The submission by the Recycling and Economic Development Initiative of South Africa (REDISA) focused on the possible effects of the environmental levy on tyres at R2.30/kg of tyre as proposed by the National Treasury. Speakers from REDISA highlighted that the change proposed would halt a significant portion of the funds going to REDISA in the short-term (six months), while also introducing uncertainty in the long run with regard to budgeting and contracting. These changes will critically undermine the work done by REDISA in its approved Plan, and will significantly harm the functioning of REDISA as well the waste tyre industry, both of which were argued to face possible collapse should the levy be implemented. REDISA explained that the constitutionality of the Bill will be challenged on the grounds of irrationality, and that details of the matter had also been submitted to the Davis Tax Committee for examination.
The following three submissions related to the Special Voluntary Disclosure Programme (SVDP) planned by the National Treasury as announced by Minister Pravin Gordon. The intention of the SVDP is to incite taxpayers with irregular assets offshore to apply for SVDP, bringing money into the fiscus while also allowing people to regularize their affairs before the upcoming Common Reporting Standards in 2017. Presenters were stakeholders from the South African Institute of Tax Professionals (SAIT), the South African Institute of Chartered Accountants (SAICA), and Pullan Kammerloch Frohlinger Lawyers (PKF).
All three submissions raised the concern that the period of six months over which the SVDP was too short, especially given the information that was to be required for application. A common concern was that the information requested was too extensive. In particular, taxpayers would have to get as many as five or six valuations of their irregular assets, which can be very difficult on a historic basis for various reasons, including poor documentation and the unwillingness or difficulty of banks in retrieving this information. Another concern of stakeholders was the lack of safe harbour protection of facilitators, lawyers and auditors in terms of their reporting obligations to the Financial Intelligence Centre (FIC) and the Independent Regulatory Board for Auditors (IRBA). Stakeholders also felt that the rates suggested were too high and may dissuade people from coming forward. Lastly, stakeholders repeatedly stressed the need for a simplification of the process, to reduce administrative burden on the part of the applicants and the relevant state organs.
As a group, members indicated that they were impressed with the work done by REDISA, and largely compelled by their arguments. They felt that the proposal had not been properly thought through, and that further consideration would be needed following feedback from National Treasury and the Davis Committee. The challenge to the constitutionality would be investigated by legal expert Frank Jenkins.
With regard to the SVDP, there was some debate among members and stakeholders over whether or not five valuations were excessive, and also over whether or not safe harbour should be provided. In terms of the time-frame, some members felt that there is a need to keep it shorter at six months, in order to finish the SVDP before the 2017 Common Reporting Standards, and also because decisive action is required from government. Overall, stakeholders in general stressed the need to ‘attract’ as many people towards applying for SVDP as possible, while members urged that a balance is required between the need to bring forward irregular taxpayers, and the need to penalize them sufficiently in accordance with certain norms.
Recycling and Economic Development Initiative of South Africa (REDISA) submission
Mr Halton Cheadle, Director, Bradley Conradie Halton Cheadle Attorneys (BCHC), presented on behalf of REDISA. He explained that a green or circular economy is a radically innovative way to protect the environment by establishing a self-sustaining industry that creates jobs while processing waste. The circle economy creates something with value from something without value (waste). The creation of this industry will require a legislating scheme in which the state has no financial responsibility but the state has supervisory power to ensure implementation.
Mr Cheadle explained that the REDISA Plan approved by the Minister of Environmental Affairs under the Waste Act has provided this framework. The plan takes on the environmental responsibility of producers and on their behalf establishes small businesses and cooperatives to collect, transport, store and process waste tyres. Funding comes from these producers who in turn pass some of the cost onto tyre dealers and users. The Plan is renewable for periods of five years; the legislation says that the Plan must be revisited and resubmitted for approval by the minister at five-year periods. This is a long-term project that sets three targets: diverting tyres from dumps to improve environmental outcomes, establishing small black businesses and creating jobs.
Mr Cheadle discussed the results of the REDISA Plan to date. When the plan was initially implemented, only 4% of used tyres were diverted from landfill. Following implementation, over 60% of waste tyres are now being diverted. In order to achieve this, REDISA has had to establish and contract with cooperatives of transporters, depots owners and processors in order to transport, store and process waste tyres. As such, the project has managed to create over 3200 jobs and 226 Small and Medium Enterprises (SMME’s). These include 22 depots of which 21 are black-owned, 76 transporters contracted of which 75 are black owned, and 74 micro-collector cooperatives.
Mr Cheadle added that the waste tyre management system REDISA has implemented is regarded as the current best practice internationally for waste tyre management.
Mr Cheadle went on to explain that the elements of the Plan have been developed to run over long time spans. The leases on depot premises run for three to five years. The incubation and support of a new small business takes at least a year. Contracts with depot owners and transporters generally create two to three year obligations. Establishing a product testing institute, including construction and implementation will take at least three years. REDISA has been able to enter into such contracts on account of the fact that it is supported financially by monthly fees paid by producers. Subject to Ministerial review in 2017, this funding will continue for another give years.
Mr Cheadle went on to explain that a National Treasury submission of April 2016 indicated that the purpose of the proposed waste tyre levy is to reduce waste while encouraging reuse, relying and recovering, and thereby discouraging tyre discard into landfills. However, Mr Cheadle observed that this will not happen simply because the levy is introduced – the case of waste tyres is vastly different to the case of plastic bags for example. It requires a great deal of effort and structure to achieve positive environmental outcomes. The Treasury submission also stated that the levy will be implemented at a rate of R2.30/kg of tyre, including fees paid through REDISA directly by producers, effective from 1 October 2016. REDISA would expect that such an important change would not occur so immediately and in the middle of their fiscal year.
