Taxation Laws Amendment Draft Bill; Tax Administration Laws Amendment Draft Bill: public hearings

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Finance Standing Committee

15 September 2015
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

The Committee heard submission from various professional associations and other interested parties regarding proposed amendments to the tax laws. The presenters were unanimous in their opposition to the removal of Section 6quin of the Income Tax Act, which since 2012 has eliminated double tax so that multinational companies can more readily locate their headquarters in South Africa. Most were of the view that the issue was an economic one, and that the removal of Section 6quin would chase business out of the country; a representative of the South African Institute of Tax Professionals(SAIT) said that SARS had to choose between “12% of a little or 28% of nothing.”

There was a general sense from the public submissions that the rights of taxpayers were being steadily eroded by amendments to the law, and that SARS was trying to grant itself far-reaching powers that could easily be abused. SARS was portrayed as trying to shift the balance of power away from taxpayers. In particular, presenters expressed concern about a provision that would allow SARS to extend the prescription period by three years where there were “complex matters” since the definition of this term was wholly left to their discretion. Three years was also felt to be far too long. It was also argued that SARS was using its power to obtain information in ways that infringed on taxpayers' legal privilege, and that information obtained through staff interviews in the process of a tax assessment was of doubtful accuracy and legal status due to the nature of the methods. This picture was doubted by the Chairperson, who pointed to SARS' excellent international reputation, and a SARS representative, who argued that they were in fact restoring balance in response to taxpayer behaviour. The SARS representative defended their information gathering methods, saying that they were in line with international norms.

The Chairperson called for changes to the general structure of public engagements with taxation laws in the light of their highly technical character and potentially far-reaching effects on the economy. It was always difficult for non-experts to understand the political implications of minute changes to tax laws. They needed to be more interactive and consultative.

Meeting report

Banking Association of South Africa (BASA) submission
Mr Leon Coetzee, Chairperson: Direct Tax Committee, BASA, introduced the BASA delegation before handing over to Tracy Brophy (Head of Tax Risk Management: First Rand Bank) to deliver the first part of their submission.

Ms Brophy spoke about tax law and the regulatory landscape in South Africa. She said there was a need for tax law in South Africa to proceed in sync with regulations. It was driven by international regulatory frameworks. An important change in the landscape at present concerned the giving and taking of collateral. The financial industry had been in discussions with government over the past year, and she expressed satisfaction that the draft Taxation Laws Amendment Bill granted a dispensation to the industry allowing exemption from securities transfer tax and capital gains tax on the transfer of liquid equity for twelve months. However, she hoped that in future the exemption would be widened to other assets, such as bonds, and extended to a longer time period. She looked forward to an ongoing productive relationship with government.  

Mr Coetzee then raised some concerns about the amendments to the Tax Administration Act. The amendments resulted in an Act that BASA did not consider fair and equitable. It would make tax compliance unduly onerous for willing taxpayers and would erode the rights of taxpayers. The office of the Tax Ombud should be independent from the South Africa Revenue Service (SARS) in order to provide necessary oversight of the relationship, which was presently unsustainable. International experience showed that taxpayers who perceived the tax system as fair and equitable were more likely to comply voluntarily. He noted with concern that the possible compromising of taxpayers' legal privilege had no precedent internationally. He also expressed concern about the power granted to SARS by the amended Tax Administration Act to interview any employee.

The Chairperson expressed some frustration at the length and repetitiveness of the submission.

Ms Brophy concluded the BASA submission by calling for the amendments granting these sweeping powers to SARS to be deleted.

The Chairperson said that he was unhappy with the general structure of public engagements with taxation laws in the light of their highly technical character and potentially far-reaching effects on the economy. They needed to be more interactive and consultative. He hoped that the representatives of SARS present would defend themselves against the allegations of authoritarianism, which did not accord with his own recent engagements with them.

PricewaterhouseCoopers (PWC) submission
Mr Kyle Mandy, PWC partner, noted that they welcomed many of the amendments, although the submission would deal with their concerns. He raised several issues.

