Taxation Laws Amendment Bill & Tax Administration Laws Amendment Bill: National Treasury and SARS response to public hearings; Tax and Harmonisation Reform: National Treasury briefing; Twin Peaks Bill: Expert briefing

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Finance Standing Committee

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

The Committee first heard representatives from both National Treasury and the South African Revenue Service (SARS) present draft responses to public comments on the Taxation Laws Amendment Bill and Tax Administration Laws Amendment Bill (TLAB & TALAB). The main issues addressed by public comments on the TLAB include efforts to close estate duty loopholes, collateral transactions, special foreign tax credits, and Research and Development tax incentives. For TALAB, issues included the procedure for legal privilege, reduced assessments, periods of limitation for issuance of assessments, and the liability of third parties appointed to satisfy tax debts.

Members saw that further progress could be made on developing these bills when it is tabled; the Minister of Finance plans to table the two bills on 27 October. The Chairperson emphasised the necessity of stakeholder consultation as a general principle for Parliament but also for these issues and welcomed input from a representative of the Banking Association of South Africa (BASA). Members saught clarity on specific situations arising from the estate duty loophole and the twelve month limitation on collateral transactions. Members generally lamented a perceived lackluster government support of Research and Development funding.

The Committee then heard a short presentation on the effects of potential retirement reforms. These reforms would raise the exemption cap for employer and employee contributions to retirement funds to 27.5% of taxable income or R350 000. This would benefit the working class, but National Treasury noted that there has been push back from labour constituencies and unions on this issue and that workers currently prefer provident funds. Members welcomed social security legislation as long overdue and agreed that education on this subject would be vital.

The Committee finally heard a presentation from both a representative of the Authority on Financial Markets (AFM) from the Netherlands and the Financial Conduct Authority (FCA) from the United Kingdom on Twin Peaks legislation and the practices of each respective entity in each respective country. While the legislation is similar in both countries, the Dutch model is far older and the two regulatory entities created by said legislation are more distinct. In the UK, though the two entities regulate different parts of the industry, they share the same board and cooperate on a number of projects. Members asked about the process and duration of creating the legislation in these countries and also about the challenges these entities have faced with market acceptance and public awareness.

Meeting report

The Chairperson welcomed everyone and announced that this meeting would be an opportunity for stakeholders to respond to National Treasury’s remarks on the results of public hearings on the Taxation Laws Amendment Bill (TLAB) and Tax Administration Laws Amendment Bill (TALAB). He first allowed for Mr Momoniat to make comments.
 
Briefing by National Treasury
Mr Ismail Momoniat, DDG: Tax and Financial Sector Policy, National Treasury, explained that the TLAB and the TALAB were published in July and did not deal with rates and thresholds. The bills dealt with complex issues like tax harmonisation. National Treasury and SARS had received 52 written comments. We must take into account all the different approaches to taxation when considering money bills. Today’s presentation was a draft document. The Minister was familiar with the process. A final document will be published when the Bills are tabled.
 
Ms Yanga Mputa, Chief Legal Director, National Treasury, agreed with Mr Momoniat. The Bills will be introduced on 27 October.
 
Mr Momoniat said that further changes that came from this meeting from this meeting would take a few more days; the 21st was too soon. He added that the Twin Peaks Bill had been certified.
 
The Chairperson said that Parliament would not be working in December. This idea that there was only a week to consider the BRRR was absurd and worthy of protest. Two weeks was more reasonable but still not enough. This Committee should use its mandate to protest this issue.
 
Mr Momoniat agreed. He would leave that issue to Parliament. The main issues addressed by public comments on the TLAB included efforts to close estate duty loopholes, collateral transactions, the Solvency Assessment and Management (SAM) initiative, and special foreign tax credits. For the TALAB, issues included the procedure for legal privilege, reduced assessments, periods of limitation for issuance of assessments, and the liability of third parties appointed to satisfy tax debts.
 
