A summary of this committee meeting is not yet available.
JOINT BUDGET, FINANCE SELECT AND PORTFOLIO COMMITTEES: JOINT MEETING
4 March 2003
BUDGET HEARINGS: TAX POLICY
Chairpersons: Ms B Hogan (ANC) [Portfolio] ; Ms Q Mahlangu (ANC) [Select]; Joint Budget: Mr N Nene (ANC) [NA] ; Mr T Ralane (ANC) [NCOP: Free State]
Documents handed out
National Treasury Presentation
Presentation by Prof Le Roux (UWC)
Presentation by Prof Lester (Rhodes University) - document available on 15 March
The presentations by Treasury and SARS provided an overview of the tax relief proposals for 2003/2004, and the enforcement strategy was outlined. Prof Lester provided a review of the 2000-2002 financial years, the 2000-2004 South African tax collections and tax tables, tax savings and fiscal drag, tax thresholds, corporate tax collections, a residential property comparison and international tax amnesty. In his presentation Prof Le Roux focused on the financing of the Basic Income Grant via indirect taxes. Discussion ranged from the effect of tax cuts, the foreign exchange amnesty, VAT policy, financing the Basic Income Grant, Urban Development Zones, the corporate tax rate and the tax gap.
National Treasury Presentation
The presentation (see document) was conducted by Mr Martin Grote, Treasury Chief Director: Tax Policy, which looked at the tax policy stance since 1995, the relief proposals, direct tax provisions, general business tax stimulus measures and indirect tax provisions.
South African Revenue Service Presentation
Mr Frans Tomasek, from the South African Revenue Service (SARS), conducted the presentation (see document) which outlined the revenue position to date and the target for 2003/4, the compliance strategy and the way forward for SARS.
Mr N Nene (ANC) asked Treasury if it is realising the desired benefits of the tax cuts of R62b that had so far been given to tax payers.
Mr Grote replied that the presentation had indicated briefly that savings behaviour by individuals over the last five years has shown improvement, so perhaps one can make the correlation that the Personal Income Tax (PIT) relief actually added to that because there was a surplus to work down the debt position and to actually add to the net savings.
Mr Grote noted that Treasury is investing heavily with its macro-economic and tax divisions in a model-building exercise, in conjunction with the World Bank and Australia's Monash University. This is cutting-edge modelling - not a hedge model. This will allow Treasury to ascertain just how much it has available, and it can then decide where and how these funds will be allocated and distributed. This is a new level of modelling which South Africa has not yet achieved. The data is being provided by SARS in an increasing fashion in terms of usability but the overall macro-economic models are still not there, and it is in this area that Treasury is now investing.
The Chair sought clarity on the position with regard to consumption expenditure.
Mr Grote replied that the revenue take from Value Added Tax (VAT) is increasing dramatically, but there are many factors that lead to this. One such factor is inflation - higher prices allow more to be collected. Also SARS has invested heavily in enforcement mechanisms. It is difficult to isolate these factors and identify a particular trigger. Disposable income has increased and it would thus filter through in terms of consumption. He was not able to provide a more accurate figure for this.
Mr Lesetja Kganyago, Treasury Deputy Director-General: Economic Policy and International Relations, added that it is difficult to say how many of the changes in economic activity were exactly as a result of the tax cut. Suffice to say that over the past two years household consumption expenditure in South Africa has been pretty robust, and has actually been growing in excess of 3% per annum. Treasury believes that the tax cuts did underpin the growth in household consumption expenditure because the household sector has not quite been saving, and thus with all those tax cuts they must have been spending the money. It can therefore safely be said that it underpinned household consumption expenditure.
Mr K Moloto (ANC) [NA] asked whether SARS or Treasury has managed to study adequately the vehicles that have been used to transfer money offshore illegally, and are there any deficiencies within the current exchange control measures. What really drives this trend?
Mr Grote responded that this is probably one of the most difficult areas in which to pre-empt behaviour by individuals. The first thing one is taught when studying international finance is that exchange controls do not work because it is so easy to get money out of the country, as there is no way to check for most of the violations and government "cannot x-ray everybody going over the border". Thus indirectly the proper economic environment has to be created so that people do not have the need to "schlep" money offshore, this would be the easy answer to this question.
Mr Moloto noted that the SARS presentation indicates that Italy "has gone for this foreign exchange amnesty twice". He wondered if South Africa had started this adequately - with regard to the vehicles that are being used and the current inefficiencies in the exchange control measures - so that the same measure does not have to be repeated in the future?
Mr Tomasek replied that SARS is aware of several vehicles but not necessarily all of them. One of the aspects of the amnesty is full disclosure, and it is hoped that what SARS gets out of this is a better understanding of the vehicles that it does not yet know about, as well as the variations of those that SARS does know about.
He continued that in Italy, the first amnesty was for individuals and the second for companies. Thus individuals got 2,5% and companies got 5%, because Italy saw these as different target markets. France too has duplicated the foreign exchange amnesty charge and although he was not certain of the reason for the second charge, he does suspect that it is because the first charge was too high and it had to be re-run at a lower rate to get the people into the system.
Mr Grote added that the danger of international comparison is not having a full understanding of the specific economic and political conditions within that country. It is thus merely a guideline.
Mr Kganyago agreed with Mr Grote. Such vehicles can be as crude as packing money in a suitcase. Some European countries used to have banking services before the customs desks were reached and people could deposit their money before clearing customs. However, since "September 11" there had been a complete change in stance. The political landscape has changed significantly and there is a big move to combat money laundering and the financing of terrorism. Such controls are not only limited to preventing people from taking money out of the country. If there is no proper control in both the source and destination countries, money could actually be used for undesirable activities.
South Africa is fortunate to participate in the Financial Action Task Force where the issues of money laundering and the combating of the financing of terrorism are dealt with. There has been a change in mindset. Something has to be done in the destination country about money that had been siphoned illegally from developing countries. This cannot be achieved by the source country alone, as the co-operation of the destination country is needed to be able to tackle this.
