National Treasury briefed the Committee on the contents of the 2016 Taxation Laws Amendment Bill and Tax Administration Laws Amendment Bill. The contents highlighted included:
- The change to the processing of the changing of the effective tax rates, to allow the Minister’s announcement on Budget day to be effective, subject to Parliament’s ratification;
- Anti-avoidance measures dealing with the use of trusts and interest-free loans to avoid donations tax and estate duty;
- Anti-avoidance measures aimed at dealing with the conversion of remuneration into dividend income through the use of employee share incentive schemes;
- Anti-avoidance measures to deal with hybrid debt instruments;
- Changes to the manner in which long-term insurers valued their liabilities;
- Changes to the ‘controlled friend’ company regime to accommodate collective investment schemes and modify the equivalent tax exemption, to cater for group taxation regimes applied in foreign jurisdictions;
- The repeal of the withholding tax on cross-border services, given the change in the reportable arrangements required by SARS;
- The Tax Administration Laws Amendment Bill resolving matters with the withholding tax on interest for interest payments which were never made, allowing alternative forms of invoicing for VAT purposes and a change to the maximum weight of cigarettes, in order to reconcile tobacco purchases with cigarette production.
The discussion was not very in depth, as this was the Committee’s first exposure to the bills. Important aspects included a concern about anti-avoidance measures being introduced against trusts, and interest-free loans going beyond remedying avoidance and becoming punitive. Further, there were concerns about the valuation of long-term insurers’ liabilities. It was decided that after the public submissions on these bills, the Committee would have another session on them.
The Committee moved on the Financial Sector Regulation Bill, dealing mainly with the process. It was decided that the Committee would work from the July 2016 version of the bill, and any concerns from the public or subsequent changes by Treasury should be highlighted to the Committee.
National Treasury on Draft Taxation Laws Amendment and Tax Administration Laws Amendment Bill
Mr Ismail Momoniat, Deputy Director: General Tax and Financial Sector Policy, National Treasury, said the Draft Tax Laws Amendment Bill (TLAB) dealt with some procedural issues regarding the announcement of the tax rates by the Minister of Finance. Further, it had provisions broken up into personal income tax and savings; general business tax; taxation of financial institutions and products; tax incentives, international taxation and value added tax (VAT). Then there was the related bill, the Taxation Administration Laws Amendment Bill (TALAB), as taxation bills were split into a money bill and a bill dealing with the administrative aspects. These could not be separated, and having just the one may not make sense, so their content needed to be read together. The presentation also dealt with the tax proposals which were not in these bills. It therefore also provided a descriptive report on the tax employment incentive and learnership allowance, which both expired that year; as well as the tax on sugar.
Mr Momoniat said every year the Minister made tax announcements in the Budget Speech, and the Budget Review extrapolated these in detail. Chapter 4 and Annexure C in the Budget Review did this. To give effect to that, some bills were published immediately, or soon, thereafter, so the Rates and Monetary Amounts and Administration Bill (Rates Bill) was published on budget days. These were always draft bills, and they contained most of the rate changes, because this was just changing numbers or the threshold of a base. In 2016, the special voluntary disclosure programme (SVDP) provisions had also been put in, because they were urgent, and it was hoped it would take effect in October 2016. There was also an extraordinary bill, the Revenue Laws Amendment Bill, which dealt with delaying the coming into effect of provisions relating to provident funds. This had been enacted into law in May 2016.
The TLAB and TALAB before the Committee dealt with the more technical and complex tax proposals. They required a lot more legal drafting and consultation. When the Minister made tax announcements, no one was consulted beforehand and there would be some shock and awe, and then National Treasury (NT) had to follow up with consultation. The consultations for these bills and the Rates Bill were different, because of the formers’ complexity. A series of meetings had been held after Budget Day, which had translated into the TLAB and TALAB, which were usually published in early July. These bills contained changes to the tax base, the closing of loopholes, changes to the tax administrative procedures and other technical or procedural changes.
Some of the proposed tax changes in the Budget did not have to come as amendments to current tax Acts, and could be changed through changes to the schedules to the Customs and Excise Act. Many of the ‘sin taxes’ on alcohol and tobacco were effected through that subordinate legislation, as would the tax on sugary beverages. Although it only required a gazette, the same process was still followed and Treasury regarded them as part of the tax proposals. When they were due, there were hearings, except for the taxes on alcohol and tobacco, which took effect as soon as the Minister announces them in the House.
The TLAB and TALAB had to be split between Money Bills under section 77 of the Constitution and section 75 bills. They were published as draft bills, and there were hearings on them. Once that process was completed, Treasury then comes to Parliament with a response document indicating the content of submissions, what had been accepted, what would be amended and what was not accepted. After that, the bill was finalised and introduced as a formal bill. To then amend the introduced bill was more difficult, and it was hoped that a tabled bill would not be amended. Members would know that in 2015 a tabled bill had been amended.
It was often found that when there was a new tax, the process must be explained. For example, with the stakeholders in the sugar industry, Treasury had to explain that the Minister had announced it, a paper would be published and any submissions received would be considered for the first draft Bill. Now that Treasury had received submissions and the date for comments had closed. At times, there were pretty strong comments, but Treasury urged stakeholders to remain calm and continue with the public consultation process and further meetings would be held, including workshops. What made this year different was that when Parliament had a recess for elections, then Treasury’s consultations became a bit misaligned. When Parliament’s and Treasury’s periods of comment were aligned, then the same comments were received. The other complexity was that the Rates Bill hearings were also still being held due to the recess.
Mr Momoniat turned to the content of the TLAB. This year, a specific provision had been put in which would allow the Minister of Finance to change the effective tax rate before the final bill was adopted. Before, this had not been a problem, as the Minister would decrease personal income tax some time before. The tax year started on 1 March and the deduction tables therefore effectively deduct at the lower rate. The issue was, if Parliament were to reject the proposed change in rate, then people would have paid less and would then get a bill for the remainder. The previous year, when personal income tax was increased by 1%, the same approach had applied, but people wanted to deduct at the higher rate. The question was, what would happen if Parliament rejected that proposal? It would mean that the South African Revenue Service (SARS) would have to return money or the people would pay less. That was possible for some of our taxes -- Pay As You Earn and customs and excise -- but was not possible for other taxes. Whether VAT was increased or decreased, it could not take effect immediately. It must be remembered that these were market sensitive taxes, and one could not wait. Treasury wanted to put in an empowering provision that when the Minister made an announcement, some of these other rate changes could come into effect, subject to the law coming through Parliament months later. That was the context in which this proposal was being put forward, because it was the case with some taxes.
Ms Yanga Mputa, Chief Director: Legal Tax Design, National Treasury, said the Minister’s announcement was not arbitrary. It was subject to Parliament passing the law at the end of the year, so if the legislation was not passed for an increase, then SARS would have to refund the money. The intention was to align all the tax provisions, because they were available only in the Fourth Schedule of the Income Tax Act (ITA) and the Customs and Excise Act, where a notice in a gazette made by the Minister would in law increase the tariff.
