Rates & Monetary Amounts and Amendment of Revenue Laws Draft Bill: National Treasury briefing

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Finance Standing Committee

19 April 2016
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

The Standing Committee on Finance met with representatives of the National Treasury and the South African Revenue Service (SARS) to be briefed on the draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill.

National Treasury introduced the briefing by stating that the budget was being followed by four sets of bills. The Revenue Law Amendment Bill had dealt with urgent amendments that allowed for the delay in the requirement to annuitise for members belonging to provident funds. The Rates and Monetary Amounts Amendment of Revenue Law Bills 2016 dealt with changes in tax rates and the monetary threshold, and the additional relief under the voluntary disclosure programme (VDP). The Taxation Laws Amendment Bill, 2016, to be published in July, would deal with the remaining tax proposals as announced in the 2016 budget. The Carbon Tax Bill would deal with the introduction of the carbon tax. The Rates and Monetary Bill were published on the budget day, and both bills had been slightly simplified and published on 12 April for further public comments.

Tax revenue was required to fund public functions such as health, social protection, safety and security. Each country had unique circumstances and views on the level of public spending required to fulfill those functions. To improve economic growth and ensure a sustainable tax system, the tax policy debate centred on the tax mix and on improving the efficiency, simplicity and transparency of the tax instruments. Direct taxes in South Africa included personal income tax, corporate tax, dividend withholding tax, estate duty, donations tax and payroll taxes. Indirect taxes included value added tax, excise duties, custom duties, transfer duties, securities transfer duties and environmentally related taxes. The Committee was given details of how the 2016 tax proposals would raise an estimated additional gross tax revenue of R18.1 billion in 2016/17.

There was extensive debate on the merits of the voluntary disclosure programme. Some Members were of the view that the VDP seemed to favour the rich who had deliberately invested offshore in order to avoid tax, as SARS always came down hard on minor transgressions by those who were poorly salaried. SARS countered that it was more productive to offer the opportunity for transgressors to come clean, rather than try to seek them out and get bogged down in legal issues.

Members raised a wide range of issues related to the latest tax regime. They asked how the R2.30 kg per kilogram tyre levy would find its way back to the industry, because its objective had not been to raise revenue. The tax proposals for the transfer of property above R10 million seemed to punish people for being rich. Was it an international norm for individual tax rates to be higher than those for company tax? When would the list of basic products currently exempted from Value Added Tax (VAT) be reviewed? What was labour saying on the proposals for an expansionary fiscal policy? The cost of borrowing was inevitably going to increase, so how would this affect government spending? SARS commented that the revelations from the “Panama Papers” in the media had been good for the financial authorities, as it would encourage people to come forward. It was becoming difficult to hide private wealth.

Meeting report

Draft Rates and Monetary Amounts and Amendments of Revenue Laws Bills

Mr Ismail Momoniat, Deputy Director General, Tax and Financial Sector Policy, National Treasury, said tax proposals and tax revenue were contained in Chapter four and annexure C of the 2016 budget review. The budget was being followed by four sets of bills. The Revenue Law Amendment Bill had dealt with urgent amendments that allowed for the delay in the requirement to annuitise for members belonging to provident funds. The Rates and Monetary Amounts Amendment of Revenue Law Bills 2016 dealt with changes in tax rates and monetary threshold, and the additional relief under the voluntary disclosure program (VDP). The Taxation Laws Amendment Bill, 2016, to be published in July, would deal with the remaining tax proposals as announced in the 2016 budget. The Carbon Tax Bill would deal with the introduction of the carbon tax. The Rates and Monetary bill were published on the budget day, and both bills had been slightly simplified and published on 12 April for further public comments.

Tax revenue was required to fund public functions such as health, social protection, safety and security. Each country had unique circumstances and views on the level of public spending required to fulfill those functions. To improve economic growth and ensure a sustainable tax system, the tax policy debate centred on the tax mix and on improving the efficiency, simplicity and transparency of the tax instruments. Direct taxes in South Africa included personal income tax, corporate tax, dividend withholding tax, estate duty, donations tax and payroll taxes. Indirect taxes included value added tax, excise duties, custom duties, transfer duties, securities transfer duties and environmentally related taxes.

