2016 Budget: Public hearings

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Finance Standing Committee

02 March 2016
Chairperson: Co-Chairpersons: Mr Y Carrim (ANC) and Mr C de Beer (ANC)
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Meeting Summary

The joint sitting of the Standing and Select Committees on Finance heard submissions from six entities on the Revenue Laws Amendment Bill. The entities were the Congress of South African Trade Unions (COSATU), the Witwatersrand University’s School of Economics and Business Science, the Federation of Unions of South Africa (FEDUSA), the SA Institute of Tax Professionals (SAIT), PricewaterhouseCoopers (PwC) and theSouth African Institute of Chartered Accountants (SAICA)

COSATU said it was against an increase in VAT or applying a differentiated system, because it was inherently regressive and harsh on the poor. There should rather be increases in taxes on luxury goods, wealth and dividends. It was in favour of an employment incentive. It was opposed to any interference with the Unemployment Insurance Fund (UIF) surplus. Lastly, they argued for reform of the Southern African Customs Union (SACU) system, and increased measures against base erosion and profit shifting. It understood the need for government to impose austerity measures, but was concerned that this should not negatively affect service delivery. However, it rejected any attacks on the public service wage bill, saying government should rather focus on cutting wasteful and “bling” expenditure.

Wits University spoke about the potential fiscal cliff facing South Africa, where expenditure on social assistance and remuneration of the civil service would eventually consume all the revenue generated by government. It pointed out the differing inflation estimates by National Treasury and the South African Reserve Bank, and agreed there was a need to reform the SACU payments because South Africa could not afford them. On tax reform, it welcomed the use of fiscal drag by National Treasury. He preferred cuts in expenditure, rather than increases in tax. If tax increases were intended, these should not be through an increased VAT rate. Further, it was opposed to a wealth tax because of the administrative difficulties and preferred increasing the tax burden on high income earners. It recommended that politicians stop making populist statements with fiscal implications, such as broadening the range of beneficiaries of social grants. South Africa needed to hear that no new aircraft would be procured for the President, so that it could be seen that government was serious about reducing expenditure. Further, SA could not afford the size of Cabinet and this needed to be reduced. It cautioned that the public dispute between the Minister of Finance and the Commissioner of the South African Revenue Service needed to be resolved urgently. Regarding state owned enterprises (SOEs), it said loss-making entities should rather be handed over to the private sector, rather than sold, as they were a constant drain on the government.

FEDUSA urged for an inclusive dialogue, in order to have all partners committed to the implementation of the National Development Plan. On fiscal consolidation, FEDUSA felt the spending ceilings announced by the Minister sent out a good message. Further, personnel spending by government was critical, because in areas such as policing, education and health government had to render a service. There were concerns about vacancies in critical funded posts and furthermore a trend was being observed where civil servants were resigning to cash out their retirement plans, because of misinformation in this area. It was concerned about South Africa’s debt obligations consuming R147 billion, or 10% of budgeted revenue. This could be solved by increased economic growth. It welcomed the marginal relief for personal income tax and increases in transfer duty for properties above a certain value. There was a need for structural reform in the interests of economic growth. South Africa should focus on job rich, but energy lean, sectors such as tourism and the oceans economy. The structural rigidities which prevented new businesses and therefore new jobs, need to be removed. FEDUSA felt a minimum wage was required to protect the working poor. It was also concerned about state owned enterprises, particularly in the aviation sector. It questioned whether it was really important whether a company was owned by the state or private sector. It was firm in its view that there should be no more bailouts and that these enterprises must be run by competent boards.

PricewaterhouseCoopers felt Budget 2016 was well done and welcomed the proposed reduction in the budget deficit to 2.4% of GDP, but failure to stick to previous estimates were creating a credibility problem. It therefore called for an acceleration of measures to reduce the deficit rather than leaving them to the outer years. However, the budget deficit was due to a problem with expenditure rather than revenue collection. A concern was raised about the anomalies in revenue collection data for November and December 2015, because there had been a significant drop in collections across all taxes. The projected R18 billion increase in revenue was welcomed, but it was cautioned that this was only a real increase of R13 billion, given inflationary increases. Further, it was good that the increases in the tax burden were being borne by higher income earners. They cautioned against looking to capital gains tax for structural increases in revenue, because it was a volatile tax and we should be careful to tax only real economic gains and not inflation, otherwise the tax became distortionary. Therefore, indexation of the base costs could be a useful measure. South Africa had an expenditure problem rather than a revenue problem. With the overall tax burden set to increase to 29% by the outer years of the medium term, this became unsustainable. South Africa had the tenth highest tax to GDP ratio in the world. Further it was highly reliant on direct taxes, as opposed to indirect consumption taxes and therefore there was space to shift the tax mix. There were ways to deal with the regressiveness of consumption taxes -- for example through expenditure to lighten the burden on the poor.

SAICA felt the Budget 2016 brought some certainty and balance at a time when it was needed, but more of the burden could have been borne now, bringing even greater certainty. Further, debt reduction was important for reasons including perceptions, and this was within the control of the Minister, but the spending cuts were small or deferred. It identified challenges, including public consultation regarding retirement reform. There was a need for a confident, efficient and effective revenue service and while it did not want to become involved in the politics, this needed to be sorted out. There was also a need to review the incentivisation regime. Lastly, there needed to be clarity on whether the perceived tendency towards more indirect taxes was an actual policy stance. It recommended that drought relief be treated with the seriousness it deserved, by declaring a national disaster to ensure the necessary money was not only appropriated, but actually allocated where it was needed. Further, earmarked taxes had their place, such as with the fuel levy and road maintenance. Lastly, it felt the period of six months given to the voluntary overseas asset disclosure programme was too short and legislative restrictions on advisors to aid people hampered the potential success of the programme.

SAIT was concerned about the short period for the voluntary disclosure programme, in that it did not cover all the taxes and that a new regime was being used when there was a tried and tested one available. Earmarked taxes were a concern, because it caused pockets of money to be trapped, which was a concern because the cost of borrowing the money was greater than passive income earned, costing the government money. These funds should not be retained solely for the sake of a bureaucratic structure. On retirement reform, SAITs supported many of the smaller amendments. The annuitisation which Treasury had opted for was a mild form, but the main concern which came out of the process was that there were some groups which followed the processes and were not listened to, while others did not need to follow the procedure and were listened to nonetheless. This betrayed a weakness in the consultation process and needed to be resolved. SAIT noted that there were no increases in the estate duty, but warned against the proposed amendments. These would deem income transferred over a period of time from a person’s estate into a trust to be that person’s upon death. This was retroactive and unfair to people who had paid tax to get assets out of their estates. SAIT agreed with the reforms around share incentive schemes in principle, because the intention was to target high end schemes and leave the schemes aimed at benefiting rank and file employees untouched. It felt that incentivisation needed to be reviewed, because government was not clear on what it wants to incentivise at present. It needs to first look at the economy and determine where it wanted to incentivise growth and target that properly. It was concerned that there was little for small businesses in Budget 2016. Again, government needed to understand how small business functions and target the help. For example, small businesses run generally on a cash basis and therefore ought to be taxed on a cash basis. It welcomed the amendments aimed at closing down share incentive schemes. Further, it argued that base erosion and profit shifting were not as much of a problem as the Organisation for Economic Cooperation and Development made them seem, and the problems facing South Africa in this area were very different to Europe’s. Lastly, the response times for taxpayers need to be increased.

The discussion saw Members raise several matters of importance including:

  • The necessarily regressive nature of a differentiated VAT system;

  • The presenters’ positions on state owned enterprises;

  • Potential reforms for tax incentives, such as the Research and Development incentive;

  • Practical ways in which government could reduce expenditure.

Meeting report

Submission by Congress of South African Trade Unions (COSATU)

Mr Matthew Parks, Parliamentary Officer, COSATU, made the submission on behalf of the organisation. On the economic context of the Budget, the triple challenges of poverty, unemployment and inequality persisted as part of apartheid’s legacy and in fact unemployment was increasing. The government faced major challenges in combating the above, given the trying global economic climate, declining tax revenues and infrastructure. Yet COSATU was still concerned about the low levels of growth, and that much of the growth was jobless. It was also aware of the increasing frustrations of the workers, and this led to the need for government to adopt a radical economic transformation. A plan needed to be presented on how government would fight unemployment.

Mr Parks moved on to the fiscal responses in the above context. Government was faced with either adopting austerity measures in order to stabilise the budget deficit or to attempt economic stimulus in order to boost the gross domestic product (GDP). This choice was embodied in the approach adopted by US-led institutions such as the World Bank and International Monetary Fund versus the approach which had seen China grow to its present levels. COSATU supported the government’s continued infrastructure and social support spending, because it was necessary.

Mr Parks turned to COSATU’s tax reform proposals. COSATU supported government’s decision not to increase Value Added Tax (VAT), because this was a regressive tax which reduced demand and further oppressed poor workers. Further, COSATU would be against any future increases of VAT, regardless of whether it was targeted at luxury goods or further zero-ratings were introduced, because these costs would eventually be passed on to the general consumer. COSATU was in favour of increased taxes on luxury goods, wealth and dividends. An employment incentive tax could go a long way towards increasing revenue and generating employment. Further, requiring local procurement and encouraging local beneficiation would lead to increased revenue. COSATU was opposed to any interference with the Unemployment Insurance Fund, because this was workers’ money paid as a form of insurance premium. The Southern African Customs Union (SACU) contributions needed to compensate for different currencies and SACU revenues needed to be rationalised. Lastly, given the excesses of illicit financial flows and tax evasion, government should impose stricter controls in this area.

