The Department of Science and Technology provided an update on processing of applications for the Research and Development (R&D) tax incentive. The R&D tax incentive was part of a package of policy instruments to promote economic growth and enhance competitiveness. South Africa offered generous R&D tax incentives, offering up to 150% in tax deductions. The rationale for incentivising R&D was based on the market failure argument that stated that the private sector was likely to under-invest in R&D. Long term returns from R&D far outweighed the tax expenditure that the government had to forego in the short term. The Committee was taken through uptake figures; progress with adjudicating applications; tracking the backlog, and approvals and non-approvals per industry.
In discussion, it was asked why it had been stated that there was increased uptake, whereas the graphs showed decline. It was asked if the tax incentive could be quantified. There was concern about research and development in the crucial areas of gas, electricity and water.
The National Treasury and the South African Revenue Service (SARS) briefed the Committee on the Taxation Laws Amendment Bill (TLAB) and the Tax Administration Laws Amendment Bill (TALAB). The Rates and Monetary Amounts Bill (money bill) was published on budget day and contained most proposed changes to tax rates and monetary amounts. The TLAB and TALAB dealt with more complex issues or technical changes. The bills were split into the money bill (TLAB) and an s75 bill (TALAB). Carbon tax proposals would be dealt with through another bill, later in the year. The TLAB was discussed under the headings of personal income tax; general business taxes; taxation of financial institutions and products; tax incentives; international taxation, and Value added Tax (VAT). The TALAB included main amendments related to a self assessment system for income tax; medical scheme fees and PAYE; implementing automatic exchange of information; legal professional privilege assertion requirements and foreign information requests.
Discussion was limited by time constraints. Some Members felt that a vast and complex amount of material had been covered in a short time. Justice could only be done to it through a taxation workshop. The Chairperson asked the Parliamentary Budget Office (PBO) to summarise the material for a workshop, and to also help prepare an agenda. There were questions about depreciation of assets and the retirement fund threshold. It was asked why the SABC was singled out for VAT privileges. It was asked if the impact of the proposed tax reforms could be quantified. There was concern about unclaimed benefits resting in pension funds and banks, and the universalisation of old age grants.
Status update by the Department of Science and Technology (DST) on the processing of applications for the R&D tax incentive
Mr Godfrey Mashamba, DST Chief Director, presented. The Committee was taken through an introduction and overview of the R&D tax incentive; the uptake by companies since 2006; a status update of processing applications, and measures in place to improve efficiency. The incentive was part of a package of policy instruments to promote economic growth, enhance competitiveness and other broader objectives. South Africa was one of the world countries that offered generous R&D tax incentives, offering up to 150% in tax deductions. The rationale for incentivising R&D was based on a market failure argument which stated that the private sector was likely to to under-invest in R&D, partly because of the long term nature of tangible benefits from R&D; high risks associated with it, and inability to attract external funding due to information asymmetries. Long-term returns from R&D far outweighed the tax expenditure that the government had to forego in the short term. The Committee was taken through uptake figures for November 2006 to February 2015; an update of processing applications; progress with adjudicating applications per quarter; tracking the backlog; approvals and non-approvals per industry, and measures in place to improve efficiency.
The Chairperson asked the Parliamentary Budget Office (PBO) if there were outstanding issues that had not been covered.
Mr Sean Muller, PBO Economic Analyst, replied that the appropriateness of the R&D definition could be questioned, with regard to what was actually being done. The impact of increased uptakes on R&D had to be considered.
Mr A Lees (DA) noted that it was stated that there had been an increased uptake, but the graphs indicated a decline.
Mr Mashamba replied that R&D uptakes increased from 2002, peaked in 2007, and then decined. The decline was linked to the global financial crisis. The decline of 2008 to 2010 was followed by an improvement in 2011/12. A variety of factors had an influence. There was reluctance on the part of the private sector to invest. It had to be a established what impact the incentives had. There were new applicants entering the system. In the past well-known companies tended to predominate, but with new provisions it was becoming possible to attract new applicants. The graphs showed a decline because there were companies who had applied for more than one year, who were not registered as new uptakes.
Mr Lees asked if non-approval meant that an application had been rejected, or whether it meant that it was still in the pipeline.
Mr Lees noted that there was a two year backlog in dealing with applications. He asked when the backlog would be reduced, and what the deadline was for dealing with rejections and approvals.