Tax revenue was required to fund public functions such as health, social protection, safety and security. Each country had unique circumstances and views on the level of public spending required to fulfill those functions. To improve economic growth and ensure a sustainable tax system, the tax policy debate centred on the tax mix and on improving the efficiency, simplicity and transparency of the tax instruments. Direct taxes in South Africa included personal income tax, corporate tax, dividend withholding tax, estate duty, donations tax and payroll taxes. Indirect taxes included value added tax, excise duties, custom duties, transfer duties, securities transfer duties and environmentally related taxes.

To counter the impact of inflation and to minimize the impact of those with lower incomes, the bottom three taxable income brackets had been increased by 3.4 percent. The primary rebate had been increased by 1.8 percent. Medical tax credits had been increased by 6 percent. The inclusion rate for capital gains had increased from 33.3 percent to 40 percent for individuals and special trusts, and from 66.6% to 80% for companies and other trusts. The maximum effective tax rate for capital gains had increased slightly in 2015/16 for individuals due to the higher top marginal rate of 41%, and had increased across the board with a higher inclusion rate in budget 2016. Excise duties on alcoholic beverages had increased by between 6.7 and 8 percent. The fuel levy had been increased by 30 cents per litre, effective from 6 April 2016. A tyre levy of R2.30/kg net would be implemented, effective from 1 October 2016. In a bid to curb the surge of obesity due to over consumption of sugar, a tax on sugar sweetened beverages would be introduced on 1 April 2017. The plastic bag levy had been increased from 6 cents to 8 cents per bag effective from 1 April 2016, to account for inflation. An environmental levy on incandescent light bulbs had been introduced in 2009 to encourage the use of more efficient compact fluorescent bulbs and reduce electricity demand. To account for inflation, this levy had been increased from R4 to R6 per globe, effective 1 April 2016.

Discussion:

The Chairperson asked the date on which people could make comments on the VDP.

Ms T Tobias (ANC) asked the percentage rebate for people who earned below R188 000. The VDP seemed to bless people who deliberately invested offshore and in tax havens to avoid tax. What steps was the revenue service taking to educate those with offshore accounts. The 12% tax on liquid assets should be the same, as the principle of punishment was the same.

Mr S Buthelezi (ANC) asked if it was an international norm for individual tax to be greater than company tax. He asked about the elasticity of the taxes in response to slow economic growth. He asked if the VDP was legal or illegal, because if the law was broken there was no reason for VDP. The VDP seemed to be accommodative to transgressions by big business and moneyed people, as SARS always came down hard on minor transgressions by those who were poorly salaried.

Mr A Lees (DA) asked how the tyre levy would find its way back to the industry, as its intention was not to raise revenue. He asked when the phasing of capital gains tax would start.

Mr B Topham (DA) said the statistics provided on the number of people who paid individual tax could be used to monitor the trend of employment and unemployment in the country. He asked if tyre resellers had to be registered. He asked why a double cab paid a greater fuel levy since the motive was fuel efficiency, and most of them were fuel efficient. If one was under investigation by the SA Reserve Bank (SARB), could one apply for regularisation with SARS. He asked if having a foreign bank account was illegal, or if one just needed to declare that one was a South African citizen.

Dr S Khoza (ANC) said the government must be clear on what was happening with monetary policy and government spending priorities. Increasing tax must be balanced with inflation and unemployment. The “Panama papers” had revealed what was happening. She was appreciative of the special voluntary disclosure programme, as if people were not offered incentives, they would move away. She asked the current picture in balancing monetary and fiscal policy, as SARB was increasing interest rates. What informed the choices in the fiscal review? In the property market, people were spending less on high income properties. What was the significance of moving into areas where what was received was insignificant? The tax proposals for the transfer of property above R10 million seemed to punish people for being rich. She asked about the rationality of setting a threshold and then deducting 6%, rather than just coming with a percentage deduction on expensive properties. What was labour saying on the proposals of an expansionary fiscal policy? The cost of borrowing was inevitably going to go up significantly, and she asked how this would affect government spending. She asked if the VDP period was sufficient. Much was being spent on education, but the output was not good as there was a deficit between high school and tertiary education, as evidenced by the high drop out rates at universities. In Zimbabwe, it took 13 years to complete primary and secondary education and this was evident in their results -- why not adopt such as system? Incentives for learnerships were being abused as companies employed graduates to help with photocopying and as postmasters from one office to another.

