National Treasury and the South African Revenue Service (SARS) held a workshop with the Committee on the Draft Taxation Laws Amendment Bill (TLAB) and the Taxation Administration Laws Amendment Bill (TALAB). Discussions on the draft TLAB covered general business taxes, personal income tax, taxation of financial institutions and products; tax incentives; international taxation, and Value added Tax (VAT). The presentations and discussion on the TALAB spoke to the Medical Scheme Fees and PAYE and to the extension of expiry period for additional assessments. Other topics set out in the presentation had already been covered in earlier meetings and were not explored again.
Members asked questions on the guiding principles when developing the tax laws. They asked how it would be known that the changes in tax law resulted in advances. They asked about the criteria for fairness, what authority SARS had to collect new taxes, duties and levies and who decided that an asset had depreciated. They enquired about tax incentives for households, whether there was an obligation on SARS to assist companies with regard to tax treaties, who had the authority to grant extensions of the expiry period for additional assessments, and what the status of MPs' deductible expenses was, as it had been on the agenda for a long time.
Workshop on the Draft Taxation Laws Amendment Bill and Taxation Administration Laws Amendment Bill
Draft Taxation Laws Amendment Bill (Draft TLAB)
National Treasury (NT) and South African Revenue Services (SARS) presented a workshop to the Committee.
Ms Yanga Mputa, Chief Director: Legal Services, National Treasury, introduced the topic of general business taxes. She spoke to the Securities Transfer Tax (STT) and the Capital Gains Tax (CGT) implications on collateral arrangements. She said pledges would not trigger taxes if the collateral was for twelve months or less.
The Chairperson asked what the guiding principles were, when developing the tax laws.
Ms Mputa said the guiding principles were to close tax loopholes with regard to Base Erosion and Profit Shifting (BEPS) for example, to give fair tax treatment , to assist with market liquidity and to clarify anomalies for the taxpayer and for SARS.
Mr Franz Tomasek, Group Executive for Legislative R&D, SARS, said other countries like the UK also introduced regular annual changes to the tax law, as occurred in South Africa, because taxes impacted on the economy. Tax law could undergo a number of iterations over the course of years. He cited the example of the Carbon Tax, which was a new policy initiative, which would be tweaked over time.
The Chairperson asked how it would be known that the changes in tax law resulted in advances.
Ms Mputa said it was easy to see the take-ups in relation to incentives, particularly such examples in the Urban Development Zones (UDZ).
Mr A Lees (DA) said loopholes were regarded as negative by the revenue collectors. He asked if SARS had any examples to show how loopholes were closed.
Ms Mputa said that loopholes being closed was reflected in SARS generally being able to collect more taxes.
The Chairperson asked what the criteria for fairness were.
Mr Cecil Morden, Chief Director: Economic Tax Analysis, National Treasury, said the policies of neutrality, certainty and revenue buoyancy were tax principles that could be tested. SARS also looked at what the optimum trade off was.
Mr Morden also spoke to the issue of the closing of loopholes, and he said that debt-financed acquisitions of controlling shares interests were one example of a loophole being closed.
Mr Tomasek added that that loophole was dangerous, because the debt could be increased through stacking, and that these type of tax rules came under intense pressure.
Mr D Maynier (DA) asked what authority SARS had to collect new taxes, duties and levies.
Mr Tomasek said this depended on the tax, but paragraph 9 of the 4th Schedule in the tax tables provided the authority.
Ms Mputa then spoke to debt-financed acquisitions of controlling shares interests (section 24O) and to the removing of anomalies arising from cancellation of contracts. She said there would be no tax arising between ‘connected’ people.
She then spoke to addressing the issue of return of capital, after a taxpayer had held a share for three years (section 9C) and said that holding the share for three years or more would trigger Capital Gains Tax (CGT). These two clauses aimed to remove anomalies and clarified policy intent, to give certainty to taxpayers.
Mr Morden spoke to personal income tax and the closing of a loophole to ensure a consistent tax treatment on all retirement funds. This was important as it contributed to retirement savings and was tax free and tax deductible. Some of the money would be taxable when it was accessed at retirement.
