National Treasury presented a policy overview on Double Tax Agreements and the specifics on the particular treaties and protocols before the Committee.
The South African Revenue Service (SARS) presented the key articles of three Double Tax Agreements: United Arab Emirates, Singapore and Zimbabwe. The differences between articles dealing with the withholding tax rates for dividends and interest sourced in a contracting state were highlighted. As well as the nature of dispute resolution, at times being the mutual agreement procedure, and what would be deemed a permanent establishment. The protocol to the Brazil Double Tax agreement deleted the old Article 26 on exchange of information. The new Article 24 provides for full exchange of information including spontaneous, requested and automatic exchange of information.
SARS also presented Tax Information Exchange Agreements with Saint Christopher (Saint Kitts) and Nevis, Uruguay and the Turks and Caicos Islands. Articles of importance were the ones dealing with the scope of the agreements, being information reasonably relevant to the administration of tax, exchange of information upon request and costs.
In the discussion Members asked for an explanation on the choice of countries with which these agreements had been concluded and how the dividends and interest articles operated in practice.
National Treasury and the Department of Environmental Affairs presented their combined response to submissions by the Recycling Economic Development Initiative South Africa (REDISA). Overall, the Departments rejected REDISA’s main concerns being: the unconstitutionality, the misplaced assertion that the current tyre levy was a tax and not a fee and made a general indication on the performance and governance concerns regarding REDISA. The position of the departments was that the proposed tyre levy would be a more appropriate position, because REDISA performs a public function, with public funds and therefore ought to be subject to the accountability and transparency requirements imposed with collection through the National Revenue Fund and being subject to the Public Finance Management Act.
Members raising concerns about oversight and non-compliance by REDISA with requests for information, especially on composition of its board, shareholding and the same for the management company it had hired, which it was alleged had shareholders who were REDISA directors. However, these matters were flagged for a joint meeting with the Portfolio Committee on Environmental Affairs. Secondly, the constitutionality of the proposed environmental levy was considered, including input from the Parliamentary Legal Advisor who indicated that the proposed levy was constitutional.
National Treasury and SARS then responded to the submissions received on the Special Voluntary Disclosure Programme where comments included concerns about the six month period being too short. Treasury accepted this and would recommend it be extended to 9 months. Further, there were a number of comments suggesting that the reporting obligations for certain advisors needed to be dealt with. This needed to be within international standards and the Financial Intelligence Centre and Independent Regulatory Board for Auditors were in the process of preparing guidance on this. Lastly, concerns around the adjustments of effective rates and thresholds were addressed including increases in the inclusion and effective rates of capital gains tax.
Double Tax Agreements and Tax Information Exchange Agreements
Mr Lutando Mvovo, Director: Tax Policy National Treasury, briefed the Committee on the policy aspects of tax treaties, indicating that their main purposes were to prevent double taxation of the same income, create fiscal stability and prevent tax avoidance and evasion. He then spelled out the process through which a tax treaty becomes domestic law, specifically the interaction between section 231 of the Constitution and section 108(2) of the Income Tax Act.
Mr Movo then spoke to the rationale behind the specific treaties to be presented to the Committee. The Singapore double tax agreement (DTA) first became effective in December 1997, when South Africa still used a source basis of taxation and was therefore outdated, requiring renegotiation and modernisation. This agreement was signed by South Africa on 23 November 2015 and by Singapore on 30 November 2015. The United Arab Emirates DTA was a new treaty, aimed at enhancing economic relations between the two states and to assist the sizable South African presence there. That agreement was signed on 24 November 2015. A DTA with Zimbabwe first came into force in September 1965. Changes in South African domestic tax law and the increased presence of South African companies in Zimbabwe necessitated the renegotiation of the treaty. The agreement was signed on 4 August 2015.
Ms Oshana Maharaj, SARS Senior Manager, presented on the agreements from a technical perspective and noted their purpose was to remove barriers to cross border trade. Preliminary briefings had already been conducted for the Singapore DTA, Zimbabwe DTA, United Arab Emirates DTA, the Protocol to the Brazil DTA, the Uruguay tax information exchange agreement (TIEA), the St Kits and Nevis TIEA and the Turks and Caicos Islands TIEA. Further, a new preliminary briefing would be given on the Liberia Protocol to the TIEA. The negotiated DTAs closely follow the Organisation for Economic Cooperation and Development and UN Model tax conventions; she would indicate where specific articles differ from these standard approaches.
United Arab Emirates Double Tax Agreement
Ms Maharaj said paragraph 3 of Article 4 Resident was important, because it indicated that where a person, other than an individual, was a dual resident, then the tie breaker would be the persons’ place of effective management.