Mr N Kwankwa (UDM) said that with fiscal drag, it was becoming difficult to become a public representative. He asked if people knew which products were excluded from incurring VAT. When were these products reviewed? He asked if the impact on tyre levy on the poor had been considered, given that the cost would cascade down to poor people. Why not exempt public taxis, for example, as taxi fares would increase if this was not done?

Dr Dumisani Jantjies, Deputy Director General (DDG): Finance, Parliament Budgetary Office, asked about the lessons learnt from previous VDPs. He asked if there was an objective to be achieved in an automatic exchange of information. Would the tax on sugar products address the problems it was intended to achieve?

The Chairperson asked if the tax proposals were not going to exacerbate the anxieties of the private sector. He asked if the way VDP was done disincentivised people from engaging in such behaviour. Why did SARS use a no name approach when enquiring about VDP? What happened to the other 50% not taxed on VDP? How was the existing VDP different from other VDPs? The Committee had the Financial Sector Regulation (FSR) Bill and the Insurance Bill -- why did National Treasury want to bring in the Carbon Tax Bill this year? It must not come and dump bills. He asked why the sugar tax was called the “obesity bill.” In China, people in a specific community were smaller because of historical, genealogical and dietary reasons, and the men were sexist as they always liked women with small feet there. What if obesity was also genealogical? He said the Committee needed to do a discussion on a review of the employment tax

Mr Momoniat replied that the bills before the Committee were very narrow in their scope. Tax was one area where people paid money, and therefore they asked a lot of questions. They would say the fuel levy was high and would like to know the quality of the expenditure. The issue of morality then came into play. Taxation was about nation-building, as people provided money to government expecting it to be spent well on health, education and social welfare. For transparency, incentives also needed to be looked at. With expenditure, there was an appropriation bill and it went through various parliamentary processes. What did not go through the same process were tax incentives. Every year, appropriate tax expenditure figures were published. If one looked in the current budget on page 41, table C1, it tells the amounts the state had forgone in past years and the one expected for this year.

It would be music to his ears if this Committee looked at employment tax incentives. The very people who objected to tax incentives had their beneficiaries benefiting from those tax incentives. Government was going to review all incentives in the system, tax and non-tax. People who did not pay tax did this through either tax avoidance or tax evasion. There was a strong debate on VDP at the National Treasury.

Mr Franz Tomasek, Group Executive: Legislative Research and Development, SARS, said that there had been a tax amnesty in 1996, as people had not wanted to pay their taxes to prop up the apartheid regime. In 2003, there had been an exchange control amnesty that had followed the introduction of the system of taxation in 2001 with a 2% tax on the value of the assets. In 2010, it had moved to the direction of a voluntary disclosure programme, where one would come and say one had made a mistake and would like to come forward and clean the slate. It was easier for people to come to you than to look for them because finding them usually meant going through legal battles before recovering the tax. In 2010, the VDP had received 18 000 applications and received R4.3 billion as cash. It was temporary, but was then incorporated permanently into the Tax Administration Act in 2010, and started running in 2012 when the Act became live. It then had 4 000 applications and had collected R6.2 billion in tax.

Mr Momoniat said Mr Tomasek was saying that some of the funds may be legal, illegal or uncertain and here was an opportunity to come forward. If the money or assets were offshore, it was very difficult to get them. It was a game of cat and mouse. There were processes when people broke the law on the prosecution side and there were challenges there, as people did not get prosecuted enough when they blatantly contravened the law, including stealing money. It largely focused on ensuring that people got their affairs right, and the continuing VDP was for people to come forward. He would try to get reports of all previous amnesties done in the past and bring them to Parliament. The people who tended to avoid tax were the rich, and they also had offshore accounts. That was why six months was enough, as the people had lawyers.