Mr Cheadle explained that the purpose of the Bill is to replace the monthly fee paid directly through REDISA, a change which will fundamentally undermine REDISA’s ability to implement and maintain its approved Plan. The replacement of the fee means that the funding of the REDISA Plan will be uncertain as it will be subject to appropriation and a Department of Environmental Affairs (DEA) allocation on an annual basis. The time horizon will be radically shifted from a five-year or longer time horizon to one year. In particular, REDISA’s budget planning for the year will be severely constrained as it will only know its funding by May each year. REDISA will have to alter its contracting periods which will create an unwillingness to invest in the waste industry, particularly in the processing sector. The lack of certainty will hamper the full realization of both REDISA’s environmental and non-environmental obligations under the Plan, particularly in terms of the creation of small businesses and jobs.
Mr Cheadle explained that the Treasury has claimed that the levy is a tax on the basis that:
1) No fee is authorized by the legislation.
2) The fee is compulsory.
3) There is no ‘quid pro quo’ – meaning there is no reciprocal benefit for the fee paid.
However, REDISA maintains that it is not a tax, for the following reasons:
1) The fee is authorised, being authorised by waste tyre regulations 12.i) and 12.j).
2) It is not compulsory. If you look at the structure of the Waste Act, what is compulsory is to belong to a plan. Producers can opt out and establish a plan of their own.
3) It is quid-pro-quo. There is a service and a fee. The service is the collection of the waste tyres on behalf of producers, storing them in a state depot and processing them. The fee is paid by producers to discharge their environmental obligation under waste tyres legislation.
Mr Cheadle gave the comparable example of a bargaining council. Bargaining councils are established where the council performs public functions such as dispute resolution and the provision of benefits. The Minister extends a collective agreement to all employers and employees in the sector, obliging them [without choice] to fund the council. The fee is paid directly to the council. Mr Cheadle asserted that if the Treasury classifies the proposed levy as a tax, then it must accept that by the same logic, the analogous case of the bargaining council must also be considered a tax.
Mr Richard Marcus, Director, Cliffe Dekker Hofmeyr Attorneys, discussed the repercussions of the change from a Company Law perspective. REDISA is a private company whose only funding comes from levies from producers. The problem with the proposal is that there will be no alternative immediate funding to replace what REDISA will lose. As explained, REDISA’s obligations are set up for five years. The result of terminating the funding is that REDISA will face the prospect of having to cease its operations. Rather than channeling its funds to enhance and expand the work it does, REDISA will have to adopt a transitional structure, where after if no alternative funds are found the directors will have to consider insolvency. This means that the board will have to stop entering into new contracts or renewing contracts with small businesses, who may go out of business themselves. The board will have to cut back on the establishment and support of small businesses, and reduce or remove subsidies to processors. Additionally, the board will have to stop the rolling out the current phase of the Plan. There will also be the significant expenses that are incurred when going through the termination process, among which are the costs of negotiating the termination of contracts with third parties that REDISA ends prematurely.
Mr Marcus continued, explaining that the proposed levy will have a dramatic effect, essentially destroying the tyre plan and the tyre recycling industry as it currently exists in South Africa. There is currently insufficient value in waste tyres for the industry to be self-sustaining without existing support structures. As processing is slowed down, depots will reach capacity in a matter of months. The non-renewal of transporter contracts will create stockpiling at tyre dealers. Ultimately, the waste tyres will end up in dumps again.
Mr Marcus explained two differences between the proposed levy and the environmental outcomes targeted in the Waste Act. At present, REDISA provides credits and refunds for producers who are exporting, as they are not contributing to South Africa’s environmental burden. Secondly, REDISA does not charge a levy when a when a tyre is retreaded. The levy proposed by Treasury will be imposed on exports, which will increase the price our tyres will find on the international product. The levy will also penalize the retreading on tyres. Mr Marcus stressed that this is highly irrational policy on both of these counts.
Mr Cheadle took over to explain that REDISA will challenge the constitutionality of the proposed levy based on senior council’s legal advice. The unconstitutionality arises from the fact that the policy is irrational and is therefore liable to be set aside under the principle of legality (rule of law). The following arguments apply:
There was a failure to consult with REDISA, small businesses, processors and the rest of the waste tyre industry before the decision was taken in 2015 to replace the fee with a levy.
The underlying reason for the fee is based on a mistake of law – it is not a tax but a fee
The proposal purports to be a Bill contemplated in section 13B of the Waste Act, however, it cannot be a Bill under Section 13B under the Waste Act.
The proposal cuts off REDISA’s funds mid-term without providing it with alternative funding to meet its obligations under the Plan.
Mr Cheadle concluded that the levy’s implications have not been thought through. REDISA’s recommendation was to remove section 13(2) from the Bill. Alternatively, the proposal to introduce this levy should be deferred to April next year.
Chairperson Carrim commented out of interest that Mr Cheadle had been active and made a large contribution during the struggle against apartheid.
South African Institute of Tax Professionals (SAIT) submission
Ms Erika De Villiers, Affiliate Tax Policy Advisor, SAIT, stressed that the VDP needs to build on the trust and good faith that was established following the first amnesty. Certainty must be provided through a simple and predictable process. The costs should be palatable to encourage disclosure.