Ms Maharaj said Article 5 deals with Permanent Establishments where paragraph 2 specifies listed permanent establishments including a farm or plantation. In paragraph 3, deemed permanent establishments required a project, construction or installation to carry on for more than 12 months. The furnishing of services by employees would qualify if that was for nine months out of any 12 month period. Where professional services are furnished by an individual, it must last for more than 183 days in any 12 month period.
Ms Maharaj said Article 10 on dividends allows both source state and resident state taxation, with the source state withholding tax being 5% for a shareholding of 10% and 10% otherwise. There is an anti-abuse rule for dividends, where the article will not apply.
Ms Maharaj said Article 11: Interest, there is source and resident state taxation, with a 10% withholding tax on the source. There is also an anti-abuse provision here. The same applies to Article 12: Royalties. The anti-abuse provision for the above three articles applies a main purpose test.
Ms Maharaj on Article 24: Mutual Agreement Procedure, said one of the minimum standards of the base erosion and profit shifting (BEPS) project, under action 14, was to make the dispute resolution mechanisms more effective. Each DTA to be presented all include articles on mutual agreement, which authorise the competent authorities of the contracting states to resolve mutual agreement problems which relate to the interpretation and application of the agreement. Further, to consult to eliminate cases of double taxation not provided for by the agreement.
Ms Maharaj on Article 25: Exchange of Information, said this article is in line with the OECD and UN Models. It authorises full exchanges, including requested, spontaneous and requested exchanges. Further, bank secrecy or the absence of a domestic tax interest cannot be used to deny requests.
Ms Maharaj on Article 28: Miscellaneous Rules, said this provides that dividends and interest paid by a resident to a contracting state, political subdivision or local authority thereof will be exempt from tax in the source state. Further, paragraph 2 defines government as Government of the United Arab Emirates (UAE), local government of the UAE, UAE financial institutions and any other statutory body or institution or instrumentality wholly owned by the government of the federal or local government of the UAE; and the South African Reserve Bank (SARB), any other statutory body or institution wholly owned by the government of Republic of South Africa.
Ms Maharaj said paragraph 1 of the Protocol to this DTA gives a clarification of the term state as including the government of the UAE, a local government of the UAE, an agency which is an integral part of the federal or local government of the UAE or an integral part of one of its local governments. This specifically included the Abu Dhabi Investment Authority. Paragraph 2 clarifies that the provisions of paragraph 4 of Article 6 will not apply to the mere purchase of land of a contracting state for its own purposes.
Zimbabwe Double Tax Agreement
Ms Maharaj on Article 4: Residence, said here the BEPS recommendation on dual residence has been incorporated for persons, other than a natural person. So residence would be determined by mutual agreement between contracting states on a case by case basis. Failing which, the provisions of the agreement will not apply, except to the extent which the competent authorities agree.
Ms Maharaj on Article 5: Permanent Establishments, said an installation project, building site or associated supervisory activity must continue for more than 6 months to be deemed a permanent establishment. The furnishing of services by an enterprise through employees or professional services by an individual must continue for periods exceeding 183 days in a 12 month period.
Ms Maharaj on Article 9: Associated Enterprises, said this was part of the BEPS best practice recommendations on mutual agreement procedures. This Article provides for adjustments to profits that may be made for tax purposes where transactions have been entered into between associated enterprises, not on arm’s length terms. Paragraph 2 goes on to require an appropriate adjustment by the other state to alleviate the economic double taxation, which is the taxation of the same income in the hands of different persons.
Ms Maharaj on Article 10: dividends, said this places a 5% limit on source state withholding tax, where there is a 25% shareholding and 10% tax otherwise. Article 11: Interest, here source and residence taxation is permitted, with a 5% limit on the source state. Exemptions are listed for the State, Central Bank and for debt instruments listed on recognised stock exchanges, which are the Johannesburg Stock Exchange and Zimbabwe Stock Exchange. Article 12: Royalties, also allows source and residence taxation, with a 10% limit on source state.
Ms Maharaj said Article 13 deals with technical fees which are payments of any kind to any person, other than to an employee of the person making the payments, in consideration for any service of an administrative, technical, managerial or consultancy nature. The source state withholding tax is limited to 5%.
Ms Maharaj said Articles 24 and 25 are the same as in the UAE DTA.
Ms Maharaj on Article 26: Assistance with the Collection of Taxes, said under this article both states are empowered to collect taxes on behalf of each other.
Singapore Double Tax Agreement
Ms Maharaj on Article 4: Residence, said this is a similar provision to what was recommended by the BEPS Action Plan allowing for residence of a person, other than an individual, to be determined by mutual agreement and in the absence of such agreement the person would not be subject to the DTA, aside from Article 24 dealing with exchange of information.