Mr B Mnguni (ANC) sought clarity on the impact of HIV/AIDS. It had been estimated that about 10% of economically active individuals will be affected in the next ten years.
Mr Kganyago replied that this will be a fairly interesting modelling exercise to engage in, but stated that he is not sure of the lingo that would be used. The only other way would be to address it via the extension of the public benefits organisation.
The Chair referred to the tax benefits and stated that one certainly sees the benefits of tax relief, but there has been sustained lobbying for some time around a Basic Income Grant (BIG). Has any serious work been done on the macro-economic impact of a social income grant versus tax relief, because this seems to be at the heart of the current debate in South Africa.
Mr Kganyago responded that this work is ongoing within Treasury, and it is more comprehensive than the BIG concept because it has to look at the entire social security provision in South Africa. But what has also been guiding Treasury had been the need to move as many people as possible away from dependence on welfare, and to give them an opportunity to participate meaningfully in economic activity. This guides the kind of approach Treasury is taking in terms of this study, although it is still in its infancy.
Whether it is through the BIG or other social spending activities or tax cuts is a topic of continuous debate amongst fiscal practitioners. There is definitely a very, very strong case that the provision of tax relief also stimulates economic activity, but it is also true that putting money in people's pockets also stimulates economic activity. Clearly the provision of tax cuts is one way of putting money into people's pockets to generate economic activity. The question which then arises is the position of those who are currently not paying taxes because they are unemployed. All this would hopefully be made clear when this challenging and probably lengthy study is completed.
The Chair stated that she would be "very interested" to see the assessed macro-economic benefits of either - it would be very useful. She noted that once a basic income grant is introduced it is not reversible, because it is a sacred contract with people. Government cannot give people R100 and then say two years down the line that it cannot afford it or it cannot increase it. Yet with regard to tax policy, people are in a sense far more used to taxes increasing in very difficult circumstances, and it is politically a more acceptable and flexible instrument. She said the report of this study is keenly awaited because it is a very interesting debate.
The Chair was "very relieved that we have never put up VAT" because it is a regressive tax. It had remained constant all this time, even with inflation rising. Last year there was a massive increase in inflation but one of the tax reliefs that were not granted was around VAT. Is this based on the premise that not increasing VAT over the last ten years in fact compensates for inflationary increases?
Mr Grote agreed that Treasury has not changed VAT for many years. In designing tax policy, one would like to always have an understanding of the contribution of the individual tax instruments to the overall tax take. Here Treasury usually uses the contribution of the tax instrument in terms of the overall revenue and the contribution of the instrument in terms of GDP. South Africa has a unique VAT model which is very much designed to support the enforcement capacity of the SARS, and South Africa is thus actually being labelled as an exemplary system. This is why SARS is currently engaged in training many Southern African countries in the VAT area, because it does have ten years' experience in this.
The current VAT contributes to the overall revenue approximately 24-25% which is the world average, and in terms of GDP South Africa's relatively low VAT rate of 14% still contributes 6,5% of GDP. There are many countries in Europe that have a multiple VAT system with a standard rate of 16% which even extends up to 22%, and with a huge effort they are only able to collect 6,2%. The revenue authority needs tax instruments which are efficient, which can be well managed, which are buoyant and which produce revenue, and the "lows" thus tamper with that. Lowering the rate in one year when the going is wonderful and then increasing it in the next year, increases the hurdles from a political management perspective. When the VAT rate is increased it then also opens up the debate for the introduction of multiple rates, and the efficiency of the South Africa system would then go down the tubes.
Mr Grote stated that he thinks that the focus in SARS is to get the compliance gap for VAT within an international acceptable framework, and perhaps it is already there, because the verdict is out that it may range between 10-20% internationally. He stated that he is not sure as to the position with regard to South Africa, but it is doing extremely well if one looks at the tax to GDP ratio.
Many of the tax questions posed to Minister Manuel during 2002 dealt with VAT. Many demands come through for zero-rating and on a lower rate. Treasury has consistently argued on the basis of household expenditure. With regard to zero VAT on books for example, those benefiting most would actually be rich households. If one looks at the expenditure pattern, they will have the biggest cash benefit compared to the low income household, and this is why Treasury has consistently argued that pro-poor or poverty relief measures are probably more effectively rolled out on the expenditure side. Clearly tax has a role to play, but rolling it out in terms of increased grants to children and increased pensions and food aid really targets those people. Especially as the delivery system is improved over time - if this is linked to the Public Benefit Organisation (PBO) sector which is known for having a track record that is much better than Government's in terms of service delivery to needy communities. Treasury believes PBO have a better connection with the community and are able to roll out the delivery better. This is informing Treasury's policy on VAT.
Urban Development Zones
Mr M Tarr (ANC) believed that the Urban Development Zones (UDZ) is a wonderful idea. He noted that the United States had a similar policy a few years back, in which they confined it to a limited number of very restricted areas because the feeling was that if it is spread too wide the benefits would not be felt. What is the position in South Africa? Will it be decided that these zones be confined to Hillbrow only for example, as mentioned by Minister Manuel in his Speech, and how will these zones be identified? If a real impact wants to be achieved, it would be wise to limit it to very specific areas.
Prof Keith Engel, Treasury Tax Consultant, replied that Treasury has focused on depreciation because it is believed to be a more effective way than an income tax rate. The reason for this is that it incentivises a specific behaviour, so that if one invests in those underdeveloped local areas of the town or in new machinery that investor would get the benefit, whereas "corporate income tax could go anywhere to anything". Thus depreciation is a much more targeted approach and it is widely used internationally as a very effective means of stimulating the economy. Although he was reluctant to refer to the United States situation, Prof Engel noted two major United States growth packages were on depreciation incentives. It is thus a useful thing.