Mr Parks moved on to state expenditure. COSATU understood the need for fiscal austerity in the current economic climate. However, it was concerned about the cuts to key service delivery aspects of departments, while there were increases in policy aspects. It continued to be concerned about the persistence of vacancies in the public service. Further, it rejected attacks on the public service wage bill, because teachers, nurses and police officers deserved to earn a living wage and COSATU would fight any attempt to deny this. COSATU would rather support cut backs in wasteful expenditure, such as a reduction on ‘bling expenditure’ like government events and the over use of consultants, rather than departmental capacity. COSATU also encouraged the ending of the use of labour brokers and outsourcing across all spheres of government. Lastly, it encouraged the creation of the office of Chief Procurement Officer in departmental organograms in order to ensure compliance with procurement process across Departments.

Mr Parks concluded by noting the effects of the water crisis on the operations of government and the need for efficiency in order to combat the harm being done. COSATU supported the government’s efforts to try and stabilise ailing parastatals, and encouraged it to ensure rogue chief executive officers (CEOs) were brought under control and took responsibility. National Treasury (NT) must provide state-owned enterprises (SOEs) with sufficient funding for them to be able to fulfil their developmental goals, as privatisation would not achieve this. Lastly, COSATU noted the many developmental achievements made under the ANC-led government, but still perceived the need for radical economic transformation.

Submission by Wits School of Economics

Prof Jannie Rossouw, Head: School of Economics and Business Science, University of Witwatersrand, spoke about the risk of a looming fiscal cliff in South Africa. A fiscal cliff was where certain points of expenditure absorbed all government revenue, in this case, social grants and civil service remuneration expenditure. The present scenario had been generated from data gathered on expenditure trends since 2008. The fiscal cliff could be avoided if populist choices could be avoided, and the 2016 budget gave tentative hope.

He said that the 2016/17 budget for social assistance amounted to R140.5 billion, which was about 10.6% of total budgeted government revenue. This showed an average 9.4% annual increase since 2008, when social assistance expenditure was at R62.5 billion. Treasury predicted that by 2028 the number of beneficiaries from social grants would grow to 18.5 million, based on current policies. This was due to growth in the population covered by the grants -- children under 18 and people over 60. He emphasised that there was no room to increase the categories of beneficiaries as had been envisioned previously.

South Africa could no longer afford its civil service wage bill. Civil service remuneration had grown by 13.1% annually on average since 2008. Further, the civil service had grown by more than 200 000 employees between 2008 and 2015. In 2015/16 the civil service’s remuneration was R476.7 billion, which comprised 44.4% of government tax revenue. According to the 2016 budget, this was set to grow over the MTEF from R516.8 billion in 2016/17 to R590.8 billion in 2018/19. Although the percentage of government tax revenue absorbed by the civil service wage bill was set to decrease from 44.5% to 42.5% by 2018/19, this percentage was far above comparable countries’ expenditure, with Brazil and Mexico spending about 18% and 26% of total budgeted revenue respectively.

Prof Rossouw said that without any further real tax increases, if the observed trends as set out above persisted by 2060, social assistance and civil service remuneration would absorb more than 80% of the budget. Moving to the way forward, he emphasised that economic growth was crucial and if growth disappointed, everything changed. So the targets set by Budget 2016 for the MTEF should be treated as cast in stone. Therefore, details of planned expenditure cuts must be announced urgently to ensure that progress could be monitored.

Prof Rossouw said Treasury and the South African Reserve Bank’s (SARB’s) inflation forecasts differed for both 2017 and 2018, leading to an urgent need for certainty. South Africa’s average inflation rate since 2002 was 5.8%, which meant that prices doubled every 12.4 years and high inflation hampered real growth. The targets of most inflation targeting countries were below South Africa’s.

Prof Rossouw referred to government vehicle purchases, and noted that the Minister had given attention his previous presentation on this point. Page 14 of the Budget indicated that guidelines would be produced on the values of vehicles bought for political office bearers, and he would like to see it implemented in practice. Government should actually purchase only proudly South African manufactured vehicles, as it purchased imports to the value of R3.5 billion of the R7.5 billion purchased annually. The local purchase of vehicles to the value of R3.5 billion, using a government expenditure multiplier and assuming a 97.5% propensity to consume, could increase GDP by as much as R40 billion. It would simply require an announcement by government that it would purchase only proudly South African manufactured vehicles and the GDP would increase.

He said that Treasury was using fiscal drag to increase the personal income tax burden and he would prefer expenditure cuts rather than tax increases. Where this was not possible, fiscal drag was preferred to higher income tax, and he was against a wealth tax. He was also against higher VAT, because it rested very heavily on poor people in South Africa and there was no space to do this. If higher taxes were the way forward, he proposed introducing an additional income bracket of a marginal income tax 45% on income of more than R1 million, and 50% on income above R2 million. He emphasised that politicians should not be excluded from these higher taxes. He would be in favour of these tax increases rather than a wealth tax, because it would require a new administrative system and would only be on recordable assets. Further, there was the problem of using a net or gross tax. He believed it was much neater to go with higher income taxes on higher income earners.

Prof Rossouw said South Africa could no longer afford the SACU agreement. As he had said previously, “South African taxpayers must stop buying wives for the King of Swaziland”. South Africa’s transfers under the SACU agreement were equal to 1.2% of our GDP, which was nothing but development aid to our SACU partner countries. The international norm for development aid was 0.7% of GDP and for a start South Africa should reduce its SACU payments to that level. Further, because it was not voted on by Parliament as development aid, it did not even get credit for this huge contribution because it was not shown as such in the Budget.

Turning to recommendations, he said that “politicians should refrain from making populist statements with serious financial implications, because taxpayers could no longer afford this”, because there was no room to increase the scope of social grants.

Civil service trade unions should refrain from asking for large and unaffordable remuneration increases in the civil service. The country could not afford the increases granted in 2015, and needed a moratorium on new employees in the civil service. He would have loved to hear the Minister say in the Budget speech that there would be no new aircraft for the President. If the air force could not maintain the current aircraft, they would break the new one. Secondly, the public was no longer convinced that there was a problem with the current plane and if the people maintaining it were not capable of doing so, proper mechanics should be hired instead. He felt that the stories of the plane breaking were being drummed up as justification for the purchase of a new plane. South Africa needed to hear that there would be no new plane, so that it could be assured that government was serious in its drive to save money.

There needed to be a reduction in the number of Cabinet Ministers and Deputy Ministers, because South Africa could not afford the Cabinet. To make the revenue available go further, expenditure cuts were the primary recommendation and details should be published to allow the public to hold government accountable. Fiscal drag was preferred to higher income tax, but if that became necessary, higher income earners should be taxed more, rather than wealth taxes being imposed. VAT was regressive and should not be increased. Further, South Africa could not afford the SACU agreement.

Lastly, South Africa could not afford the tension between the President and the Minister of Finance. “The public was flabbergasted, they have no idea what was going on and it was a war by press statement”. It was really necessary for South Africa to have its fiscal house in order and for it to be understood what was happening between the President, the Minister and the Commissioner of the SA Revenue Service. Not only were South Africans looking at these problems, but so were international ratings agencies, and there was every reason to believe they would act on them, leading to a credit risk downgrading for South Africa.

Submission by Federation of Unions of South Africa (FEDUSA)

Mr Dennis George, General Secretary, FEDUSA, said a presentation had been received from the Minister and the Director General of Finance in the National Economic Development and Labour Council (NEDLAC), because it had become practice for the social partners in NEDLAC to also participate. FEDUSA’s view was that if steps were not taken towards ensuring that the economy grew, the counry would face serious challenges. The decision had therefore been taken to work together to implement the National Development Plan (NDP), although some had had some reservations. The economy was not inclusive and growth was too slow. Growing the economy would provide more revenue, which meant government would have to borrow less and be able to create more jobs, including opportunities for the youth. The social partners hade agreed on having an inclusive process, which the Committee should be a part of, to start moving South Africa forward.

FEDUSA was very concerned about the impact of the previous day’s electricity price increase, because it was above inflation and would affect every sector’s costs. The suggestion was therefore that one must direct one’s efforts towards sectors which were not as heavily affected by the electricity constraints. There should also be a more concerted effort regarding small businesses, particularly through creating infrastructure for them to operate in townships.

A lot had been said about the economic outlook and it seemed like every institution had started to reduce South Africa’s growth expectations. Looking at the NDP projections, this year growth was supposed to be 5%. Therefore, one had to go back to the drawing board and this was why the inclusive engagements would be important. Hopes had been put on the NDP, but the framework projected quite a different scenario. The R7.6 billion raised through the limited fiscal drag would help, as would the fuel levy increases and R2 billion in adjustments. All these sorts of interventions were needed, along with the provisions made in Budget 2016 for 2017 to 2019. More detail would be needed, because the figures set out for the outer years were only projections and those were dependent on the adjusted growth rates. FEDUSA thought if the seeds could be laid for higher growth rates, this would positively affect those figures.

Mr George referred to fiscal consolidation, and said the spending ceilings should be recognised as the Minister and government putting a message across. There was also an opportunity for labour, government and business to engage with the ratings agencies. A critical area was personnel spending, because government had to render services when it came to education, health and policing. FEDUSA members found that there were a lot of vacancies and that one person had to do more than one person’s job. There was also now the problem of civil servants just resigning and taking whatever they could get. When the Committee considered such matters, it should keep in mind that the public service had to render a service and when there were properly budgeted positions they had to be filled. An affiliate union, the Health & Other Services Personnel Trade Union of South Africa (HOSPERSA) had raised a specific matter and FEDUSA would take it up with the Minister of Health. It was important for government that the correct number of staff were there to render the service.