Personal Income Tax and Savings
Ms Mputa spoke to clause 12 of the TLAB, which limits the avoidance of donations tax through the use of interest free loans to a trust. Tax payers would make an interest free loan to a trust, thereby avoiding donations tax, because it was not a gratuitous disposal. The growth in the transferred asset also avoided estate duty. This proposal addressed this avoidance, where a loan is made to a connected person who did not fall within the definition of a donation, by deeming the difference between the interest charged and the official rate of interest to be income in the hands of the person making a loan, and taxable at the marginal rate applicable to that person. Secondly the amount deemed to be income was not going to qualify for the annual interest exemption, because it was deemed to be income, not interest due to the person having constructed an avoidance scheme. If the loan was later waived, there was no deduction or write off in terms of that loan. Further, such loans would not get the annual donations tax exclusion which could be used to reduce the loan amount. This was an anti-avoidance measure. If a donation was made to a trust, then one pays tax at 20%, but the interest free loan avoids this and these rules were meant to resolve that.
Clauses 13 and 14 were also anti-avoidance measures dealing with employee share schemes. Most of the schemes were used by taxpayers to disguise high salaries through the use of restricted share instruments, which gave rise to dividends instead of salaries. There was the current section 8C of the Income Tax Act, which taxed the shares when they fully vested as the market value, less expenditure incurred. What was seen was that the shares never vested, but the employees were getting dividends from the shares. So the time for vesting, as envisioned by section 8C, never happened or by the time the shares vested, the value was stripped to zero. So there was no tax to be levied on that share. The proposal was that as the share was received by virtue of employment in senior management and received dividends from the share, the dividends received would be treated as remuneration before the share vested. Then they would be taxed at 41%, so that there was equity and salaries were not disguised as dividends. However, companies would get deductions for the historical cost of acquisition.
Ms Mputa said currently there was a deduction for contributions paid to retirement funds in respect of services rendered. Here there was a difference in interpretation of the current section 10(1)(gC) of the Income Tax Act (ITA). This provided an exemption for South African residents receiving retirement benefits in respect of employment outside of South Africa. The consequence was that the residents who worked outside of South Africa received their benefits tax free and were at the same time getting a deduction. NT therefore wanted to ensure a fair tax treatment of retirement benefits, and was proposing that the exemption be limited to benefits received from foreign retirement funds, and not foreign employment.
The cap was being increased for employer-provided bursaries in section10(1)(q), which was last increased in 2013. The cap was being increased so that employers could provide more money towards the education of employees and their relatives.
General Business Tax
Ms Mputa said the bill dealt with many anti-avoidance measures, some of which were introduced in line with Organisation for Economic Cooperation and Development (OECD) Base Erosion and Profit Shifting (BEPS) project, even if they pre-dated some of the BEPS. Given some of the discussions, perhaps South Africa was an early adopter. Even though there were anti-avoidance measures, they were hurting legitimate schemes. Clauses 17 and 18 dealt with the double non-taxation of cross-border hybrid debt instruments. Tax payers wanted to treat the equity part of the hybrid instrument as debt so that they could get interest deductions and if this was happening cross-border, with a non-resident the interest was not taxable on the other side. These rules would be triggered only if it was within the South African tax net. If it was going out, then the reclassification would not apply. This was because there was no way to police non-residents outside of South Africa. This was in line with BEPS.
Clauses 17 and section 8F provided relief for companies in financial distress. Currently, the hybrid debt rules had a provision where, if a tax payer was subject to a subordination agreement guaranteed by a third party, the reclassification would apply. When auditors could see that a company was going to be in financial distress, they then recommended entering into subordination agreements. Treasury was trying to allow for entering into subordination agreements, provided that the company would be solvent after paying the interest. The interest would be allowed as a deduction, even if there was a subordination agreement. The rules for solvency and liquidity were linked to the same test in the Companies Act.
Ms Mputa said that in 2015, changes had been made to the ITA to indicated that the outright transfer of collateral would not attract capital gains tax (CGT) or transfer duty, to assist companies with liquidity. NT had put a limited period of 12 months on the transaction -- one had to return the share to the lender within 12 months, and it also had to be the identical share. The financial sector had welcomed the rules, but had said the period of 12 months was too short. Treasury was therefore extending the period to 24 months. It also wanted to cater for the situation where the borrower was unable to return the identical share, and if it was because of corporate actions outside of one’s control, any other share could be returned. Treasury was also not only limiting it to shares, and was extending it to listed government bonds transferred under this arrangement.
Cause 16 dealt with the refinement of third-party backed shares to assist with legitimate transactions entered into before 2012. Treasury was finding that anti-avoidance rules were hurting legitimate transactions. In 2012, anti-avoidance rules had been introduced to deal with third party backed share instruments with debt-like features, like preference shares. These rules targeted share issues, where the dividend was guaranteed by unrelated third parties. It had come to Treasury’s attention that before the introduction of these rules in 2012, there were legitimate transactions which were never meant as an avoidance scheme. To provide relief for these legitimate transactions, Treasury proposed that parties which fell foul could cancel the transaction, and a 12 month period was given for the cancellation, ending on 31 December 2017.
Ms Mputa said Treasury had found a circumvention of anti-avoidance rules dealing with third party backed shares. Instead of owning the shares, a trust would be interposed between the company and the share. SARS had seen these structures, and an example was where the formation of the trust holding mechanism saw investors acquiring participation rights in a trust, and the underlying shares were preference shares. So there was an indirect holding of the preference shares, and the company would therefore not be caught by the anti-avoidance rules. NT was therefore trying to amend the definition of ‘hybrid instrument’ to include any right held through a trust or any other instrument.
Clause 30 clarified an oversight which had been brought about by the coming into effect of the Companies Act. Currently, the small business corporation regime provided for them to be taxed at a progressive rate, which was more favourable than the normal 28%. In order to qualify for this progressive rate, the small business corporation had to be either a closed corporation or a company registered under the Companies Act. Therefore, when the new Companies Act had come into effect, it had defined a private company as excluding personal liability companies, and such personal liability companies could not qualify for the progressive taxation. To correct this oversight, it was proposed that personal liability companies be expressly included in the definition of small business corporations in the ITA.
The Chairperson interrupted, asking Members for guidance. The Committee still did not have the entire text of the presentation by Treasury. Regardless, the presentation had been submitted only that morning, and the Committee had reached a critical point. He suggested the Committee take a decision and indicate to the Director General of National Treasury that in future, if the documentation was not received by the prior Thursday, the meeting would be called off. From his experience as a chairperson of several committees, Treasury and SARS were some of the hardest working and most efficient Departments. However, he was coming to realise that they were asking the Committee to grapple with a programme which they themselves could not deliver on. He asked Members whether they would like to go on through the entire presentation, or discuss what had been presented so far. It must be remembered that this was the Committee’s first look into these matters.
The Co-Chairperson said that was why the Select Committee was present, to get better acquainted with the content of the Bills before they were presented to the National Council of Provinces (NCOP). When they came to the NCOP, they had little time to process them. The Select Committee took a decision that that was how it would work for the Fifth Parliament. So anything that could assist in explaining the content, more was welcome, even possibly contrasting the present legislation with what was being changed.