With regard to UDZs, much effort went into this because it was a difficult new area for Treasury, and a significant period of time was spent considering international research on both developed and developing countries. It was found that most African neighbours do not have these kinds of incentives and if they do these are simply privately negotiated. Typically what they use are tax holidays which the International Monetary Fund (IMF) warned is not effective. The Irish example seemed to be the flagship for UDZs, and it was also used by the UK, the United States followed and India used it as well, but the Irish model seemed to be the most well-defined of the group. Treasury is making major efforts to figure out good criteria here from those examples, but the problem is that those jurisdictions had different problems to those experienced in South Africa. It was thus decided that the provincial and local government group within Treasury would consider this matter, and they ultimately directed Treasury in a better way.
One thing to note is that South Africa is a developed country in terms of this problem because other developing African countries do not have the problem of their cities being abandoned, which is a problem experienced by developing countries. Again all efforts were made to tailor this to South Africa's needs, and the next phase that has to be embarked on is consultation. Treasury has tried to match this up with the President's Urban Renewal Initiatives, although the two do not cover exactly the same areas. The President's project focuses more on the expenditure side. Some areas work more effectively on expenditure than with tax.
Dr G Koornhof (UDM) noted that urban decay is not a new phenomenon and it has been experienced over many years in several countries. He doubted whether Treasury had studied international comparisons in developing economies. It is all very well to improve the infrastructure in a decaying city, but at the end of the day a flow of people to that area is also needed.
Mr Grote replied that a comprehensive study has been conducted by Treasury and it had considered international practice. In fact the listed criteria are the same criteria used in the United States, Ireland and Italy. He accepted the argument that Treasury is focused on the developed world, but the problem is that there is only so much data available and it is unfortunate that the developing world is lacking as far as publishing its incentives.
A tax incentive/tax database study was done in SADC, for example, and it was a battle to get the tax incentives in the database as many jurisdictions hold them back because they negotiate them individually on a discretionary basis, which is obviously not the route followed by South Africa. The usual procedure in a tax policy environment would be to go to the Organisation for Economic Co-operation and Development (OECD) and the IMF research and then to the Internet, and it would always be those countries in the developed world that are on the radar screen. Unfortunately this is the problem Treasury has.
In designing the Urban Development Centre, Treasury clearly limited it to about thirteen areas. It would be a huge battle for SARS to do it for 250 municipalities. The few big areas in South Africa is where the biggest impact can be made. It is synchronised in terms of expenditure policy because the Budget does make provision for a conditional grant for urban infrastructure development which must be labour intensive, so Treasury has linked it to that. These focus areas were provided by the local government section within Treasury. The trick within the next two or three weeks would be to get those cities into the meeting room and delineate an area in which it already has investment plans, where there is existing infrastructure, where there are actually first class buildings which have just fallen into disuse and all that has to be done is to refurbish and maintain it.
Thus the conclusion is that it was informed by international practice, many of the definitions and criteria used by other jurisdictions are being used by Treasury in the draft legislation. Mr Grote accepted that clearly this has not been done with regard to the developing world, but this information is not available. Members are encouraged to furnish Treasury with such information in the next couple of weeks, should they have it.
Mr Pravin Gordhan, SARS Commissioner added that the issues of UDZs will be quite a critical matter and agreed that urban decay is an international phenomenon, especially in developing countries.
Dr Koornhof referred to the fuel levy and noted that one of the sectors that will also be quite severely affected is public sector transport, especially the commuters that have to travel long distances between home and place of work. Has Treasury studied the impact that the increase in the fuel levy would have on such commuters?
Mr Grote responded that Treasury is very aware of the fact that the taxi industry, for example, probably has the oldest stock of vehicles, which primarily use leaded fuel. Again Treasury's policy is just "piggy-backing" on what has been rolled out on the expenditure side. The contingency reserve of R8b over the next three MTEF years has already indicated that the taxi recapitalisation can dip into that, where the taxis would most probably be utilising diesel-powered engines. Treasury has for years already built an incentive of a lower fuel levy on diesel as it is also a more fuel efficient energy carrier. Thus Treasury's tax policy has already taken into consideration that the use of larger, safer, fuel-efficient vehicles has to be incentivised.
Treasury is also aware that the taxis consume about 20% and all the public investment going into public infrastructure and public transport at the moment points to a way of mass transport systems. It is thus probably a synchronisation issue with perhaps a bit of a time lag. He believed that taxi recapitalisation will happen during 2003, and there is therefore an efficiency gain for them.
Treasury also announced its plans for a more streamlined fuel pricing system which will, on an annual basis, constitute a saving of R1b or possibly more. It can thus be assumed, on the basis both of data received from South African Petroleum Institute and the discussions held with both Department of Transport and Department of Minerals and Energy, that the knock-on effect is limited.
Corporate tax rate
Ms R Taljaard (DP) stated that she is intrigued by Treasury's argument about the corporate rate and the targeted incentives, and the balance Treasury is aiming to strike. It gave this as the reason for its "out-of-hand" dismissal of a reduction in the corporate rate. This is a concern as a Business Map recent study raised this as one of the possible disincentives to foreign direct investment. Also the countries noted in the presentation with which South Africa is seeking comparison, both on the top marginal rate and on the corporate rate, are the developed countries whereas South Africa is in an emerging market-competing environment. It is difficult to then benchmark in this regard.
She was alarmed by Treasury's comment that there is no clear indication that a reduction in the corporate rate would increase the dividend retention or ensure that the cash is released into further productive economic activity either on the domestic side or in other areas. This comment is based on assumptions on what corporate behaviour may or may not be if there is a reduction in the corporate rate versus incentivisation and these assumptions need to be teased out. She believed that the debate on a reduction of the corporate rate has not been sufficiently canvassed.
Mr Grote replied that he could have provided a further eighteen examples of countries where the convergence of the corporate rate would still be 30 to 32%. The point made during the presentation is that the corporate rate is internationally attractive, as given out by the average. It also has to be remembered that this is weighted averages, and takes the GDP of the country into full account.