The main thing about debt servicing cost was that if the economy could grow at a higher rate, then more revenue would come into government, creating room for faster debt reduction. This action was needed, but at the same time there was a need to spend to grow the economy. The R147 billion, or 10% of total revenue, was a serious amount of money for this. On the tax proposals, FEDUSA welcomed the marginal income tax relief and increasing the transfer duty from 11% to 14% for properties above the stipulated value. FEDUSA was looking for a review of the learnership and employment tax incentive scheme in NEDLAC, and he hoped Treasury would come back on this point.

Mr George moved on to structural reforms, saying the NDP pointed out that structural changes were needed to move to a higher growth path, particularly reducing over-reliance on resource extraction and energy intensive sectors. There should be increased reliance on job rich sectors, such as tourism, agriculture and the oceans economy, and FEDUSA intended raising this with government. SA needed an economy where new businesses could start up and jobs be created. It had to tackle the structural rigidities which prevented new businesses from forming, such as electricity and skills shortages. The high broadband costs were another impediment. FEDUSA was part of the committee of principals under Deputy President Cyril Ramaphosa trying to find workable solutions for labour market reform. That committee was also looking at how one could protect the working poor with a national minimum wage, and the pressure should not be lessened.

Mr George moved on to state-owned enterprises SOEs and reform, and said FEDUSA organised the airline pilots, cabin crew and ground staff. Its position was that if major changes happened, then there had to be consultation, because the workers in the aviation industry had supported the country well by facilitating tourism. He asked whether it was really important who owned a company? Whether it was owned by the state or by the private sector, FEDUSA’s point was a line in the sand must be drawn that one could no longer bail out those companies. It was important that SOEs were supposed to be led by competent boards and this was something which was a concern, given what was happening.


Mr B Topham (DA) said Prof Rossouw’s recommendations needed to be looked at properly, specifically about SACU and doing a proper development aid allocation. The inclusion rate of capital gains tax (CGT) was going up and it seemed that at some point it would hit 100%. How did FEDUSA and Prof Rossouw feel about the need for an inflation adjustment to the base value of assets for CGT? On the dividend tax, some of the comments were for an increase, which would in theory stimulate retention of capital in businesses and possibly aid job creation. What would the presenters feel about a reduction of the corporate tax rate to stimulate more investment in the country? To COSATU, he asked about an investment credit to encourage local procurement and he presumed that meant not just locally produced capital, but all machinery.

Dr M Khoza (ANC) addressed COSATU, agreeing on many of the points it had raised. However, there were issues on which she felt COSATU should express itself. Firstly, South Africa’s low average propensity to save -- what was the position of COSATU on the absence of a culture of savings? This was linked to SA’s vulnerability, because of its dependence on foreign entities to fund the economy. Secondly, on South Africa’s competitiveness in the labour market, what was COSATU’s view on the productivity and competitiveness of South Africa’s labour market? She would also like to hear COSATU’s views on regional integration, with neighbouring countries in particular. If this issue was not being tackled, then South Africa was working backwards, because the region was so disjointed despite the large amount of commonality with our neighbouring countries. If our neighbours were going through a difficult patch politically or otherwise, it was important and one could not go on ignoring the knock-on effect which events in neighbouring countries had.

To Prof Rossouw, she wanted to hear what he had to say on issues of poverty and equality in South Africa. She respected him as an academic, but she thought there were areas where she thought that he did not appreciate the poverty levels. Further, what could one do with jobless growth, because the labour market may not being congruent with what companies wished to produce. She agreed that South African manufactured cars should be bought, but what was his view on those companies using machines, rather than human labour. How should one deal with the tension between innovation, technology and addressing the issues of poverty? What else was there to deal with poverty alleviation, aside from social grants? She also wanted to hear about the contribution of those very social grants to the retail food chains.

To FEDUSA, although the Minister had announced the increase in transfer duty, she wanted to know the value of the potential contribution to the fiscus. She was not sure if there were sufficient numbers for this to actually be of assistance, especially with residential properties. FEDUSA had questioned whether it mattered who owns SOEs, but if this did not matter would FEDUSA encourage outright sales of these enterprises and in their view, which ones should be looked at?

The Co-Chairperson asked, if VAT was inherently regressive, what happened if the basic foodstuffs were exempted. COSATU had spoken about how the exemptions were not passed on to the consumer. A similar matter had been raised by the Parliamentary Budget Office with the fuel levy, because the poor bore a disproportionate burden as the townships were far from the city and industrial centres.

To Dr Rossouw, he wanted to raise the relationship between social stability, social inequality and the grant system. Government was acutely aware that this was not sustainable. On buying South African cars he agreed, but he would like to say that in any case the Minister would have gone for a ceiling which had been on the agenda since 2010. He was unsure of how Dr Rossouw was aware that the Presidential jet could be fixed, but all of us would agree that if it could be, then it should be fixed. He asked Members to apply their minds to the electricity increases and how to manage that in the Committee’s report.

Addressing Mr Parks on the savings issue, he said COSATU had agreed that savings were far too low. The issue was how to encourage saving, and it should be incentivised, rather than simply making it a legislative requirement. The Public Investment Corporation (PIC) and Government Pension Fund (GPF) could be used to spur investment, which was supported by COSATU, but these investments must be linked to job creation and have requirements. To encourage productivity, companies must pay a living wage, there must be job security and decent conditions. It was difficult to say to workers at Telkom, be productive -- but 60% of you will be gone by July. It was the role of the Skills Education Training Authority (SETA) to up-skill workers to make sure the skills were relevant and available.

On regional integration, he was on the same page as Dr Khoza, particularly with regard to the Southern African Development Community (SADC). The concern was that Zimbabwe was outsourcing its economic problems to South Africa and at many places, Zimbabwean workers were employed because they were often undocumented and would not make a noise about labour conditions. That was part of what had caused the tension and violence last year. COSATU knew that was a political problem and that the Department of Home Affairs (DHA) was doing its level best to manage migration. He also supported the DHA’s approach to Lesotho, because it could not be wished away. SA also had a special responsibility to Namibia, Angola and Mozambique for the devastation they had suffered while supporting South Africans. Regional integration should be done by encouraging investments by governments in infrastructure jointly.

On VAT, COSATU felt it was a regressive tax, hitting the poor hardest because of a lack of disposable income, hence the concerns about increasing it. There were some examples where VAT levels were differentiated for different products, and this may be a good idea. On dividends and local procurement, the proposal was basically how to generate more revenue for government, but to do it in a way which incentivised business and used available resources to encourage local procurement. Government procured many things and if one tightened up the Department of Trade and Industry’s rules, it could help.

The Co-Chairperson said Members knew about these social accords, but the problem was that they did not work. The question he wanted to ask was whether it was possible to have a compact between business, labour and government, and how this one would be different. The conditions now were dire and whatever the past experiences were, the parties should be able to strike some form of deal.

Mr Parks said COSATU would support that view wholeheartedly -- to learn from past experiences and have tangible targets. Further, COSATU would like to engage Treasury more than twice a year on the budget, rather than just have ex post facto engagements. Everyone was in the same boat and it did not matter where the leak was, it must be plugged.

The Co-Chairperson said this time National Treasury (NT) was being given an opportunity to respond before the Committee wrote its report. He invited stakeholders who had Cape Town-based liaison offices, so that there could be more dialogue before the Committee wrote its report.

Mr George said in the broader scheme of government revenue, CGT was only a small aspect. The big money came from personal income tax, which made up 37%. Corporate taxes represented only 16% and VAT was 25%. This was why FEDUSA argued that job creation created a lot of revenue, because people who worked paid tax, and it was regular. One should not argue about whether an increase in VAT of 1% would be good, but rather focus on the things which made a difference.

The Co-Chairperson asked about whether productivity could make a contribution to inclusive economic growth. He quoted from a paper he had written for corporates, who had asked him the same question. The full paper would be shared with Members, but he read: “the central ambition of trade unions was to improve and enhance the living standards of members and workers. However, this goal could only be achieved if high quality jobs and wealth were created in all enterprises.” The basic reason for this was that if productivity increased, its members’ living standards would increase. He read further: “This increase was not automatic, because the distribution of the wealth in that enterprise could be weak.” The danger was that if a few senior managers and executives took a disproportionately large part of that money for themselves, the wealth could not be distributed fairly.

On the question of whether it mattered who owns what, currently the South African aviation industry was the only one FEDUSA was looking at. It agreed with the Minister that it was unnecessary to have SA Express, Mango Airlines and South African Airways, with multiple boards and multiples of all the executive officers. FEDUSA as labour representatives were not afraid to think outside the box in the interests of the country. Looking at this scenario, another airline such as British Airways had come with its own capital and paid tax to the government. However, SAA comes to the government wanting money. One should deal with this in a practical way and get the message out that it was better for South Africa if one had a company that paid tax to us and created decent work for our workers. But a company which came to the government every year with a “long, democratic story” did not help.

With the Airports Company of South Africa (ACSA), the state owned the airports and the regulator sets the fee, but if SAA did not pay the fee it would not be grounded, because the Minister would quickly phone the CEO. FEDUSA felt that ACSA could be sold to the private sector, and the regulator kept in place. The money produced from such activities could be spent on education or the National Health Insurance. FEDUSA was willing to have discussions with government or anyone who wished it, but he did not want to come to a session where he was told beforehand that he could not say certain things. He wanted a discussion between open minds about what was best for the country.