The Chairperson said this was one area where the executive got away too lightly, because of the lack of technical expertise. It was not the job of Members to look into an amendment of an amendment which went back to 1962. The majority party was actually at a disadvantage, given the historical trajectory of many of its Members. It was a good thing to have Members like Messrs Lees and Topham, whose professional interests had been in this area. He was very reluctant to move on, and what had been presented should be discussed. It should be agreed that Treasury must present documents on time and the Committee should take a resolution to that effect. Ultimately, it reflected on a Chairperson’s integrity and whether they were serious about their work. He was tempted to call off the meeting, if it were not for the cost of sending the delegations from SARS and NT back. He was realising that there was nothing exceptional about Treasury, and they ought to be treated the same as any other Department. The Financial Sector Regulation Bill was the cliff, because two new submissions had been received from the Association for Savings and Investments South Africa (ASISA) and the Banking Association of South Africa (BASA), who claimed they had given them to NT. Treasury had had two and a half months to bring this to the Committee, and it had brought it the day Parliament sat. He had reached the end of his tether on this matter, because he had to chair the meeting properly.
Mr B Topham (DA) said it must be pointed out that there were very few people who would know about everything in the draft TLAB. The area in which he had a little bit of knowledge, was trusts. The purpose of the amendment was to limit the potential for estate duty planning. One of the allowances which was in place for this was the R100 000 donations allowance. The amendment effectively created the situation such that one may donate R100 000 to anyone, except one’s own trust. He could donate R100 000 to his friend, who could then donate to his trust, and that would be fine. He felt that was a fundamental principle issue and tax payers should be allowed to use the R100 000 to donate to whoever they liked. He worried about the loan accounts, and appreciated what was intended to be remedied, and he was happy with that. If he invested R1 million into a private company which did not make any money, leading to the decision not to charge interest, there were no penalties. However, if he decided to invest into his family trust which had business opportunity rights, or if that family trust invested into his company, as there was no income-producing asset there would be deemed income in his hands. There was another provision in the ITA which only deemed the income if that asset was appreciating in value. There were many examples where assets were put into a trust and there were losses and the asset was not growing. The amendments would now not allow the writing off of that loan, because that would create a donation event. Perhaps those issues needed to be investigated again.
Mr A Lees (DA) said the deemed interest under clause 7C was a bit confusing, because if the donation were to remain in the hands of the donor and not be donated, then the interest accrued would be part of one’s annual interest allowance. This was now making the provision punitive, and was not just dealing with the avoidance. In addition to what Mr Topham had mentioned, he had trouble with that. On the question of the dividends being taxed at the marginal tax rate, whatever that may be, would the dividend tax of 15% -- which would already have been paid on the declaration of the dividend -- be claimable, or would the dividend be taxed twice?
Ms Mputa said in terms of s7C dealing with trusts, similar comments had been received regarding taking away the R100 000 annual allowance as being punitive. These comments would be looked at to see what other anti-avoidance measures could be put in place without being as punitive. On the loan account with a trading trust, this provision was aimed at discretionary trusts used for estate planning, not for trading trusts or vesting trusts. Treasury would clarify the provision to indicate the types of trusts captured by the provision, because it was intended to cover discretionary trusts.
Mr Cecil Morden, Chief Director: Economic Tax Analysis, National Treasury, said the intention with the dividends was not to have double taxation, but rather that the income should be taxed at the appropriate rate. When it was disguised remuneration, it should be taxed at the marginal rate and not the dividends’ rate. The notion that it would be taxed at the dividend rate and then at the marginal rate, was incorrect. If that was clear, it would be rectified.
Ms Mputa referred to the interest exemption, and said Treasury was not deeming it to be interest, but rather income. The taxpayer would not qualify for the interest exemption, and that was intentional. If it was deemed to be interest, then it would qualify for the interest exemption. Treasury, given the comments received claiming this to be punitive, would look into applying donations tax and estate duty laws instead of income tax principles.
Mr Topham said discretionary trusts were set up for estate planning, protecting one’s estate from insolvency or one’s children from themselves, and often did have a business interest, so it was not just a matter of stipulating a discretionary trust or otherwise. On the punitive aspect, this had been a perfectly legitimate business practice for almost 2 000 years. A similar question had arisen with Secondary Tax on Companies, where a debit loan account was deemed to be dividends. What had happened very quickly was there were no longer debit loan accounts which did not charge interest. However, Treasury did not need to make it more punitive, because once the provision dealt with the avoidance, it would stop. Taking the R100 000 donations allowance away was a totally separate issue, and these people were not tax evaders -- they were engaged in legitimate tax planning and once the rules changed, their behaviour would change.
Dr M Khoza (ANC) said that while she understood the need for anti-avoidance measures, the Committee probably needed to look at what was being brought forward. Perhaps Ms Mputa could assist by commenting on what happened when a bank, based on its risk assessment profile of a client, mitigated the risk by converting the loan to an interest free loan. What would the tax implications of this be? Would that be considered as tax avoidance, where the intentions were legitimate? What instruments were used to isolate legitimate cases from the real tax avoidance schemes? The same applied to estate planning, because not all of these structures were put together for legitimate purposes. The Committee also did not want to disincentivise people from planning for their families into the future. Would this be considered in the future? Was Treasury’s submission based on speculative assumptions, or was it based on specific cases which had helped it to ascertain the extent of the challenge?
Mr Lees said what concerned him about Treasury’s responses was that there was uncertainty, with it having received submissions and it going to look into the matters. The Committee was present to look at a final bill. Would this draft be going back for further changes?
Ms T Tobias (ANC) suggested parking this matter, because she had reservations about Treasury’s response.
The Chairperson agreed. The Committee would have to come back. When public hearings were held, the stakeholders would give the Committee more insight. Perhaps, given its lack of technical expertise, the Committee could process what was absolutely necessary now and defer the rest to the following year.
Taxation of Financial Institutions and Products
Ms Mputa said clause 48 dealt with the tax treatment of long-term insurers, given the introduction of the new Insurance Act and the Solvency, Assessment and Management (SAM) project, which determined the way in which long-term insurers valued their liabilities. In 2015, it had been announced in the Budget and presented to Parliament. Parliament had instructed Treasury to consider it again and hold more consultations, because the new Insurance Act would be effective only from 2017, and SAM would come into effect then. The taxpayers were concerned about the definitions of ‘value of liabilities’, ‘Adjusted IFRS (International Financial Reporting Standards)’, and the transitional period where tax payers were not hit by tax up front, but SARS was still able to collect. Treasury had had several engagements with the long-term insurers and further consultations were planned. Treasury was proposing in the draft Bill was to have new definitions to take into account the new valuation method, because when SAM came into effect, SARS was not going to rely on the Financial Services Board (FSB) and actuaries -- the insurer would have to do its own valuation. Therefore, there were new definitions of ‘value of liabilities’, ‘Adjusted IFRS’ and a phasing-in approach was being taken for the transitional period.
Mr Momoniat said it must be remembered that SAM was for insurers what BASEL III was to banks. The dates were contingent on the Insurance Bill. Members would remember that this had been an issue which came up in the 2015 TLAB process, and there had even been differences among the industry. Treasury also meets with the regulators, including the Financial Service Board. NT did not want to change the rules backwards, and even changing them forward, there were issues such as capital considerations. This was found even with banks, where there was not a standard definition of capital, and each institution had scope for interpretation. This was why Treasury sat with the regulators to see what was a reasonable and what a reasonable transition period would be. At some point, Treasury would be happy to explain SAM to the Committee. These amendments were a bit different, coming from the regulators, but Treasury needed to recognise on the tax side, what happened with the regulations.
