2015 Tax proposals & Draft Rates and Monetary Amounts Bill: National Treasury briefing

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Finance Standing Committee

26 May 2015
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

Officials from National Treasury briefed the Committee on the 2015 tax proposals. Personal Income Tax (PIT), Corporate Income Tax (CIT) and Value Added Tax (VAT) accounted for more than 80% of total tax revenues. The tax to GDP ration was high compared to African countries, but relatively low compared to OECD countries. Tax policy proposals for the Budget 2015 included a modest increase in the marginal PIT rates and increases in fuel levies. Additional proposals included an increase in the electricity levy by 2c /kWh to 5.5 /kWh. Tax treatment of transfer of collateral in securities lending arrangements was being reviewed. Changes were made in 2014 to the Income Tax Act to counter base erosion and profit shifting (BEPS). There had been a public outcry that the tax-avoidance measures were too broad and affected bona fide commercial transactions. It was proposed that these provisions be relaxed.

National Treasury then presented on the Draft Rates and Monetary Amounts Bill. With regards to PIT adjustments, all taxable income brackets and rebates were increased to counter the impact of inflation (fiscal drag), and to minimise impact on lower incomes. Marginal tax rates would be increased by 1% for incomes of above R180 900. There would be relief for lower incomes, and additional tax on incomes above around R500 000. There would be a more generous turnover tax regime to support small and medium economic enterprises (SMMEs). The general fuel levy would not be earmarked, as fuel revenue was not buoyant. South Africans had to be encouraged to pay for services and electricity. If SANRAL did not pay debts, cost of borrowing would go up for government, Eskom, municipalities, and borrowers from banks. The National Treasury would not proceed with the increase of 2c /kWh to the electricity levy, as there was evidence that intensive users were paying the levy. The 2015 budget aimed to reduce the remuneration threshold against which contributions to the Unemployment Insurance Fund (UIF) were calculated, for one year. It was later decided not to proceed with that, after discussion with labour and business constituencies in the National Economic Development and Labour Council (NEDLAC). There had to be more time for consultation about extending benefits to workers who contributed to that Fund.

In discussion, comparison of South Africa to other countries in tax matters, was questioned. Inequality and social structure formed the background to tax policy. There was concern about arbitrage between personal and corporate income tax. The Treasury was questioned about the implications of the considered 2c /kWh increase in the electricity levy, and the decision by the Treasury to not go ahead with that. There was interest in the implications of the decision not to grant a one year tax holiday to the Unemployment Insurance Fund (UIF). The Treasury assumption that taxation consequences of collateral transfer could negatively affect liquidity and investment, was questioned. There were remarks and questions about base erosion and profit shifting (BEPS); alternative funding methodologies for Eskom; the reliance of the tax system on middle income earners; fuel levies, and retirement provision. The Standing Committee also discussed procedures to follow up with regard to the Carbon Tax Bill and the withholding of municipal equitable share grants until payment arrangements had been made with Eskom.

 

Meeting report

2015 tax proposals and Draft Rates and Monetary Amounts Bill: National Treasury briefing 
The briefing was presented by Mr Ismail Momoniat, Deputy Director General, National Treasury,  Mr Cecil Morden, Chief Director: Economic tax analysis, National Treasury and Ms Yanga Mputu, Chief Director: Legal Tax Design, National Treasury.

Mr Momoniat noted that taxes, including duties and levies, were the most significant sources of revenue for government. Tax revenues performance over 2014/15 was lower than the 2014 budget and higher than the 2015 budget. Personal Income Tax (PIT), Company Income Tax (CIT) and VAT accounted for more than 80% of total tax revenues. The tax to GDP ratio was still below the peak of 2007/08. The ratio was high compared to most African countries, but relatively low compared to OECD countries. Tax systems had to be sufficiently flexible to adjust to changes in economic activity.