Mr Mashamba replied that there were measures in place to deal with backlogs. The rule of submission of applications within 90 days was not achieved in 2014.
Dr B Khoza (ANC) noted that it had been argued the year before that not enough was being spent on R&D. She asked that tax incentives be quantified. The meaning of 150% was not clear.
Mr Mashamba replied that countries like Brazil and Malaysia offered as much as 200%. Anything above 120% was generally considered to be super-reduction. There was a trend towards aggressive R&D policy. The Treasury had allocated R5 billion, which amounted to 14 cents to the Rand. There were unsuccessful companies who were still applying, which posed a risk to R&D expenditure.
Dr Khoza said that she was worried when she looked at applications from different sectors. Electricity, gas and water were critical areas. South Africa was water-stressed. More money had to be spent on treating water, especially in KZN. She asked why there was a low uptake in the critical areas, and what kind of incentives were on offer.
Mr Mashamba replied that there had not been significant research on water, although development of new technologies was encouraged. It was not possible to know how many firms were undertaking R&D. The only available statistics were related to firms who were in the system.
Dr Khoza asked about the meaning of “Community, social and personal services”.
Mr Mashamba replied that he was not currently able to elaborate on the meaning of the category.
The Chairperson asked if incentives could indeed be called generous. The question was whether there was overall movement. It would be best to invite the President of the organisation concerned. Overall progress had to be evaluated. It appeared that generous incentives were on offer, but it was not being taken up. He asked if people were informed about incentives. The incentive issue had been raised in the Committees of Public Enterprises and Trade and Industry. The DST had a good Minister who could get things done.
Dr Khoza returned to the issue of reserarch about water. She disagreed that there had been little research about water. Research was being undertaken about purifying sea water through desalination, in KZN. There had to be research about the impact of dams on the environment. There could be debilitating effects.
Mr Mashamba replied that there were water programmes in place.
The Chairperson asked why the Treasury deemed it important that Mr Mashamba present to the Committee.
Mr Momoniat replied that it was an important issue. Not enough information about the incentives systems was available. The Treasury had referred the issue to the Davis Tax Commission. Too many incentives could undermine the tax base.
Briefing by the National Treasury and the South African Revenue Service (SARS) on the Taxation Laws Amendment Bill and the Tax Administration Laws Amendment Bill
The briefing was presented by officials from the National Treasury and SARS. The Treasury was represented by Mr Ismail Momoniat (Deputy Director General); Mr Cecil Morden (Economic and Tax Analysis); Ms Yanga Mputa (Chief Director, Legal Services), and Mr Olano Makhubela, Finance Investment and Swings). SARS was represented by Mr Franz Tomasek (Group Executive, Legislative and R&D).
It was explained that the Minister of Finance announced tax proposals in his 2015 Budget Speech and in the 2015 Budget Review. The Rates and Monetary Amounts Bill (money bill) published on Budget day contained most of the proposed changes to tax rates and monetary amounts. The Taxation laws Amendment Bill (TLAB) and the Tax Administration laws Amendment Bill (TALAB) dealt with the more complex issues or technical changes and also required consultations after the Budget announcement. Changes required much more legal drafting and were often technical. Bills had to be split into a money bill (TLAB) and a s75 bill (TALAB). Carbon tax proposals would be dealt with through a separate bill later in the year.
Carry-overs from the previous year dealt with in the TLAB were the harmonisation and more equitable tax-treatment of retirement funds, which included consultations with NEDLAC on thresholds and the previous year’s amendments; the VAT zero-rating of agricultural inputs, and an update on the adjudication process related to the Research and Development tax incentive.
A retirement reform update was given. The labour constituency had raised concerns in 2014 about the impact of annuitisation requirements on provident funds. The TLAB was discussed under the headings of personal income tax; general business taxes; taxation of financial institutions and products; tax incentives; international taxation, and Value Added Tax (VAT).
The Tax Administration Laws Amendment Bill (TALAB) included main amendments like the self-assessment system for income tax; medical scheme fees and PAYE; implementing automatic exchange of information; legal professional privilege assertion requirements, and foreign information requests.
Tax proposals not in the TLAB or TALAB included the electricity levy; the tyre levy; the diesel refund system; the maximum age for the preservation of pension assets, and unlisted property-owning companies.
Dr Khoza remarked that the presentation was too complicated.
The Chairperson asked that the PBO assist in simplifying matters. The PBO had to tell the Committee what the Treasury was not telling it.