Ms Tobias said at some stage she had raised the issue of the appropriate role for valuators and actuaries in shaping this legislation. There were different views on how valuators looked at the role of government’s interventions through regulation. The Committee also needed to avoid the situation of having fundamental contradictions, especially when doing valuations. The valuators would serve the interests of the client, but it was in the general best interest to reach a consensus. One should look the plan to deal with South Africa’s gross domestic product (GDP) growth and the participation of business in such a way that it harmonised the relationship. It was important for her that before looking at this provision, the Committee knew the extent to which consultation had taken place with actuaries and valuators in shaping the regulations, so that these stakeholders understood where the Committee was coming from, and also to ensure the matters they raised were considered by the Committee. She would like a report of such engagement, because it would be of assistance to Members, who were not experts in the valuation field.
Mr Topham said he had spent a morning at KPMG doing a SAM, and this was a very specialised area. He did not think it was right that SARS had a specialist who was going to check with the insurers, separate from the regulator. This was an area where the definitions and quantification techniques utilised by the regulator should be the same as those of SARS. SARS personnel would then be able to rely on a report from the FSB on the value of the liabilities. To him, it would be a bad idea to have three different versions -- IFRS, SARS and FSB -- of these definitions. The Committee needed industry and regulators’ inputs, but if these could be aligned, that would be in the best interest.
Mr Momoniat said the issue of valuation here was slightly different, and was about capital provisioning. For example, with Basel, there was a push towards standardising banks. Even for Treasury, these were hard issues and the best way to understand was to hear the industry. It was the job of the regulator to explain in detail. To the extent there was harmonisation, this was what was intended by these provisions. Under Basel, the issue was a question of fair value and recognising it immediately. A lot of the work in Basel, which did not set accounting standards, was convincing the persons who set those standards that when one dealt with banks, there was a case to be made for a slightly revised approach. The same was the case for insurance, and this was very hard technical concept, which was difficult for Treasury as well. The best way to be advised, in a sense, was through the hearings, but the regulators needed to guide. It was their function to enable the industry to function, understanding the rules. That was why it was very specific as to what the international standards were, and how things were classified, because South African standards must be in line, with its institutions being global. If one followed the Brexit story, then currently there was a system of passporting, so if a company wanted to operate in another country without being re-regulated, then there must be equivalence in the regulatory regimes. This was a whole discussion on its own, and if Members wanted a quick overview of the Insurance Bill, it may help.
The Chairperson said there were huge time pressures, and Treasury needed to start thinking about what was absolutely necessary in this Bill, and what could be deferred.
Ms Tobias said NT should bring information on the international standards, so that they could be compared with other standards, such as the American’s. Not all countries followed the same standards, and here South Africa was making its own.
Mr S Buthelezi (ANC) said he agreed that Treasury should be consulting with the industry. He was concerned that Mr Momoniat had said that even Treasury had problems with what had been brought before the Committee, particularly as Members had a bigger interest to defend than just the industry. To ensure that balance, the bill had been brought before the Committee. It must be remembered that the business point of view was profit maximisation, and nothing else, so comfort should be given that from the government and the regulators’ point of view, there were at least experts giving a broader view and ensuring government was not dependent on business.
Mr Momoniat said that was a very important point, and tax policy was one of the areas where things got complex. It was very hard for NGOs and others to come in. Therefore, there was reliance on government’s experts, who were the regulators. They get into the gory detail, go to international conferences and get into the real ‘nitty-gritty.’ The industry was not part of setting those international standards. They were set by the regulators from around the world who go through a process in setting the standards. It was very important that South African regulators had the capacity to comment, because there were country specific considerations. Looking at Basel III, there was a whole discussion on total loss absorbency, and that was having some perverse outcomes in developing countries. Treasury therefore tried to get a South African perspective, then a developing country perspective, and then a developed country perspective. This process was very much imposed on the industry, and it had had similar discussions with regulators in other countries. All Treasury did was develop these measures with the regulators, because it was aware of the conflicts of interest and what the interests of business are. Also, one should point out that this was not a negotiation, as tax was prone to lobbying, as had been seen with the sugar tax. NT was not much loved in the industry, but what helped was when industry sees that these actions were in their own interest and in line with international standards. Treasury certainly did not take what the industry says to write the rules.
Mr Morden said a couple of changes were being made to tax incentives. One was to highlight the importance of renewable energy, and there was an accelerated capital allowance. At the moment, ancillary investments around the plant itself, such as fences, did not qualify for a deterioration allowance. South Africa was very fortunate as a country to see these initiatives growing, so additional allowances were being allowed.
Mr Morden said there was also an incentive regime which looked at urban development zones. The incentive had been introduced about 10 years ago, and Treasury had listed 16 large municipalities in the Act. 15 of them had taken up the incentive, while one had not. NT had received a number of requests from municipalities to also access these incentives, so based on certain criteria, the municipalities could be considered. They should not be open to all municipalities, because there needed to be a focus for these incentives. This did provide a means for Treasury to be approached and it would develop those regulations as it went on, to be added to the Act.
Mr Morden said the venture capital regime had been introduced in 2008 to assist small and medium sized businesses to access equity injections. Some of these businesses had found it difficult to get loan finance and there was scope to get direct equity investments, but the risks were quite high. There were many people who were willing, and Treasury had now created a regime which allowed a venture capital company to receive investments from high net worth individuals, and these venture capital companies could in turn invest in small or medium businesses. Presently, there were 36 registered venture capital companies. One issue was the connected party rule, where people abuse the system and use it to invest in their own businesses or family business. NT was putting forward an amendment which would require the connected party test to be made, not at the beginning of the investment, but only three years later. This would allow people who set up these funds to provide funding up front and then to try to solicit funding from others.
Mr Morden said mining companies were required to submit a social and labour plan to the Department of Mineral Resources. This required them to invest in the communities in which they operated. Presently, the legislation provides for companies which provided infrastructure for their employees to get a deduction. However, when this was done for people outside their work force, then they could not get the deduction, as it was not part of the production of income. NT was saying that given that the social development plan went beyond employees, it should extend the deduction to those investments as well.
The Department of Human Settlements was in the process of consolidating its three entities into one. The difficulty was that there were tax implications if these merged, because one was a taxable entity and the others were public benefit organisations (PBO). Merging a PBO into a taxable entity would lose the PBO benefits, so NT was making provisions to smooth that transition, and allow the three entities to merge without negative tax implications.
Mr Morden said there was an initiative to encourage land reform which assisted emerging commercial farmers. There were some existing commercial farmers who wanted to assist emerging farmers by providing donations of part of their land. However, if they did that, it triggered donations tax, because it did not form part of the general land reform initiative. This provision would then alleviate the need for them to pay donations tax if they did make land available in this fashion.