A cause of concern here is that Treasury has received data from numerous merchant banks over the last twelve months on the excess cash companies sit on. The argument was reduce the Secondary Tax on Companies rate, as it will pump the cash out. But given the fact that in any other jurisdiction a dividend distribution will be taxed in the hands of the individual, Treasury is not convinced that the argument that the rate should be reduced really flies. Mr Grote believed that what they have to create for the corporate sector is an investment environment with attractive accelerated depreciation allowances. This is important if it is remembered that if one has 40-20-20-20 accelerated depreciation allowance, the corporate rate in the first year of seeking investment could actually be zero.
The real issue here, which Treasury is currently working on, is the effective tax rate. There are certain sectors in South Africa that currently have a rate of about 5%, and some sectors are at about 12%. If this is the issue that drives investment, then it is not the tax rate but probably the accelerated depreciation allowances which makes the macro-economic stability and the regulatory framework attractive.
Mr Grote stated that, with regard to the developing world, a premium always has to be paid for the environment in which one operates, and South Africa has much more to offer than many other countries in the developing world. Treasury has learnt from its discussion with others in the Commonwealth Group that tax is not the driver. The crux is in fact the regulatory environment and the security of the investment. It is these factors that attract investors. There is thus not one easy answer to this question.
Prof Engel added that Eastern Europe, as a developing part of the world, has very low corporate rates. Yet in Africa, for example, most of the rates are fairly high, although Botswana and Namibia are on the lower side, and the problem in those jurisdictions is that they eventually give away too many incentives. He believed that South Africa's rates are fairly competitive and, while there are jurisdictions such as Eastern Europe with much lower rates, it is questionable whether their low rates are in fact sustainable.
Mr Grote did not agree that Treasury has ignored the emerging market countries and assured Ms Taljaard that their corporate rates have been considered. Some of those countries have reached levels of up to 15%, but these are not sustainable. The result is that the rate will then again have to be increased in two years time to 18%, and this stop-go effect would probably have a more negative impact on investment behaviour.
The Commissioner added that the point made by Mr Grote has to be taken more seriously, and it in essence relates to what the nominal rate is and what the effective rate is. Unless and until the effective rates rise, which Treasury and SARS have to ensure, corporate rate cuts should not be considered just yet. This is quite an important position to adopt for compliance purposes. SARS has to concede however that as some of the work it is currently engaged in progresses, improvements will be made to the effective tax rate. It is hoped that during the course of the next year more work will be done to identify the effective tax rates in the different sectors, and whether those sectors need to be rewarded with corporate rate cuts.
Increased revenue take / Tax Gap Project
Ms Taljaard noted that SARS attributed its increased revenue take to four factors and wanted an indication of the contribution of each of these factors. This would provide a greater breakdown which would indicate whether South Africa has reached a plateau in the efficiency gains, and whether the revenue overruns are now primarily emanating from other sources. She asked if figures are available for the contribution of the Tax Gap Project to the revenue take.
The Commissioner replied that a plateau has not been reached because "there is still money out there". South African tax accountants have put almost R3b on the table in the space of 48 hours after the amnesty provision was announced. There is clearly a significant amount of money out there. Thus clearly, when considering the kinds of schemes/vehicles used, "this Committee might want to lead the nation in a soul-searching process about what had been going on in the last ten to fifteen years, who was involved in this process of taking money out of this country, exactly what was the fiscus deprived of especially since 1994 and also the manner and extent to which different types of professionals and others have been involved in this process". These are interesting questions, and although South Africans "might want to have a collective amnesia about it", it is better to put some of these matters on the table so as to understand this conduct that cannot be tolerated in future.
The Tax Gap Project has given SARS a much better understanding of where the revenue leaks are, and Mr Tomasek has explained part of the strategy in the presentation. This analysis will be built on, and hopefully during the course of the next year SARS will have a much more targeted approach to both providing services to the right kind of people in the right kind of form, and also with regard to providing the right kind of tax and customs enforcement measures.
Dr G Woods (IFP) noted that recently the Commissioner has been placed on record for indicating the precise extent of the tax gap. Does the Commissioner actually has an informed understanding of what makes up that tax gap? He did not expect the Commissioner to make the actual amount public because it might alert the wrong people, but he needed to be assured that it is not just a "thumb suck".
The Commissioner responded that SARS does have a considered view of the cause of the tax gap and the activities that predominate in the individual tax areas. In fact some of these matters were shared with this Committee during 2002. The figure indicated is certainly not a "thumb suck", and SARS is currently conducting more detailed empirical work to verify some of the information that arose from the study. A matter that might still be a "thumb suck" however is the actual quantum of the tax gap and the figure that is being loosely passed around is R30b, which will not be changed at this stage. As stated earlier, the tax gap analysis with regard to the cause of particular revenue leakages is extremely useful for SARS, as it enables SARS to develop a very conscious and deliberate compliance strategy.
Dr Woods requested information on the progress of the New Income Tax System (NITS) project, which SARS had introduced some years back. Earlier Mr Tomasek had referred to the third party interfaces which, it is assumed, is all part of NITS, but what is the progress on implementation and how successful is this is proving? He noted that the list of interfaces mentioned in Mr Tomasek's presentation did not include those originally expected. One interface is banks, although there has been some controversy surrounding this. Plus there are the credit bureaux, stock exchanges and the Department of Home Affairs with regard to matters such as deceased estates.
The Commissioner replied that SARS has gone beyond NITS, although some of the interfaces are in place. SARS regularly checks the credit bureaux and the National Traffic Information System (NaTIS) to see what the status or details of taxpayers are. It sometimes checks with the Department of Home Affairs as well and as the Home Affairs National Identification System (HANIS) project progresses, SARS hopes that it will attain both real-time and reliable data which could feed into its systems as well.
SARS is currently developing a data warehouse and this has been going on for the last nine months. SARS will offload data from NITS, the VAT system, the Pay As You Earn (PAYE) system and other systems into this data warehouse. Using sophisticated data mining software it will develop models that will help the Treasury to do whatever it needs to do, but also enable SARS to detect taxpayer profiles. This warehouse would then be the repository of the third party data referred to earlier by Mr Tomasek where data-matching can occur, whether it is from the Deeds Office, from the banks in terms of IT3s or any other data bank that might enable SARS to profile its taxpayers.