Mr Cecil Morden, Chief Director: Tax Policy, National Treasury, launched into the first issue of individuals circumventing the estate duty. Some financial service providers have been marketing a scheme to avoid estate duty by transferring assets into a retirement fund immediately before death. This loophole arose due to two previous amendments in 2008 and 2009 to eliminate the maximum age for retirement annuities and after the exemption of retirement fund assets from estate duty. Changes to close this loophole should only apply to excessive contributions that were made to a retirement fund after 1 March 2015. The TLAB would now also eliminate the issue of introspectivity.
 
Ms Mputa said that submissions proposed the 12 month limitation of the collateral arrangement be removed. The delegation felt that this would be an unacceptable detour from common law.  The twelve month requirement mirrors the requirement currently available in the Security Transfer Tax Act for securities lending management.
 
In 2016, the new Insurance Act would come into force and the Financial Services Board (FSB) would introduce a SAM framework. Some submissions called for changes based on International Financial Reporting Standards (IFRS) for short term insurers and adjusted IFRS for long term insurers had been accepted for now.
 
A special foreign tax credit for service fees was introduced in 2011 for withholding taxes imposed on South African residents by foreign countries in respect of services fees from a South African source. This went against international tax practice. The TLAB repealed the foreign tax credit. Taxpayers have been opposed to the removal of this incentive, so the Bill converts Section 6quin of the Income Tax Act from a credit to a deduction.
 
Mr Morden explained the issues around the Research and Development tax incentive. The Science and Technology Minister had defended this incentive and had explained its objectives. The Minister felt that this incentive was in line with international practices. The concerns raised included:
·         The incentive should apply as from 1 October 2012 regardless of the date of application
·         Companies were prejudiced because of administrative delays
·         There was no recourse mechanism (objection and appeal) if an application is denied
·         Definition of innovation required with a high threshold
·         Clarity needed of the intention of the R&D tax incentive
The Department of Science and Technology (DST) was introducing a new IT system and is appointing an external task force. R1 billion of this money turned into revenue in the years for which government has good data. Some of the difficulties from the transition period have thus already been addressed.
 
Input from SARS
Mr Franz Tomasek, GM of Legislative Policy, SARS, spoke about the issue of legal professional privilege being invoked in respect of information required by SARS. SARS wanted to narrow and specify the information required for a claim of legal privilege and felt that delegating this task to an outside contractor would be unhelpful.
 
SARS agreed with commentators that a shorter period for assessments was unwise; the period would remain three years. Ministerial powers over the period of assessment had been very contentious. SARS needed to be able to get information from taxpayers if necessary. The period for audits had been debated extensively. An extension would not be taken lightly and would have to happen either 30 or 60 days before prescription ended. The Bill would include a list of four examples of a ‘complex matter’ though this was difficult to define.
 
In the situation of the nomination of a third party, taxpayers would be given 72 hours notice. Banks thought this was too short, while other businesses thought that this was too long. There is the opportunity for relief if the taxpayer approaches SARS on time and qualifies. A comment suggested judicial oversight; this is not common in other countries.
 
Discussion
The Chairperson asked about the extent of consultation.
 
Mr Momoniat said that government did not want to get into negotiations with industry. There were meetings, but many in attendance at these meetings were lobbying for one specific issue.
 
The Chairperson said that engagement was not about concession. If you have had sufficient engagement, then the Committee has fulfilled its role.
 
MsMputa said that, for example on transfers of collateral, stakeholders were given two options even before drafting the Bill. The industry was consulted on the SAM framework.
 
The Chairperson pointed to closing loopholes as the first matter. He called for comment from stakeholders. This should not be a political issue. The Committee should hear both sides. He noted that Parliament offered BASA interaction and they declined.
 
Mr Leon Coetzee, BASA Representative, welcomed the foreign tax credit. BASA took note of feedback from SARS on legal privilege. BASA welcomed the compromise with SARS on the agent appointment and the regulation of banks’ standard tax debts. Regulatory changes for banks should require significant consultation. With collateral, this was especially necessary. The National Treasury imposed significant requirements on banks with bonds; at the moment, tax legislation around bonds is highly punitive for banks. Banks want enablement to comply with legislation, not avoidance.
 
A stakeholder thanked Parliament for its openness to consultation.
 