Prof Rossouw responded on the issue of poverty and inequality, and agreed that social grants made a big difference to the lives of 16.5 million people. Given the situation South Africa was in at the moment, it had no option but to continue with what was paid at the moment, because people depended on the grants to survive. However, he was very concerned about the possibility of extending the scope of grants to children to the age of 21, although the Minister had said that this would be on condition that they were spent on continued education. However, it would not be possible to apply that rule, because the youth had difficulty in accessing higher learning. SA could not afford the eight million people this could add to the social grant burden. Likewise the idea raised in 2013 of including everyone over 60 under social assistance would cost R26 billion.

The second part of the question had been about labour absorption in the country and jobless growth. The answer was simple -- we need to make the employment of labour more attractive. To do so, we need to understand the cost of labour against the cost of capital. If it was attractive to employ capital, then the calculation was simple: interest rates were too low -- which was the cost of capital -- compared to the cost of labour. Labour had an obligation to make themselves attractive to employ, and one had to look at the full cost of employment, not just wages and fringe benefits. Labour disruptions like wildcat strikes and stay-aways made labour unattractive. SA had to call on trade unions to change their behaviour, because it was through their behaviour that labour became unattractive. There had been a very big strike in the North West province and mines were putting people out of jobs, because it was more attractive to employ capital than labour in the platinum mining industry. As part of reconsidering the cost of labour, one would have to rethink the policy of low interest rates, because this made capital cheap.

He said there seemed to be an idea in certain government circles that it was easy to be a business person in South Africa. It was very easy to talk about employment when it was other people’s money at risk. Five out of seven new small businesses failed within two years. It was tough to be a small business. An example of the difficulty was that a business dealing with the state issued an invoice and at the end of that month the business has to pay VAT. The government department pays the business six months later, and the business has collected VAT for SARS for six months before the government departments pays it. One goes out of business before one is paid, because one can not fund the VAT on the invoice, because government departments do not pay small suppliers. SA could not get small businesses going, because it was impossible to be a small business person in South Africa.

Referring to SOEs, and which ones he meant, he said SAA came to mind. FEDUSA had dealt with this, and he agreed with it viewpoint -- but it could simply be given away. It would be cheaper to the taxpayers of South Africa if someone would take it, because R5 billion was put into it every year. PetroSA came to mind as well and if he applied his mind, he could come up with a long list. These should simply be given away. SA should not try to sell them, because investment bankers and legal advisors would get wealthy from trying to handle the sale. The SOEs should be given away and save the taxpayers a lot of pain and a lot of money.

The Co-Chairperson had mentioned ceilings on the values of cars, and this was different from requiring only South African cars to be bought.

The Co-Chairperson said he agreed with that point.

Ms T Tobias (ANC) said she held a different opinion on SOEs, and wanted the various stakeholders to have a special day to discuss the matter.

Prof Rossouw said there was a lot which could be done in South Africa, as pointed out by the other speakers. This was a time to put small differences aside, a time when South Africa was in a corner and needed to start thinking outside the box. Sacrifices were needed at all levels, from higher taxes to giving away SOEs. In conclusion, he fully agreed that VAT was regressive in its impact on poor people and a differentiated VAT system was a nightmare to implement. South Africa did not have the capacity to implement a differentiated VAT system.

Submission by PricewaterhouseCoopers (PwC)

Mr Kyle Mandy, Tax Policy Leader, PwC, said both the Minister and NT deserved congratulations for Budget 2016, bearing in mind that he had been in the job for only two months.

He began with the fiscal framework. PwC welcomed the proposal to reduce the budget deficit to 2.4% of GDP over the medium term. However, it had to be pointed out that a sustainable reduction in the deficit was continually being pushed further down the road. For example, the 2015 budget had claimed that the 2016/17 deficit would be reduced to 2.6%, but Budget 2016 put it at 3.2%. This trend had been on-going for a number of years now and was becoming a problem. This was because it called into question the commitment to reducing the deficit to sustainable levels. PwC would like to have seen an acceleration of the deficit to below the 3% level, and believed it could have been achieved through an acceleration of the additional tax increases proposed for the next two years, together with some of the spending cuts which would also come into effect only over the next two years. If one was talking about an additional R10 billion cut in the deficit, that would bring one below the 3% level, based on the forecast GDP growth. PwC believed this was sustainable and the scope was there to do it this year. Perhaps a chance had been missed, but maybe it could still be looked at.

As far as the fiscal deficit was concerned, the problem was expenditure, not revenue. He spoke to a graph which depicted that tax revenue levels had recovered to those prior to the financial crisis. However, expenditure continued to be way above what it was. One really needed to see the levels of expenditure starting to decrease, as proposed over the medium term. It needed to start coming down quite dramatically, because SA was at unsustainable levels, and space had to be created for future initiatives like the national health insurance (NHI) and social security reform.

Mr Mandy moved on to revenue forecasts, and said when the written submission had been compiled only the December revenue figures had been available and based on that, the expected shortfalls in revenue collections was going to be R12 billion, versus the R4 billion included in Budget 2016. Now that the January numbers were out, the forecast had been revised and the shortfall would be R6 billion, rather than R12 billion previously forecast. This was better, but it was still higher than Treasury’s estimate, which PwC certainly hoped would be achieved. This raised a question around the quality of data or the anomalies which came out in the November and December revenue collections, which were by all measures atrocious. Big questions needed to be asked of SARS and National Treasury about the serious anomalies in that data.

PwC welcomed the R18 billion worth of tax increases as a general proposition. It had to be pointed out that the tax increases in reality were not R18 billion -- the structural increases were in the region of only R13 billion, because some of those were ordinary inflationary increases, like much of the increase in the general fuel levy and excise duty. PwC welcomed the way the increase in personal income tax had been spread, borne by mainly high income earners. It preferred that it was done through fiscal drag, rather than raised tax rates, because it felt this was a more sustainable way of increasing the take from income taxes. It welcomed the fact that some of the burden had been spread on to general consumptive taxes like the fuel levy, although it was acknowledged that this was a regressive tax.

There were concerns around CGT increases, because there was a proposed R2 billion increase as far as CGT inclusion rates were concerned. There were two concerns as far as these increases were concerned. The first was the volatility of CGT, because by its very nature it was very volatile and should not be looked at to increase structural revenue collection. It was far too risky to rely on it and information received from SARS on CGT collections had been provided in the written submission. Secondly, on the inclusion rates themselves and particularly with the corporate tax inclusion rate, which was at 80% -- when CGT had been introduced, the lower inclusion rates were a compromise for not having indexation of capital gains. The principle was that only real economic gains and not inflationary gains should be taxed under CGT, because otherwise there were huge distortions and conflicts between current income and long term capital growth or return on investments, leading disincentivisation of savings. A point had been reached where one needed to look at the indexation of capital gains, and more detail had been included in the written submission. PwC looks forward to the base that would be added in relation to the increases in the next couple of years, with a R15 billion increase in each year. No detail had been provided in the budget, and it would be an interesting consultation process.

Mr Mandy offered a word of warning as far as South Africa’s tax burden was concerned. As stated earlier, SA did not have a revenue problem, it had an expenditure problem. Looking at where its revenues were going, they were on a steep upward trajectory, the tax burden was set to head above 29% by 2018/19, and that would be reaching unsustainable levels. That also spoke to crowding out space for future initiatives like the NHI. SA could not sustain the levels of tax increases going forward. The only way SA could get the tax burden down was through growth.

Based on World Bank GDP data, excluding social security taxes, SA had the tenth highest tax to GDP ratio compared to every country in the world in 2012. Personal income tax sat at around 10% of GDP, VAT was slightly below 7% of GDP and corporate taxes were about 4.5% of GDP. The corporate tax, personal income tax and consumption taxes were high, compared to the Organisation for Economic Cooperation and Development (OECD) averages. This meant SA was highly reliant on direct taxes as a country and had a fairly low reliance on indirect taxes. This meant there was an opportunity to shift some of the tax burden to the general consumption taxes, to make the tax mix more attractive for growth. Further, there were ways of dealing with the regressive nature of consumption taxes, and SA needed to look at the fiscal system as a whole and not look at tax policy in isolation.

He agreed that the poor should not bear the tax burden and SA needed to make sure they saw relief through the expenditure side of the budget, and this could not be done through a taxation system which created too high a level of economic distortion. The risks of over reliance on corporate income tax was that corporate income tax was much more volatile than other taxes, which had been demonstrated by how corporate taxes fell substantially in the wake of the recession. To rely on corporate tax to the extent SA did was doing the country a disservice. It was also the most highly distortionary tax regarding economic growth. Income taxes were a disincentive to savings, which had been spoken about earlier. Further, it was an incentive towards higher consumption. One really wanted to penalise consumption and reduce the taxes on income, to encourage savings. Therefore, the tax mix needed to be reviewed.

Mr Mandy said the issue had been raised already, but SACU was unsustainable and SA was subsidising Botswana, Lesotho, Swaziland and Namibia to the tune of up to R30 billion per year more than it should be, if there were a fair revenue sharing formula. He was pleased to see in the Mini-Budget that government was in the process of renegotiating the revenue sharing formula, but he was disappointed not to see this in Budget 2016. This needed to be looked into urgently, because SA could not afford to subsidise the other SACU countries to the extent it did. However, this should be done bearing in mind how reliant some of these countries were on SACU funding. This meant SA had to make sure they had fiscally sustainable revenue-raising mechanisms. He spoke to a graph which showed how the SACU states were also competing with South Africa through lower tax rates.