Ms Maharaj on Article 5: Permanent Establishment, said a building site building site, a construction, assembly or installation project or any supervisory activity in connection therewith which continues for a period of more than 12 months will be deemed a permanent establishment. The furnishing of services, by an enterprise through employees or professional services by an individual must total 183 days in a 12 month period. Further, activities by an enterprise engaged in the exploration or exploitation of mineral resources will be deemed a permanent establishment after 6 months.
Ms Maharaj said article 9 is the same as in the Zimbabwe DTA.
Ms Maharaj said Article 10: Dividends, allows both source and residence taxation. It imposes a withholding tax of 5% where there is at least a 10% shareholding, otherwise 10%. Paragraph 4 exempts dividends paid by a South African company to the government of Singapore. The Article includes an anti-abuse provision, as with the UAE DTA.
Ms Maharaj on Article 11: Interest, said this allows source and residence taxation, with source taxation limited to 7.5%. Exemptions added in paragraph 3 for the State and for debt instruments listed on recognised stock exchanges, in line with domestic law. Article 12: Royalties limits source state taxation to 5%. Both articles include anti-abuse provisions.
Ms Maharaj said articles 24 and 25 are the same as in the other DTAs.
Ms Maharaj said the protocol to the Singapore DTA clarifies that interest on funds connected with the operation of ships or aircraft in international traffic shall be regarded as profits derived from such operation. This will be where the interest generating investment is integral to the operation. This is in line with the commentary on Article 8 of the OECD Model Tax Convention. Paragraph 1 of the protocol includes a most favoured nation provision. In the event that South Africa concludes a subsequent DTA, which prescribes a lower rate of dividends tax for source states under Article 10, then Singapore must be informed in writing and the best possible rate would be applicable.
Protocol Amending the Brazil Double Tax Agreement
Ms Maharaj said the amendments became necessary given the drive towards a comprehensive exchange of information article in DTAs. The protocol deletes the old Article 26 on exchange of information. The new Article 24 provides for full exchange of information including spontaneous, requested and automatic exchange of information.
Uruguay Tax Information Exchange Agreement
Ms Maharaj noted that all the TIEA she would present dealt with exchange of information on request only. Further, that the differences stem from specific executive’s preferred wording. The agreements closely follow the OECD Model Tax Information Exchange Agreement. The TIEAs ensure that bank secrecy or the absence of a domestic tax interest can no longer be used to deny a request.
Ms Maharaj on Article 1: Scope of Agreement, said this applies to exchange of information which is foreseeably relevant to the administration or enforcement of domestic tax laws covered by the agreement. This includes information that is foreseeably relevant to the determination, assessment, and collection of such taxes, the recovery and enforcement of tax claims with respect to persons subject to such taxes, or to the investigation of tax matters or the prosecution of criminal tax matters. Further, the requested party must ensure that the effective exchange is not unduly prevented or delayed. She noted that with other TIEAs Article 1 has been split into Scope of the Agreement and Jurisdiction, which is allowed under the OECD Model.
Ms Maharaj on Article 5: Exchange of Information upon Request, said the information is to be exchanged regardless of whether the requested party requires the information for its own tax purposes. Further, dual criminality is catered, so the requested party must exchange the information regardless of whether it may disclose a crime locally. The Article requires the domestic law to permit exchange of information held by certain local entities, to allow for the determination of beneficial ownership. So it must allow access to information held by banks; other financial institutions; persons including trustees and trust beneficiaries; and company registration and ownership information. This article does not impose an obligation to obtain or provide ownership information with respect to publicly traded companies or public collective investment funds or schemes, unless such information can be obtained without giving rise to disproportionate difficulties.
Ms Maharaj on Article 6: Tax Examinations Abroad, said this allows personnel of a competent authority may, with the permission of the requested party, enter the territory and be present at interviews conducted by the requested party.
Ms Maharaj on Article 7: Possibility of Declining a Request, said a competent authority may decline a request where it is contrary to its public policy. Further, a request does not impose an obligation to disclose any trade, business, industrial, commercial or professional secret or trade process. A claim shall not be refused on the grounds that the tax claimed is being disputed.
Ms Maharaj on Article 8: Confidentiality, said this is a very important article and if it is breached other contracting states may decline to provide further information. So, all information which has been provided to a competent authority must be kept confidential and may only be disclosed to courts or administrative bodies. The information may not be disclosed to anyone else, without the express consent of the requested party.
Ms Maharaj on Article 9: Costs, said this article is in line with international best practice and other TIEAs in force. Indirect costs, ordinary costs, incurred in providing assistance shall be borne by the requested party, and direct costs, extraordinary costs, incurred in providing assistance shall be borne by the requesting Party. If the costs are expected to be significant, the requesting party should be notified.