The Chairperson said that the Committee realised that building a structure of everyone on this issue when so many people disagreed was almost impossible.
 
The stakeholder said that DTAs compromise the taxpayer. As for reduced assessment, this matter was continuing to pan out. One proposal was that an extension should mirror whatever time period SARS felt that the taxpayer had been uncooperative. The courts had questioned debt recovery. Judicial oversight had been raised.
 
The Chairperson said that the Committee would now address all sides. He apologised for using his phone so much, but it was a political matter.
 
Dr B Khoza (ANC) asked for clarity on the modernization of the estate duty and the closing of loopholes. Were they related?
 
Mr Morden said that the two were separate issues.
 
Dr Khoza wondered whether the Committee understood these loopholes. What kind of loopholes were they? Procedural, legislative, or systemic?
 
Mr Morden said that, in 2009, government had made a change that when you die, your retirement savings do not go into your estate. This had resulted in people pushing all of their money into retirement savings.
 
The Chairperson noted that the Bill was still tentative. Nonetheless, what was the Committee’s view?
 
Mr D Van Rooyen (ANC) said the Subcommittee supported this.
 
The Chairperson agreed.
 
MsKhoza asked when the effective date would be.
 
Mr Morden said 1 March 2015.
 
Mr A Lees (DA) said that the Committee had only looked over brief notes. He asked for clarity on the estate tax matter. After 1 March 2015, any contributions to the retirement savings would be considered as part of the estate. Was that correct?
 
Mr Morden said that only excessive contributions would qualify.
 
Mr Van Rooyen wondered if members agreed on how this matter was being handled.
 
Ms Khoza wanted to hear from the banks. How would this legislation disable banks? She wanted to compare National Treasury’s position with BASA’s position more exhaustively.
 
Mr Coetzee welcomed National Treasury’s proposals, though the proposals at the moment only dealt with exemptions with regard to outright transfer of collateral through invested securities. The quality of your security was very important. Cash was the best form of security. Banks needed longer term capital arrangements. By allowing outright transfer of collateral. Perhaps the Committee could extend these ideas to other areas. Banks did not support the 12 month period; they needed a longer period. There were no tax penalties for pledges.
 
Ms Mputa said that bonds currently did not attract Securities Transfer Tax. Bonds yielded interest; interest was fully taxable. As for the time period, there were two options and Banks chose the latter.
 
Mr Morden said that, if CGT was an issue for bonds, Treasury could likely accommodate it. The time period could not be considered this time around.
 
Mr Momoniat said that Treasury would meet further with banks.
 
The Chairperson welcomed the Treasury’s call for dialogue.
 
Mr Lees asked whether one could enter into a new loan agreement every year. So, one could say to a client that we can enter into a five year agreement so long as we technically renew it annually.
 
Mr Coetzee said there were a few different kinds of transactions. The normal securities lending transactions that came with very reasonable restrictions were opened and closed often and regularly. The banking side needed more time than the trading side for lending transactions in order for collateral to be posted. When financing long-term projects, banks needed security for longer periods; this was why a 12-month period was necessary.
 
Mr Lees said that, if one wanted to give a five-year loan, could one just renew the collateral every year?
 
Mr Coetzee said that this was possible. However, SARS could track avoidance and build in safeguards to regulate this. Banks were mainly concerned about the source of collateral.
 
The Chairperson noted that there are no issues around Solvency Assessment and Management (SAM) framework. Were there issues with the withdrawal of special foreign tax agreements?
 
Mr Lees asked about enforcement issues. There seemed to be a view that, if one did not get the foreign tax credit, then the credit was lost. SARS seemed committed to ensuring that a mutual agreement that arose from a dispute was enforced. Should that be emphasised?
 
Mr Tomasek said that this was correct. Taxpayers felt that this was a much quicker option than a mutual agreement procedure. Once a taxpayer was turned down in another jurisdiction, South Africa must enforce treaty agreements. In practice, other countries rarely ignored treaties.
 
Ms Khoza went back to SAM. It would take effect in 2016, but other standards did not come into effect until 2018. Why? What happens if companies were invested elsewhere?
 