Ms Taljaard contended that the dates for application for amnesty are from May to October 2003 yet the legislation has not yet been processed. Is there not a concern that perhaps the timelines will not work out in the way envisaged. Will this be feasible or will government have to look at an extension for application depending on the legislative vagaries of Parliament?
The Commissioner responded that Minister Manuel is quite comfortable that these timelines can be met. He would probably be engaging in some discussion with the Committee and with the House to determine how the legislation can be processed.
Dr Woods agreed with Ms Taljaard that the estimations problem in South Africa is a very serious one as it undermines credibility of the Budget and introduces distortions. At the beginning of each financial year it puts Minister Manuel in a position to hand out something to everybody which is celebrated, but somehow it does show that there are some problems within the overall system. SARS has to be pushed a little bit further on this problem, because it is after all an issue that comes up year after year, and one would hope that after the fourth or fifth year of such overruns government would now have the intelligence base and statistics to become a little more astute in dynamic estimation methodologies.
The information provided by the Budget Overview on overruns is scant to say the least, but the biggest issue mentioned there is company tax where it states there was a R12,4b overrun. This amounts to 25% on corporate rates, so SARS would be 25% out. As SARS and Treasury do their estimations on income tax at a time well advanced in the financial year in which these taxes then arise, there is just something that is not quite gelling regarding this whole tax estimation issue.
The Commissioner replied that Dr Woods had been raising this issue for some time now, but it is regrettably not an issue that can be resolved in their lifetime because of the nature of the South African economy and the unpredictable world around them. South Africa is doing pretty well in trying to develop a system that does give the market sufficient information and transparency about revenue collections and estimations.
It is very clear that the bulk of the overruns come from the resource sector, and there is no way in which either Treasury or SARS could have estimated in February 2002 that inflation would go up, that the Rand would depreciate, that the resource sector would do that well and their profits would therefore rise, or even that their dividends would be distributed to the extent that they were, and that therefore the corporate taxes or STC would be climbing to the extent they did. Neither SARS nor Treasury can be blamed for such unpredictable phenomena. It is regrettable that Dr Woods states that a shadow is now being cast over "the credibility of the budget". Perhaps Dr Woods has a crystal ball that he can lend SARS to assist us to get a better handle on this process.
Both Treasury and SARS are endeavouring to get this estimation as correct as possible. SARS does have monthly revenue figures from the Treasury's side which indicate very clearly what has happened in the last month, what has been spent, what is in the bank, what is to be borrowed etc. This gives SARS at least a flow of information that provides assurances to the market.
Parliament has two opportunities to revise the budget: one in October and the other in February the following year. It just so happened that in this fiscal year Minister Manuel has taken both opportunities to update the figures in line with the expectations. SARS could still come out slightly below the February revised figure, as it did during 2002, but SARS cannot indicate where it will come out in 2003. There is no way that SARS can get these figures "absolutely on the dot", even with the best systems in the world.
The Commissioner noted that other revenue administrations have been checked in the last year, and most of the developed country administrations have gone horribly wrong as far as revenue estimation is concerned, to the tune of more than 6% of their budget. Thus the UK, the United States, Germany and many other countries have gone completely wrong and have fallen severely under their estimations.
This issue is unfortunately going to be raised year after year, although SARS has done a phenomenal amount of work to increase revenue. SARS has stated frankly to this Committee on previous occasions that it has by no means transformed every system in SARS nor does it have everything in place. SARS will only get there in another three or four years.
Dr P Rabie (NNP) referred to Mr Tomasek's presentation dealing with investigation of enforcement actions, and stated that it indicates that there will be a targeted campaign regarding illegal beer and wine production. Is it possible to furnish Members with the volume involved here?
The Commissioner responded that he is not sure of the volumes, but this process could involve tens-of-millions of Rands. Mr Tomasek added that the value being placed on this is some R46m. This is especially prevalent in the Eastern Cape.
Dr Rabie referred to the same slide in Mr Tomasek's presentation and requested that the "ghost imports" be explained in layman's terms, and which sectors of the economy are responsible for this particular action or practice.
The Commissioner replied that these false exports, which rely on false export documentation. Here Close Corporations are set up, registration is obtained from SARS, false documentation is prepared, stolen customs stamps might be used to verify those documents, VAT claims are made, the exports never leave South Africa, if they even exist, and the perpetrators disappear with the VAT at the end of the day. The sectors involved here are predominantly the alcohol and cigarette-producing sectors.
Mr Tomasek added that people prefer to use relatively low volume but high value products, because they do not then have to explain as much transport. But it could be a variety of goods.
Ms R Joemat (ANC) stated that the Committee had dealt with a Bill that stated that the SARS budget would be estimated by the amount of revenue it collected. Could Treasury indicate how far this process is?
Mr Grote replied that the arrangement between Treasury and SARS in terms of resourcing SARS is based on a ratio of total tax collected. Contrary to misperceptions, the more SARS generates does not mean the more resources it receives. It does not work like that. It has to go through a budget process, and here SARS competes with any other line department in terms of the good cause shown that priority is there and money has to be spent. Those discussions are informed by international benchmarks, and there are some revenue services that get up to 1,9 to 2,2% of revenue collected in terms of their resourcing. He thought the South African dispensation is 1,25%, and SARS is therefore "a very lean, mean machine in terms of resourcing".
An additional allocation has been made to SARS in the MTEF because it has performed as expected by exceeding their targets, and this informs the further allocation because money is used effectively.