The tax policy proposals for the budget 2015 included a modest increase in the marginal personal income tax rates and increases in fuel levies. Additional proposals included an increase in the electricity levy by 2c /kWh to 5.5c /kWh to help manage the demand for electricity, especially by energy intensive users. Further developments on the carbon tax were proposed. The transfer of collateral in a securities lending arrangement resulted in securities transfer tax and capital gains tax. That could negatively affect liquidity and South Africa’s attractiveness as an investment destination. The tax treatment of the matter was being reviewed. With effect from 1 April 2014, changes were made in the Income Tax Act to counter base erosion and profit shifting (BEPS). There had been a public outcry that the anti-tax avoidance measures were too broad and that they also affected bona fide commercial transactions, even when there was no element of BEPS. It was proposed that these provisions be relaxed, without losing sight of the original policy intent.

Draft Rates and Monetary Amounts Bill
With regard to PIT adjustments, all taxable income brackets and rebates were increased to counter the impact of inflation (fiscal drag) and to minimise the impact on those with lower incomes. Marginal tax rates were increased by 1 percentage point for incomes above R181 900. PIT brackets were increased by 4.2%, and rates increased by 1 p.p. (except for the bottom bracket). There was relief for lower incomes, and additional taxes for incomes above around R500 000. In an inflationary environment, individuals faced higher tax liabilities if incomes were increased to account for inflation, but personal income brackets were not. Most of the relief due to bracket adjustment would be for lower and middle income earners.

It was noted that the top marginal income tax rate was on the upper end, compared to African countries, and in the middle when compared to OECD countries. There was a more generous turnover tax regime to support Small, Medium and Micro Enterprises (SMMEs), and increases in excise duties for alcohol and tobacco. The general fuel levy was not earmarked. Fuel revenue was not very buoyant, and there was limited scope to raise new revenue even if it was to be increased. South Africans had to be encouraged to pay for GFIP and electricity. Not paying for services led to higher charges for those who paid.

If SANRAL did not pay its debts, South African ratings would be downgraded, and the cost of borrowing would go up for government, Eskom, municipalities, and borrowers from banks. Even if fuel tax was earmarked for GFIP, the fuel levy or PIT would have to be raised to deal with the gap in the National Revenue Fund (NRF). The National Treasury was reviewing the impact of the proposed additional 2c /kWh on the electricity levy. The National Treasury met with intensive electricity users with regard to possible loopholes, and there was evidence that such users were indeed paying the electricity levy. It would therefore not proceed with the special electricity levy.

In the 2015 budget, the Minister of Finance proposed to reduce the remuneration threshold against which contribution to the UIF was calculated, for a period of one year. The UIF had an accumulated surplus of R72 billion. The Minister had later decided not to proceed with the implementation of the proposal after engagements with the labour and business constituencies at the National Economic Development and Labour Council (NEDLAC). More time was needed for consultation with NEDLAC and interested stakeholders about extension of benefits to workers who contributed to the fund.

Key challenges were related to earmarked taxes and fiscal imbalance. The Road Accident Fund (RAF) existing liability was R98.5 billion, and the UIF surplus was R72.3 billion.

Discussion
Mr D Ross (DA) referred to the user charge being linked to steep electricity prices. The impact on consumers and the economy had to be considered. There had to be more information on the 2c /kWh effect in terms of the electricity crisis. The increase would make things tougher for consumers. There had to be more information on the effect that would have on the electricity crisis.

Mr Momoniat replied that the user charge increase would have an impact on inflation. Electricity levy propositions were short-term. The question was whether this could be used as a tool in the Energy War-room. It was not included in the fiscal framework, but was rather a proposal announced to be used as a tool. There was lack of knowledge about intensive electricity users, and it was not known what they paid. It was not known how people paid the levy versus the actual tariff. When the proposals were made public, the National Treasury knew that information would be volunteered. Inputs were received, which had to be verified with Eskom. Users argued that they were under contracts, and there had to be confidentiality. However, more information was needed. It had to be known which contracts were indeed confidential, and which not.

Mr Ross noted that carbon tax had been referred to the Parliamentary Committee dealing with environmental matters. The Standing Committee also had to be informed about it. He did not oppose carbon tax in principle, but it was badly timed, with the Eskom crisis at hand. The National Energy Regulator of South Africa (NERSA) was mandated to look into special tariffs for intensive users.