Ms De Villiers discussed costs. At present taxpayers have cost concerns, and it is felt that the inclusion rate of 50% of the highest market value of assets would be too high. For example, it would mean that an individual who retains their assets offshore could have a total cost of around 30% of the market value of the assets, being 10% derived from the exchange control levy and 20% from tax. A total cost of around 20% - 25% would be more palatable resulting in a better uptake. This could be achieved by reducing the inclusion rate to 40%.
Ms De Villiers explained that there is currently a complexity burden in applying for amnesty. There is too much tracing of historic information required. It is necessary to determine the market value of tainted assets at five year-ends in the window period (or for the entire period held in respect of prior disposals). It is necessary to trace all undeclared accrual to offshore assets derived from these amounts, which can be very difficult. Often legal and illegal earnings have been commingled and are difficult to untangle. In addition, financial institutions take time to process cases and charge significant amounts for the gathering of information.
There are several factors that slow down information recovery from banks. In recent years, people have moved accounts from one bank to another often. Banks have to answer to clients taking amnesties all over the world. Banks charge huge fees to put all the necessary resources in place urgently. In the USA and EU, clients often have no access to records as many of the smaller banks collapsed in the 2007/2008 banking crisis. For these reasons, SAIT suggests that it would be much simpler to use the market value of assets held on 29th February 2016 for both the tax Special VDP and the exchange VDP.
Ms De Villiers then discussed the use of special VDP where the asset is derived from a mixed or commingled source (where a tainted amount has been mixed with a legitimate amount). The tainted amount can be considered pre-tax, whereas the legitimate amount is an after-tax amount such as from declared income. Currently, these mixed assets must either be entirely included or excluded from the SVDP as a total - no apportionment is provided for in legislation. When deciding to apply for the proposed SVDP, the taxpayer has to consider the costs of the SVDP as opposed to the ordinary VDP. This adds complexity as they will have to perform financial modeling, possibly going back as far as 2001.
Ms De Villiers detailed SAIT’s recommended simplified approach for the SVDP. It works as follows:
If the taxpayer can prove that all undisclosed assets were derived from untainted funds, then pay a levy of 10% (or inclusion rate of 25%).
If the taxpayer can’t split the source of the funds, then they pay a levy of 15% (or inclusion rate of 40%).
The levy is calculated on the 29th February 2016 at market value. This is in addition to or on top of the exchange control levy.
If a taxpayer leaves the assets offshore the taxpayer will pay a total (exchange control and tax) levy of 20% -25%. This charge is not insignificant especially given the recent devaluation of the Rand in vis-à-vis assets held offshore.
Ms De Villiers went on to discuss the re-basing of offshore assets. The inclusion rate in the SVDP is applied to the highest market value of the offshore asset in the 5-year window period. If the owner sells or disposes of the asset they should not be taxed on the market value again. So there is a need to re-base the cost of asset to be equal to market value in order to prevent double taxation.
Ms De Villiers moved on to the treatment of trusts, commenting that it is a significant and technical area of concern. Non-vested assets of non-resident trusts can benefit from the Special VDP if a donor or beneficiary elects to be deemed to have held that asset instead of the trust. SAIT suggests that there should be room for proportional deeming where a non-resident trust has more than one beneficiary. It would be an onerous exercise for only one of the beneficiaries to deal with. Getting group consensus amongst trust beneficiaries is often very difficult; hence there is rationale for proportioning. In addition, it is unclear to SAIT why resident discretionary trusts cannot apply for and benefit from the Special VDP.
Ms De Villiers discussed relief for donations tax and estate duty, a function of the Special VDP intended to provide relief to the transferor, being either a donor or an estate. Technically the wording of the revised draft Special VDP does not seem to achieve this, as it is only the person who holds the offshore asset in the 5-year window period who is entitled to apply. If a donor disposes of the asset by way of donation, the donor will no longer hold the asset for the 5-year window period, and therefore strictly cannot apply for the SVDP. In addition, the transferee also needs the relief because these taxes carry a secondary liability.
Ms De Villiers explained that certain taxes are excluded from the SVDP, in particular Value Added Tax (VAT). The usual problem with VAT is where the taxpayer charges VAT and keeps the proceeds. However, the SVDP here is trying to deal with a different problem, being when VAT relief is sought but VAT was never charged. The potential cost of VAT VDP could dissuade taxpayer from applying for Special VDP [if it were included].
Ms De Villiers discussed the importance of safe harbours for facilitators. Professional advisors have various reporting obligations, for example to the Financial Intelligence Centre (FIC) or to the Independent Regulatory Board for Auditors (IRBA), as well as for other regulatory requirements. If these advisors do not have safe harbour they cannot engage their clients with regards to SVDP because they will be obliged to report their clients as soon as they formally engage with them. Without the safe harbour provision the offending taxpayer and advisors will be reluctant to enter into the discussion. The safe harbour should cover accountants, lawyers and financial institutions. She stressed that the safe harbour provision will be a critical success factor in the SVDP.
Ms De Villiers discussed the window period for application. The current period for applications is proposed to run for six months from the 5th of October 2016 to the end of March 2017. SAIT felt that the six-month period is very short given the processs and documentation involved. Delays often arise due to other countries having tax amnesties. SAIT proposed that the application period should extended to run for a year, especially if the five-year valuation calculations are still to be required.
