wet said emerging farmers were not affected by the zero rating issue as they were currently paying VAT.

 

Ms Glover said Old Mutual was not investing shareholder money so 23M did not influence whether Old Mutual got more or less profit as it only collected fees and was not a shareholder in the operating companies. She said the people who suffered were either the pension funds or policy holders, like the Government Employees Pension Fund (GEPF) or alternatively the students who had to pay more in school fees. It operated in more than just schools it also built houses. The maximum fee schools it targeted could charge were R15 000 p.a. so these was not model C schools or private schools. Similarly in housing it was targeted at houses just above the RDP level.

 

Mr Jada said R&D investment in SA needed to be encouraged by local and foreign multi-national companies. The way the adjudication Committee of the DST subjectively reviews applications currently meant that if something had been done before it was not innovative and so fell out of contention. Thus the Rooivalk development would not qualify because the Americans had developed the Apache helicopter already.

 

On the recourse mechanisms, he said they had investigated it and taken legal opinion. The Ministers decision to accept or decline a project was final nothing else other than taking the Minister to the high court could be done. KPMG would love to be able to go via the Ombudsman. The DST was doing an unbelievably good job working under pressure with more than 10 000 applications having to be sifted through. These delays were compounded by the subjective application of the need to be innovative.

Regarding the cash flow impact, there were small grants organisations got but they were small in terms of what companies needed to invest in. The R&D incentive was unique. In the rest of the world investments did not need pre approval like in Australia for example.

 

Ms Yanga Mputa, Tax Specialist Tax Policy Unit at Treasury, said SARS welcomed the criticism and was meeting industry to improve the quality of the drafting.

 

With regard to the small business corporations and the DTRC, SARS would be considering them.

 

Section 11D on R&D was introduced in 2006 and SARS had made lots of changes via industry inputs since then. SARS was meeting with the DST the following day on matters arising from the hearings and would be meeting with industry. The high threshold figures was a policy decision which she could not answer.

 

Regarding the deletion of section 23M, she said section 31 addressed different issues to that in section 23M.

 

Mr Johan De La Rey, a SARS official who was a member of the R&D adjudication panel, said there was a good reason for SARS to be part of the Committee because the relief was inbuilt into the Income Tax Act. So he needed to be there for the interpretation of the act. SARS need not be involved if the DST gave a pure grant.

 

Presentation by Motor Industry Bargaining Council (MIBCO)

Mr Tom Mkhwanazi, General Secretary (CEO) of MIBCO, said they were also representing a further six bargaining councils. Their concern was with the proposed amendment of section 12(l) of the VAT Act per Clause 89(1)(a) of the DTLAB. In particular the covering of all the powers and functions as stipulated in section 28 of the Labour Relations Act, the commencement date of 1 April 2015 which should be made retroactive to 1 January 2013 and funds such as Sick Pay, Leave Pay and Holiday Pay Funds (see slides 9-10 of the MIBCO presentation).

 

Presentation by African Farmers Association of South Africa (AFASA)

Ms Langelihle Simela, Executive Director at AFASA, called for the repeal of the VAT zero-rating for agricultural inputs. She said the removal of the zero –rating would increase the cost-price squeeze on farmers who were registered for VAT, and negatively impact on the sustainability of the sector and national food security.

She wanted to exempt all six input items, so that no farmer paid VAT on these items. All farmers who were registered for VAT would benefit from this rule. She wanted a 14% subsidy for smallholder farmers to be considered in order to level the playing field.

 

Presentation by SA Breweries Foundation (SAB Foundation)

Ms Bridgit Evans, Manager SAB Foundation, gave a background to the SAB Foundation and introduced Iyeza Express, one of the Foundation’s entrepreneurial enterprises. SAB Foundation was concerned about the wording “widely accessible to all” with regards to small business funding and were also concerned with the small business funding entity’s 25% distribution requirement. Furthermore they were concerned about small business funding entity’s holdings in non-listed entities, the lack of passive income exemption and capital gain tax as well as anticipated share for share swaps.

 

Discussion

Ms Kekana wanted a response from SARS and Treasury on the implications of the SAB foundation presentation and taking into account various other foundations similar to it. She said the AFASA presentation was important because the President had pronounced on rural development and food security. Why did the bargaining council want an exemption and to be treated the same way as the pension funds?

 

Mr Matiase said more than 2m black families depended on communal farming systems. So there was a need for people to be taken back to land as this was a historical injustice where black people had been taken from the land. He said AFASA’s call for the zero rating to be extended to black emerging farmers was a compelling case.

 

He wanted to know if the SAB Foundation intermediary companies were based locally or abroad in tax havens where base erosion and transfer pricing occurred.

 

Ms D Mahlangu (ANC) asked AFASA, with regard to membership categories, from which categories it recruited its membership?

 

Regarding the 14% subsidy for smallholding farmers, Mr Ross said that their costs had escalated by 14% because they were not registered and so could not claim it back. Getting them registered was a massive challenge.

 

Dr Khoza asked if AFASA had any relationship with SARS to assist members becoming compliant.

 

Mr Mkhwanazi said most bargaining councils did not have pension funds. The introduction of the Pension Act had been disruptive to bargaining councils. In some cases bargaining councils collected pensions for pension funds. R1b in pension fund monies had not been paid out to people.

 

Ms Simela said AFASA was a national association, started in 2011 and was not in competition with other agricultural bodies and represented small holding communal land farmers.

 

On the issue of the 14% subsidy, she said AFASA had talked about registration of farmers but that it would be difficult to get everyone as farmers found the whole process difficult to go through and did not even keep financial records of their own business.

 

On their relationship with SARS, she said many were not registered because they did not understand the process, but the matter would be discussed at their upcoming congress in October.

 

Ms Evans said SABMiller was a global company and the intermediary companies were a number of different companies around the world, one of which was SAB South Africa

 

Ms Mputa said that amendments had been made for the current year so that the SAB Foundation and Iyeza Express would both benefit being exempt from tax.

 

Regarding the clarity of language issues, Treasury said it would discuss the matter with them.

 

Regarding the bargaining council, she said Treasury thought this was what they had always wanted but would discuss the matter with them.

 

Mr Prenesh Ramphal, Senior Manager Tax Research and Development at SA Revenue Service (SARS), said that on the zero rating issue there was a need to develop a medium term solution so that industry knew what the compliance requirements were. AFASA said there were 30 000 farmers while Agri-SA said there were 40 000 farmers while SARS believed there were 70 000 farmers registered for this dispensation. SARS needed to relook at compliance issues.

 

The Chairperson said he would like to seek as much consensus as possible evolve and took the submissions seriously. Three major areas of concern were those affecting small business, emerging farmers and section 23M and also the drafting.

 

Dr George said, regarding the retirement tax SARS, that there would be engagement regarding retirement tax reform the previous year and that there would be consultation with industry. What engagement had there been and the implementation was set for 1 March 2015. This implementation should be delayed for a year.

 

Ms P Kekana said AFASA should get its house in order and African farmers should get organised.

 

The meeting was adjourned.

 

 

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