In the ITA, various provisions were found for tax exemptions -- for example, business associations which were exempt from tax where they received fees from their members. There was also the PBO regime, and what had been found was that an industry association, which used to have an exempt status due to its member contributions, had broadened its activities to provide training and skills development. It had therefore lost its tax exempt status, and NT feels that in their particular environment, it could fit into the PBO space. It was therefore extending industry-based skills training to allow them PBO status for exemptions.
Mr Morden said the research and development incentive was a difficult area, where there had been many complaints from the industry. The Minister of Science and Technology had set up a team to look into this, and NT was examining this report. NT unfortunately could not accommodate all the recommendations at present. An interim measure was needed due to the delay in the approval process, which had resulted in tax payers not being able to claim, with the submission date having closed. What had been done was to open up a window to allow them to open their returns without any penalties, to now claim the allowances if approved way after their tax year.
Mr Topham asked why the Department of Human Settlement’s (DOHS’s) entity had been registered for tax to begin with.
Mr Morden said there were good reasons why public entities were taxable, and there were a few of these. This was based on business principles, as the entities sometimes competed directly with businesses.
Dr Khoza said when dealing with tax incentives, it was important to be consistent with the criteria and not seem to favour some, so why had the other municipalities been excluded and only 16 municipalities allowed to access the incentive? Why could there not be accommodating criteria to allow access from various municipalities, rather than them having to go through the long process envisaged. Secondly, connected parties had come up in other legislation, and there was aneed to be explicit about what was meant, because the list could become endless. She hoped this had been looked into, because as much as possible Members did not want to over-regulate. The DOHS’s entity, the National Housing Finance Corporation (NHFC) concerned her, although she understood and supported consistency. If it was going to encourage NHFC, then the Committee might as well encourage the Rural Housing Loan Fund (RHLF). Members must not forget to align whatever incentives were decided upon, with state’s developmental agenda. Sometimes people got trapped in a particular price structure and even if one had experience, they may be excluded on the basis that one has done very large contracts. Some of the exclusionary measures were a bit of a concern, and the Committee must align its small business incentives. Members welcomed the incentives, but a word of caution was needed around R&D. One needed to be clear about exactly what was intended, because it posed a problem to simply to leave it to the minister alone, without any guidelines. If it was not based on anything, then there could be challenges.
Ms Tobias said the approach of looking at the urban development zones excluded small municipalities, especially as these municipalities require the cash injection more because they cannot generate income on their own, as half of its populace did not pay rates. The bigger urban zones had people who were contributing rates. At the end, this was subjecting smaller municipalities to surviving on the grants they received from NT. She pleaded for them to be allowed to present their cases. On the venture capital regime, she had followed it with interest. Some of the venture capitalists, in order to provide the investment, want to take more than 50% of the equity or profit. They were not investing because they had an interest in seeing the business grow, and were actually extending their own businesses. She wanted to know at what percentage these venture capitalists operated, especially when the funds and incentives came from the state. Even black-owned venture capitalists had been pure bourgeois and not looked at this from a developmental point of view. The first question asked was how much equity they would get. On social and labour plan incentives, she would follow how many companies had taken up this incentive.
The Chairperson suggested that Ms Tobias should raise her points and when the public hearings were held, and the Committee would be able to go into greater detail.
Ms Tobias said she wanted to differ with the view that a PBO could be a taxable entity, because this would affect the role which such organisations played. How the role of PBOs was being shaped needed to be looked at it carefully, beyond the matter with the DOHS. Once a precedent was set, then it may open up for PBOs in other sectors. This was a good plan, but it may have unintended consequences.
The Chairperson said the Committee could not have a huge team on the Financial Sector Regulation Bill [FSRB] and sit with them for two hours. It was agreed that the Committee would not sit that Friday, but would need to sit every Friday, compared to the current every alternate Friday. He was applying to sit the following day, from 2pm until whatever time the House rises, on the FSRB. Members should be cautious about going too deeply into the issues, because they were yet to receive notes from the Committee support staff or hear the public comments.
Mr Morden said the amendment being made to the urban development zone was precisely to open it up to the smaller municipalities, and the criteria would be pretty streamlined. On the DOHS initiative, this was an important initiative towards encouraging the development of housing. Treasury took note on R&D concerns, but it was managing it reasonably. Given the problem with delays, the opportunity had been provided for people to claim their incentives. On venture capital companies, this was an important initiative, because these people invested in very high risk businesses and if they lost, it was their own money not state money. It was important to encourage the development of small and medium-sized business. On the mining companies’ social plan, the amendment introduced a mechanism to ensure that what was invested for the employees and the community were both treated the same.
Mr Franz Tomasek, Group Executive: Legislative Research and Development, SARS, said connected parties were already defined under the ITA, and was not something which was vague.
Ms Mputa said that in the 2013 Budget, the Minister had introduced a withholding tax on cross-border services, where a non-resident was rendering services to a resident who paid for the services, and was to withhold tax. The problem was that it was difficult to collect tax in cross-border transactions. The effective date of these provisions had been postponed to 1 January 2017, but in February 2016 SARS had issued a revised list of reportable arrangements, and had included this aspect of services rendered to South Africans cross-border. Treasury’s view was, if this was going to be caught under reportable arrangements, there was no need for legislation which was going to achieve the same result, so the proposal was to repeal the withholding tax on services regime, because the reportable arrangement would pick it up.
Clause 21 dealt with the exemption of collective investment schemes from controlled foreign company (CFC) rules. South Africa has had CFC rules from 2001, aimed at preventing avoidance where South African residents owned more than 50% of a foreign company and shifted money to it. A company was regarded as a CFC if it was more than 50% owned by South African residents. There was uncertainty where there was a South African collective investment scheme, and where unit holders were South Africans. The collective investment scheme in turn invested in a global fund. Therefore, was the global fund a CFC of the collective investment scheme, or the unit holders? To remove this uncertainty and because collective investment schemes were a flow-through entity, if a collective investment scheme invested in a global fund, that fund would not be regarded as a CFC.
Ms Mputa said currently the CFC regime had an exemption whereby if a CFC paid tax in a foreign country that was comparable to the effective tax rate in South Africa, there would be no tax attributed in South Africa. This was done to promote competitiveness of South African CFCs. However, the manner the legislation was phrased was that it created a foreign tax paid, even if in fact no foreign tax was paid due to group losses. If there was group taxation in the foreign country and the losses led to no tax actually being paid, then the exemption would not apply.
Mr Buthelezi asked for the last proposal to be explained further.
Ms Mputa said there was CFC legislation where, if a South African resident owned more than 50% of a foreign company, that company would be regarded as a CFC and the income of the company would be taxed in the hands of the South African tax resident as it arose. However, there was an exemption where the CFC was in a jurisdiction with comparable tax rates, then that income would not be taxed in the hands of the resident. This was done to avoid the administrative burden and ensure that CFCs were competitive. If a comparable tax was being paid of more than 75% of the South African tax, then the resident would not be subject to imputed tax. However, the calculation of that could be based on foreign standards and there may be group taxation. The way the CFC legislation was drafted was for a foreign tax paid to be recognised, even if in fact no tax was paid due to the application of group taxation, with the group making a loss. If one qualified for no tax because of an overall group loss, the CFC would be regarded as having not paid comparable tax.