MsMputa explained that when SAM came in, proposed changes in the Insurance Act would mean that the companies would no longer be required to make determinations.
 
Ms Khoza said that coverage under the current policies of the FSB fell off in 2016 and that these provisions cover the in-between period.
 
Mr Momoniat said that this matter had received much international pressure from the business community to finish sooner rather than later. The actual date of passage depended on the speed of legislation.
 
The Chairperson reminded everyone that two foreign visitors were coming at 12:15. He moved to consider Research and Development incentives.
 
Mr Van Rooyen said that the Subcommittee discussed this yesterday. It heard yesterday about the establishment of a task team on this issue. Around June next year, we would expect a report from that task team. Let us wait for the outcome of that process.
 
The Chairperson asked who was on that Subcommittee.
 
Ms Khoza said that SARS and the Department of Science and Technology (DST) should be represented. We need to know the composition of that Subcommittee.
 
Mr Van Rooyen said that there was a meeting yesterday, though Ms Khoza seems to be talking about the task team.
 
The Chairperson asked who was at the meeting yesterday.
 
Mr Van Rooyen said that only members were there, no stakeholders. Members were trying to address matters raised by stakeholders.
 
The Chairperson thought that this was a stakeholder consultation to include government officials as well. If the stakeholder was not there, then that was not good. The process must involve stakeholders. For big things, for example the Twin Peaks Bill, we set up Subcommittees. Perhaps one of us would have to meet with stakeholders outside of Parliament.
 
Mr Van Rooyen said that the stakeholder should be consulted after the feedback from the task team. If necessary after that, we can consult that specific stakeholder and others.
 
The Chairperson said that, in principle, stakeholders should be heard. This has been remarkably successful. I will speak about this matter further after the meeting. People here are elected to legislate and to govern. Is there any other comment on this presentation?
 
Ms Khoza said that the issue of R&D must not be forgotten. This was a key weakness across South African government. Investment was low; we are in need of innovation and should involve as many stakeholders as possible.
 
The Chairperson said that Research and Development investment was very low in this country compared to the international community and had been for a long time.
 
Mr Van Rooyen said that we must be cautious with the excessive allocation of funding. I must indicate that South Africa was actually more generous than many countries. The Minister’s process through the task team would help us solve these issues by providing clarity.
 
The Chairperson agreed but said that, more generally, Parliament has a procedural obligation to stakeholders. He moved to legal professional privilege.
 
Mr Lees said that his party could not commit to anything at this time; just because he had not spoken it did not mean that he or his party agreed.
 
The Chairperson found this point obvious. These were just suggestions at this point.
 
Dr Khoza said that some members wanted to make decisions, while others wanted to defer them.
 
The Chairperson called for comments on reduced assesment and saw that there were none. He welcomed a delegation on the Twin Peaks Bill. He further called for comments on the issue of period of limitations for issuance of assessments.
 

Mr Van Rooyen said that the Committee was comfortable with this resolution. If a case went beyond its five-year limit, then government loses. Seven years was an acceptable cap.
 
The Chairperson supported SARS position. He called for comment on the tax debt third party liability issue.
 
Mr Van Rooyen called attention to the issue of audit interviews. There should be further discussion on this.
 
The Chairperson noted that he had asked SARS and/or National Treasury to interact with a particularly evocative specific stakeholder from the last meeting.
 
Mr Tomasek recalled the Chairperson requesting that she report back to the Committee in some way; they did not meet with her.
 
The Chairperson was amazed at how many people watch channel 408. He moved to consider Tax and Harmonisation Retirement Reform.
 
Briefing on Tax and Harmonisation Reform
 
Mr Momoniat said that, on 1 March 2016, two things will happen: the tax deduction on contributions to retirement funds sets a cap at 27.5% of taxable income or R350 000 and provident funds start to annuitise. The goal is to enhance post-retirement preservation. A tax incentive encourages all workers to save for retirement; this tax deduction and any tax deduction should be accompanied by an annuitisation lest, upon retirement, workers spend through their savings too quickly. There will be the same treatment across all retirement funds. Vest rights will be protected, with no annuitisation for those in provident funds over the age of 55 and only annuitisation on funds put in after 1 March 2016.
 