PWC's first concern was the repeal of Section 6quin of the Income Tax Act which concerned the granting of rebates against South African-sourced income in cross-border trade. It had been introduced to prevent double-taxation and to make South Africa more attractive as a regional services hub. The National Treasury's reasons for repealing it were that it was a departure from international practice, that it encouraged tax treaty partners not to comply with the treaty, that it was an administrative burden for SARS and that it was being used for income for which it was not originally intended. However, PWC contended that the rationale for Section 6quin remained, and that it should not be removed from the law, at very least for non-treaty countries. It was crucial for South Africa's attractiveness as a regional services hub.

The second concern involved share schemes. The proposals that had been put forward this year would create at least as many problems as they would solve. They did not address the root cause of the problems in this area.

The third concern was third-party agent appointments. The present legislation would allow SARS to intercept debt payments from a third party to a tax debtor. Whilst acknowledging that SARS was entitled to some powers not granted to ordinary creditors, they were concerned about how this was used in practice. It should be a last resort, but this was not the experience of some of their clients. He questioned the constitutionality of the proposed legislation to automate such collections, in the light of the recent Western Cape High Court judgement on garnishee orders. There was no oversight on the process.

Mr Frans Tomasek, Group Executive: Legislative Research and Development, SARS, said that SARS' standard operating procedure was first to contact the taxpayer, then to issue a final demand and only then to appoint an agent. In some cases, an agent could be appointed without a final demand having been issued, but these were very specific. He also pointed out that there was a total tax debt of R83 billion, so it was to be expected that there would be many agent appointments.

PWC fourth concern was the extension of prescription from 3-5 years to “an appropriate period,” and an extension of three years in the audit of “complex matters.” The rationale for the fixed period was to bring finality to financial matters, and it was common practice worldwide. One problem was that a matter that was complex for one person might not be complex for another. He said that there should be a published list of what matters SARS considered “complex,” and that the three year extension period was too long: eighteen months should be enough.

South African Institute of Tax Professionals (SAIT) submission
Mr Keith Engel, Deputy Chief Executive, SAIT, introduced himself before handing over to his SAIT colleague, Prof Pieter van der Zwan, from the North West University.

The first issue raised concerned the removal of Section 6quin. The presenter went through two hypothetical examples of income with and without the provisions of Section 6quin. The first showed an increase in taxation from 33% to 61% for a high-end consulting firm when Section 6quin was removed. The danger was that, faced with such high tax rates, a highly mobile business like a consultancy would leave the country, taking tax income and employment with it. He requested therefore that the repeal of Section 6quin be reconsidered.

Mr Engel clarified that the issue with Section 6quin was whether South Africa wanted to be a shared service centre, and the elimination of double taxation. A second point of concern was the issue of securities lending. In general, one could only make such a loan if one had collateral, preferably in cash, but possibly also in debt securities or shares. The Bill only covered shares, however, and not debt securities. It also required debtors to change the nature of collateral every twelve months, despite the fact that some debts had a far longer lifespan (5-to-10 years).  For instance, if a bank makes a home loan, the home loan remains the same collateral over the 20-year period; this collateral does not change.  The same principle should apply t securities lending. SAIT supported these amendments in principle but said that there remained some fine tuning to be done.

Prof van der Zwan agreed with PWC that the “complex matters” required a detailed definition, and that the open-endedness of the extension period left taxpayers rather exposed.

Mr Engel also worried about the practical implications of the Bill with respect to legal privilege. There was a danger that legal opinions could be used against the clients who sought them.

He also expressed some confusion about the meaning of the amendment to Section 8C. He had not been able to find anyone who could give him a proper explanation of it. Mr Engel said that SARS and the Treasury were right that there was abuse in this area, but the amendments that were being made seemed to be hitting the innocent hardest. A full study of section 8C was required t finally settle this area.