Government of Saint Christopher (Saint Kitts) and Nevis Tax Information Exchange Agreement
Ms Maharaj said she would focus on the difference in the articles, but these are not differences in the standards but rather differences in drafting.
Ms Maharaj on Article 1: Object and Scope of the Agreement, said in paragraph 2 there is no reference to criminal tax matters. This however, still allows the use of information in criminal tax matters.
Ms Maharaj on Article 5: Exchange of Information upon Request, said again domestic law should provide for the availability of this information. Further, paragraph 2 has been consolidated to include all the entities which ought to have information and includes “Anstalten” which is a foundation in that territory. The idea was ensuring exchange of all taxable entities’ information, including beneficial ownership.
Ms Maharaj on Article 9: Costs, said here there was some different drafting, because ordinary costs are used rather than indirect costs. However, these are synonymous. Extraordinary costs, or direct costs, include costs of engaging external advisors in connection with litigation or otherwise and are borne by the requesting party.
Ms Maharaj said there is an article 10 in this TIEA, titled Implementation of Legislation. This is not part of the model, because pursuing such an agreement should mean that the contracting states already have domestic legislation in place to implement the agreement.
Government of the Turks and Caicos Islands Tax Information Exchange Agreement
Ms Maharaj on Article 1: Scope of Agreement, here the article only speaks to enforcement of domestic laws, which does not include the administration of domestic laws. That does not create any problems. The second paragraph does not include a reference to the recovery and enforcement of tax claims. This does not create any problems for the enforcement of the TIEA. Further, the Turks and Caicos Islands wanted an article on jurisdiction, so the OECD Model article 1 was split into two.
Ms Maharaj on Article 4: Exchange of Information upon Request, said this requires domestic law to allow for exchange of information on all entities within the contracting states and the beneficial owners thereof. Paragraph (b)(i) has a difference, referring to “legal and beneficial ownership”, rather than the usual language of ownership or ownership chain. These however are interchangeable and the reason for this is normally that the law advisor on the other side had a preference for the wording.
Ms Maharaj on Article 8: Costs, said this article is different from the others presented, but is still in line with international practice. It allows a Memorandum of Understanding (MoU) to be signed between the competent authorities, to operationalise the costs. This would allow the competent authorities to agree on what would constitute direct or indirect costs.
Ms Marharaj noted that an article on Legislative Requirements was requested by the Turks and Caicos Islands, similar to the one in the Saint Kitts and Nevis TIEA, which was agreed to.
Protocol Amending Tax Information Exchange Agreement with Liberia - Preliminary Briefing
Ms Maharaj said this protocol had just been finalised and is the first protocol to a TIEA. When this TIEA was concluded the standard was exchange of information upon request. Many countries have now accepted spontaneous and automatic exchanges. Many jurisdictions have signed a multi-lateral agreement, which would allow full exchange of information. As Liberia had not signed that, South Africa requested a protocol including spontaneous and automatic exchanges. In order to have this with Liberia, two articles were inserted, which create the legal framework. The text has been initialled and would be presented formally to the Committee. A competent authority agreement would be concluded stipulating the types of income would be included in automatic exchanges. Spontaneous transmission of information may occur where a competent authority feels it is reasonably relevant to the achievement of article 1 of the original TIEA. The competent authorities can decide on the procedures to be used for spontaneous exchanges.
The Acting Chairperson, Ms T Tobias (ANC), said it was a pity that the EFF was not present, because The Acting Chairperson had responded to their concerns raised in 2015 by requesting the Parliamentary Budget Office (PBO) to make input on this matter.
Mr S Buthelezi (ANC) said there would be a high propensity for contracting states to not agree about residence and could the criteria for determining this be shared. Secondly, he asked if there was a dispute resolution mechanism above the tax authorities engaged in the negotiations. He asked for an indication of the effectiveness of DTAs generally. The choice of countries with which the DTAs had been signed was curious, especially Liberia and Saint Kitts, so what criteria guided those choices. He asked whether the most favoured nation article with Singapore, enjoins South Africa to give similar tax agreements to those concluded later with other partners. His concerns were that countries were not the same and there may be extraneous socio-political conditions bearing on giving a particular country concessions, which may not apply to the most favoured nation.
Mr B Topham (DA) asked if Liberia was the first country that was being amended on voluntary exchange of information and if so did this mean South Africa must still approach all other countries to account for this going forward. Further, whether article 22 provides for the tax on controlled foreign companies and would a foreign state permit a deduction if taxed locally. He asked for a practical explanation of how articles 10 and 11 would work. If a person was taxed on a dividend paid from South Africa at 10%, would they be able to claim that back in the other state?