Mr Momoniat replied that the slides perhaps showed too much detail.
Mr Muller added that there had been challenges around the process in the previous year. Outside experts would have to be brought in. The PBO could assist in simplifying matters.
The Chairperson remarked that experts had to be identified. Money had been available in the previous year, but experts could not be found. One could not extract an academic for a period of two months in a democrcay. The tax authority was bound to discover loopholes through practice.
Dr Khoza asked if the Minister could declare a whole area as an Urban Development Zone (UDZ) node, to qualify for tax incentives (slide 31).
Mr Morden replied that currently the legislation only allowed municipalities with a population greater than two million people to demarcate two areas as UDZs. The amalgamation of municipalities highlighted the need to extend the demarcation of more UDZ arteas per municipality. Currently the focus was on areas that were perceived to be in decline, as in derelict CBDs.
Ms T Tobias (ANC) asked what was meant by the term “connected”.
Mr Tomasek replied that a connected person was usually a relative. In the case of companies, it was a subsidiary. It referred to something that was not in ordinary commercial space, that impacted on the way people did business in ordinary commercial space.
Mr Lees referred to slide 9. He asked that it be confirmed that the threshold figure with regard to retirement funds was R150000.
Mr Lees referred to the granting of VAT privileges to the SABC. The question was why the SABC was singled out for that special privilege. It rightly had to be extended to other entities. Credit control was poor, and therefore the SABC was let off the hook. Yet there were many who struggled to collect debt. The question was why the privilege was not extended to all.
Mr Morden replied that the SABC was in a unique position. When a television set was bought it had to be registered, and the SABC had to be notified. The TV owner was invoiced to pay the licence. People could not be traced through licence invoices. The concession to SABC was not considered to be a major concession.
Mr Lees asked about the VAT registration threshold. He was looking forward to the proposed workshop. A vast amount of material had been covered, and it was not possible to ask all the questions that had to be asked.
Mr Morden replied that the VAT registration threshold was high. It was adjusted some years before, and there was no intention to up it soon. 45 to 50% percent of those registered for VAT were below the threshold. Those were mostly vendors who registered of their own accord.
Mr Lees noted that SARS had a cutoff date of three to five years to determine whether there had been fraud. If the taxpayer had made a mistake, he had to trace it back over that period.
Mr Morden replied that the cutoff point for taxpayer assistance was three years. If tax returns were wrong on account of a third party, there could be assistance after three years.
Ms Tobias asked about depreciation of assets. She asked how the value of depreciated assets was determined.
Mr Morden replied that assets could not simply be written off. It had to be placed on a balance sheet to depreciate over time. It could be over a period of three, five, or twenty years. A building asset could only be written off over twenty years. The time required differed from asset to asset.
Dr Khoza asked if the impact of proposed tax reforms could be quantified. She asked if there were positive spinoffs.
Dr Khoza asked if unclaimed benefits were being regulated, with reference to pension funds and banks. She asked about the universalisation of old age grants.
Mr Momoniat said that there had to be a session on retirement reform. The challenge regarding universalisation of old age grants was that it could discourage saving, as it could disqualify people from old age grants. There had to be a comprehensive picture of old age grants.
The Chairperson noted that financial sector bills would be dealt with early in September. Such bills were not formally tabled in Parliament; hence there could not be public hearings. The last quarter was usually devoted to annual reports. The Finance Standing Committee had too many entities to look at, and therefore rotated with respect to such entities. SARS had to be looked at every year. The programme for the quarter could be available later in the week. The PBO had to cooperate on the taxation workshop, by providing a summary of key issues and by helping to set up an agenda. Mr Lees had written to him about the Sikhakhane report on an alleged undercover intelligence unit in SARS. He would brief Mr Lees about the division of labour between the Finance Standing Committee and the Joint Intelligence Standing Committee with regard to that matter. As far as possible the Finance Committee would receive quarterly reports from the Treasury and SARS in every term.
The meeting was adjourned.
- Draft Memorandum on Objects of Tax Administration Laws Amendment Bill, 2015
- Publication of the 2015 Draft Taxation Laws Amendment Bill & Draft Tax Administration Laws Amendment Bill
- Status update on processing of application for the R&D tax incentive: DST presentation
- Draft Taxation Laws Amendment Bill & Tax Administration Laws Amendment Bill: National Treasury and SARS