Mr Momoniat replied that there could only be a general presentation in this meeting. Carbon tax was not included in the Bill. Legislation on this was being prepared and it would be taken to Cabinet.

Mr Ross remarked that the National Treasury was included in the War-room process. He referred to reports that consideration was being given to placing 30% of Eskom on the Johannesburg Stock Exchange (JSE). He asked about any alternative funding methodology. Sovereign bonds could be considered, as elsewhere in Africa, or loans extended for a longer period.

Mr Ross noted that the PIT figure was 37.1% and the CIT was 19.5%. He suggested that the CIT had to be increased. The problem was imposed on lower income scales. Those who earned around R15 000 per month in fact paid more tax. With regard to middle income taxing, South Africa ranked high compared to the rest of Africa.

Mr Momoniat replied that the pressure on CIT was down. There was the problem of arbitrage between PIT and CIT. The bigger the gap, the greater the possibility for abuse. BEPS issues had to be addressed. Capital was being moved to tax havens. The Davis Committee was asked to comment on the structure of the tax system. CIT could be increased, but the implications had to be considered. PIT could not raise that much from the rich, as there were too few of them. The middle class would pay the bulk of the 1% increase. Only 78 000 people earned over R1.5 million. R319 billion was raised from middle incomes. It was a difficult discussion. The National Treasury stressed the need for tax morality. Efficiency of spending by schools and hospitals and the like had to be looked at. People had to feel that their money was going somewhere. That encouraged good tax morality. When the Auditor-General identified fruitless expenditure, people wanted consequences.

Ms T Tobias (ANC) advised that NEDLAC appear before the SC. She suggested that Mr Momoniat and his team had been boxed in at NEDLAC. There was the imbalance of huge relief on company taxes, and only 1% added to PIT. The Standing Committee was prepared to help. Users had to be made to pay for irresponsible use. Communication strategies with stakeholders had to change. There had to be a methodology of engagement with stakeholders. The long tax holiday for some had to be elevated to public discourse and engagement. The challenge of the UIF surplus had to be addressed, and challenges of liability had to be considered.

Mr D Van Rooyen (ANC) asked why fuel levies went up from 2009.

Mr Momoniat replied that it was hard to explain fluctuation in fuel prices. One reason was the fact that South African fuel was still dirty. There had not been efficiency changes in refinement. The country was lagging behind. South African cars also had old engines. If there was earmarking for different use, fuel levies had to be increased for everybody else, including in the Eastern Cape. PIT and CIT tax would have to be increased.  When funds were used for other purposes, this would have to be taken from the National Revenue funding. Doubling the fuel levy would not result in double the tax collected, but in fact it would be much less.

Mr Van Rooyen referred to the reversal on the electricity levy for intensive users. It was stated that evidence from consultation with the intensive users indicated that intensive users were voluntarily paying the levy. Information about such evidence had to be highlighted.

Mr van Rooyen asked about evidence that had caused the NT to effect changes regarding security tax transfer. Changes were put on hold because it was felt that these could stop cash flow and reputedly have an adverse effect on investor confidence. It was not easy to come to such profound conclusions. He asked what happened in other countries. There was income tax provision against tax base erosion. Gaps were to be closed against the flight of revenue from the national revenue fund. Sceptics were saying that South Africa was heading for a tax revolution, but the facts showed that the country occupied an in-between position.

The Chairperson referred to the implementation of National Treasury decisions about tax retirement. He asked that the Committee Researcher compile a page on proposals from the previous year, and that the Researcher could at the same time look at outstanding issues. The National Treasury had to say what had been done about decisions deferred in the previous year. The Bill would be tabled on 3 June, with public hearings thereafter. He asked Adv Frank Jenkins if there could be advertisement for public hearings during the current week, even though the Bill was not yet tabled.

Adv Frank Jenkins, Senior Parliamentary Legal Adviser, replied that this would be in order.

Mr Momoniat replied, with regard to the retirement provision, that definitional issues would be picked up on, and taken to the Tax Laws Amendment Bill (TLAB). The full context had to be known. Rents and securities were not in the Bill, but part of the TLAB.