The Acting Chairperson asked, on Liberia, if SARS was working with the Department of Trade and Industry on the bilateral agreements to take the issues beyond just taxation. On costs, she was concerned that the requesting parties would bear more costs, because if South Africa needed to request information, but was faced with costs which were beyond its means then it would not be able to source the money. She raised this in the context of base erosion, because South Africa wants to get information on as many South Africans doing businesses abroad. Further, were the competent authorities limited to the government negotiators and can they include private parties. Previously she had dealt with the collection of royalties and the South African Music Royalty Organisation had been unable to collect foreign royalties, did these treaties aid in that? Lastly, was the use of the phrase 'exploitation of minerals' legally correct?
Ms Maharaj clarifying residence, said for example with the Zimbabwe DTA the BEPS recommendation was for dual residence for persons other than natural persons. SARS picked up that there was a lot of tax planning happening around the place of effective management, which was the only factor used to determine the tie breaker for dual residence. In the treaties signed for a number of years, SARS has put the taxpayer in a position where they must structure in such a way that it is clear to the competent authorities that they are resident in one or both of the contracting states. This was done to ensure there could not be planning around place of effective management, by looking at other relevant factors such as incorporation. This has worked well so far and SARS has been able to agree with other competent authorities where the residence is. The problem sometimes arises where the taxpayer structures in such a way as to make it unclear where they are resident and this is being prevented. The Commissioner is the competent authority and they delegate to specified officials, being the Treaty Section.
Mr Mvovo added that there were weaknesses in the past with past DTAs only making use of the place of effective management for the residence tie breaker test. This led to taxpayers creating dual residence structures which are incorporated in South Africa, but have their places of effective management in a low tax jurisdiction; leading to residence disputes. However, place of effective management would take precedence over place of incorporation. This main tie breaker clause has now become mutual agreement between competent authorities, which would consider factors including where the directors are resident and where the management occurs. The criteria are also the position in the domestic legislation, meaning this brings greater alignment.
Ms Maharaj said the second question was on the dispute resolution mechanism and there are two types of competent authorities: the authority dealing with interpretation of DTAs (SARS Treaty division) and the competent authority for transfer pricing matters, which also lies with the Treaty division group executive. An example of a dispute would be where an assessment is raised in another country, but the taxpayer is not happy with the interpretation and comes to the resident state. If the resident state’s competent authority agrees, then it will take it up with the competent authority of the other state to resolve the issue. In many cases, the competent authorities are able to resolve the issues. However, where this is not possible, then the mutual agreement procedure cases can take a long time to resolve. The BEPS project tried to make the dispute resolution mechanisms more effective, so South Africa as part of the G20 was asked to join the Forum on Tax Administration: Mutual Agreement Procedure Forum and undergo a peer review process. This will come up in 2018 to test its ability to handle mutual agreement procedure cases and information provided to taxpayers on how to access the mutual agreement procedure. On whether the DTAs work, these do work at times. SARS spends a lot of time training on double taxation agreements and these can be very effective where the other country’s residents get treaty benefits. However, there are issues with South African residents accessing treaty benefits. This is really a capacity issue within the tax administration and there are fewer issues around South African sourced income, than with South African residents abroad. The choice to conclude agreements with Liberia and Saint Kitts, was based on there not being a DTA with these countries and South Africa as a G20 country had committed to enter into as many information exchange agreements as possible. These countries were therefore flagged for TIEAs. With other countries there are existing DTAs which allow full exchanges or the Multi-Lateral Convention on Assistance in Tax Matters applies with the over 100 signatories. The most favoured nation article in the Singapore DTA is a tax policy matter. Singapore made the request for the most favoured nation article and wanted the lowest possible rate for dividends withholding tax under Article 10.2. They wanted to have a competitive treaty with South Africa to prevent treaty shopping. South Africa has some rates which it does not go lower than, which is the 5% for a 10% shareholding, as a Treasury policy. Other countries usual request them, because they want to ensure direct investments, without the interposition of a third jurisdiction.
Mr Mvovo said Singapore was one of the countries which had a zero rate for dividends and interest in the DTA, which had to be renegotiated. So they wanted assurance that they were not being targeted, because they were the first to be renegotiated. Treasury’s position is that most favoured nation articles are not agreed to, because this locks the country into the rates. On the efficacy of DTAs, the presentation had indicated that tax treaties assist with tax collection, so there is a benefit for the tax administration. Businesses when looking to invest do not necessarily want to go through the difficulties of investigating the local tax code and so their first port of call is the DTA between the relevant countries. On whether Treasury consults with the Department of Trade and Industry when concluding DTAs, at times requests come from DTI’s side, because they visit other countries looking to encourage investment and DTAs will often be raised. Other requests come from the Department of International Relations and Cooperation, because it has regional footprints across the globe.