He spoke to the rationale for the tax changes in TLAA 2013. He noted that the retirement tax regime for contributions was complicated. He also outlined the amendments to tax deductions in TLAA 2013 and referred to the fact that Provident Fund members who contributed would see an increase in net pay. He gave three examples of people at the top, middle and bottom of the tax scales, to illustrate the impact. The proposed amendments would come into effect on 1 March 2016.
He then spoke to amendments to annuitisation requirements in TLAA 2013, the impact on Government Employee Pension Fund (GEPF) members, the withdrawal from retirement funds by non residents and to the closing of a loophole to avoid estate duty through excessive contributions to retirement funds (section 3 of the Estate Duty Act). Henceforth, retirement funds could not go to an estate. He said that the authorities had taken a look at various retirement vehicles on the market.
He then spoke to the estate duty report from the Davis Tax Committee. He noted the removal of anomalies for income and disposals to and from deceased estates, and bursary and scholarship exemptions for basic education from Grade R to Grade 12 .
Turning to the taxation of financial institutions and products, Mr Morden spoke to transitional tax issues resulting from the regulation of hedge funds. As from 1 April 2015 hedge funds were regulated and this would provide tax certainty. There would be a changeover from hedge funds to Collective Investment Schemes (CIS). No tax would be triggered in the transfer because it was a transitional arrangement and these tax proposals would be finalised in the coming years.
He spoke to the extension of Murabaha and Sukuk to listed entities (section 24JA) saying this would provide relief to the market in the form of extra liquidity. Islamic finance was introduced in 2010 and was previously valid only for government and public entities.
Mr Tomasek said interest was not permitted in Islamic finance, but these Islamic finance vehicles served as a series of constructs which gave a similar outcome without the payment of interest, through establishing partnerships with profit share.
Ms T Tobias (ANC) said she wanted to see more Islamic banks in South Africa.
Mr Lees said he assumed the purpose of this clause was to bring more companies into the tax net.
Mr Tomasek said it was to allow deductions on interest equivalents.
Turning to tax incentives, Mr Morden spoke to accelerated capital allowances for manufacturing assets governed by supply agreements (section 12C). He said the depreciation regime would be 40% in year 1 and 20% in year 2, to allow business equipment to be made available to component suppliers for no consideration.
Ms Tobias asked if there were no unintended consequences. She asked who decided that an asset had depreciated.
Mr Tomasek said the write-off was set in legislation, at 40/20/20. The difficulty was in the issue of ‘value’. Transfer pricing could occur if companies had cross border operations where the value could be stripped out. At the draft legislation stage, SARS specifically looked for loopholes and the legislation's language was tested. One of the reasons why tax laws were so complex was that they were trying to close loopholes.
He then spoke to Special Economic Zones (SEZs) and anti-profit shifting measure (section 12R). He said it was an anti avoidance measure and was triggered if a related party transaction was greater than 20%.
He then spoke to the further alignment of the tax treatment of government grants. He noted that the grants were not taxed, and that grants for Private/Public Partnerships were exempt.
He spoke to the demarcation of additional Urban Development Zones (UDZs), the UDZ Tax Incentive and the UDZ - list of approved municipalities. He said the purpose was to try to take the existing infrastructure and re-use it, as it was standing idle.
Mr Morden said the National Treasury was also working on developing the qualifying criteria with inter-governmental structures.
Mr Lees asked if the deduction was in the short term, but would increase in the long term.
Mr Morden said the deduction impacted on the cash flow and Internal Rate of Return (IRR). He said there was a size restriction in the determination of the area of the zone.
Ms Tobias said depreciating assets were not only found in the CBD but also in the peri-urban areas.
The Chairperson said mining towns were a similar case, and noted that in Groutville, KwaZulu Natal, the textile industry had collapsed.
Mr Morden said one avenue was to extend UDZs, but it was necessary to be cautious on decentralisation, as the former regime had built infrastructure in areas that were not economically sustainable. There was a need to focus on integrated urban development which was connected to rural development.
He then spoke to extending the window period and introducing a compliance period for the IPP tax incentive regime (section 12I) and said the incentive happened after it been made, and not after it had been approved.