Submission by South African Institute of Chartered Accountants (SAICA)

Mr Pieter Faber, Project Manager: Tax, SAICA, said one of the main themes of Budget 2016 had been to provide some certainty in very uncertain times, and that expectation had been made public. The Budget had a lot to achieve and a lot of that could not be achieved, simply because those concerns were not something to which the Budget had a direct application. Overall, the Budget was very balanced, but the usefulness of a good crisis should not be underestimated. SAICA felt more of the burden could have been placed now, instead of creating uncertainty about whether this was as bad as it would get. That was probably the bigger question on peoples’ minds, rather than whether they were to pay more tax this year.

One thing which was within the control of the Minister was debt reduction, and once again spending cuts were deferred or small, creating a problem for the planning of future initiatives as mentioned earlier. It also meant that the negative perception was not addressed, because the Minister had expressed the view that there no fiscal cliff -- but this was the position of many people and that perception needed to be addressed. Not doing so created volatility in the Rand, and at times the perception was as important as the facts.

What had been encouraging was the Minister’s invitation to collaboration and dialogue, which was a very progressive approach and a positive development. One of the big challenges was public consultation. Retirement reform was more about the principle and in the Standing Committee on Finance, a lot of work had gone into trying to improve the consultation process. The concern SAICA had, and which had been raised by the Chairperson of the Standing Committee the previous year, was why one ended up with the same things year after year -- passing legislation and then continuing to debate it year after year. This should not be the case, and neither Treasury, the public nor the Committee, wanted to discuss the same matter. This was something which must be addressed going forward, because retirement reform was not the only issue, although it had been on the books since 2013. The withholding tax on services faced similar problems, and the Budget had noted that it would be withdrawn without having been implemented. There was a similar situation with the section 8C double taxation issue, which had been dealt with last year and was being proposed for discussion again this year. The problem was that these things get passed into legislation, before there was a solid policy position or enough consultation had been done.

Mr Faber said one of the big drivers of revenue was the efficient and effective revenue collection. The Minister had noted, and SAICA agreed, that SARS needed to be congratulated for what it had achieved in a short period of time. However, SAICA was cognisant of the environment in which that was happening, and did not wish to get involved in the debate. Regardless, it proposed that the issues be resolved through open dialogue. SAICA did not want to detract from the issue that there were problems within SARS at the moment, and would like to see a confident, efficient and effective SARS. Experience had shown that an inefficient and ineffective revenue service was a lot worse. SAICA would like to engage with the Minister and the Commissioner of SARS once the dust had settled.

SAICA had recently completed a report on the 12 biggest challenges facing small businesses. The top three included payments by big business and government, while number four, strangely, was registration for VAT. This should not be the case, and these were the types of things SAICA was concerned about.

Regarding tax expenditure, Mr Faber said the Minister had noted the proposed re-looking at certain incentives. SAICA supported the policy of having limited incentives and the ones we had should be as effective as possible. What had been of concern from the numbers coming out of the Budget, was that various incentives, including the learnership allowance and the Research and Development (R&D) incentive, over the last four or five years had been showing significant negative growth. The questions were why some of the incentives were down by 50% -- were they efficient and what was driving this lack of uptake? With the announcement of the review of the R&D incentive, hopefully the scope would be extended, given the policy shifts and administrative hassle which had prevented the uptake in the past. One needed to understand what the reasons were before any constructive comments could be made, but one should only support tax incentives which produced positive results.

One thing which was clear in the policy -- which also seemed to be a global trend -- was a move away from direct taxes towards indirect taxes. If this was a strategic move to migrate the tax mix towards indirect taxes, there must be a certain policy indicating where SA was going. This was so that taxpayers and businesses could start planning how to deal with the way Treasury intended to collect revenue. SAICA would request clarification from the Minister as to whether that was merely perception, or was what was happening.

Mr Faber said drought relief had been announced and was welcomed by SAICA. However, the severity of what was being faced was very shocking, and the agricultural industry was saying it needed between R7 to R16 billion, depending on how bad it was, with a 40% crop failure. This was the worst drought SA had had in 100 years, and we needed to take cognisance of what that meant. Going forward, there had to be relief where it was needed and declaring this a national disaster was the first step, not only to appropriating the money, but actually getting it to the needy. Operation Hydrate was a good example, because its focus was on helping first and placing the blame later.

On earmarked taxes, the Minister had noted the stark contrast between the Unemployment Insurance Fund (UIF) surplus and the Road Accident Fund (RAF) shortfall, which demonstrated that earmarked taxes created problems for fiscal mobility. However, SAICA believed that earmarked taxes had their place and a good example was the general fuel levy’s attachment to investment into road infrastructure. Once the earmark had been removed, a significant decline of investment into roads had been seen and the levy had become just a general revenue collector. If one were to use the UIF surplus, SAICA would recommend not using for increased benefits or to pick up RAF shortfalls, which were not necessarily a fiscal management issue. To help deal with the negative perceptions the surplus could be put towards debt repayments, as a token to the world.

Lastly, the special voluntary disclosure programme for exchange control was a welcome initiative and allayed the previous concerns around the lack of alignment between exchange controls and tax. SARS had showed quite successfully that while there needed to be a punitive system for wilful transgressions, there was value in having a mechanism which allowed people to come clean on their own. Perhaps there needed to be a permanent voluntary disclosure programme for exchange control, and then aligning the punitive measures with that. There was only a proposed six months to do this and a lot of limitations from a regulatory position did apply. For example, the disclosure requirements under the Financial Intelligence Centre Act (FICA) and the Audit Professions’ Act prevented certain professional advisors from being used, because they could not do so without having to disclose these matters to help a client voluntarily disclose. To make this an effective programme perhaps one should remove those barriers only for six months.

The Co-Chairperson said the matter which SAICA had raised about the SARS voluntary disclosure model and operations had been on-going concerns and the proposal should be put on paper, because the Committee would be having frequent engagements with stakeholders over the coming year.

Submission by South African Institute of Tax Professionals (SAIT)

Prof Keith Engel, Chief Executive, SAIT, said many people had been happy with Budget 2016 because of the signal it had sent. This came back to the social compact and whether there was a fair trade off between taxes and spending. What the Budget had showed a recognition for was that Treasury would not simply keep raising revenue year after year and not take into account that spending was becoming a problem. The question became how serious the spending cuts were going to be -- and if one took the Minister’s word, these cuts were going to be serious. If we kept delaying the cuts, we were going to face a credibility problem, but he did believe there was credibility.

Prof Engel said there has been a lot of support for the exchange control amnesty measure. It was less of a principle issue, and more pragmatic. The big amnesty had happened years ago when he was still in Treasury and he had opposed it then, but it was probably the most successful initiative done and it had generated a lot of revenue. With the first amnesty, people had not believed Treasury and felt that SARS would victimise the people seeking amnesty. However, SARS had been very true to its word and now a lot of people who had missed the first one had realised that they had made a mistake. With the changes in the global economy and the global exchange of information, many people wanted to “come clean.” While SAIT supported the amnesty, there would be some detail issues as some of the lessons learnt from the last amnesty had been lost. The amnesty was not complete and did not cover all the taxes -- the point raised by SAICA, around the practitioners and disclosure and the six month time was limited. SARS may like the six month period, because it felt it would get the money faster, but it took time to gear up for these amnesties and it may be found that six months was too short. Further, the previous amnesty was very simple -- you declared the assets you wanted liberated and the amnesty was given. Here there would be elements of tracing, and this was tricky terrain. Therefore, SAIT proposed the amnesty be adjusted slightly, given the lessons learnt previously. The question was how many people would come forward if it was effective, but Treasury would say that this round should not be as generous as the prior amnesty. The process should be as simple, but the relief should not be as generous because that was what Treasury had said would happen.

Prof Engel referred to earmarked taxes, and said one thing identified in the Budget was that we have trapped pockets of money. Sometimes earmarking may work, but what was being found was that it was not just on the tax side, but on the expenditure side. In some Departments, the money was not being spent on certain activities -- for example, some parastatals would hold on to money because they wanted to have it for the following year. If they were holding money, low amounts of income were being generated and our borrowing on the money was much higher, therefore the government was losing money. The question being asked was similar to the previous year, and there was some conflict about the pocketing of money. However, no one should be entitled to certain amounts of money -- it should be shared and open. The point was one did not want money simply sitting there for the sake of some bureaucratic structure. Therefore, SAIT agreed with the Minister in this regard.

There were a number of small amendments on retirement reform which SAIT supported. The one outstanding issue was on annuitisation. The point was that the annuitisation which was being proposed was very mild, and Treasury was saying that if incentives were going to be given towards retirement they should be used for retirement, rather than allowing it to be wasted and those people becoming a burden on social assistance. This has been going on with the trade unions for quite some time, and frankly the unions had not been negotiating much, nor had they really been listening. One of the concerns which had come out of this debate was that some people were more important than others. Certain people who came to these meetings were not listened to and dismissed out of hand, while other groups did not have to follow the procedure and still got listened to. That was the more disturbing element at this point. To be fair to the unions, the issue about retirement reform was how workers could be expected to save for retirement if they did not have money during their lifetimes. If people could not pay their debts, they did not want their money trapped in retirement. This issue did not just apply to workers and provident funds, but applied across the board. He felt the way this had been addressed has been fairly ad hoc, and showed a weakness in the discussion process, which needed to be improved.

Prof Engel said he was surprised to see that estate duty had not been raised, but that Treasury was going after some issues with regard to loan trustees. This may be appropriate if one believed in the estate duty, because what everyone did was set up a trust, and put their house or some assets into the trust for an interest free loan which, after ten years, gets the house out of the person’s estate. These schemes did not work as well as people thought they did -- it was a bit of a money making scheme for some of the advisors. Even though they were good for estate duty, they were very bad for capital gains tax and other things. Therefore, most people tended to unwind these schemes illegally and he tended not to be in favour of them. The proposed amendments seemed confused, because they spoke to both a donations tax and an estate duty. He would say it should be one or the other, and the tax should be aimed at the point where the assets were put into the trust. Further it should not be retroactive, so all the people who had done this could live with it and people going forward should be stopped. It was unfair to the people who had already paid tax to carry out the scheme if they were taxed again, but it would be fine going forward.