Ms Maharaj replied to whether controlled foreign companies would be able to find relief under article 22 of the UAE DTA, saying South Africa eliminates double taxation through the credit method under section 6quat of the Income Tax Act. The way the DTA reads the UAE intends to alleviate this through the exemption method. Each contracting state is allowed to use its own method to alleviate double taxation. If South Africa’s resident is being taxed in another jurisdiction, South Africa is to eliminate double taxation through its domestic methods. On how the dividends withholding tax works practically under a DTA, using the UAE DTA, if a South African company issues a dividend to a UAE resident then the domestic rate of 15% would not apply and the company would only have to withhold 5% if the UAE resident holds 10% of the shares. So the effective rate is lower than under domestic law. On costs, the reason why the costs article was drafted in the manner that it was, was to ensure the requested party is not overburdened. So the competent authority would make a specific request to another competent authority, where information is required and the cost issue would come up. If the other jurisdiction cannot get the information without litigating for it, then it would have to inform the requesting authority, which would then have to decide whether the costs are worthwhile. Many times the types of requests made are for tax returns, balance sheets or bank accounts; where SARS knows of something. However, fishing expeditions are not allowed. So South Africa is protected around costs. There is a lot of capacity required for exchange of information within the competent authority, but it is very useful for tax audits. On foreign royalties, the collection of withholding taxes underlying law has changed. With the withholding agent, the South African paying the royalty abroad, would have to do the withholding under domestic law or under the DTA. That withholding agent will then have to pay over to SARS.
Mr Mvovo clarified that these articles only deal with the tax aspect of royalties, rather than the actual payment of royalties.
Ms Maharaj replied on the use of the phrase 'exploitation of minerals', saying the term was legally correct and the interpretation as per the commentaries on the OECD Model convention would apply. So under the Singapore DTA, if a Singaporean enterprise engages in the exploration and exploitation of minerals, then that would be deemed to be a permanent establishment after six months.
Dr Dumisani Jantjies, Director: Finance, Parliamentary Budget Office, said the PBO had prepared a report which would be presented to the Committee. He noted that certain issues had been raised the previous year including: Parliament’s processing of DTAs, BEPS matters being taken into account in the updating of DTAs (which was happening) and the state monitoring of other countries’ implementation of DTAs.
Mr Mvovo said Treasury had indicated that it makes a preliminary briefing to the Committee, before agreements are signed and is then open to the Committee’s guidance on the process from there. Otherwise, Treasury would await the formal presentation by the PBO.
The Acting Chairperson then read the Committee Reports on the DTAs, Protocols and TIEAs in which the Committee recommended the adoption of these agreements by Parliament under section 231 of the Constitution.
These were each adopted, each time the DA’s reservations were noted.
Draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill and Rates and Monetary Amounts and Amendment of Revenue Laws (Administration) Bill 2016: Response to submissions
Ms Yanga Mputa, Treasury Chief Director of Legal Tax Design, said Treasury would be presenting the draft response and the final response would be published after this meeting. There were three important issues raised in the Draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill (Draft Rates Bill): the tyre levy, the special voluntary disclosure programme (SVDP) and the adjustment of normal rates. She noted that on the tyre levy, issues were raised concerning the Department of Environmental Affairs (DEA), so it was present.
Ms Mputa noted about the consultation process thus far, the Draft Rates Bill was published on Budget Day, 24 February 2016, and then the Draft Rates and Monetary Amounts and Amendment of Revenue Laws (Administration) Bill (Draft Rates Administration Bill) was published on 12 April 2016. These contained the SVDP and a consultation was held on 10 June 2016. Thereafter, changes were made to the Bills and revised draft Bills were published on 20 July 2016, with a simplified version of the SVDP. The Committee was briefed on 17 August 2016, with Treasury and SARS receiving 22 written comments, including from the Davis Tax Committee. This response to the submission was the first draft, which would be final after the meeting.
Environmental Levy on Tyres
Ms Mputa said Treasury received a submission from South African Tyre Manufacturers Conference (SATMC) who was present in the meeting and it supported Treasury’s proposal.
Ms Sharlin Hemraj, Director: Environmental and Fuel Taxes, National Treasury, said in 2006 Treasury published an Environmental Fiscal Reform Policy Paper, which set the framework and criteria to develop these taxes. This would internalise the costs of environmental damage into the pricing of goods and services. In that context a range of environmental taxes were developed, including the carbon tax and the motor vehicle emissions tax. Waste management was identified as a key area and therefore the Department Department of Environmental Affairs (DEA) was brought on board for the tyre levy. Treasury sees the tyre levy as part of a broader initiative around applying levies to priority waste streams, with the intention of encouraging waste reduction, reuse and recovery.