The forecasting of corporate tax is most difficult because of all the external factors impacting on it. Mr Grote believed that South Africa has a very good record when it comes to indirect taxes, and in many cases South Africa is out R30m on a tax base of R16b, which is not really that bad. Treasury has followed closely what has happened in other jurisdictions, and the Germans have a system in which they have actually farmed the whole revenue estimation out to six academic think tanks. These think tanks then make the data available, they go into periodic discussions and these discussions are actually filtered through their parliament. Yet the Germans got it horribly wrong with regard to corporate tax.
This is an area in which Treasury battles, and there is no sinister incentive provided by Treasury for SARS to underestimate these figures because, as stated earlier, the allocations to SARS are on the basis of the budget. Treasury is thus the last to see it go wrong because, if Treasury had R7b more at its disposal, it could have done so much more to incentivise the economy. Treasury thus does want to get it right from the very beginning - it is just an immensely difficult area.
Ms L Mabe (ANC) asked if SARS has interacted with government departments as part of its education campaign, to ensure that departments release the personal income tax certificates (IRP5s) on time so that there is better compliance.
Mr Tomasek responded that this is definitely an exasperation for SARS because it has to grant large-scale extensions because people do not have their IRP5s. SARS has already had interactions with the Computerised Human Resource Management Information System (PERSAL), and this is being taken forward to speed up the process.
Ms Mabe asked SARS to explain whether it has given any thought to providing incentives for disclosure by money launderers, so that more information may be gathered as to how they operate?
Mr Tomasek replied that the amnesty SARS is granting is probably one of the biggest incentives around right now. SARS is expecting an information flow from the full disclosure that will show how those launderers operate. From the enforcement side, the creation of the Financial Intelligence Centre is going to give a great deal more information both to government and to law enforcement agencies as to how these events occur and how they can be tracked down.
Mr Z Kolweni (ANC) [NCOP: North West] referred to the comments made by Mr Tomasek with regard to "education service engagement process", and asked SARS to inform Members of the consumer friendliness of its services.
The Commissioner responded that Mr Kolweni is probably referring to the Siyaka process which was completed in the major part of the Western Cape in February 2003. The new assessment centre and enforcement centres and the new customs operations are all working reasonably smoothly. There are about four or five outlying offices that will be tackled in the course of the next four to six months, and the preparations are well underway to get implementations starting in Gauteng later this year.
Mr Kolweni stated that Mr Tomasek also referred to the "one-stop service" provided to larger companies, and asked SARS to elaborate on this.
Mr Tomasek replied that a large corporate could be registered with SARS' corporate tax centre for income tax purposes, plus registered with several SARS offices for VAT purposes because it is possible to have multiple registrations for VAT. This is difficult to manage both for SARS and the company, and thus the idea behind a "one stop service" to bring it all to one place where the client can have a relationship manager who keeps track of what is going on, and can also do some cross-checking to ensure everything makes sense.
Mr Kolweni asked, with regard to third party interfaces, whether SARS could explain further the position of the credit bureaux.
Mr Tomasek responded that SARS has this facility available already, which is probably one of the reasons why it was not included on the list in the presentation. SARS interacts with credit bureaux for tracing purposes and for cross-checks. If SARS cannot trace certain taxpayers, often the credit bureaux might have the latest available information on the taxpayer. SARS frequently encounters taxpayers who do not update their details with SARS. If they have either an outstanding return or debt that SARS has to collect, SARS first has to ascertain their physical location. This is the sole purpose of its interaction with the credit bureau. It is not involved in any other engagement with the credit bureau. SARS will use any other source available to it in this regard. SARS cannot do reliable debt-collection if it does not have reliable information about where people are. He stressed that SARS is not putting people on credit bureau black-lists.
Mr Moloto asked whether there are any international jurisdictions that give substantial rebates that effectively exclude a large portion of lower income groups from paying tax.
Mr K Durr (ACDP) [NCOP: Western Cape] referred to limiting losses on secondary trades with particular reference to agriculture. For a very long time there have been capital flows from people's income to rural areas which has both promoted food security and created jobs, especially the wine industry in the Western Cape. How much has Treasury researched this because it could have an unintended negative effect on rural employment and food security.
Mr Tomasek replied that this is clearly a proposal that still needs a fair amount of work. This will not impact on someone who is in the business of farming but it will impact on someone who is in the secondary business of farming. However the question arises that if someone is using the tax system to subsidise their investment in a farm, the net effect is that they are in a position to pay more for both the farm and the goods and services available there. This would allow them to unfairly compete with people who are not able to exploit the tax system in that manner. This would consequently push prices up for those people. The question is where the line has to be drawn as to whom the incentive is given to. Should it be given to someone who is in it for a hobby or someone who does it for a living?
The Commissioner added that the prime purpose of many of these secondary trade engagements, at least from SARS' point of view, is to write off tax losses against other forms of income. Thus a large number of professionals who reside and have their primary business in the urban areas will have their farm somewhere else, which makes a horrific loss which can then be written off against the taxable income which the person makes from the primary profession. In that way the person is undermining the fiscus, when all the frills are taken away. SARS is saying that it cannot afford to allow this, and if there is no bona fide second occupation, then something has to be done to act against it. SARS will work with everybody concerned to ensure that there are no unintended consequences. SARS and Treasury have shown sensitivity to public feedback and systems are in place to address this problem.
Prof Matthew Lester (Rhodes University)
The presentation focused on a budget review from 2000, tax collections and tables, tax savings and fiscal drag, the tax thresholds and future tax rates.
Prof Pieter Le Roux (UWC)
The presentation (see document) was conducted by Prof Legislation Roux, who is the Director both of the Institute for Social Development Studies at UWC and the Institute for Social Development.
Dr Woods asked Prof Lester to explain if, in his opinion, the current basic tax system is coherent. Is it wholly appropriate to the South African social and economic environments and the competing needs between the two, especially with regard to the proportions of burden distribution? Is it suitable as a macro-economic instrument with regard to GDP considerations?
Prof Lester replied that taxpayers have never before seen a SARS system work as effectively as the current system. They were used to filing their tax returns and never asked a question. Taxpayers are now paranoid because while SARS has to be cleaned up, the rest has to be cleaned up as well. The offshore aspect was a big part of the paranoia and was creating a tremendous amount of negative sentiment regarding the entire regeneration process of SARS.