Ms Tobias asked what kind of yardstick would be used to measure whether the CFC was paying comparable tax? Would they ask the CFC itself, and at what percentage would the comparison be made? Were South African companies doing business elsewhere not supposed to be encouraged to pay tax in South Africa?
Ms Mputa said that a CFC would submit a tax return to SARS, and if tax was paid in the foreign country at more than 75% of the South African rate, then the CFC was not supposed to pay tax in SA, but would still have to submit a return.
Mr Topham said the CFC rules had not been simplified otherwise, so there were still the foreign business establishment tests, and such. Not all foreign operating companies were CFCs, and those that were CFCs probably did not disclose it.
Ms Mputa said the definition of a CFC was 50% ownership, but to provide for competitiveness, the foreign business establishment was provided for bona fide operations. If actual business was done, then one would be exempt.
Ms Tobias asked if there was a list of persons doing business in tax havens, because it may be found that many people were doing business there, as they knew it would be difficult to get information from them.
Mr Tomasek said the government knew about the people trading in tax havens, who had complied. The real question was about people who had smuggled money offshore or trapped money that they had earned offshore. The blunt answer was not all of them, but more was known today than last year or the year before. One of the game changers in this space had been the common reporting standard, which meant tax administration authorities would be exchanging information about the investments held in various jurisdictions. The list of countries participating covered quite a few low tax jurisdictions. Some would be exchanging information from 2017 onwards, and tax authorities would be getting more and more sight into the low tax jurisdictions. Another game changer was that there were now whistle-blowing websites, which had made some very interesting information available, such as the Panama Papers. Authorities did not get comprehensive information, but it allowed SARS to pull on the strings and see where they led. Another example was HSBC, but there were any number of leaks which occurred. There were a number of developments happening in the international space which made it more difficult to hide money offshore.
Value Added Tax
Mr Morden said there had been an amendment two years ago, trying to clamp down on illegal gold. People not only smuggled the gold, but also ripped off the tax system by claiming input VAT where no tax had been paid. Treasury had previously tried to counter this, but unfortunately had gone too wide and covered second-hand goods where VAT had been paid on the initial new product. The amendment was to allow legitimate second-hand goods to generate a claim for input VAT if they contained gold.
Clause 84 dealt with entities which were on the payment-based system. If one was on the payment basis and received a supply in excess of R100 000, then one had to go back to the invoice basis. This was causing problems for some entities, and the risks were not great, so they could continue to report on the payment-based system.
Mr Tomasek said clause 86 dealt with goods being destroyed, such as through a natural disaster. The Customs and Excise Act indicated that one did not have to pay the customs duties, but the VAT Act still required the VAT, so the amendment was to remove that requirement from the VAT Act.
Tax Administration Laws Amendment Bill
Mr Tomasek said there were several Acts covered by the TALAB. The key issues in the Income tax Act included the withholding tax on interest. The issue here was when a taxpayer claims they owed interest to a foreigner and duly paid over the withholding tax to SARS, but the taxpayer then runs into difficulty and the interest is never actually paid to the foreigner. It would be good to be able to refund the tax, and that was what these provisions were aimed at.
With provisional tax, there were several changes. Firstly, directors were currently allowed to transfer funds between retirement funds. As the tax treatments of different retirement funds were not the same, SARS wanted the directors to come forward for a directive when such a transfer occurred. Previously, directors were able to get income out of their companies without having to pay PAYE and only pay the provisional tax later. Now there were rules about the timing of receipts and deductions of contingent or variable payments. The proposal is to remove these special rules and simply rely on the general rule in the ITA. Thirdly, when tax payers do not put in a second provisional tax estimate currently, if nothing is received within six months it is deemed to be a nil estimate. That is causing some difficulties, because when filing season opens, people put in returns and then they are assessed. However, what estimate does SARS use? The proposal is to align the period of grace with the opening of the filing season. Lastly, a broad range of payments is currently excluded from the provisional tax calculation, and the problem is that it is a little bit too broad. The ones which should be excluded are the ones which are taxed separately under the special rates schedule for lump sum and severance benefits. Those are fine, because the tax is withheld when payments are made, so the provisional tax calculation does not need to deal with them. There are, however, other similar amounts, such as those caught by paragraph (d) of the ‘gross income’ definition, which are also excluded, but where tax is not withheld. Taxpayers are in the happy position that tax is not withheld and they do not have to pay provisional tax, because there is no penalty.
Mr Tomasek said with the Customs and Excise Act there were two issues. Currently there was a maximum weight per cigarette of about 2g, which was approximately double the maximum weight of a cigarette today. Some players in the market were using that gap to do illicit production runs. The proposal was to bring the maximum weight down, for better reconciliation between actual tobacco purchased and cigarettes produced. Secondly, there was a proposal to insert a general anti-avoidance rule, which was modelled on the general anti-avoidance rule for indirect tax found in the VAT Act.
The VAT Act was quite document-intensive if a business, and in business-to-business transactions, the purchaser was allowed to claim back the VAT paid. To do that, they had to have a tax invoice and there were certain specifications for a tax invoice. For example, the VAT number of the supplier was required. What happened was that sometimes the supplier would issue documents that did not meet those requirements, so strictly speaking the purchaser could not claim their input VAT and the supplier may refuse to correct the deficiencies. The suggestion is that alternative documentary proof was acceptable and the criteria for the alternative documentary proof are set, also making it clear that it is meant to be a last resort. If the person did not issue the correct documentation, then the purchaser had to have made an attempt, before relying on this.
On the alignment of prescription periods, with most taxes, if a tax payer comes up with a late deduction, then it has to be raised in the original return and after five years, or three years, both SARS and the tax payer have to live with it, unless there was fraud or non-disclosure. With VAT, tax payers are allowed to make certain deductions in subsequent periods and do not have to go back to the original assessment. The difficulty is that tax payers could do something now which should have been done years prior. The proposal is that although something could be deducted in the later period, it can not be more than five years before.
Mr Tomasek said the Mineral and Petroleum Resources Royalties (administration) Act, has a payments system which partially replicates what happens in the ITA and the idea was to treat everyone more consistently. Treasury would like greater alignment with the Fourth Schedule of the ITA. He noted that government may have been a little too over enthusiastic on one aspect, with a lot of comment received and was looking at it quite carefully. That was the timing of the final return.
Mr Tomasek, on the independence of the Tax Ombud, said two models had been looked at: an ombud which drew resources from the tax administration, and one which was part of the government ombud. South Africa had chosen the first and had not gone with the UK model, which the Katz Commission had recommended. It was closer to the Canadian model, given the constitutional similarities, but with adjustments. Treasury and SARS had some had discussion with the Tax Ombud, and there were proposals to enhance its independence. The first would be to extend the term from three to five years. Secondly, the Tax Administration Act currently provided for staff to be seconded from SARS, with the concurrence of the Commissioner, but now it would be a direct appointment under the SARS Act, although the funds would still be coming from the SARS budget through a carve out. On the mandate, there were currently a wide variety of things that could be looked into, as long as they were triggered by a taxpayer’s complaint. The Tax Ombud felt there would be value in looking into things which were not so triggered, with the Minister’s approval. Finally, if SARS or the taxpayer decided not to not follow the Tax Ombud’s recommendation, the Ombud could see whether further matters needed to be looked into or reported to the Minister.