Ms Hemraj said the tyre levy was initially proposed in Budget 2015, but was delayed to address administrative challenges and transitional arrangements. Budget 2016 announced that the tyre levy would be implemented at R2.30/kg from 1 October 2016. It was made clear that this would replace the current fee structure under DEA regulations.
Ms Hemraj, on the nature of the fees and whether it is a tax or a fee, said Treasury was of the view that it was more like a tax, because the payment of these ‘fees’ by industry is a mandatory requirement, and not voluntary in nature. The compulsory nature of the waste tyre processing fee implemented by Recycling Economic Development Initiative South Africa (REDISA) is therefore more akin to a tax. Further, there are foreseen problems with REDISA being responsible for the collection and disbursement of revenues, yet the company remains outside the PFMA with limited accountability to government.
Ms Hemraj said REDISA contends that section 13 of the Bill was unconstitutional and irrational, due to failure to consult. Treasury rejects this view, because under section 77 of the Constitution only the Minister of Finance may introduce a Money Bill. There is no need to introduce a Money Bill, as the Customs and Excise Act serves this purpose. Further, there have been many engagements between Treasury, DEA and relevant stakeholders including REDISA. REDISA was consulted in February, June and July, with the tyre industry being consulted on 23 August 2016. Lastly, as the levy replaces the fee in place it appropriately makes this a more transparent tax. Therefore, there is no need for a socio-economic assessment. She noted that submissions have been received from the South African Tyre Manufacturers’ Conference and the National Association of Automobile Manufacturers of South Africa tyre industry in support of a more transparent and accountable handling of the monies.
Ms Hemraj on the tax treatment of retreaded tyres and imports which have been included under the legislation, said under the REDISA Plan there is an exemption for these tyres because they have already been levied at some point. The REDISA Plan also provides for credits and refunds to tyre manufacturers who export tyres. The comment was echoed by industry and Treasury was looking into either exempting all retreads or providing a rebate. Exported tyres were to be credited or refunded.
Ms Hemraj said Treasury view was that it was changing the collection agent for the levy and clarifying that it was a tax. However, REDISA argues that this change in the funding model would prevent it from discharging its obligations. Further concerns were around the uncertainty with funding from the fiscus, to DEA and then to the plans; and the role for the Waste Bureau being established under DEA. Lastly, that cutting off funds from the REDISA Plan would mean it would be unfunded for at least six months. National Treasury rejects REDISA’s argument, because the tyre levy will be deposited in the National Revenue Fund and Treasury will propose an appropriation in DEA’s vote on a three year rolling basis. This will be based on the submission of a sound business plan from REDISA to DEA, with the appropriation adjusted annually. REDISA’s submission in February 2016 and an independent audit indicate that REDISA has enough funds to operate for eight months from October 2016, which is beyond when the allocation would be made in April 2017.
Ms Mputa emphasised that REDISA had submitted that it would not have any finance from 1 October 2016 to the end of March 2017. This was not correct, given that it would have sufficient funds for eight months.
Ms Limpho Makotoko, Chief Operating Officer, Department of Environmental Affairs, said REDISA has indicated in its 2016 Annual Financial Statements that it has a reserve of R665 million as at 29 February 2016, which was specifically earmarked for implementation of the REDISA Plan. Based on that, along with revenue collected from 1 March 2016, there should be adequate funding to continue with the Plan and there was no threat of job losses. Further, the new funding model was not reckless of job losses, but was intended to bring more transparency into the regime. The allocation would be dependent on the submission of a business plan, which at the time was still outstanding.
Ms Makotoko on governance, said under the REDISA Plan, REDISA was to appoint a management company and Kusaga Taka Consulting (KTC) was appointed for this purpose. DEA had engaged with REDISA on this point to ensure there is accountability and requested certain documentation. These included information around the appointment process, the contractual arrangements which would indicate the distribution of the management responsibilities to KTC, the founding documents of KTC and its financial statements. Further, REDISA indicated in its financial statements that an amount in excess of R100 million is paid to KTC and DEA requested a breakdown of this amount; this was still outstanding at the time of the meeting. Information obtained by DEA indicated that KTC’s board was not transformed. Further, in its financial statements REDISA indicated its directors were also shareholders of the management company, KTC. This, in the DEA’s view, created an untenable conflict of interest when dealing with public funds, particularly as REDISA had refused to disclose exactly what KTC was being paid for.
Ms Makotoko said government has a responsibility to ensure oversight and accountability, but the REDISA board currently did not have any representatives from government or the tyre industry and there is therefore limited oversight. This was identified in 2013 already, leading to the amendments to the National Environmental Management: Waste Act and the establishment of the Waste Bureau which would remedy the lack of accountability. The Waste Bureau would oversee all plans and REDISA would continue to implement its plan, with funding allocated to the Waste Bureau as part of the DEA vote.
