The Committee heard a joint presentation from National Treasury and the South African Revenue Service on the Taxation Laws Amendment Bill [B29B-2015] and the Tax Administration Laws Amendment Bill [B30-2015]. The presentation dealt with changes to the law in the areas of general business taxes, taxation of financial institutions and products, tax incentives, international taxation, value added tax, personal income tax and tax administration. The Bills closed loopholes, addressed anomalies, streamlined procedures and moved the country towards increased compliance with international standards.
Particularly important were the contested retirement reforms. These had been opposed by trade unions because the amendments would have limited some workers' entitlement to a lump sum immediately on retirement. Treasury had committed to an extensive campaign to educate workers about the benefits of the new measures. Few workers will be affected for a decade. It is hoped that the legislation would address the need to engender a savings culture. Also important were the implementation of the Organisation for Economic Co-operation and Development Standard for Automatic Exchange of Financial Information in Tax Matters which aims to counter cross-border tax evasion and aggressive tax avoidance.
The Committee agreed that the opposition to the retirement reforms indicated that there was an urgent need to improve the general level of financial education in the country. Members asked about the input of the Davis Tax Committee on the two Bills, and expressed some concern that the new legislation would hamper business development and job creation.
The two Bills were adopted, along with its Limpopo oversight report.
Taxation Laws Amendment Bill: briefing
Ms Yanga Mputa (Chief Director for Tax Policy, Treasury) gave an overview of the changes to the South African tax system as introduced by this Bill. She spoke on general business taxes, taxation of financial institutions and products, tax incentives and international taxation. On the topic of general business taxes, Section 9C of the Income Tax Act was amended to close a loophole allowing the proceeds of the sale of shares that had been held for more than three years to be taxed at a low rate. All such proceeds would now be subject to capital gains tax (CGT). The Bill removed some anomalies in the taxation of contracts between connected persons (such as subsidiaries) cancelled within a year. These would no longer incur CGT. In response to the higher capital liquidity requirements of banks in order to comply with Basel 3 regulations, the Bill made provisions for transfers of collateral to be exempted from CGT if the debt is less than twelve months old. Banks had asked for the period to be lengthened, and Treasury had agreed to consider the matter further. The Bill would also close a loophole on the use of interest-bearing debt in the acquisition of a controlling stake in another company.
Taxation of financial institutions and products
The Bill addressed the unintended consequences that hedge funds would be considered to be Collective Investment Schemes from 1 April. The Bill limited unwarranted relief for long-term insurers, by closing a loophole caused by reference to “reinsurance” and would allow Real Estate Investment Trusts (REITs) to deduct foreign tax credits and tax-deductible donations. The unlisted REITs mentioned in the budget was, however, not addressed in the Bill, because the Financial Services Board still needed to pass legislation on this matter.
Ms Mputa said the Bill would ensure that the full accelerated depreciation allowance would be available to taxpayers who made machinery available to a components supplier for no consideration. This was a situation that arose in the automotive sector when, for instance, Toyota made the machinery required to produce its logos available to suppliers, without selling it or requiring rental. Anti profit-shifting provisions would be introduced to limit the exploitation of special economic zones for tax avoidance. The tax treatment of government grants for public-private partnerships (PPPs) was brought in line with that of other government grants. The threshold for declaring an urban development zone (UDZ) was to be lowered from a 2 to 1 million persons population, and the requirements to qualify for the Industrial Policy Project (IPP) tax incentive would be made less stringent. The depreciation allowance for electronic communications cables outside the country would be calculated on the basis of a write-off period of 15 rather than 20 years.
Mr Cecil Morden (Chief Director for Economic Tax Analysis, Treasury) said that the depreciation allowance for rooftop photovoltaic panels would assume a write-off period of only one year, instead of three, and the value of the energy efficiency incentive would be increased from 45 to 95c per kilowatt-hour of energy saved. An anomaly preventing the film industry from taking advantage of tax incentives intended to encourage the development of the industry in South Africa, would also be addressed.
Ms Mputa said that the Bill would relax the CGT rules governing the cross-issue of shares (when, for instance, a local and international company buy each other's shares), which had been intended to counter tax-free corporate migrations but had had unintended consequences for bona fide commercial transactions. The foreign tax credit to provide relief from double-taxation for South African based multinationals had not worked as intended and departed from international norms, and would be replaced by a tax deduction. Pre-2011 diversionary rules on inbound and outbound sales for Controlled Foreign Companies would be reinstated. The definition of “interest” for the purposes of the withholding tax would be limited to the definition found in Section 24J(1). Finally, the definition of “immovable property” would be aligned with the Organisation for Economic Co-operation and Development (OECD) model tax treaty.
Value added tax (VAT)
Mr Morden said that the Bill would make allowance for the South African Broadcasting Corporation (SABC) to calculate VAT on the basis of payments received instead of invoices issued. The widespread non-payment of television licenses had created cash flow problems for the SABC because the annual notices of renewal they were obliged to send were treated as invoices. The zero rating for the National Housing Programme would be repealed due to administrative difficulties, but potential losses would be compensated by larger grants. There were some other technical amendments.