Ms De Villiers was concerned that the SVDP doesn’t apply to amounts that have been disclosed to SARS under an international agreement, but taxpayers don’t know when an amount has been disclosed to SARS. This creates an unknown risk for applicants which will dissuade disclosure. This is why SARS must directly advise the taxpayer when the information has been disclosed to SARS (and the SVDP therefore does not apply). This is recognized in the regular VDP –the key point is taxpayer notification. Taxpayers cannot be foreclosed for ‘behind the scenes’ events unknown to the taxpayer.
Ms De Villiers closed by stating that there is room for error in the process given the difficultly acquiring the information necessary to apply for the SVDP correct. There is a concern that SARS could challenge applications at a later stage, possibly undermining protection clauses. For this reason, SAIT recommends that good faith protection should be provided.
South African Institute of Chartered Accountants (SAICA) submission
Mr David Warneke, SAICA Member, noted that SAICA has already given a more detailed submission to Treasury. He began with a discussion of the time period allowed for applications. He stressed that the proposed time period of the special is VDP is too short. If you compare it with previous VDPs and amnesties that have been offered, these have run for at least nine months. The reason is that there is much information required to make the application. This could include attaining the market value of offshore assets, as many as six times over. Potential applications also need to seek advice on the application which takes time. During the 2010 VDP it took three years for the reserve bank to process all the applications. Doing market evaluations five times over historically is time-consuming, and one has to submit this information together with their application. SAICA’s recommendation is to extend the application period to at least 12 months, thereby encouraging more people to apply. SAICA also notes that the explanatory memorandum to the Bill stated that one of their objectives is to allow taxpayers to regularize their affairs before the reporting period for the common reporting standards comes into effect in September 2017. If one allows the SVDP to open on the 1st of October and run until August/September, that would give almost an eleventh or twelve-month period, which is more realistic. If a short period of time is going to be retained, SAICA’s believes that it should at least be made possible for applications to be able to submit a high-level application, possibly with the details of evaluations to follow later. As presently worded, it may disqualify someone from applying altogether if they do not have all of the evaluations, for instance, over a five or six-year period available and submitted at the end of each tax year.
Mr Warneke discussed the obligation of advisors to report enquirers. He urged that the success of the SVDP will depend on ones’ ability to get advice from professionals. Lay people are very unlikely to make a successful application on their own – they would need to seek advice first. In terms of current law under the Auditing Profession Act, these auditors have a responsibility to report clients when there has been a contravention. In terms of the Financial Intelligence Centre Act (FICA), accountable institutions also have a duty to report to the FIC if they suspect that transactions are in contravention.
SAICA’s concern is that attorneys may also be included under this obligation. Under the broad language used in the FICA, particularly in Section 29 (2), it is only the suspicion of irregular transactions requires the reporting of the client. Attorneys are currently exempt from reporting obligations provided that the matter enjoys professional privilege. However, there appears to be an argument that the consultation could relate to a possible future contravention and that such a matter might not be in privilege. If this argument holds attorneys may also be required to report the client. The result is that, for someone that lives in a small town which has only one chartered accountant and an attorney for example, they may be completely unable to consult with any of these people for fear of being reported.
Mr Warneke noted that both the 2006 and 2010 VDPs excluded both accountable institutions and registered auditors from the obligations to report in terms of a VDP application, which helped undoubtedly to make those programmes successful. SAICA’s recommendation is that the proposed SVDP should also exclude registered auditors and relevant persons covered under FICA from reporting enquirers pursuant to applications under the SVDP. Mr Warneke added that one would need to consider extending exclusions under Section 29(2) of the FICA.
Mr Warneke moved on to discuss the determination of the market value of overseas assets. Assets must be held or deemed to be held between 1st March 2010 and 28th February 2015 to make them eligible for special VDP. The value of the assets must be determined, in many cases five times over for the same asset. This is because you are required to value the asset at the end of each tax year. SAICA believes that this requirement is too time consuming and costly, and in many cases will prove unnecessary. Immovable property and unlisted shareholding are particularly problematic from the valuations point of view. It is also uncertain as to which types of valuation will be acceptable in the SVDP. It is not clear in the proposal what would happen if there was a dispute later over the valuation and whether the application would be disqualified.
Mr Warneke considered the case of a taxpayer who owns two apartment flats overseas which were bought many years ago. He stressed that it is very difficult to get historic valuations of assets over the past five years. The same is true of unlisted shares. Therefore, SAICA made two proposals to simplify dealing with valuations. The first is that the flat owner in question be allowed to use any market valuation of his apartments at any one date during the 1st March 2010 – 28th February 2015 period. This option is attractive because he/she is more likely to have at least a single market value available. There is no need to find and process five valuations. SAICA’s second proposal is that the flat owner could use the market value of the apartments as at 1st October 2016, when the SVDP commences. This is the simplest valuation to determine.
Mr Warneke pointed out three inconsistencies between the SVDP for tax and the VDP for exchange control. Firstly, if someone is under investigation by the South African Reserve Bank (SARB), they are generally unaware of this. A person may unwittingly apply for SVDP only then to find out that they do not qualify as they are under investigation. This will dissuade people from applying. Under the Taxation Administration Act, provision is specifically made whereby if a person is aware of a current or impending investigation, then they cannot qualify for relief. A similar clause should be introduced to the SVDP for exchange control. For example, if by the date of application, the person had been informed that they were the subject of an exchange control investigation or audit, that they then be disqualified but not otherwise. In other words, transgressors should know in advance if they will qualify.