He said share incentive schemes had been a major problem, but he did support the amendments. SA had been tinkering with this area for quite some time and the problem was that there were some high executives in the private equity space who consistently wanted to convert their fully taxable salary into low tax dividends or something else. They hide their bonuses and growth through these schemes, which SARS had continually been trying to go after. It was important that their hidden salary was taxed like normal income. However, because SARS had not been watching this carefully, every time they went after it they hit the wrong thing. There were a large number of share schemes which were meant to promote black economic empowerment (BEE) for the rank and file, which were the schemes which ended up accidentally getting hit by the amendments. In the current proposal they were hitting the high end schemes, and the low end schemes were getting relief. The drafting was yet to be seen, but SAIT agreed with the principle that there should be no double taxation, but high end schemes were ordinary revenue income.

Prof Engel said the Department of Science and Technology (DST) seemed to talk about wanting to promote and help the R&D incentive. However, when the guidelines came out, they had shown that the private sector was not trusted and the incentive would be shut down. Every time one got down to the words, it became completely different from the stated intention. He felt there was a serious problem of distrust, but the problem lay in the R&D incentive itself. Government did not know what it wanted to incentivise, therefore it made generic rules which shut off random things. If they wanted to have an incentive, it should look at the economy to see what it wanted to incentivise. In the meantime, SAIT was requesting that the normal deduction be available for people who did not want to go through the channels, because research and development was an expense. The bigger issue was that Treasury and the Department of Trade and Industry (DTI) were creating a lot of incentives every year, where they accelerated depreciation. However, these incentives simply did not work, because instead of understanding the needs of business, government created incentives and hoped there would be growth. One of the incentives which was always being pushed for was depreciation allowances and more deductions, but the problem with this was that most start-up businesses did not make money until three to five years later, and the deductions meant nothing to them. Most of the R&D companies and small warehouses made no income, so the R&D incentive was meaningless. What happened when incentives were simply created was that the benefit went to the wrong people and all one did was get what one would get anyway, but not get anything new. The incentives had to be thought through from the business perspective from the beginning to determine what government really wanted. The DTI was having problems, because it had run out of cash, which showed that some of the incentives did work, but were now impeded by the lack of cash. Therefore, he felt a lot of the tax incentives should be done away with and more should be pushed into cash, because it did not make sense to have incentives which were mislabelled or went to the wrong people.

Prof Engel referred to the mining community infrastructure, and said SAIT fully supported the amendment to provide mining companies a deduction for expenses related to mining community infrastructure expenditure. Mining companies were forced as part of their licence requirements to spend money on community infrastructure, such as hospitals and roads. For many years, this had not been deductible, but was an expense. This was not an incentive, but a recognition of the expenditure and should match the accounting, whatever that may be. Further, rehabilitation costs of mines were not deductible during the mine’s lifetime, and it was better to rehabilitate during a mine’s lifetime, therefore the tax system should promote that. Overall, this was a good amendment -- SAIT just wanted to see an extension.

He said that unfortunately the Budget had provided much for small business. Here again, he felt that incentives were being provided which did not work. Prof Rossouw had mentioned that many of the problems facing small businesses did not need to be fixed through an incentive, but rather a few things needed to be recognised. One of those was that small businesses run on cash and should be taxed on a cash basis, both for VAT and income tax. Over and over, small businesses send out invoices and SARS wanted its money, but with government the business would not get its money for up to 12 months. It was not only that the government did not pay quickly, big companies also did not. Companies knew small businesses did not have the resources to challenge them, so they made them wait 90 days. SARS should collect only when the cash came in. Most systems in the world had a cash-based system for small businesses up to a small amount, and this was standard practice. South Africa had gone with cash and accrual, in order to prevent avoidance, but potential avoidance should not be allowed to undermine small business. If government wanted to help small business, it must understand their businesses and SAIT was saying the tax and the cash flow should match.

Micro-businesses were different from small businesses, because they were survivalist. Therefore, all they needed to do was pay a token tax in order to be in the system and be legitimate. However, whenever we deal with micro-businesses, we make it too complicated. Turnover tax should be like a medallion tax for taxis. The bottom line was that the Budget amendments did not make the situation any worse, so small business could thank Treasury for that.

On share buy-back avoidance schemes, Prof Engel said he was surprised Treasury had taken so long with this, because government was losing between hundreds of millions to possibly billions with these schemes. Instead of selling their shares, companies were entering into buy back structures and converting taxable capital gains into tax free dividends. These schemes needed to be shut down, not only going forward but going back, because they violated the business purpose doctrine and were shams. This was an area for legislation, but also for SARS intervention. There was an advanced reporting requirement, but people had a very interesting interpretation to get around it. It was a big money pot, but he would say that if we were to go after these schemes and the capital gains tax rates on companies kept going up, now it was getting distortionary. Therefore, it was not about just putting up capital gains across the board, because capital gains on companies selling companies gave rise to a double or triple taxation. Overall the amendment was supported and the schemes needed to be shut down. The only question was how.

He said one kept hearing about base erosion and one of the problems he was having with government was that it kept looking for labels and not facts. It went for incentives, but went for the wrong ones, and the same applied to small business. People were looking for the honeypot with base erosion, and this was coming from the Organisation for Economic Cooperation and Development (OECD). The OECD was sending messages across the world about abuse, and while some of it may be happening, a lot of it was simply not true. Further, the abuse happening in Europe was different from what was happening in Africa. Africa had a very different treaty set up, and in Europe the aim was to allow free flow. What they had found was that 50 years later it had worked against them. Africa had always been protectionist and we were arguing for adding more rules to areas where we had already done something. A problem was excessive interest, but we had sections 23M and 23N of the Income Tax Act, thin capitalisation, interest building and hybrid rules. Maybe there was some space to do more, but already our rules were becoming punitive. He supported stopping abuse, but warned against going after labels. Instead of going into the economy and learning the facts, government was looking at what the OECD was saying. This did not help, because we would end up hitting the honest businesses and miss the guilty ones.

Prof Engel said South Africa at some point wanted to be the gateway to Africa, but in the name of avoidance we were getting tougher and tougher on cross border activities. We were doing this because the OECD wanted us to, but the problem was that the OECD and the United States were speaking with forked tongues. They wanted to live in a world where everyone else was enforcing the rules, but they did not. Looking at the United Kingdom, which had one of the softest controlled foreign company (CFC) rules in Europe, with their multinationals they were becoming a Mauritius. The UK has CFC rules in name alone and they hardly meant anything, while we were making it more and more difficult for our economies, preventing us from competing. The problem was that we had bought into the mantra, but had not looked into the practice.

Cross border services were another messy area and what was being found was that we were double taxing services. The specific problems needed to be address, but again because we do not understand the facts we were putting in random rules. The reporting requirement we had was a random rule. We need to understand business, get the facts and then we could quickly shut down the avoidance.

Prof Engel said lastly, in the Division of Revenue Bill 2016, there were a lot fewer changes to the Tax Administration Act. Last year most commentators had been happy about this, because it was felt that things were getting a little one sided. To be fair, there had been a proposed amendment about the limitation for taxpayer response times being extended beyond 30 days. Treasury seemed to think that this was only needed for complex matters. However, for taxpayers with all their other administrative duties, this may be difficult. Small businesses needed longer response times, because they had other things to do and they were trying to cope. Further, the response times for the taxpayer were short, but the times for SARS were long. SARS had administrative difficulties and was a large institution, which meant it needed time. What SAIT was recommending was that there be fairness in the system, because everyone needed time and there were continual requests for information falling on small businesses. Therefore, the amendment should be more focussed on small business. He thanked SARS for the amendments to the rules for access to a taxpayer’s bank account.


Mr Topham said all his questions came from the perspective that the DA wanted to stimulate job creation and job retention. PwC made a strong argument for indexation or inflationary adjustments to the base costs for capital gains tax. He wanted other presenters’ views on this and whether increases on a dividend tax with a decrease in corporate tax would stimulate investment in South Africa. Would the presenters agree that a differentiated VAT system would have a knock-on effect, regardless of whether certain things were exempted, such as luxury items? Would the items which were exempted still get a higher price in the long run? Looking at Ireland and England, which Prof Engel had mentioned were moving closer to tax havens, there the R&D system effectively gave one a Pay as You Earn (PAYE) credit, which went hand in hand with a small business which had not paid tax in the first few years. Perhaps this was a way one could extend the R&D incentive, and it could be a cash flow incentive. Another aspect was that the incentive supported the employment of people who had recently left tertiary education, in line with what SAIT said about choosing which industries to incentivise, and this could help. South Africa’s unskilled labour was expensive, but our skilled labour was comparatively cheap. Therefore we should be a destination for foreign companies to come and do research and development, which would create job and bursary opportunities for our young people.

Addressing SAICA, he suggested on did not need legislation to allow an ethical waiver to allow advisors to assist with voluntary disclosure. Could the professional bodies not do a directive to clarify that the members were allowed to advise, without the advisors having to report the potential tax evasion? On CFCs, he had not picked up a specific recommendation on what we could do to loosen up the rules, because he agreed that there were a lot of restrictive rules. This was particularly the case with regard to small businesses which were trying to expand abroad, because it was easier to comply with the rules for bigger enterprises.