Issues like the Panama papers being in the news was good for SARS, as it made people come forward. It was becoming difficult to hide private wealth. It was impossible to reach out 100%. The tax treaties were very narrow. Some people had dual citizenship and had a different address when they opened an account in a country where they did not have citizenship. SARS may think someone owed it something in South Africa, but it maybe went to the UK because it depended on when they got registered. People who had funds outside the country were becoming insecure and the onus was on them to come forward. This was a judgment call. When people came forward, there was a large amount of revenue SARS hoped for. It did not know how much, as people who did things illegally did not tell what they were going to do.

There was no final view on this issue, and Parliament could say SARS had been too generous and needed to stop it. The Davis Tax Committee was very strong on this -- the six months was enough and people could prepare to regularise. In tax policy, the intention was not to be said that SARS was going for the rich. There had been issues on inequality and last year French economist Thomas Picketty had come to South Africa to deliver the Mandela lecture. These issues were very important in the world, and since 2008 inequality had increased in the world and the issue of taxing not only income, but also wealth, had come to the fore. The Davis Committee was looking at donations tax and estate duty, which were the only wealth taxes as such, but there were other proxies like capital gains and transfer tax.

In tax policy one had to balance between equity, taxing the wealthy and getting proxies to tax that. There was no one way of doing it. The tax system was progressive, but not all taxes were progressive as some of them were about changing behaviour in poor communities. Tax on tobacco was not progressive, but one also wanted poor people not to smoke. The non-revenue taxes were not ring-fenced, such as the Unemployment Insurance Fund (UIF) and Road Accident Fund, and the problem was when one had a huge surplus in one or another, but could not move it.

There were health issues involved in taxation, but poor people preferred white bread to brown and the exemption was on brown. The Health Department had to come forward. It was not called an “obesity tax” and there was not going to be a special bill on sugar, but it would form part of the Taxation Laws Amendment Bill (TLAB). There was no dedicated legislation for some of the tax proposals. Minister Motsoaledi called it “obesity” because he saw it as a medical condition.

He could not tell Parliament what to do and what not to do, but would like to come to Parliament to talk about carbon tax. This was the only Committee that had not looked at it, as three or four committees had done so. There were some people coming forward saying the world was going to collapse if something was not done. South Africa had committed itself to certain targets at Paris. The Chairperson mentioned Sasol, which was the second biggest emitter, and if it did not make a noise something was wrong. The longer this matter hung in the air, it generated uncertainty as it had been on the table for five years. It was not as onerous as people wanted it to be. It was about changing behaviour over five years. The emitters would of course gang up, but now it was time to be bold, as this was the biggest challenge facing the earth and South Africa was bound to certain commitments in Paris. This was a primary tool towards achieving this objective, and any delay could have serious implications. Some Committees had invited SARS to talk about it.

Mr Tomasek said a VDP was needed because SARS wanted to collect money now and would like those people to be on the tax base in the future. For the people involved, it would give them a clean slate. The VDP was only the starting point of the discussion when a person came to SARS. Now it would know there was an asset and whether the asset was legitimate -- maybe it was an inheritance and not taxable before. Sometimes SARS had to deal with other tax authorities and engage in legal battles to try to find out where this asset came from and how long it would be. While this information was important, it had to be done at a retail level, rather than a wholesale level. This was quite a difficult task for SARS, who would want to limit the number of people involved. If one was wealthy enough, one could emigrate. It made sense for SARS to allow people come forward and create a clean slate. The VDP did not take all the money, but it wanted one to make a significant contribution and going forward, one was fully taxed.

The Chairperson asked how much the person would have lost if he had stayed in the country.

Mr Tomasek replied around 40%.

The Chairperson asked why a person who was morally sound would be punished more.