South African Institute of Chartered Accountants (SAICA) submission
Mr Pieter Faber, SAICA Project Director: Tax, drew attention to the effect of SARS information requests from taxpayers themselves as opposed to the auditing profession, noting that these taxpayer requests undermined the relationship of trust between auditors and their clients (upon which the truth of their audits relied) and created a perception that the auditing profession was working for SARS. The migration to self-assessment, and amendments concerning the removal of certainty regarding the period of prescription and the correction of errors, all posed dangers for taxpayers' rights. Prof Osman Mollagee added his voice to those calling for the reinstatement of Section 6quin. The issue was not tax-technical but simply economic; we have to choose between “12% of a little or 28% of nothing.” He also said that the public did not have sufficient opportunities to contribute to the discussion of tax bills, and criticised the lack of a forum for the public to query the omission of its requests from the national budget.

Ms Yanga Mputa, National Treasury: Chief Director: Tax Design,  said that requests for tax amendments were made public in November, but the Minister of Finance obviously had the final say on what went into the budget. Although Treasury did not provide written responses to explain why a proposal had not been included, the public could request meetings.

The Chairperson added that he did not think there was any country in which a professional association could demand an explanation from the Minister of Finance as to why a proposal had been rejected.

Mr Tomasek pointed out that Parliament did hold hearings directly after the budget announcement.

The SAICA representative explained that he did not expect this. He was concerned rather with omissions by Parliament in their submissions to the Minister of Finance, and that the public was not sufficiently informed about the consultation process that they were now engaged in.

The Chairperson said that public hearings were advertised in all official languages.

South African Institute of Professional Accountants (SAIPA) submission
Mr Ettiene Retief, SAIPA Tax Committee Chair, recognised the intention behind the repealing of Section 6quin, but also worried about its potential effects on business in practice. Double taxing was a constant problem, and he requested that SARS, at the very least, subtract foreign tax deductions before calculating its own tax percentage. There was also a general problem that constant changes to tax laws discouraged international trade, which depended on consistency and certainty. He also felt that there was a steady erosion of taxpayers' rights. The extension of the prescription period for “complex matters” was being abused, and there was no reason for there to be a blanket three-year extension in such cases. In fact, thirty days should be sufficient.

Discussion
The Chairperson reiterated his call for a more consultative process for discussing tax bills. He asked the visitors to be very specific when they alleged that, for example, taxpayers' rights were being eroded.

Mr Engel suggested that these dialogues tended to be too adversarial, emphasising differences at the expense of similarities.

An ANC committee member recalled that the Tax Ombud himself, Judge Bernard Ngoepe, had spoken earlier this year about the independence of his office and that its funding model and appointment procedure could compromise its independence. Where there any other reasons to believe that its independence was threatened?

Mr Coetzee said it was essential for the Tax Ombud to be independent so that it could provide independent oversight of legislation in the Tax Administration Act to ensure that taxpayers' rights are not infringed.

Mr Dumisani Jantjies (Economist, Parliamentary Budget Office) asked whether any of the presenters had dealt with the Tax Ombud, and if so, what was the impact of their engagements?

The ANC committee member asked PWC and SAIPA to substantiate their calls for reducing the extension period for “complex matters.” Why eighteen months and thirty days, exactly?

The PWC representative explained that the basis for the suggestion of eighteen months was essentially a gut feel guided by experience.

Mr R Lees (DA) noted the unanimity of the concerns submitted. He agreed that the issue of Section 6quin was essentially economic.

The Chairperson also noted the unanimity of concerns expressed, but wondered how SARS could have gained the excellent international reputation it had if it was as draconian as it was being portrayed. He invited SARS to respond to this portrayal.

Mr Tomasek agreed with the general trend of submissions that they were altering the balance of rights and obligations of taxpayer and SARS, but he argued that they were in fact restoring the balance in response to taxpayer behaviour. For example, the extension of prescription to “an appropriate period” was a response to taxpayers withholding information requested by SARS. He hoped, however, that the extension provided by the amendment would function as a deterrent and not actually have to be used very often. He acknowledged the concerns around the definition of “complex matters,” and said that SARS had some proposals that would go a long way to addressing them.  He also indicated that only the Commissioner would have this power as opposed to general audit staff.