Ms Mputa spoke to the depreciation allowance in respect of transmission lines or cables used for electronic communications outside South Africa (section 11(f)). She said the cables were used for e-commerce outside of South Africa. The allowable deduction was for the depreciation of cables over 15 years, and not for the current 20 years.
Mr Morden spoke to the accelerated depreciation allowance for rooftop Solar PV and said the write off for these was allowable over three years in the ratio 50/30/20 per cent respectively. The incentives helped the cash flow of these businesses. For small businesses this could be written off in one year.
He spoke to the adjustment on the energy savings tax incentive (section 12L) and said the country was not very energy efficient. The regulations had been published in November 2013 and would impact on emissions of greenhouse gases and carbon emissions. Co-generation energy projects would also be included and would run until 2020. He said the fiscal impact would be seen in the following year. This was an important policy initiative but he did not know what the uptake numbers would be.
Ms Tobias asked if there were tax incentives for households.
Mr Morden said SARS did not like to give incentives to households because it complicated the filling in of tax returns.
Ms Mputa spoke to the relaxing of CGT rules on cross issue of shares, and introducing measures to counter tax-free corporate migrations. She said that although the 2013 changes addressed base erosion and profit sharing (BEPS), it was hampering bona fide businesses. She said that tax would be triggered after three years for new entrants.
She spoke to the withdrawal of the special foreign tax credit, saying that in 2011 a special tax credit had been introduced, which was intended to give relief. This would now be reversed.
Mr Morden said businesses had complained that they were being taxed twice so the government had given relief. Government should not have given this relief as it should have been referred to the other country where the tax should not have been imposed.
Mr Tomasek said SARS had allowed a deduction, but not a credit, to companies that had been taxed twice.
Mr Lees asked if there was an obligation on SARS to assist companies with regard to the tax treaty.
Mr Tomasek said there were commentaries on model taxes but these commentaries did not have direct authority. They were useful for interpretation purposes.
Ms Mputa spoke to the reinstatement of the CFC diversionary income rules (Section 9D) and said that in 2011 changes had been made and the diversionary income rules had been removed, thinking that transfer pricing rules would be more effective. Now, in 2015, these rules were being reinstated.
Mr Morden spoke to the VAT Accounting method (Section 15(2)(a)) saying that there were small changes to the VAT system. Companies could now decide whether their VAT would be invoice based or cash based but not both.
He spoke to the repealing of the zero rating for the national housing programme (sections 8(23) and 11(2)(s)) saying that the administration for this had been a nightmare.
He then spoke to enterprises supplying commercial accommodation, monetary threshold adjustments (section 1) and to the zero rating of services for vocational training (section 11(2)(r)). See attached presentation for full details.
Draft Taxation Administration Laws Amendment Bill
Mr Tomasek spoke to the Medical Scheme Fees and PAYE and said that a person would not have to wait for a refund. The legislation was only applicable for PAYE, as the provisional tax system already catered for this legislation.
Mr Morden noted that this would apply to people still working.
Mr Lees asked if employers were ready for this legislation.
Mr Tomasek said it would only come into force from 1 March 2016.
He spoke to the extension of expiry period for additional assessments (1) [Clause 50, section 99 of TAA]. He described the complex structures that were created which allowed money to flow in a loop, and said that this meant that SARS must have more time to investigate these complex structures. In addition to the complex structures, companies were changing their tax jurisdictions to avoid paying tax. In one case it took two years to unravel the web of structures. In this particular case the company had to pay a substantial amount of money at the end of the day.
Mr Lees asked who had the authority to grant extensions.
Mr Tomasek said the authority was reserved for the Commissioner, who could delegate it. He said the type of instances requiring the extension would not happen every day.
Mr Tomasek noted at this point that only two of the issues included in the full presentation would be covered as the topics in the presentation had already been covered in earlier meetings.
Mr Lees asked what the status of MPs' deductible expenses was, as this had been on the agenda for a long time.
Mr Morden said there had been an interaction and a written response to the Committee, but the presenters would have a relook at the correspondence.
The meeting was adjourned.