Mr Momoniat said some of these proposals were not in any budget as a propsal, but with engagement between the Minister and Tax Ombud it was felt that the Tax Ombud had surpassed its first stage, was operational and its independence was now something to consider. This was a phased approach and the proposals went a step in that direction, but there were still issues which Members may want to take notice of.
Mr Tomasek said currently when SARS won a court case in the High Court and above, it could be awarded costs. Currently, those were for SARS to offset against expenses paid. That was inconsistent with what happened with other government Departments, so it was aligning with them, and costs would go into the National Revenue Fund.
Regarding the extension of periods to raise an objection, if a taxpayer was unhappy with an assessment by SARS, they could raise an objection and had 30 business days to do so. In practice, this has turned out to be on the short side, so the proposal was for that to be set through rules issues by the Minister of Finance, after consultation with the Minister of Justice and Constitutional Development. Presently, in the legislation, taxpayers had a further period to ask SARS to accept an objection on reasonable grounds, which was 21 business days. The idea was to extend that to 30. Taxpayers could get yet a further extension on exceptional grounds.
Mr Tomasek on the general anti-avoidance rule, said here it was a slightly different matter. Under systems as they existed before the Tax Administration Act, it was clear that SARS could impose a penalty if the general anti-avoidance rule was invoked. Recently, lawyers had been attempting to re-interpret the judgments on that point and the very similar wording of the Tax Administration Act, to disallow SARS from charging a penalty. The proposal was to clarify that SARS could in fact impose such a penalty. As the new system worked on a basis of behavioural categories, there was a proposal for a new behavioural category. On voluntary disclosure programmes, Members would have heard about the special one, and this was something which would apply to both the special and permanent ones. Currently, taxpayers could not come forward for a voluntary disclosure if you were being audited. This was logical, because the auditing removed the volition. There was a rule, and the carve out was whether SARS could be convinced that the audit would not have picked it up. The question had arisen as to what was meant by audit or investigation, and this had been defined.
The Chairperson asked about the relevance of the tax proposals not in this Bill.
Mr Morden said this had been to flag matters which had been announced in the Budget Review, but which had not been proceeded with.
The Chairperson said Members could read that themselves, because it was not relevant to the processing of the TLAB for this year.
Mr Momoniat said the other issue was the Employment Tax Incentive (ETI) and the Sugar Tax, which Treasury would like to brief the Committee on.
The Chairperson said the Committee had applied to meet the following day during the sitting, and the House Chairperson had agreed in principle. The Committee would meet from 2pm until the House rose. Secondly, given the morning’s proceedings and the complexities of the bills, he would suggest that another meeting be had on these issues, after the public hearings. When was the latest that these bills should be passed by the National Assembly?
Mr Momoniat said it was normally introduced soon after the Medium Term Budget Policy Statement (MTBPS) and then the Committee had two or three weeks to pass the Bill. Treasury normally came two or three weeks before that with the response document. These tax bills were always full of issues, and the presentation by Treasury was done just to bring out the issues it feels are material. Once the hearing was had, Members got a sense, and at times there was a workshop to explain the issues. Perhaps that should be done soon after the hearing.
The Chairperson suggested that as this had been a very haphazard exchange, and Members felt ill at ease about what was being said. On the sugar tax, the Committee understood that obviously the industry was going to complain, but it had to arrive at an independent opinion on whether it agreed with Treasury, or business or labour. Did the bill have to be passed in November 2016?
Mr Morden said it would be in the Rates Bill the next year.
The Chairperson asked when the Carbon Tax Bill would be brought.
Mr Morden said it would be good to have a briefing session without formally tabling it, and leave the passing to the first quarter of 2017.
The Chairperson said the Committee was not having the sugar or carbon tax bills in this financial year. It did not have the capacity to deal with these two complex bills, which were going to involve all stratas of the public. Treasury should go and consult more, and come with a Bill which was reasonably consensual. He therefore felt the Committee should quickly move to the Financial Sector Regulation Bill (FSRB). In the Committee’s programme, it had changed things earlier, but had not dealt with consequential changes. For example, Treasury did not need two weeks for a reply to public submissions. The public would be here on Tuesday, 30 September 2016, and Treasury would have to come with responses on 6 October 2016. He would confer with NT and the Committee section, to come up with proposals.
Mr Momoniat said the special voluntary disclosure hearing would be busy.
The Chairperson said the previous Chief Whip had given the Committee relief from sittings for the whole of the last quarter of 2015, and it had sat in various subcommittees, which could be done again. He would confer with Parliament’s management and come back with concrete proposals on going forward.
Ms Tobias asked for clarity on tax on lump sum and severance benefits. Would it be withheld before the lump sum was paid, or would it be done later? She asked this because the MK Military Veterans Association had not had tax withheld on their lump sums, and had got into trouble when they became due. On the invoices, if a VAT number had not been provided, then there was going to be a cumbersome process, and there should be principles for people to be able to obtain the necessary information to make their claims. On the ombuds, she was interested in the scope of the issues the ombuds would be dealing with, beyond the triggered complaints, so Members knew what they were approving the ombud to investigate. Lastly, she was interested in how SARS would budget for litigation, if the costs were going to be channelled into the National Revenue Fund.
Mr Tomasek said the distinction on the lump sum severance payments was if one was in an employment relationship or not. If one was in an employment relationship, generally the employer would deduct. The employment relationship was a bit broader than usual, and being paid out of a pension fund was an employment relationship. If the taxpayer was not in an employment relationship, then there was no withholding and the tax payer would either have to pay provisional tax or have to pay on assessment. On what needed to be on a VAT invoice, this was specified by law and suppliers knew what they had to put on invoices. However, some suppliers did not follow the law and that was where the problem came in. It was the supplier who created the problem, but it was the purchaser who could not claim the input VAT, and the intention was to address that mismatch. With the tax ombud, the scope had already been set in the Tax Administration Act and what was being done was creating another mechanism for triggering the scope. On budgeting for litigation, this was a challenge as it was variable, although there was a general sense of how many cases it would handle. Unlike other Departments, litigating was part of what SARS did, because it had to resolve disputes with taxpayers. For other departments, it was unusual to litigate. SARS had a baseline, but there may be variations. Equally, whether SARS was going to win or lose a case was unknown. So it was a challenge to budget for, but SARS did its best.
Taxes not in the TLAB: Sugar Tax and Employment Tax Incentive
Mr Momoniat said it was the previous Committee which had dealt with the Employment Tax Incentive (ETI). It was an incentive where, if one was between the ages of 18 and 29 and got between R2 000 and R6 000, one’s employer could apply for a tax exemption. This was aimed at encouraging employers to take on young people. The incentive expired on 21 December 2016, and the learnership incentive also expired on 1 October 2016 for new applications.