The SAICA representative explained that they were not suggesting that SARS was trying to claim inappropriate powers for itself, but were worried that there were not sufficient controls in place to ensure that the powers were not being abused. For example, he reported that the power to take money from a bank account in response to a tax misdemeanour was being used as a first resort, rather than a last resort, and that no action was taken against SARS officials who abused such powers.

South African Institute of Freight Forwarders (SAAFF) submission
With reference to Amendment 24(1) concerning the extension of the prescription period from two to three years, Mr David Logan (CEO, SAAFF) recommended that Sections 76(4), 76b(1a), 76g(1g), 76g(1d) and 76b(1e) of the Customs and Excise Act (1964) also be amended to three years.

With reference to Amendment 65 concerning limitation of voluntary disclosure of a default, Mr Logan recommended that Section 227 of the Tax Administration Act of 2011 be amended to exclude any unintended default based on a customs declaration, or alternatively in the absence of graft laws, that an amendment be made to Section 85 of the Customs Control Act of 2014 to allow an electronically submitted correction of a customs declaration to constitute a voluntary disclosure.

Mr Logan said that the SAAFF supported Amendment 81.

With reference to Amendment 82 to Section 202 of the Customs Duty Act of 2014, Mr Logan saw no need for a fixed penalty for non-prosecutable offences like clerical errors.

Mr Logan agreed that common dispute resolution procedures were a complex matter and appreciated the effort to finalise these procedures by 2016.

KPMG submission
The KPMG representative drew attention to recent media statements by the Minister of Science and Technology, Ms Naledi Pandor, that South Africa should be working towards a 1.5% of Gross Domestic Product (GDP) spending on research and development (R&D). The average spending on R&D over the last three years was 0.76%. Tax laws had a role to play in incentivising R&D.

The current R&D tax incentive was not working as intended.  For example, in South Africa, start-up enterprises could receive a tax deduction. However, since many start-ups operated at a loss, a tax deduction was not much help. There were also procedural problems in the applications for the deduction: if it was submitted half way through the year, one could only claim for the remainder of the year, even if the project had been undertaken at the beginning of the year. Another problem that there was no appeal process for a deduction that had been denied. In addition, the Department of Science and Technology's criterion to determine worthy projects (“Is the project world-beating?”) was far too stringent. For example, it would not deem a project to design a rocket to Mars worthy, because India had already designed one. He wondered whether this was really what was intended. If not, the criterion should be something along the lines of “does the project further economic growth and employment, in line with other government objectives?”

He also reminded the Committee that the matter had been discussed last year but nothing had come of it, and no response had been received.

The Chairperson expressed some disbelief and disappointment about this, and undertook to see that it was dealt with. He did not want to see the same submission returning every year.

Webber Wentzel submission
Ms Nina Keyser (Head of the Tax Dispute Resolution and Tax Controversy Management team, Webber Wentzel) raised the issue of legal privilege. The method that SARS was proposing to use to determine whether a legal correspondence was subject to legal privilege was problematic, because it involved asking the legal practitioner about the contents of the communication, a question which could not be answered without implicitly waiving any legal privilege. She suggested that a better method would be to ask the legal practitioner in question whether it was subject to legal privilege.
           
A second issue concerned SARS' powers to interview employees of a firm being audited. Ms Keyser had no problem with this power in principle, but objected to the way it was being used in practice. She had seen several cases where SARS officials had requested interviews with large numbers of staff members in all branches of an organisation, right from the beginning of an audit, without any grounds for suspicion. Because organisations were not being asked who the correct person to ask a given question was, SARS was eliciting evidence from the wrong people. There was furthermore no clarity on what the status of the information gained from such interviews was. She called for these provisions to be scrapped.

The Chairperson questioned Ms Keyser's description of the situation, and asked again how SARS could have such a good reputation if their activities were as they were being described. He warned presenters not to make broad accusations lacking in credibility.

Ms Keyser assured the Committee that she could provide documents to back up her account. She insisted that she was not exaggerating.