With regard to offshore transactions, SARS has just recently come to an understanding of how many people are involved, as well as the extent of the paranoia amongst those people. Thus although the regeneration of SARS was healthy on one hand because it enabled SARS to have a better comprehension of the extent of the funds, on the other hand people were terrified. This is why the 2003 Budget is so good, because it is providing the relief needed and also shows that government can afford to provide this relief. It also shows that SARS "is not going to lock everybody up".
As far as the appropriateness of the system is concerned, this is an ongoing target. South Africa is a lot better off than it has been in previous years, and this should continue. It is a target that South Africa can never reach, but it can always strive to achieve it.
Prof Le Roux added that he does support Prof Lester's conclusion that it would not be possible to simplify the tax system in a modern economy such as South Africa's. The only possibility here could be Capital Gains Tax (CGT) because it is not bringing in very significant potential income, and it does complicate the lives of companies quite significantly. The approach that is likely to be followed in Namibia is to have more deemed income rather than CGT.
Dr Woods asked Prof Lester to comment on the suggestion made by many people that the tax system and its encompassing laws have become too complex, and that the cost of compliance is creating barriers to small business for entry into the market.
Prof Lester responded that "it is a complicated world out there" and tax is also becoming incredibly complicated, but he is not sure whether it can be simplified. The South African tax system is still comparatively simple by world standards. This means that South Africa has to catch up with the rest of the world, because it was not only its business that was isolated during Apartheid but its tax system as well. The system is thus not too complication because "that's just how taxes are".
With regard to cost of compliance, if one were to look at the return on every Rand spent on increasing the revenue collection function, the cost of compliance on government's side is a great return. The problem lies with the business sector because its costs of compliance are now made enormous, and it is required to provide more and more reports and information. This again is a concern, but it is in no way different from anywhere else in the world.
Mr Moloto asked Prof Lester to elaborate on his misgivings on the ring-fencing of secondary trade.
Prof Lester replied that these secondary losses have to be broken up into two categories. The first relates to those who profess to be trading when they are not in fact trading, because it is merely a hobby. Here SARS is already well armed with Section 23(g) which can go as far as to investigate the person's motive for trade.
The big problem arises with regard to the second category that conduct official, proper trades, like a farm for example. In this case it is not so much a question of ring-fencing that loss, but the problem is that government has for all these years been financing and growing the farming community out of secondary losses. This was the only way to secure investors in that area, and this was especially so in South Africa where it is so difficult to bank any farming deal, and capital partners had to be found.
Prof Lester stated that the extent to which they share in these deals from a tax perspective is not that great because there are current ring-fencing provisions within various farming losses in any event, but there is some benefit. Prof Lester expressed his concern that if this facility is killed "stone dead" the capital that is invested in the farming community might cease. He is thus not saying "no", but just that it needs much more investigation.
Mr Moloto referred to Prof Le Roux's comments on the financing of the basic income grant through increasing indirect taxes, and asked if this would not lead to serious consequences of deviant consumer behaviour. For example, if the taxes on luxury goods were to be increased at a very high rate, would this not result in smuggling?
Prof Le Roux responded that the Namibian tax system did impose a 30% differential tax on luxury goods but it caused all sorts of problems, and the uniform rate is thus preferred. The level will increase but at the same time everyone will be accessing the grant, and thus 80% of the people would be better off if government pushes up all the indirect taxes by 50%. In other words VAT would have to be increased from 14% to 21%, but at the same time this would make available an extra R100 for every household per person. The combined impact of this would be that 80% of the South African population will have more money in their pockets, and the remaining 20% will start paying more, but it is only really the top 5% of this 20% that will really feel a significant burden.
The level at which non-compliance with VAT occurs in these circumstances has been investigated. Many countries have a higher rate with Chile operating at 21%, and Scandinavian countries even higher. This does not seem to be of such a different order from South Africa's current 14% rate that it is likely to lead to massive increase in cross-border smuggling activities.
The Chair asked whether the increase in VAT would not "gobble up" the additional R100 right from the start which would result in a zero sum, with the result that there would be no benefit?
Prof Le Roux replied that the proposed 7% increase in VAT would pay for the additional R100 to be paid to everyone, but it redistributes R13b from those above R1000 per person per month expenditure to those below this margin.
The Chair stated that those persons would however be purchasers of goods, and they would then be paying a further 7%.
Prof Le Roux replied that about a quarter of the population spends approximately R250 per month, and these individuals would now pay another R25 in VAT but will then be receiving an additional R100 via the redistribution, and would thus ultimately be R75 better off. It would then have a direct benefit for everyone below the R1000 per month cut-off point, which is 80% of the people.
The Chair stated that it "blows her mind" that Prof Le Roux can be proposing something that would be as punitive on the poor as raising VAT to 21%, especially in view of the current regime facing South Africans.
Prof Le Roux agreed that this is the case within the present regime, but stated that if R500 could be provided to every household of five people the reality is that those people spend far less additionally than R500, and they would be better off.
The Chair commented that this matter would be the subject of much debate.
Ms Taljaard agreed with the Chair's reservation regarding increasing the VAT rate. She stated that the manner in which a basic income grant is financed is a crucial issue, and perhaps the reference to "indirect taxes" implies policy decisions in other areas not necessarily limited to VAT. Has any thought been given to other forms of indirect taxes and or levies or user charges?
The Chair stated that this is an interesting point especially in view of the fact that Ms Taljaard's party is strongly in favour of the basic income grant.
Prof Le Roux replied that, with regard to the DP's policy on the basic income grant, it is senseless to have a policy before decisions have been made as to how it will be financed, because different financing regimes have totally different net burdens on society. Should it be financed via company tax, which is included in the presentation, it would cost government the full amount of R50b because it will be made available to everyone. If it is financed via income tax the net additional burden will be R30b, with the net addition for indirect tax being R15b.