Unions opposed annuitisation. Members of public funds do not get tax deductions. Part of the reform was driven by vertical and horizontal entity. No one will get a deduction beyond R50 000. The National Treasury does not approve of people cashing in their pension funds upon resignation; people should put it in a preservation fund. There can be degrees of preservation. Workers prefer provident funds. Retirement reform should not be one big bang, and this is not a nationalisation of retirement funds. Delays will not serve the interest of workers. The minimum threshold needs to be raised and even doubled. There have been six meetings with NEDLAC this year with 40 since June 2012. The labour constituency wants the social security white paper released. One option to assuage labour doubts would be to raise the minimum threshold for annuitisation so that most workers will not be affected.
 
The Minister of Finance has decided to implement tax reforms as scheduled on 1 March 2016 through the 27.5% or R350 000 cap. The Minister has requested a meeting with NEDLAC next week to consider two options: either keeping current legislation but increasing thresholds to mitigate the potential impact on provident fund members or delaying the requirement for provident fund members to purchase an annuity on retirement. Many high-income people are also members of provident funds. High-income earners could get a 47.5% deduction; that would be crazy.
 
Mr Morden said that there would be a limited period for provident funds. Lower benefits will align better with employee contributions to their retirement. Monetary thresholds will have to be adjusted to reflect this alignment. The monetary cap will supersede the percentage limitation as a fallback option for provident funds. The Income Tax Act cleans up issues between pension funds and provident funds.
 
Mr Momoniat said that these matters will be further discussed after the Minister’s meeting next week. The Minister will table the Bill on the 27th of October, and may open the Bill sooner than that for technical comments. Item 2.1 also has more information about this.
 
Discussion
 
Mr Van Rooyen asked how government expects to communicate these changes to the people in a clear way. How will govern differentiate without being draconian? People are very concerned about what comes into their pockets.
 
The Chairperson saw that this is a very political matter. We hope that consensus can be reached before processing the Bill. There have been meetings since June. Social Security has been on the table for far too long. This legislation is consistent with Parliament’s legislative agenda, with NHI and other programmes also in the works.
 
Dr Khoza asked how drastic the impact of this will be. What will the likely effect be on an individual member?
 
The Chairperson said that no one wants to pay taxes. In addition to COSATU, all constituents will be concerned with this issue; it’s a human condition. We cannot use our own subjective situations to affect our policy considerations. One must pay the taxes that come with one’s income level, no matter what one does. The National Treasury and SARS should consider having a general Parliamentary briefing to educate on this matter. Some groups feel that these taxes are punitive when they have been previously disadvantaged; they feel that as soon as they move up in the world, they get chopped.
 
Dr Khoza said that the Committee cannot backtrack now on implementation of retirement reforms, but understanding the impact will be helpful. Are we exaggerating the impact?
 
The Chairperson called for response. He agreed that we need to educate people and send a clear message to media.
 
Mr Morden said that this will benefit many people. Most people only contribute 20% currently, with some less and some more, raising the threshold to 27.5% will benefit the working class. The cap may impact the higher impact group. If one calculates the widening of the base, not many people will be impacted. We can send the specific numbers.
 
Mr Momoniat said that we have dealt with this issue of classification between income brackets in the National Treasury. Educating people on taxes will be essential. A report to Parliament on this would be helpful.
 
The Chairperson asked the Committee Secretaries to take down all the decisions taken during the next two weeks in the programme. He called for a presentation on the Twin Peaks Bill.
 
Briefing on Twin Peaks Bill
 
Mr Momoniat introduced representatives from the UK and the Netherlands to speak about Twin Peaks.
 
Mr Gert Luiting: Manager at the Netherlands’ Authority on Financial Markets came to explain the Netherlands’ Twin Peaks structure. With regards to functional supervision, the Dutch National Bank (DNB) covers prudential and system regulation and the Authority for Financial Markets (AFM) covers market conduct regulation. One of the lessons learned from the financial crisis was that DNB and AFM must work more closely together.
 