The second inconsistency relates to market value determination. In addition to the five valuations required by the tax SVDP, the exchange control VDP has an additional date – the 29th February 2016. So the taxpayer in the example from before would have to get six valuations. It is also unclear exactly who can do these valuations and whether disputed valuations would disqualify applications. SAICA recommended that the date of the exchange control VDP be changed to match the date required by SARS to obtain the market value.
The third inconsistency is the fact that there is no permanent exchange control VDP like there is for income tax. SAICA recommends that exchange control also be provided with a permanent VDP. This process should be fixed and transparent. There should not be a doubling-up of penalties on the same offense. Such a process would encourage people to come forward, and make the VDP more likely to be effective.
Mr Paul Gearing, Director, PKF, gave the submission. Income tax rates have jumped up from the 2% rates they were around the first amnesty to the 50% rates of taxable income that we see today. The forex rates are similar to what they were before. He commented that while the initial amnesty was a good idea, the timing was bad and it is likely that there was a lot of activity that was not disclosed but should have been. The 2010 Foreign Exchange (Forex) VDP did not properly address tax issues and thus did not reach full potential. He posited than a more reasonable tax VDP would have had a greater response had SARS taken a less ‘hardline’ view.
Mr Gearing stated that the SVDP is a positive amnesty in that it covers both income tax and reserve bank issues. However, it is significant that it is treated as a VDR and not an amnesty. The problem is that the level of disclosure and accuracy relating to events that could have occurred decades ago is too demanding. The tax rates are also too high relative to the first amnesty. In addition, trusts are included in a somewhat negative manner.
Mr Gearing went on to discuss exemption from FICA. When the small business tax amnesty took place in 2006/2007, there was a clear exemption from FICA whether or not the person took up the amnesty or not. Without it advisors cannot promote the amnesty. Once SARS is notified taxpayers cannot apply for VDR. The Independent Regulatory Board for Auditors (IRBA) indicated that without an exemption clause, auditors that assist their clients in applying for the amnesty will have to request reportable irregularities to the IRBA. Therefore, every company that comes forward will have a reportable irregularity and additionally a qualified audit report (because they will not have regularized within 30 days). This will cause issues for their bankers, their credibility and their creditworthiness. There is no rational reason why both the FICA and IRBA exemptions are not provided for in this legislation. There needs to be the protection mechanism for advisors in order for regularization to occur.
Mr Gearing discussed a need for simplicity in the process. PKF believes it is excessive to demand the disclosure of facilitators, or to require knowing which company took funds out of the country, and so on. He asked if it was not sufficient to simply know: 1) the holder of the foreign asset on a given date, and 2) the market value of the asset at the same date. PKF suggests a base of 50% at a fixed rate of 14%. This simplification matches the simplicity of the regularization of forex.
Mr Gearing went on to discuss VAT, he felt seemed to have fallen through the cracks – in the second draft it was explicitly excluded. To require parties to do a separate VDP for VAT will add another layer of tax and costs and will not be in the interest of the fiscus. Treating VAT as a separate issue is adding further and unnecessary complexity. It will also encourage people to bury their assists deeper into complex structures. He felt that the correct approach is to use a ‘broad net’ with a simplistic approach which will include as many people as possible.
Mr Gearing urged that there is no rational reason to exclude trusts and the estate duties provisions which are currently applicable to trusts. The 2003 amnesty created a legal fiction allowing the donor to apply for the foreign trust but did not change the legal position of the trust and as such did not change the estate duty position. There is no reason why this ought not to have been the case, and there is also no reason as to why local trusts cannot also fall within this SVDP.
Mr Gearing commented that there been a failure to deal with provisional tax consequences that will arise due to the adjustment in 2015 and 2016, when both years’ second provisional tax payments would already have been finalized. This will mean that provisional tax would be understated. PKF suggests automatic relief from penalties arising from SVDP provisional tax underestimation.
Mr Gearing discussed the capital gain base cost. In that the taxpayer is paying on the current market value of the assets, the base cost of the assets ought to be set at current value, as was the case in the 2003 amnesty. If this is not done, not only will the taxpayer have to provide six valuations, but they also have to ascertain what the original cost was, which is an unreasonable requirement.
Mr Gearing pointed out that there are various conflicting dates between SARS and SARB. There is no logical reason to have so many dates, and this will also cost companies who are paying for all of these valuations. Again, the proposal is to simplify the process by requiring one date only. The SVDP could use the 2015 valuation date [28th February 2015] without the need to obtain prior validations.
Mr Gearing noted a technical issue for the case where a South Africa company diverted sales which are effectively donated to a foreign trust. If this was done before March 2010, it would be excluded from the ambit of the SVDP which does not make sense.
Mr Gearing restated that PKF suggests a simplistic solution which could be used over a broad base and achieved within a six-month period. The same number that is given to SARB for a base can be used as the basis for the SARS calculation. It is unnecessary to require all the additional information and cause extra work and anxieties by asking too many questions. If a valuation is known at a reporting date, let the person simply pay a payment to SARB of 10% to leave the funds offshore, and payment of 14% to SARS (based on the 50% using the corporate rate) to rectify all problems/irregularities with the funds along this way. This leaves the final amounts in a range of around 24%-25%, a figure that people can hopefully live with. ‘
Mr Gearing concluded by saying that the opportunity exists to create a structure that is necessary for people to regularize. The opportunity was missed in 2003 and 2010. As a country we cannot afford to miss this opportunity again. People want to regularize their affairs, but without they correct structure they will end up hiding them deeper and deeper. Many of the funds have been there prior to the 2003 amnesty and are yet to be discovered. A simplistic and inclusive amnesty will reveal the rest of the iceberg that was only just scratched by the 2003 amnesty.