Mr Momoniat replied that by definition it was not fair, but at the moment, the country was getting zero. Countries that had high ethical standards used to have secret bank accounts and organisations like FIFA doing all their nonsense. Previous amnesties had been very limited. Some of the most powerful countries in the world were tax havens -- the United Kingdom and Netherlands, for example and all the islands that fell under British rule. After 2008, the very countries that had refused to give information were themselves affected. The US had started requesting information to report on US citizens, and countries like South Africa had refused, saying that the US must first give information as well. There was no such thing as secret bank accounts anymore. A person who was hiding information did not know whether he would be caught in this round or not, and the country could not go on a “fishing” expedition. The VDP pushed people to come forward. Some people could run away to overseas, but the intention was not to make people run away, but to pay their dues and once in the system, SARS would continue to get revenue.

The world was changing and events like Panama and the HSBC issue were very good for developing countries. The US had a weird system of taxation. All its big companies operated outside the US and were taxed in the country where they operated. When they repatriated the cash to the US, they paid 38%. Massive amounts of money were not going back to the US as the corporates expected there would be an amnesty to allow them to bring the money back. Many companies were evading tax as they allowed big companies to buy them and move their domicile to that country. The latest was Pfizer, and many pharmaceutical companies were doing it. The Obama administration had moved in the last two weeks to stop the deal. It was an issue of cat and mouse.

Mr Tomasek said that most people who found themselves in these situations did it deliberately, but SARS did not rule out negligence and that was why it had a no name approach. Once SARS knew about you, it was not a voluntary disclosure anymore. It could be a possibility for one to apply for regularisation with the SARB while under investigation with SARS, but they tended to coordinate.

Dr Khoza asked about the audit process on those with foreign assets.

Mr Kwankwa asked how SARS dealt with clients who received bad advice from bankers. Many clients were receiving bad advice on the usage of trusts.

Ms Tobias did not see anything wrong with the 35%. The assumption that liquid assets of a person in South Africa would be of more value than off shore was a wrong assumption. Imposing a 12% penalty on people with assets in South Africa was wrong, as people may have only a house and few assets that did not match what they had off shore because offshore they paid less tax.

Mr Topham said there was a reason for this VDP, because many people had not trusted the first amnesty. In the 60s, 70s and 90s, taking money from South Africa was the thing to do to avoid apartheid exchange control regulations. People needed to pay back that money.

Mr Tomasek said there were two kinds of audit -- compliance audit and investigative audit. The investigative audit was more detailed and usually started with a letter saying these were the terms of engagements. There two ways one would end up as criminal was if the audit unveiled something criminal that needed to be pursued. This would end up as a civil case where it looks on the tax side, or a criminal one which had to be pursued within the ambits of the constitutional precepts on someone who was accused. The ongoing VDP allowed one to come and disclose what one had been advised or what one had or where one had done something deliberately. It allowed one to come forward before being caught. Section 233 of the tax administration act had a table that stated how one would be penalized. The voluntary disclosure was more generous when one came to SARS. The voluntary disclosure made because of an audit was not treated generously. The 2% was to encourage people to use their off shore funds to settle their matters. SARS had worked hard in the 2003 amnesty to give people all the good reasons to trust it.

Mr Momoniat said the legislation was before Parliament and he was hoping to receive comments on whether it should be six months, or whatever. The National Treasury was open to comments and the people who fell into this category knew who they were and would eventually be caught. This was different from other amnesties as there was pressure coming from places where they never thought information would come out. It included the UK Prime Minister, who had been caught in the mix of assets inherited.

Mr Cecil Morden, Chief Director: Tax Policy Analysis, National Treasury, said it had had a discussion on the possibility of bringing forward the October date. SARS had the data on the gender of people who earned between R70 000 to R188 000. The data on race was not in the tax system. Stats SA did impute the race statistics. The international trend was to come with a relatively lower corporate tax. A lot of corporate tax was passed on to individuals.

The Chairperson said tomorrow the Committee would consider the Finance Intelligence Centre Act (FICA), bill which had been on the table for some time. Treasury must give an overview of the policy issues and how it had resolved them, to remind Members. Voting on the bill would be next Tuesday, together with the report on the budget vote for National Treasury. It was worrying that there was only one sitting next week.

The meeting was adjourned 

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