Mr A Lees (DA) said he needed clarity on the revenue data anomalies which PwC wanted the Committee to follow up on. On the UIF, these were contributions made by employees and employers for a particular purpose, and were not taxes -- they were contributions to an insurance scheme essentially. Were the presenters suggesting that we raid these for a general contribution to the fiscus? On the trust reform, to deem transfers to the trust to be part of the estate upon death, was it being suggested that the annual tax free transfer should be eliminated? For example, if he set up a trust and used his annual allowance to transfer assets over an extended period, under the proposed amendment, would the assets owned by the trust be deemed to be his? On the voluntary closure programme, when this had been done previously it had been said that it may be done again, but that SARS would not be as lenient. What exactly would less lenient, according to SAIT, and what should be tightened up? He agreed with the comments about small businesses and the need to pay VAT.

Mr L Gaehler (UDM) said he also wanted clarity on the comments about the UIF, because that was worker’s money. If it was suggested that these funds should be cleared to the general revenue fund, what about suspense accounts in the various municipalities which would have to be cleared? Secondly, he agreed with the comments about the 30-day response times for taxpayers, especially with regard to small businesses. However, what was being suggested as an alternative?

Mr Mandy, on the high dividend tax and a lower corporate tax rate, said there needed to be some caution, because that was the purpose of the secondary tax on companies. It was intended to incentivise companies to retain distributions and to re-invest them, but that had never worked. Having a high dividend tax might make it attractive for companies to retain money, but that did not mean the money was spent, potentially creating inefficiencies. If a company did not have a use for the surplus it produced, it would be much more efficient for it to distribute that to the shareholders who could then use that money for consumption or investment. One did not want to trap pools of money in the economy which were not being spent. He reminded the meeting that corporates were already sitting on large amounts of cash, because they could not find anything which they believed was worth spending their money on. Even at a lower dividend tax rate, they were not making distributions. As far as multinationals were concerned, it would have no impact at all, because as a general proposition they would be paying much lower rates of tax on their distributions because of treaty relief.

On the luxury VAT, PwC was not in favour of it and Prof Rossouw had raised one of the reasons in the complexity of the system. There were other reasons, such as definitional problems because what constituted a luxury to some might not be for another. Even once the luxury goods had been identified, how did you determine whether one’s products actually fell within that space, which was a present problem in the customs duty space. Further, we already had a luxury goods tax in South Africa which was the ad valorem excise duty. If we wanted to tax luxury goods, we should be taxing them through the ad valorem excise duties rather than VAT.

On skilled labour and R&D, the point he would make was that South Africa underplayed its strengths and tended to try to compensate for our weaknesses. We needed to leverage our strengths and a major one was our financial services, which were not leveraged. We talk about South Africa being the gateway to Africa, but we think just talking about it would make this so. In his view, there were areas in the country which should be designated as international financial service centres and we should make them gateways to Africa, along the lines of what had been done in Dubai. That was not just a tax issue -- it was a package which made it easier to set up headquarters in South Africa. It was something which should be explored, not because it would generate a significant number of direct jobs, but because it would create indirect jobs and taxes.

On the data anomalies in revenue collections, the revenue collections according to the published data for November and December last year, had fallen fell off dramatically. That had given the distinct impression that the wheels had fallen off the economy and revenue collections were in for a rough ride for the remainder of the fiscal year. The question was why that was, because revenue collections should be relatively stable. There should not have been the huge drops we saw in revenue collections and further these were not just with one tax, they had been across the board. In both personal income tax and VAT we had seen the rate of growth in collections drop off dramatically, but then suddenly come back with very large increases in collections in January. This raised questions about what had gone on there, because it would be understandable if it were only for personal income tax and the government had been late in paying its employee tax for a month, which would have had a dramatic impact on collections, because it affected cash in the bank. However, there was no explanation of what happened over those three months and some form of explanation was called for.

On indexation for CGT, Mr Faber said initially we had started off with a low inclusion rate to make it administratively simple. By continuing to add on to this we were starting to force ourselves into an administratively complex system and the question was whether the trade-off was something we were willing to accept. That was whether the increased cost of tax administration was really worth it for the amount collected through CGT, which was not a major driver for collections in any case. Some balance needed to be found and it needed to be asked whether the chosen direction was correct going forward.

On dividends withholding tax versus corporate tax for job creation, from a policy perspective we should be hesitant to use tax, or tax incentives, to try to create jobs, because this did not directly create jobs. It was difficult to make a relevant statement on whether dropping one rate would be better, because the crux was economic growth and business confidence. Would either a higher rate way give further stability, or business confidence, should be the question rather than whether playing around with rates would achieve the outcome?

On the effect of a differentiated VAT system, he agreed that SAICA would probably not be in support of it, because it was administratively complex and it may not necessarily provide the returns we were seeking.

On the R&D cash flow incentive, we needed to first sort out what our policy was. The big constraint with tax incentives, especially in R&D at the moment, was that we did not necessarily know what we wanted to incentivise. Every year the policy had been changing. For example, there had been a court case with a taxpayer relating to business software for the 2010 tax year, notwithstanding that in 2011 Treasury had amended the Act to clarify that they wanted to incentivise business software. How could there be an incentive which led to SARS chasing down taxpayers who thought they were within the scope of the legislation and when it was clear that this was the policy intent? This created a lot of uncertainty and we needed to sort out what we were doing before going to the underlying intricacies. On the voluntary disclosure and ethical directives, the question was a bit misplaced because the professional advisors had a legislative obligation to disclose under FICA or the Audit Professions Act. An accountable institution under FICA had no choice about disclosing that a client had indicated that they had an offshore trust. The client would not do this, specifically because of this, and if the people who could help were excluded from the voluntary disclosure programme then it reduced the ability to encourage people to disclose. In the previous programme, one of the problems had been whether people would be victimised if they disclosed, and the on-going disclosure programme in the tax environment had been managed well by SARS. These were the same concerns facing the South African Reserve Bank -- balancing being punitive and having a system to allow a mechanism for people to come clean. That spoke to the question of certainty. If people were going to be encouraged to disclose, they had to be certain of the punishment they faced and did not want it to be at an official’s discretion.

On the UIF, he felt it may be a policy statement that the money was worker’s money, because it was actually deemed tax in the way it was reported and dealt with. It was not deemed to be a pool of money for employees’ benefit. The Minister had made the express statement that if he un-earmarks some of these taxes, it would be to provide fiscal mobility. However, this came with the risk that those monies would not be spent on the things which they had been earmarked for, and the UIF was really the only example of an earmarked tax. The issue was whether we had managed the payments to unemployed contributors properly, rather than whether the charge was relevant.

Prof Engel said the only issue with CGT was that it was a tax on inflation, and now we were seeing the tax go up. We were going to see inflation go up and this would be even more, given December 2015. Previously we had been sensitive to inflation, but now we were becoming less and less so, and Mr Faber was calling for a more complex form of relief.

On VAT differentiation, he did not think anyone was in favour of a dual rate system. Importantly, a luxury VAT did not make any money, so why create the complexity? The real concern was raising the primary rate of VAT and if it was unfair to the poor, he was not hostile to zero-ratings. The only problem was that the zero-ratings we had at present did not necessarily make sense. Typically what government’s problem was that it sat and thought of rules which the world must comply to. If we want to know what things really needed to be zero-rated, we should go to the townships and spaza shops to determine what really needs to be zero-rated. There was an argument that all zero rating got absorbed by the sellers, but he was not sure if that was true. It did not make sense to do so, although they may absorb some of it. If the aim was to increase revenue, we simply needed to raise VAT and fix the zero ratings system. A lot of economists had said that in the Division of Revenue Bill, we effectively have a second tax rate, not only because of the ad valorems but because we would be taxed on sugar, alcohol, tobacco and environmental damage.

On R&D, Mr Topham had raised a new proposal of a PAYE credit, but he was reluctant because the starting point was the proposal and not the facts. However, the point raised around R&D was good, because of what we wanted to incentivise around R&D. The aim was not to incentivise buildings or test tubes, it was to incentivise people, and if this incentive was going to be there, it should be linked to that. If a PAYE credit was going to be given, it seemed to be talking more to the employment tax incentive. We had to be clear on the aim of the intervention in the industries, because if it was not, SARS would fight it.

On what to do about CFCs, he was saying that if South Africa wanted to be the gateway to Africa, we probably had to have CFCs and other relief which was targeted for Africa. Maybe we could be heretical and say Africa, excluding Mauritius, which may not be right from a policy point of view. At the end of the day, we needed to be smart about taxes and it was about doing what was right for the economy. Africa was a different case from the rest, and the problem was double taxation.

On earmarking, money was fungible at the end of the day and what was really important was that whatever commitments made under the UIF were kept. How they were kept really does not matter as long as they were kept. When earmarked taxes were created, there were problems and frankly these were taxes on employment which was the reverse of an incentive. Reallocating now was a question of perception and the commitments had to be kept.

On the voluntary disclosure programme, this was a second amnesty, but politically we do not want to call it that so we use a different label. We should have re-used the old amnesty Bill and increased the rate at which income was taxed. Increasing the rate at which disclosed income was taxed and using the old Bill would ensure everyone knew the rules.

On how many days taxpayers should have to respond, SARS gets 90 days and perhaps it should be between 60 and 90 days. If taxpayers were given too long, they did not respond either, but the number should go up to somewhere around 60 days.

Prof Rossouw said he was the chief operations officer during the previous amnesty, which had received 43 000 applications. It had taken a year to get all the applications in, and people had disclosed R43 billion worth of foreign assets. R3 billion had been collected and it had taken three years to handle all the administration. Therefore, thinking about a six-month amnesty was ‘pie in the sky’ and it would not work. Just for people to get their documents together took about a year. He agreed that we needed to go back to the old amnesty. The administration of the previous amnesty at its peak employed 105 people and was a big effort, which should be done properly.