Chairperson Carrim noted that stakeholder accounting firm Price Waterhouse Coopers (PWC) has also made a written submission. He then explained that while there is always a gap between the views of stakeholders and the committee, the purpose of the consultations is to minimize this gap as far as possible before a decision is finally made by the committee, who has the final say. He added that tax issues are some of the most complex for parliamentary members to decide on. There is an imbalance in knowledge as the PKF and other teams are technical experts but committee members are not and cannot be expected to vote and decide on clauses that they do not understand. In these cases, the committee will often opt to defer decisions to a later time or possibly to another body. For this reason, the committee urges stakeholders to present in as simple and straightforward way as possible.
Questions for REDISA
Mr A Lees (DA) commented that the stats are impressive in terms of the improvement in used tyre management. He wanted REDISA to confirm that the change suggested in the legislation will definitely result in the permanent halting of funds to REDISA, and not just for six months. He also wanted to know if they expect that the industry will ever be self-sufficient. Lastly, if REDISA is indeed forced into liquidation, who are the shareholders and directors and who would be in change over this process?
Mr S Buthelezi (ANC) commented that the team presenting is not very transformed [in terms of their racial makeup]. He added that he found REDISA’s comments compelling, especially in that economically a tax always has negative implications on growth. He feels that the government’s role should generally be limited to creating an enabling environment.
Mr Pule Mabe, Finance Whip, ANC, asked about the type of organization REDISA was, and in particular if it was a private company, a profit making entity or an NGO. He was interested in their relationship with civil society. Their work has been commendable in terms of the creation of jobs. It was mentioned that tyre manufactures can subscribe to an approved plan, but it is unclear how open the interpretation of this phrase is. He added that the levy on new tyres, used tyres, and the retreading of tyres seems like an excessive burden on the consumer as these levy’s will ultimately be borne by them. Lastly, he wanted clarity on the meaning of the phrase ‘extended producer responsibility.’ Additionally, how does the REDISA model fit into the concept of the circular economy? He added a comment that ultimately, in terms of tax, government need to look to increase the tax base [rather than tax rates].
Ms P Kekana (ANC) suggested that the Bill has unintended consequences not properly considered, which have been raised by presenters and REDISA in particular. With regards to REDISA’s recommendations, she wanted to know if they should be read together or separately. Specifically, if there is a challenge to the constitutionality, it must be examined as a focal area on its own.
Mr B Topham (DA) wanted to clarify the situation and gave his interpretation. Currently there is fee imposed in terms of National Environment Management Act which is applied with the purpose of dealing with the environmental impact of tyres, which has the secondary benefit of creating jobs. The proposal [in the Bill] going forward is that the same amount of money, bar the exemptions to exporters and retreaders, is not going to go to REDISA but to the state coffers. Hopefully, the money will then find its way back to the REDISA project. So the proposal is that the funds now go to the Minister, and thus REDISA does not have certainly that they will receives funding, which is the core of the issue. He therefore asked if there is no way that policy makers could ensure to REDISA that the funding will end up in REDISA.
Mr Mabe asked whether REDISA collects and pays tax. He wanted to know more about the taxation paid.
Chairperson Carrim noted that there was a legal expert present at the meeting, Frank Jenkins, who would investigate the issue of constitutionality as raised by REDISA.
Response by REDISA
Mr Marcus responded to questions on behalf of REDISA. REDISA is a non-profit company with no shareholders. It terms of its transformation, it has seven directors, five of which are female, two are white and five are non-white. The board has same responsibilities as the board of any company. Regarding the issue of the six-months without funding: unless there is something to replace the income over the six months, the process will grind to a halt in a very short space of time. Cash reserves will cover operating costs at most for a period of four to six months. REDISA will still have to plan for a winding-down of the business will which cost a great and be a significant waste of money. So the reality of REDISA failing in those six months is very real.
Mr Marcus continued. On the VAT issue, REDISA being a non-profit does not pay income tax, but currently pays R77 million per annum in VAT, and is thus a substantial contributor to the fiscus. The unique basis of the REDISA model is that it takes away the burden of the state to conduct these activities. For this reason, the ‘extended producer responsibility’ means that it is the producers and the consumers using the products who ultimately bear the responsibility of waste disposal.
Mr Macrus spoke to the concept of the circular economy – the idea is that, because of the REDISA model, the industry will become efficient and over time eventually becoming self-sustainable. Across the world this is a leading approach to this problem that has been well-acclaimed.
Mr Cheadle took over and explained that while it is difficult to predict, in the long-term the plan is to establish a product-testing unit upstream that will set standards for waste tyres. Over time the system aims to become self-sustaining, which will lead to the lowering of the fee. That is the intention of REDISA’s plan.
In response to Mr Mabe’s question regarding the compulsory nature of the fee, Mr Cheadle reiterated as before that the requirement of current waste tyre regulation is that producers must either establish a plan, or join one. There is an approved plan, but nothing stops any producer or group of producers from suggesting their own plan to the Minister, who is then solely in charge of approving or rejecting it. This plan can involve the producer opting out entirely from the recycling industry and instead vouching to deal with waste tyres of their own accord.