Personal income tax
Mr Morden focussed on the contested retirement reforms. The fundamental objective of the reforms was to encourage people to save. There had been significant differences between the tax treatment of contributions to provident funds, pension funds and retirement annuities. The intention of the 2013 amendments to the Taxation Laws Amendment Act had been to have a common base for all kinds of contributions. There had been opposition from trade unions, however, because the amendments would have limited some workers' entitlement to a lump sum immediately on retirement. In response, the implementation of the provisions had been postponed to 2016 (and would be reviewed in 2018) and the threshold had been raised to R247 500. Treasury had committed to an extensive campaign to educate workers about the benefits of the new measures and it hoped that the legislation would address the need for a national savings culture. Treasury data shows that about half of provident fund members will not be affected by enforced annuitisation for 10 years after the implementation date as their total contributions will be below R247,500.
Tax Administration Laws Amendment Bill: briefing
Mr Franz Tomasek (Group Executive for Legislative Research and Development, SARS) said that in practice, South Africa had a self-assessment system for tax, where a taxpayer submitted a return and would not ordinarily be audited. Legislation was lagging behind practice, however, and one objective of the Bill was to bring the law into line with the practice.
The Bill would simplify the tax system governing medical scheme fees and pay-as-you-earn (PAYE) tax for people over 65 years of age, increasing their monthly take-home pay instead of granting a refund at the end of the year. The Bill would implement the OECD Standard for Automatic Exchange of Financial Information in Tax Matters, an important international measure to counter cross-border tax evasion and aggressive tax avoidance. The Bill would allow SARS to require that companies to justify assertions of legal privilege, which was often being abused to prevent or delay SARS from gathering the information required to complete an audit. This amendment would also provide for dispute resolution where there are disagreements about an assertion of legal privilege. If information was withheld from SARS for a period during an investigation into a complex matter, SARS would be allowed to extend the period allowed for the investigation (usually three to five years) by the same period. This was in line with international standards. The definition of “complex matters” was clarified in response to public input: it covered matters arising from the “substance over form” doctrine, the general anti-avoidance rule, hybrid entities and instruments, and transfer pricing. The Bill would clarify the obligations of companies in response to foreign information requests from SARS. Section 93, which allows taxpayers a less formal mechanism to have their assessment reduced, would be amended in response to abuse, so that only readily apparent undisputed errors could be corrected through the provisions of this section. The Bill would amend Section 98(1)(d) to give effect to the essential purpose of the section, which was to come to the assistance of taxpayers whose assessments were incorrect as a result of factors outside of their control. Some loopholes in the voluntary disclosure programme were closed. Finally, several clarifications of the customs and excise legislation would also be made.
The Chairperson agreed that developing a savings culture among ordinary South Africans was very important. He often met with elderly people in his constituency who were suffering because of poor financial planning.
Mr S Mohai (ANC; Free State) welcomed the presentation and appreciated the work of the presenters in taking the Committee through the very complex tax legislation. He believed there was a need for the Committees involved to constantly develop the expertise necessary to conduct proper oversight. He asked whether the two Bills had benefited from the input of the Davis Tax Committee.
The Chairperson noted that Chapter Four of the Budget Review had specified that Treasury expected to receive reports from the Davis Committee on the overall tax system. He suggested that the four finance Committees would have to get a briefing from Judge Davis on this.
Mr Morden replied that the work of the Davis Committee was ongoing. While Treasury did not always agree with its findings, they had notably agreed on Section 6quin (dealing with double-taxation) and it believed the Davis Committee made valuable contributions.
Mr O Terblanche (DA; Western Cape) reported that quite a few government employees had retired immediately when they found out that their entitlement to a lump sum was going to change. He asked if Treasury was confident it had done enough to address the perceptions that led to this sort of action.
Mr Morden agreed that this was important. It was ironic because government employees were already on a pension not a provident fund and so had to annuitise automatically. This clearly indicated the need for financial education and while Treasury would have a big part in this, it was also a collective responsibility.
The Chairperson agreed that financial education was crucial and said that the Committee would need to figure it into the Committee programme in the first quarter of 2016.
Mr L Gaehler (UDM, Eastern Cape) said that the lack of financial literacy had led to a loss of skills in government through the resignations.
Mr F Essack (DA, Mpumalanga) was concerned that the tax changes as a whole were compromising the business environment. He didn't see any incentives being created for businesses to expand and create jobs.
Voting on the Bills
The Committee Reports on both the Taxation Laws Amendment Bill [B29B-2015] and the Tax Administration Laws Amendment Bill [B30-2015] were adopted by the Committee without amendments. Mr Essack on behalf of the DA reserved their right to vote until the plenary.
The Committee Report on the Limpopo oversight visit was considered and adopted. Several sets of Committee minutes were considered and adopted.
The meeting was adjourned.
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