Dr Khoza said she would like Treasury to respond to the presentation by SAIT in its entirety, because it raised a number of areas which were important for Members to process thoroughly. She felt we needed to turn this crisis into a positive, and this was when we should review some of the generosity, like around the SACU. Members needed to address this area and it spoke to re-thinking regional integration. She wanted to know PwC’s view on profit shifting by players in the service industry, because she had come across a report which stated that companies doing business with government were involved in profit shifting. On consolidating tax revenue and expenditure, she wanted to know the practical things which government should do to level expenditure and revenue. This was an area which could help Members conduct oversight. Lastly, on the incentives, she was glad the issue had come up. Perhaps we should not just be looking at tax incentives, but relief from certain legislative burdens. For example, farmers could be relived from certain legislative obligations, so that they could focus on farming. This would extend the idea behind tax incentives to other areas which may impede growth.

The Co-Chairperson said after the responses from the presenters, Treasury would make a short input.

Mr Mandy said PwC acknowledged that profit shifting was happening and that South Africa was not immune. South Africa was doing what it needed to do at this point -- it was part of the OECD process, which was acutely aware of what the issues were. However, he would agree with Prof Engel that South Africa needed to focus on its particular problems, rather than European issues. We do not have all the same complexities, but there were some which was where our focus should be.

On how to practically reduce the deficit, as he had said earlier, our problem was not a revenue problem but an expenditure one. We needed to reduce our expenditure. Some efforts were being made already, such as cutting down on the unnecessary expenses. Prof Rossouw had touched on procuring South African cars, but to really save the billions we needed to cut down on the size of the civil service. The size of Cabinet was a related issue, but spoke to the proliferation of government departments which we have. We need to ask ourselves whether we need all of these departments, and should some be eliminated or merged into others. These were the hard questions we needed to ask ourselves, because this was the only way we were going to be able to save significantly.

Prof Engel said the problem on base erosion was that we had taken on the OECD reports, and the Davis Committee had spent a large amount of time on this issue. However, this had wasted a lot of its resources because the issues were not the same. The OECD had raised it and this had made us feel compelled to write report after report. He was not saying these issues did not exist, but they were completely different. There was a base erosion problem and we had been addressing it for a number of years, even before the OECD got involved. One thing to note about farming was that we were not good to farmers. Forget about incentives -- if we simply looked at how farming operations worked and how our regime blended with the operations’ profits and losses, it would help. We have not revisited the farming system for years, but before we started looking at incentives we should get the basic regime right. Perhaps an incentive for disaster relief could be done, but it was not just a tax problem. It was a broader regulatory problem.

In conclusion, the problem was we start with rules first. Instead of starting with tax or a department, we must start with the industry, fix the problems and then come up with the rules. Part of the problem with the economy was that it was buried with rules and they did not make sense to the business, which was where we needed to start.

Mr Mandy said one of the misconceptions we had was that we were talking about the OECD concept, which was cross-border base erosion and profit shifting. In the South African context, we overemphasise that, rather than focussing on the domestic issues. It was important, but it was not the only area or biggest part of the base erosion in South Africa. An example was the share-buyback schemes, which had been happening since the dividends tax was introduced. SARS and Treasury knew about it within months of it happening, but had done very little to remedy it. What they had done was introduce a reportable arrangement regime, which in PwC’s view was covered by the existing reportable arrangement regime. That was not the appropriate response -- they should have immediately shut down the loophole. It had cost the country billions in lost revenue. There were massive domestic issues where there was base erosion. Aside from technical loopholes, we also tended to focus too much on corporates. They had been guilty of tax avoidance in the past and they still did so, but was this where the major portion of the tax gap was in the country? He did not believe that this was the case. In his view it lay in small business and the cash economy. SARS needed to be focussing on that, because that would make the tax gap as far as large corporates were concerned look miniscule.

The Co-Chairperson said he was not expecting a full reply from National Treasury. He wanted a response on CGT being volatile and it being a disincentive to savings. Was it true that we have the tenth highest tax to GDP ratio in the world? The comments on the time allotted for the voluntary disclosure problems seemed reasonable. He wanted to know why Treasury had opted for a six month time period. He wanted a response to the allegation that there were not many amendments focussed on small business. On share-buyback schemes, this needed a fuller discussion and perhaps it needed to be dealt with. Whether base erosion and profit shifting was being exaggerated may or may not be true, but he felt the pendulum was being swung too far by the presenters. Currently there were seven committees in Parliament concerned with this topic. A significant amount of money was disappearing and whether it was the amounts being bandied about, was hard to tell. If people had arguments on why it was exaggerated, he asked for these in writing.

Initial Response by National Treasury

Mr Ian Stuart, National Treasury, said he would speak to some of the high level topics. There had been comments on spending versus taxation and whether the consolidation was correctly balanced or things were being left to the outer years. This was not a clear cut thing, and matters had been left to the outer years precisely to give Treasury some flexibility. Treasury explicitly stated in the fiscal framework that come 2017 or 2018, we may want to shift the burden of the consolidation between expenditure and tax. This could mean additional taxes or further reductions in expenditure, but Treasury was unsure at this point. A lot of feedback had been received, including from the ratings agencies, that perhaps government should have gone harder with the consolidation in 2016. Treasury’s view was that 2016 was an extremely tight fiscal framework and in real terms, main budget non-interest spending was not growing at all. The heavy lifting was being done on the spending side, although tax had been increased through a combination of limited fiscal drag, excise duties and the fuel levy.

South Africa was stuck in a bit of a contradiction, because government wanted to go hard for consolidation, but consolidation had significant costs if it was done too excessively. There was projected growth of less than 1% and a strong fiscal consolidation may have knocked the economy much more than at present. On spending versus tax, the expenditure ceiling had been introduced in 2012, and had been stuck to four years, and we were now seeing explicit tax increases. The problem was that it was easy to estimate a tax increase, because the numbers were applied to the tax system. On the spending side it was less clear. In his view, departmental budgets had been squeezed extremely hard for three years, particularly on goods and services. Treasury was very aware of an overly large wage bill, which was why it had been explicit that compensation budgets were being cut in the outer two years. He added that the reprioritisation process which paid for higher education increases and the BRICS Bank largely came out of local and provincial compensation budgets, therefore compensation budgets were taking a lot of strain. Treasury’s view was that social grants were fiscally sustainable and the Parliamentary Budget Office agreed with its assessment, although it was dependent on long term economic growth. One main point was that if the economy were growing faster, the consolidation would take care of itself automatically. The tax to GDP ratio being on a seemly increasingly upward trend would fall away. If you looked at the growth rates for both spending and tax, they were not hugely significant and it was more of a story of the economy consistently underperforming, resulting in the fiscal ratios growing over time.

SACU was a big issue and Treasury was well aware of the problems. Some form of intervention was needed, because there was an inherent stasis in the programme at the moment, with all the countries fighting for their share. He was unsure what the intervention would be, but we had to recognise that for the two smallest countries, the SACU revenue transfers were effectively 60% or 70% of their budgets. If we were to cut them very rapidly, the stability of those two countries would be put at risk.

On the tax collection data anomaly, part of the story was that the personal income tax decline was offset by the sale of the Vodacom stake, but he would look at it in detail. Further, the buoyancy of customs duties had been surprising, which would mean the Rand’s weakness had pushed up exports. When our customs duty goes up, we have to revise our SACU numbers, because a share of what we collect goes to the other countries. This was why we see about R60 billion being transferred in the outer year of the MTEF, which was a very significant amount.

On the difference in the SARB and Treasury inflation forecasts, part of the answer was that the numbers from SARB would have to be updated with the increases in interest rates. Treasury was assuming there would be quite a significant tightening, which would bring down inflation. As he understood it, the early numbers did not fully take into account the inflation tightening cycle.

Lastly, the UIF gets all the headlines, but now a larger liability was being built up with the RAF. The Skills Development Levy was another area of earmarked taxes which had created all kinds of distortions in our higher education system. While recognising that it was workers’ money, it was also corporate money. There was a commitment to pay unemployment insurance and there were problems in the way the system currently paid out those funds, which partly explained the surplus. At the same time, we had to look at the system in its entirety and a discussion was being had about what to do with the UIF surplus, and whether there was budget process which could happen outside the Budget process around the UIF surplus. The conversation should be how we dealt with huge surpluses and deficits being built up in the area of earmarked taxes. He took the point that we want soft earmarking, but there was a problem with large assets and liabilities being built up, and there was almost nothing which government could do.

Mr George said FEDUSA would ask Treasury not to get too excited about the UIF surplus, because it was not money which belonged to everyone. It had been contributed by FEDUSA members and employers for a particular purpose. It was ordinary insurance and government had made the period of payment very short and the payment process very cumbersome. FEDUSA was not against having a dialogue with government about how to stimulate the system, but also to make it beneficial to the people who had contributed. The numbers of Statistics South Africa showed that between September 2014 and the third quarter of 2015, the number of people that were employed had increased to 15.8 million people, which looks like the creation of 700 000 jobs, but this was in the context of “a new normal”. Therefore, FEDUSA wanted to look at the sectors which were labour intensive, but not electricity hungry.

The Co-Chairperson referred the Committee to page 126 of the Budget Review, regarding SACU and the fact that there was an on-going process. A meeting was scheduled for June 2016 for the inter-ministerial committee and the matter was a work in process.

He then declared the meeting adjourned.

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