With regards to REDISA’s recommendations, Mr Cheadle confirmed that REDISA’s recommendation is the deletion of Section 13(2) read with part 3 of Schedule 2. REDISA makes this recommendation on the basis that the clause is unconstitutional. Alternatively, if there is uncertainty about this, the issue has been submitted to the Davis committee. REDISA will base the alternate part of its recommendation on the views produced by the Davis committee. Given that the decision will remove a large part of REDISA’s funding and ability to function, it makes sense to wait for the decision [from the Davies’ committee] on whether the proposal amounts to a tax or a fee. In this case, if it is decided to be a tax, come April there would be alternative funding provided for REDISA, which would remove the irrationality.
Chairperson Carrim suggested that members think about the issue, hear the response from Treasury, and then meet again as soon as possible with a Department of Environmental Affairs resubmission. The committee may also need to consult with the Portfolio Committee on Environmental Affairs. Chairperson Carrim felt that he was not completely convinced of the unconstitutionality, but remained compelled by REDISA’s arguments.
Mr Mabe stressed the importance of job creation and the societal impact of policy.
Ms N Mokgosi (EFF) agreed with Mr Mabe in that the country needs an enabling environment for the private sector. She added, however, the state must be decisive with policy, otherwise the result at a later stage will simply be a higher tax on ordinary people unable to avoid it. Too often government turns to simpler taxes like VAT which end up being borne by the poorer consumers rather than the rich who are avoiding taxes in elaborate ways.
Questions on SVDP submissions
Ms Mokgosi asked if PKF, when taking issue with the six-month period, has considered the reality that whenever government extends a given period in legislation, it is inadvertently leading those implicated in the process to believe that there will be another extension. Government needs to be able to catch up with avoidance methodologies. Extending the time will put legislators further behind. Government also needs to reduce the gap between rich and poor, especially given that the modern digital global economy is more in favour of the rich. Capital is extremely mobile at just the touch of a button. We do not want the government to be guilty of indecision. Government needs to send a strong message that members are not going to be overly open and negotiable; government needs to be empowered to recover these monies. This is the committee’s concern as legislators, and it is both stakeholders and the committee’s concerns that must be weighed up when decisions are made.
Mr Buthelezi commented that he was not convinced by the argument that it would be prohibitively difficult to attain valuations over a period of five years was – this is a relatively short period of time in the business world.
Mr Topham maintained that it is very difficult to get historic records, which is confirmed by the fact that it was mentioned in all of the related submissions. Therefore, making it simpler to apply for the SVDP will certainly help bring businesses come forward. Simplifying the process will also ease the contention around the time period as the process will more easily be complete in six months. He pointed out that not all money that has gone offshore in the past has necessarily been tax evasion: it could be legitimate in this regard but irregular in terms of exchange control.
Dr Dumisani Jantjies, Finance Director, Parliamentary Budget Office (PBO), suggested that despite the advantages of a safe harbour, some evidence suggests that the disadvantages may outweigh the benefits.
Chairperson Carrim commented that there is a trade-off between making the process easier and more lenient and punishing offenders appropriately, given that tax evasion charges are morally and legally wrong. Government needs to stress that when discussing amnesty. In other areas of law there is less latitude by which people can get away with what they have done.
Mr Gearing responded on behalf of PKF on the question of the period of six months. Mr Gearing agreed that the quicker the matter can be resolved the better for everyone. He maintains that it is given the number of valuations requested combined with the detailed information on the sources of funds that makes the period of six months too short. If made simple enough, six months is a practical period. Much time has been lost by not having exemptions from FICA and IRBA. This has stopped the information gathering process and the promotion of the forex VDP because of the fear of what might happened to clients. He stressed that while a five-year valuation might be an accounting norm, VDP’s deal with illegal activity, which by nature goes largely undocumented.
Mr Gearing believed that on a cost-benefit basis, given the size of these assets, most of which were untouched by the first amnesty, it is not reasonable to put such a focus on common reporting standards. Especially given how badly the country currently needs money, government needs to be decisive and enact legislation that will make an effect and bring this money back into the country.
Mr Warneke responded on behalf of SAICA. He agreed with Chairperson Carrim in that tax evasion is morally wrong, and that this is the primary target of the SVDP. With common reporting standards approaching in 2017, Mr Warneke believed that this proposed SVDP will be the last amnesty available for the assets in question. He agreed that the six-month period is too short and that taxpayers will not be able to comply. He reminded members that it is not just a question of having bank statements over the last five years – it requires acquiring different valuations of the assets from appropriate authorities, which is a costly process. Doing this six times is a cumbersome, time-consuming and costly requirement. The SVDP needs minimize the number of people who prefer to simply ‘take their chances’.
Mr Hugo Van Zyl, Specialist Tax Practitioner, SAIT, agreed that the six-month period is too short, especially given the failure to provide safe harbour. He pointed out that the fact that the problem of the time period being too short exists is as a result of indecisiveness from government. Secondly, the nature of the information over the five years requires the tracking of income from well before those five years. Internationally, periods have been extended for the sharing of information under international agreements for the exchange of tax information.
Mr Val Zyl then discussed the difficulty of requiring five years of information. Many South Africans historically put their money in overseas banks as long as 25 years ago. Many of these banks failed in the global downturn and closed these clients’ accounts. Additionally, many of these countries have different accounting principles to South Africa. These banks will often charge as much as 5000 Swiss Francs to reopen these records and retrieve the information.