The Chairperson noted that there had to be a vote on the Bill before the end of the term, by both Houses. Public hearings could be held on 9 June. The Committee could conclude on the Bill on 10 June, and vote on it on 17 June. It could be tabled in the House on 18 June.

The Chairperson suggested that National Treasury had to pronounce on BEPS, with regard to the broad issues that emerged the week before. It seemed to him that the general feeling in the joint meeting had been that SARS was doing more about BEPS than was known in the public domain. SARS only had to fortify its staff and upgrade skills.

The Chairperson asked about responses from the public to the adjustments made with regard to the UIF proposal. It had to be considered what labour had said about the UIF. He asked what other key objections there had been and what was being done about that. It had to be considered what the public and stakeholders were saying beforehand. He asked what the National Treasury meant when it said that the Standing Committee had to lead.

Mr Momoniat replied that the only comments from stakeholders were about increases. It was a simple Bill, where only the numbers changed. He said that the Standing Committee could lead because there were a number of departments involved who tended to see things from their own perspective, but ultimately funds were involved. There were problems and issues that this Committee would have to look into. The UIF was dealt with under the Portfolio Committee on Labour. The Finance Standing Committee was the one who could consider the consolidated issues, and hence had to lead in Parliament.

Mr van Rooyen referred to the discourse on earmarking. It was possible to earmark for a once-off purpose, and then return to the status quo. He asked if it could be done with the fuel levy, and what the impact on national revenue would be.

The Chairperson referred to PIT and CIT, compared to other countries,and suggested that like had to be compared with like. South African inequality had to be taken into account, and the specific nature and structure of South African society had to be considered. It was the background against which tax policy had to be tested. A balance had to be achieved. It was not the aim to be punitive towards the rich, but there had to be fairness. The country still had a long way to go. There were many service delivery protests. Tax policy could not be separated from the nature and structure of the society. The ruling party could even be tougher on PIT.  

Mr Momoniat replied that the PIT was most progressive from rich to poor. It was a powerful tool for redistribution. When taxes were too high, people tried to avoid paying. If tobacco tax were to be increased too much, there would be trade in illegal cigarettes. Increases had to be in line with what was happening in other countries, and Basel 3 requirements. There was scope for BEPS, which was currently seen to be a TLAB issue. During the first round there was discussion with the people who actually paid. The second round was critical. People could say that companies were not paying enough. Tax and lobbying went together. There was to be no one-on-one discussion with big business companies and when talking to corporations, the National Treasury told them that Treasury officials did not make decisions. Material issues were presented to the Minister. Treasury officials were not to be lobbied, nor exposed to one-sided views. The unions and NEDLAC were involved when dealing with corporations. The National Treasury did not expect the Committee to fight for it at NEDLAC, but there were issues for the Committee to consider.
 
Mr Ross remarked that there was a lack of investment by the private sector.  Corporate taxation had to be improved. There were structural constraints in the economy. Growth in corporate tax could encourage private sector investment and growth. PIT was important, but there had to be a growth trajectory for PIT.

Mr Sean Muller, Economic Analyst, Parliamentary Budget Office, remarked that the Parliamentary Budget Office (PBO) rated the Bill as substantive, even though it only came to the Standing Committee once a year. Changes had a significant economic and distributional impact. The UIF proposal would have an effect on the fiscal framework, even though it was relatively minor. The UIF proposal could make it possible to use the tax holiday to offset the effect of PIT increases. The Committee had approved the UIF proposal, but it had then been changed. More money would have to come from the pockets of income earners. The position relative to other countries also had to be considered. The South African capacity for collecting taxes was good, compared to other countries. There were countries that could not develop due to lack of capacity to collect taxes.

Mr Momoniat said that the only thing that really changed was the numbers, unlike the TLAB. He repeated that this was quite a simple Bill. The only comments stakeholders made was that they did not like the increases. There could be a debate after the budget. Rates had to be agreed upon, within the broad fiscal framework. The process was not as detailed as the TLAB process. Tax collection was not so good for Eskom and the municipalities. It was a two way deal, and people had to be billed in time. Lenders and creditors had to do what they were supposed to do, which was to collect.