When the ETI had been passed through the Committee, the commitment was, because of strong opposition from some of the unions, that there would be a review after three years to decide whether to extend it or not. The intention was, if it was to be extended, there would be a provision in the TLAB which would extend the ETI. Typically, the information for any tax incentive came with a huge lag, because people had to submit their returns when their financial year was over and Treasury had hard information for only the first two years. The figure was 686 402 workers for whom this benefit was being claimed. NT presented a few slides giving a sense of the sectors which made up this number. Like with all incentives, it was impossible to say that all of these were new jobs, because there was always a so-called deadweight for incentives. Despite that, Treasury believed it had been reasonably successful and was engaging with the National Economic Development and Labour Council (NEDLAC), giving those members NT’s review paper. NT was talking to the constituents, to be completed by the end of September 2016. The Committee would have a session to look at this matter.
Mr Momoniat, on the Sugar Tax, said it would be done by gazette.
Mr Morden said it would be done through the Customs and Excise Act, as the tobacco and alcohol taxes were done, with Parliamentary approval afterwards.
Mr Momoniat said Treasury did have too much power there, and it could be abused. When there was a new tax like this, Treasury preferred simulating hearings, so at some point, Treasury would like to go through this in detail and get the Department of Health involved, because this was a policy aimed at changing behaviour, to counter obesity. That was what was driving this tax. The revenue was not the big issue. NT would like to make a presentation, and then allow those who wanted to, to come and make submissions to Parliament. There would then be a response document, but it would not be clause by clause. NT would present the draft of the regulations for people to comment, so it mimicked the legislative process.
Mr Morden said the tax would be 2.29 cents per gram of sugar. At this stage, there was an exclusion for 100% fruit juice, but a lot of health experts argued this should not be included. That would be taken into consideration in the consultation process.
Mr Momoniat said Treasury was very open to including 100% fruit juice, for consistency.
The Chairperson said Parliament did not have a view at present and would like to have its researchers do the work. The Minister may have this power, but Parliament would have a public engagement around it. It was something which could be done in the first quarter of next year. Due to the complexity, nature and number of this year’s tax bills, it meant that more time would have to be spent than anyone anticipated, but the Committee would proceed expeditiously with the FSRB.
Consideration of the Financial Sector Regulation Bill
The Chairperson said there was only one version of the bill before the Committee, dated 26 July 2016. Two submissions had been received -- from the Association for Savings and Investments South Africa (ASISA) and the Banking Association of South Africa (BASA). He proceeded with the clause by clause reading. He said that the Treasury team was a good team, but was unable to deliver. It had had two and a half months to bring the Committee a bill with which the stakeholders agreed, but it had been brought the previous Tuesday. The Committee was not prepared to go back. It would not have public hearings on the new submissions, but it would rather look at the submissions. Where NT had agreed, that would be accepted, but where it had not, that would be investigated. If phase 2 was finished and issues persisted, there may be a need for further hearings. He asked whether any Member, having seen ASISA and BASA’s submissions, felt the Committee ought to allow them a public hearing. There had been four sets of public hearings, and further engagements between theTreasury and the public. There was a problem between NT and the stakeholders, because it was too late for Treasury to bring forth a new Bill. ASISA and BASA would be allowed to intervene where appropriate, but the Committee would not go backwards. He then moved on to clause 3 (3)(b)(iii), asking NT to explain what had been done, and why it was such a tortuous sentence.
Ms Kathy Gibson, Chief Director: Financial Sector Conduct, NT, said it had been done because going forward there would be a need to include standards relating to benchmarks, which lay between a product, a service and a financial instrument. A benchmark was something which tracked a basket of equities or commodities and the value therein. This definition was very difficult to draft to this point, and was based on the international work being done. It was agreed that it was cumbersome, and NT was open towards it being re-worked.
Mr Topham asked whether the definition was intended to cover the actual instrument, or if it was intended to define what a benchmark index was, because people invested in such indices through instruments.
Ms Gibson said the definition was intended to be the benchmark itself.
The Chairperson suggested Adv Frank Jenkins, Senior Parliamentary Legal Advisor, look at the clause for simplification. He requested a simplified explanation of what the provision was doing in writing. If the drafting could not be simplified, as long as Members understood what was being done, it could be accepted. For now it was not. He then moved on to clause 3 (4), asking what ‘at a place or otherwise’ meant.
Ms Gibson said that it could be in the ether.
The Chairperson said the Committee was accepting sub-clause (4).
Mr Momoniat said that to be clear, the July version of the FSRB had been published, and then there had been further comments. The version circulated previously was meant to demonstrate the changes, and what NT needed to do was to indicate further changes being made to the text.
The Chairperson said he refused to deal with three documents simultaneously. He had read the Bill up until clause 46, but another version had been brought forward and that was too much. He asked if anything had been distributed without the Committee’s approval. Treasury was trying to push for things which it could not deliver on. With the FSRB, the Committee was in business mode, which means Treasury had to meet its side. There was only one bill before Parliament -- the July 2016 draft. This had been received before the previous Tuesday’s meeting, but Mr Lees had come forward having received another bill dated August 2016. Then BASA and ASISA had come forward to say they had made submissions to the July version, with the amendments having been incorporated into the August version. This would not be allowed in any other Parliament, so the Committee was saying it could not be expected to manage all the documentation. The Committee was dealing with the July version, and if stakeholders had a concern with a particular clause, they were present and could raise the matter in the meeting.
Mr Momoniat said NT was working only on the July version and the matrix, so BASA and ASISA could speak when they wanted to. Would the Committee want NT to indicate how the July version had changed, to take into account the submissions? The August version could be displayed on the digital media before the Committee.
The Chairperson said this would slow the process, because Members were supposed to have read the bill before the meeting.
Mr Momoniat said alternatively, while going through the July version, NT could alert the Committee to the changes.
The Chairperson ruled that as the meeting came to each clause where stakeholders had proposed changes, NT should indicate as such, and where it was a simple matter, the Committee would agree to it. However, where it was more complex, the Committee would not accept it and require NT to come back. On clause 4, he asked what the new issues were.
Ms Gibson said she would like to revert to clause 3, because of what had just been agreed. Minor technical corrections had been made to the drafting as a result of the engagements, and further refinement to the credit definition following engagements with the National Credit Regulator and the Department of Trade and Industry.
Mr Lees asked for clarity on whether the Committee was accepting the July version of clause 3, despite later changes.
The Chairperson clarified that the clause was not being accepted, because of the new suggestion. He asked to move on to clause 4, asking what the issues in BASA and ASISA’s submissions were.
Ms Gibson said the reference in the definition of ‘financial stability’ had excluded market infrastructure, so this had now been included.
The Chairperson said he had also picked that up.
Ms Gibson said this was an unintended omission. Because of the reference to financial institutions, it was initially felt that market infrastructure would be part of that.
The Chairperson said this was not a major point, and encouraged the Committee to accept it, unless Members felt uncomfortable. Noting no objections, it was agreed to.
He asked why clause 4 (5) had been changed to designated financial services.
Ms Gibson said this was unnecessary, and it had only been deleted.
The Chairperson asked why it was unnecessary.
Ms Gibson said the responsible authority would be dealt with under sub-clause (2) and (3).
The Chairperson said he did not understand the explanation, so the Committee should come back to it. He noted that some very good grammatical changes had been made to the Bill, which clarified it and avoided the repetition of words. This was very good work, and someone internally had recognised the changes of language which made it more user friendly.
He then declared the meeting adjourned.