Mr Van Zyl added that tax evasion is not a ‘white-crime’; in 2003, 1021 applications were processed, of which 675 were black. The issue of money offshore is no longer one of white privilege. There are peoples of all ethnicities with money offshore who want to come back and bring the money back. This is why the PKF approach is logical – whoever holds the money, let them pay a fair share.
Mr Van Zyl added that the safe harbour provision does not mean that anyone pays less tax. It is designed to protect the facilitator and the advisor in the process. In 2003 and 2010 facilitators were dissuaded from providing information, even if clients wanted to regularize their affairs.
Ms T Tobias, ANC, who had arrived midway through the meeting, stated that it was not a race issue being discussed during the meeting, but a question of whether or not people are morally involved properly in the tax system. Secondly, the committee must await the Treasury response, particularly regarding the simplification of the process. Ms Tobias questioned the suggestion of a high-level application, and reminded members of the merits of common reporting standards. She felt that more clarity was needed before it was clear that the requirements were too onerous. Particularly it will depend in the views of SARB and Treasury. She requested follow-up from Mr Jenkins on the question of constitutionality. She sought better justification as to why auditors should be excluded.
Ms Mokgosi urged that members must not be mislead by racial tones in the discussion. She asked if there was any special dispensation for exiles who accumulated funds whilst outside the country.
Ms Tobias also wanted to know why the facilitators’ activities should not be disclosed. The treatment of trusts should also be more closely considered.
Dr Jantjies asked industry and Treasury whether they believed that South Africa’s current tax instruments are sufficient to raise the money the country needs.
After some discussion, given that members could not stay on at the meeting, it was agreed that further discussion regarding REDISA and SVDP’s be carried forward to the next meeting. It was agreed that further questions for stakeholders should be sent by midday of the following day.
National Treasury responses
Ms Yanga Mputa, Director, responded on behalf of Treasury. With regards to REDISA, Treasury has had discussions with the DEA on the tax before the 2015 budget. That discussion led to the budget proposal in 2016. Currently Treasury is still discussing the impact of the proposal with the DEA.
Ms Mputa stressed that the issue of constitutionality must be addressed. On the SVDP: the SVDP was meant for non-compliant taxpayers to come forward before the new system comes into place. Treasury needed to strike a balance between inciting non-compliant taxpayers to come forward and penalizing them sufficiently. She stressed that the proposal is the third draft Bill which has already taken into account many levels of stakeholder engagement.
Treasury pointed out that the current model does not require one to look back to income from several years before – the tax is only based on valuated assets that are held. There is still a link to income but it is not as restrictive as it is being made out to be. On the question of FICA and IRBA exemptions, the Financial Action Task Force (FATF) has issued guidance that exemptions should not be grated. Guidance is provided on how to approach the question of a client applying for the SVDP, and this should ‘get the professional advisors to where they need to be’. In response to concerns that cash will be further hidden away if the SVDP is not thorough enough, he stated that the Treasury is involved in making it more difficult for people to keep hiding ‘further underground.’ He concluded that while simplicity is important, a balance needs to be struck between the expectations of complaint taxpayers [with respect to fairness] and the need to bring irregular cases to light.
Chairperson Carrim requested that written responses be submitted by Monday the 12th. The stakeholder meeting was then closed and the committee moved to discuss internal issues. He stated that if there is a request from a party to change the programme of the committee, it is a group decision and not a decision that the chairperson can make alone.
Chairperson Carrim continued. Regarding meeting with South African Airways (SSA) as requested by Mr Lees, Friday [2nd] seemed to be the soonest date available. However, the updated proposal at present and given discussion with various people is as follows: 1) the committee would not sit with SSA that week (given that its representatives were not available) and 2) the committee would definitely sit with SAA on the 20th [September]. SAA is expected to submit its financial reports to the committee by the 15th. There is a legal question of whether or not the speaker has the right to sanction a body such as SAA if it does not meet such a commitment.
Chairperson Carrim then mentioned the committee’s relationship with the media. He stressed that the committee would not be intimidated by views that are spread by parties to the media. As a majority, the committee opinion on SAA is that the directors of the company and the relevant governmental representatives need to cooperate properly in the interest of the country. Secondly, the interim board of SAA’s term has lapsed, and therefore a new board should be appointed. As to who should serve on this board, this remains the prerogative of the executive, who should appoint those who are competent. He stated that he would work on a draft for a committee position statement on the situation at SAA, which would be complete by the following day.
Mr Lees supported the creation of a committee statement on the matter. He wanted to clarify that the suggestion was to not try bring SAA in for a meeting before the 20th. He felt that discussions suggested that the following Tuesday [6th] may be suitable.
It was agreed that the matter could be finalized in the next days’ meeting.
Chairperson Carrim addressed the issue of the ongoing disputes between Treasury and Eskom. He stated that the committee needs to meet with Public Enterprises, Treasury, and the related parties.
Mr Buthelezi stated that the correct approach would be for the Minister of Finance to interact with the Minister of Public Enterprises before the committee sits on the matter.
Ms Kekana agrees with Mr Buthelezi, and stressed that the committee should not sit in response to a rise in media coverage. Proceedings should follow proper process.
Chairperson Carrim agreed that the Ministers should meet first and the matter should be handled consistently with their support.
The meeting adjourns.
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