Ms Claire Lawrie: Global Affairs Manager at the UK’s Financial Conduct Authority (FCA) said that Twin Peaks in the UK is slightly different than the Dutch Model. The UK moved to Twin Peaks in 2013. In order to do both aspects of regulation well, the UK has two different bodies. The UK model is a bit of a hybrid between prudential and market conduct. The Prudential Regulatory Agency (PRA) was established in 2013 within the Central Bank. There is also the Financial Conduct Authority (FCA), which does everything that the PRA does not do. The PRA regulates 2 000 firms, whereas the FCA regulates 70 000 smaller firms.
 
The FCA aims to be forward looking and judgment-based. The FCA is also risk-based, so larger banks and firms get more attention. The FCA is trying to improve on prioritisation. Coordination between bodies is extremely important. The board members all sit on one another’s boards. Both are members of the Financial Policy Committee. Both do licensing work for businesses. The FCA and PRA do not coordinate on-site visits.
 
Consumer credit is a new responsibility for the FCA. Pay day loans was an issue that the FCA tackled. Pension reform is also a hot topic issue, as is the financial advice market. Whereas the Netherlands has had this model for ten years, we have only had only for two.
 
Discussion
 
Dr Khoza asked how the transition period was handled, especially with regards to legislative procedures. These processes do not happen overnight, after all.
 
Mr Lees said that concerns have been raised here about anticipated intrusion into businesses. The regulations in terms of, for example, parts of the insurance industry is claiming that we are now going to standardise on policies, which will stymy policy innovation because the policy content will be regulated. What has been your experience with market acceptance of regulations in practice rather than in anticipation?
 
The Chairperson said that the Bill has just now been certified. Parliament will only look at this Bill concertedly during the next six months. Are there any signs of increased consumer awareness? After all, the ultimate aim is to protect the consumer. How does coordination work in the Netherlands? I was surprised at the amount of overlap in your two systems. Short-term lenders are also a large issue here. We are negotiating with Parliament to visit both the UK and Mexico to study this issue. Even if this visit does not happen, further engagement should happen.
 
Ms Lawrie said that the legislation in the UK actually passed Parliament relatively quickly, which left a year or so to prepare for implementation of the change. The UK system had to split its previous regulatory agency into two agencies, so having this time to iron out issues of coordination was helpful.
 
Mr Luiting said that the legislation was implemented ten or twelve years ago in the Netherlands; I was not employed by government at the time. However, the procedure followed in the UK sounds like a good way to go, though I will consult my colleagues for further guidance.
 
The Chairperson asked how long the Bill took to pass in the UK?
 
Ms Lawrie guessed about nine months.
 
The Chairperson said that makes the South African time to process this Bill more acceptable.
 
Mr Luiting said that AFM does not do pre-approval for financial instruments. Companies must be able to explain their practices. The AFM only does product governance.
 
Ms Lawrie said that the UK also does not do pre-approval. The UK does do product intervention. Consumer awareness of the FCA has increased both through media campaigns and because there was a case of product protection insurance being sold to millions of people who did not need it. The FCA sent millions of text messages alerting people of this issue and their potential qualification for remuneration.
 
Mr Luiting said that a different body in The Netherlands handles financial allocation as well. Consumer awareness is hard because consumers do not behave rationally. The average man spends thirty days buying a car and two hours buying a mortgage. The boards of DNB and AFM meet quarterly to discuss the effectiveness of cooperation.
 
Committee Business
 
The Chairperson thanked the representatives for the presentation. He made an announcement that there is a conference in Paris on Monday of the Organisation for Economic Cooperation and Development (OECD) Parliamentary Forum on base erosion and profit shifting. I have been invited and will be back at Noon on Tuesday; Mr Van Rooyen will be acting Chairperson until 11 am or noon on Tuesday. I will consult Mr Van Rooyen and continue to stay on top of my work.
 
The Chairperson asked the Committee to support a consensus that Committees should have more time to do their BRRRs. The Committee Researcher is far overworked.
 
The meeting was adjourned.


 

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