Ms Keyser said that the way the Bill was drafted, it seemed that a taxpayer was responsible for approaching SARS to request a reduced assessment, which she found strange. There was also an issue arising from errors in tax returns which were agreed on by both SARS and the taxpayer. Why should the taxpayer have only six months, from the date of submission of the previous year's return, to fix it? It should be three years from the time of the assessment. Finally, she drew attention to a communication problem with the e-filing notification system which was resulting in taxpayers owing tax without realising it. A more reliable system of notification was needed.

Chief Financial Officers (CFO) Forum submission
Mr Marc Lewis, representing the CFO Forum, began by commending SARS and National Treasury, saying that their administration standards were world class, and that filing a tax return in South Africa was much better than in Australia. He added, however, that the perception of a fair and equitable tax system was an incentive for voluntary compliance, and that moderating administrative powers promoted such a perception.

Regarding the extension of prescription, Mr Lewis said that long prescription periods were a serious drain on organisational resources, especially for CFOs, who “lived from quarter to quarter.” He also worried that the amendments would give SARS unfettered access to commercially sensitive information. He said that the removal of Section 6quin would be contrary to South Africa's aim of being a regional services centre.

MTN submission
Mr Carel Gericke (Group Executive for Tax, MTN) said that South Africa currently held a 2% share in the R38 billion services sector in Sub-Saharan Africa. He agreed that the removal of Section 6quin was an economic issue. The tax credit offered in terms of Section 6quin was a material part of MTN's decision to locate their shared services centre in South Africa, and without it, it was questionable whether it could continue to be located in South Africa. He also believed that Section 9D discriminated against South African based multinationals in favour of inbound multinationals.

Discussion
Mr Lees asked SAAFF who would determine whether an offence was prosecutable or not.

Mr Jean Pool (SAAFF) said that non-prosecutable offences were defined in the Customs Control and Customs Duty Acts.

Mr Lees agreed that the R&D incentive needed to be reconsidered. He also agreed with Ms Keyser that the e-filing notification system needed to be more effective, and asked for her to provide evidence of the interview situation she had described, of which he had also seen anecdotal evidence. He questioned the wisdom of granting SARS such great powers, even if, as the highly professional and well-run organisation it was, they were seldom used. Legislation could not be based on the skills and competence of individuals. New leadership could arise in the future who would use their power irresponsibly.

An ANC committee member used the example of Greece to point out the importance of tax control. As a general point, he asked the presenters not to put sectoral interests above national interests.

Mr Jantjies defended SARS' practice of interviewing junior staff, as described by Ms Keyser. In his experience, junior staff often had insight into matters that senior staff lacked.

The Chairperson asked what the extent of compliance was among South Africans who were obliged to pay tax, compared to other developing countries. This might justify some of SARS' more stringent tax-collection strategies.

The Chairperson supported the extension of prescription in principle, but acknowledged that some of the issues raised seemed to have some technical merit. He also noted the unanimity of the opposition to the removal of Section 6quin. He suggested that SARS should think about these matters and come back to the Committee in the next quarter.  The Chairperson also suggested that taxpayers should have a right to interact with National Treasury and SARS when the briefed the Committee on their responses rather than the unilateral process that existed last year.

Ms Mputa, National Treasury, pointed out that Section 6quin was part of their constant efforts to balance South Africa's investment attractiveness against its need to ensure tax compliance. She reminded the presenters that its removal had been advised by the Davis Committee.

The Chairperson expressed surprise at what had been said about e-filing and asked SARS to respond. He also asked for a response to the issue of interviews.

Mr Tomasek, SARS, could not comment on the e-filing problems, but said he would investigate. On interviews, he reiterated Mr Jantjies point that an external auditor would not necessarily take the word of the financial director, but would want to speak to the people involved. The power to interview someone during an audit was of course, utterly unexceptional.

Ms Keyser said that they were not disputing SARS right to conduct interviews to collect information, but only asking for the rules of engagement and the status of the information collected to be clarified.

The Chairperson asked whether there was some association that could provide the committee with independent, objective advice on tax law. He assigned two people to put forward the names of two or three people who could offer this so these people could be directly employed / contracted by the Committee so internal expertise existed to review tax legislation.

The meeting was adjourned.

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