Ms Mputu said that banks wanted higher capital liquidity in accord with Basel 3. It was necessary to find out what made it difficult for them, and then to discuss the issues in TLAB. Tax policy had to look at base erosion. There had to be cooperation with SARS about issues of tax avoidance, base erosion and profit shifting. Treasury and SARS purposes had to be balanced. There would be meetings with the private sector and SARS, with a draft Bill developed that could be discussed.

Mr Momoniat added that all players would be met with and talked to in the TLAB process. User charges increased the impact on inflation. Electricity levy propositions were short-term.

The Chairperson asked if the PBO could help. The Committee Researcher was not a tax expert.

Mr Dumisani Jantjies, Public Finance Analyst, PBO, replied that the Money Bills Act did in fact emphasise the PBO role in tax related matters.

The Chairperson advised that the PBO should then work with Ms Yolande Brown, Committee Researcher, but stressed that the PBO assume the major responsibility. The PBO was overburdened and had other commitments, but the SC also lacked requisite staff. The PBO had to look at what was done in the previous year and prepare the issues. There had to be a report, but he advised that the PBO should wait until after public hearings.

The Chairperson noted that carbon tax was also an environmental issue. This Committee and the Portfolio Committee on Environmental Affairs had to work together. Ultimately the carbon tax bill would come to the Finance Committee, but for the time being there was no need to be unduly territorial. The Portfolio Committee on Environmental Affairs was not as busy as this Committee and would have more time to deal with it.

The Chairperson said that in the matter of the equitable share withheld from municipalities, he would liaise with the Chairperson of the Portfolio Committee on Cooperative Governance and Traditional Affairs. It had convened a meeting about it, and rightly this Committee should also be invited. At the meeting in the previous week, it was agreed that the Ministers of Water, Finance and CoGTA had to appear before the Standing Committee on Finance, since it would not do to work at cross purposes. There had to be a joint sitting. It was suggested that everything done by the three Committees should be combined in one report by the PBO. There was a decision to meet within seven days. There would be a joint meeting on the following day. CoGTA would take the lead in the process, and the SC would take its cue from that. The three Chairpersons would meet that afternoon.

There had to be propositions to take forward with regard to BEPS. He would contact the Minister about less exorbitant accommodation for the Financial and Fiscal Commission (FFC).

Mr Ross said that the Department of Cooperative Governance and Traditional Affairs (CoGTA) section 216 (2) intervention was a National Treasury initiative. Ideally the SC should have taken the initiative to support the National Treasury. He supported the intervention against corrupt municipalities who were not paying the bulk supplier. CoGTA and the South African Local Government Association (SALGA) were saying that the intervention was unconstitutional. He had asked the FFC to pronounce on the matter, and was told that the FFC had never said it was unconstitutional. The Standing Committee now had to take the initiative and say what it expected.
The Chairperson remarked that it was a loaded issue. CoGTA looked at it from the point of view of municipalities, as could be expected. He would confer with Mr Mdakane, the CoGTA Portfolio Committee Chairperson. Nobody had raised the matter in a meeting, and he had not known about the meeting that CoGTA convened.
 
The Chairperson referred to the Competition Commission's inquiry into banks fixing their rates. He wanted to know exactly what was being planned there, although it was still very early to determine this with full certainty. The question was when Parliament had to discuss the matter, and at what stage the Minister would intervene. He asked Adv Jenkins to consider whether the Standing Committee had to intervene. It was also a matter that touched on economic development, which meant that the Ministers of Finance and Economic Development were affected. There might have to be a joint meeting with the Economic Development Portfolio Committee.

At this point the Chairperson turned off his microphone and engaged in amicable banter with Ms Tobias about the state of responses to emails and sms messages in the Committee. He then turned on his microphone and announced, to the great amusement of all, that he wished to go on record that responses were excellent, as the Freedom Charter had intended that they be.

The meeting was adjourned.

 

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