Ms Taljaard referred to the policy decisions made in the tax reform process for specific targeted corporate incentives versus cutting the corporate rate. Is this a sound policy choice to target incentives instead of cutting the corporate rate across the board? Prof Lester was asked for his thoughts on the combination between a relatively high corporate rate for a developing emerging market economy with a tax system which also incorporates CGT?
Prof Lester replied that he goes by the adage that one has to "make money before you pay tax", and proposed that many people who come to invest in South Africa are not scared off by the tax system as by the economic climate to trade in. South Africa's tax rate "does not make a whole heap of difference" as the primary factor here is whether those investors actually want to invest in South Africa. Furthermore, the presence of CGT is not steering off investment from this country, as the CGT on exit on an investment in South Africa is not a major issue in deciding whether to invest in South Africa or not.
Yet if the decision is taken to drop the corporate rate then a range of other consequences have to be considered, because major arbitrages will again be created between individual rates and corporate rates, and this will create chaos in a wide range of tax planning that took place over the last five years. But it is gradually filtering away because those arbitrages have been basically removed. Thus there are many other factors in making a decision to invest here before tax rates are considered.
Prof Le Roux added that if one considers the countries that have employed targeted exemptions, one finds that it very often does not work as planned. Instead it becomes a loophole, creates additional problems, leads to corruption and other unintended consequences. It thus has implementation problems. Instead it would be better to bring down overall rates if the intention is to grant tax exemptions.
Ms Taljaard referred to the possible inflow from the provision of amnesty and asked if any projection had been done on the consequences on the taxation of foreign dividends, what the quantum could have been but was, in a sense, diverted and kept offshore artificially because of a policy measure.
Prof Lester replied that these are "lotto numbers" and are thus unknown. Whether it will be money that was held abroad after Section 9E was introduced is doubtful, because the amnesty does not apply to corporate tax collections.
Dr Rabie asked Prof Le Roux to explain if he had mentioned that Namibia is thinking of reviewing its position with regard to CGT?
Prof Le Roux replied that he agrees with the South African position that CGT is not a massive incentive nor is it a massive burden in the manner it is being administrated. The problem here however are the additional costs of administration because it complicates matters.
The Chair referred to the statement made by Prof Lester that if the amnesty is going to work it must not be perceived as a "witch-hunt", and stated that her understanding of the matter is that all applications for amnesty will be dealt with in secrecy because this is how SARS is bound to operate. Is Prof Lester referring to a witch-hunt from SARS' side?
Prof Lester responded that the important word here is "perception", and the problem is that SARS is dealing with a nation of frightened taxpayers. If they perceive the exercise to be a witch-hunt, even if that is an incorrect perception, the amnesty mechanism will not work. Taxpayers have to be reassured of the genuine intention here, which is to get the money on book and tax it in future. It is really then a question of a marketing exercise rather than a witch-hunt.
The Commissioner stated that wants to make it very clear that this is not a witch-hunt and Minister Manuel has also made it very clear that this is about cleaning up SARS' history and its act and making sure that it broadens the tax base. It also serves to create a new kind of compliance culture in South Africa and to ensure that, as of the 2003 return, SARS gets a different set of figures that appear on its books which it can then take forward from that point. There is thus no question of a witch-hunt.
There certainly is deep reflection amongst South Africans to ensure that a second round of these undesirable activities are not engaged in, which future SARS officials would then have to solve. It is thus about creating a new threshold in terms of national conduct, and from SARS' side there is definitely no intention of being recriminatory, but it would like to know how these activities happen.
The Commissioner stated that he has discovered via his interactions with the public generally, that most people are appreciative of the work SARS does because they see the direct benefits in their pockets. They also see a government institution that is treating people on an equal and fair basis and that all South Africans are being held to account. Those that feel afraid, petrified, terrorised etc. are clearly those that have had something to hide. This amnesty is about their disclosing what they have had to hide so that it can be cleaned up, and then move on. Fear resides in those people who are apprehensive about the fact that something that they are doing or have done might be discovered and land them in trouble with the law.
The Chair stated that she believes that it is correct that SARS, like the Internal Revenue Service in the United States, is a feared institution, or rather that people realise that they cannot play around with SARS.
The Chair commented that this is in fact the second tax amnesty offered by SARS, the first being an attempt "to get people into the tax nets" in 1996, approximately.
Prof Lester responded that the people affected by this amnesty were not included in that 1996 amnesty, because those were unregistered taxpayers.
The Chair stated that two different types of amnesties have now been offered, and if one considers the experience with regard to the first amnesty one realises that it certainly was not a witch-hunt. Although this time it involves people who have actually taken money out of the country, the hope is that it would be handled in the same manner.
Prof Lester replied that it has to be remembered that when those amnesties were being processed people were not terribly afraid of SARS, and there is thus a very different mood prevailing today.
Ms Taljaard stated that issue of what will constitute whether a person is under investigation and the question as to the reasonable steps to be taken by the person to ascertain one way or the other is a crucial feature of the implementation.
The Commissioner replied that these are the details that the South African Reserve Bank (SARB), Treasury and SARS are currently discussing. Once again SARS must give the assurance that it will find a transparent and accountable mechanism to ensure that those that are under investigation will be recorded by SARS in some way, and in a way that is externally verifiable, by the Auditor-General for example.
The Chair asked if people have been disqualified from the amnesty because they broke exchange control or income tax provisions, and what "further activities" would they be under investigation for?
The Commissioner responded that they would be under investigation not necessarily for an exchange control contravention, but for any tax-related offence. The principle of any amnesty is that the person comes forward voluntarily and makes full disclosure, voluntarily, and clearly these people are not doing that.
The Chair commented that this does make it clearer.
In concluding the meeting, the Chair stated that this is the tenth budget in which she has been involved as Member of Parliament, and it has been interesting to see how much of the debate around the budget is shifting from expenditure issues to taxation issues, almost invisibly over the last three years.
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