Ms Makotoko said DEA picked up performance challenges under the present plan. REDISA indicated that in May 2016 it had created 3 254 jobs. However, this was not in line with the stipulation in the Plan that it was supposed to report on head office, processors, transporters and depot jobs; but not informal collectors. These informal collectors constituted 2 155 of the 3 254 jobs, meaning that the total jobs which are to be counted under the REDISA Plan are 1 099. This figure could not be verified, as REDISA had failed to provide verifying documentation through employment contracts or payrolls. DEA’s conclusion is therefore that the current performance is well below the target of 2 120 jobs by year three of the Plan.
Ms Makotoko said REDISA has claimed that it has created 226 Small, Medium and Micro Enterprises (SMMEs), but again DEA did not have documentation to verify this claim. The overarching point was that DEA was struggling to get information necessary to determine whether value for money was being achieved with the REDISA Plan. Further, DEA had received numerous complaints from SMMEs which had indicated that there are no contractual agreements with REDISA, which was being investigated. REDISA has claimed that 16 recycling processors have been created. Some site visits have been visited by DEA. DEA has received complaints that waste tyres are not being delivered to the processors by REDISA, while REDISA had reported that it was exporting 38% of waste tyres collected. This was a deviation from the REDISA Plan, because that only speaks to exportation of derived products. Another area of deviation from the Plan was around REDISA establishing a “Product Testing Institute” in order to develop regulatory standards. DEA did not understand this, because regulatory functions are governmental and there are already bodies which DEA has agreements with including the South African Bureau of Standards and the Department of Trade and Industry.
Ms P Kekana (ANC) said to Treasury and DEA that the objective of establishing REDISA regarding SMMEs was important to her. Protecting the environment was important, but this effort also empowered SMMEs’ participation in the industry. Given the response by DEA and Treasury, she would like to hear REDISA’s side of the story. It is unfortunate that the response also speaks to operational issues between DEA and REDISA, because the presentation of those challenges creates the impression that a tax is being used to punish REDISA for not adhering. She did not think this tax was intended to be punitive, rather it was to allow industry to make money, while complying with environmental prescripts. Perhaps the Portfolio Committee on Environmental Affairs could aid with oversight over these matters, because as it stands DEA would be pumping money into an entity which it cannot control. There are financial implications the Committee had to consider. Therefore, the elements of non-compliance were noted including not providing information. Tthis was troubling, because this behaviour could lead to REDISA not being funded with far reaching implications for jobs and the environment. She urged REDISA to come forward and provide the information requested by DEA. As it was important for funding purposes, it must be clear what REDISA intends to do on a monthly and annual basis. Secondly, levying both a new tyre and a retread would be double taxation, but Treasury’s response only indicates that it is going to engage with REDISA to ensure some of these matters are clarified. She wanted to know whether the retread issue is taken care of.
Ms Mputa indicated that the retread comments had been accepted.
Ms Kekana noted that there is an issue of VAT when a tyre is bought. How is that being dealt with?
The Acting Chairperson cautioned Members that at this stage they were interrogating Treasury’s response, rather than re-opening debates. Further, she would afford REDISA an opportunity to respond, but not to make new submissions. When Chairperson Carrim returned, he would look at Treasury’s position, REDISA’s response and determine whether REDISA ought to be afforded another opportunity to come before the Committee.
Mr B Holomisa (UDM) said the Bill’s proposals are the most appropriate system, because it provides for reasonable checks and balances in controlling the flow of money, with proper accountability for expenditure, for appropriated funds. What interests is REDISA fighting for? Treasury and DEA’s response raises further questions. This response indicates that REDISA has not provided supporting records to appropriately account for the use of funds collected in the past three years. This was an unacceptable state of affairs. Why would the Committee consider giving even more power to this so called non-profit company, where shareholders were also directors in its management company? Why should a forensic audit not be called for, to check where the public money has been channelled? Lastly, there is a need to clarify the conflict of interest where shareholders of REDISA are directors of KTC and to check whether KTC complies with government’s transformation targets. He therefore urged Members not to entertain people who would block the implementation of this important legislation.
Mr A Lees (DA) said the question for the Committee is not about the oversight and governance of REDISA, but it has been raised. Members need to concentrate on the Bill before the Committee and whether the proposals are good, bad or even constitutional. He therefore asked for the Parliamentary Legal Advisors to comment on the constitutionality claims made by REDISA. There can be no doubt that the funding must be channelled through the legislated channels, including the PFMA and in compliance with all the requirements for allocation to REDISA or other institutions which submit approved plans. REDISA’s funding is sourced from the industry and ultimately from the consumer. Therefore, it has to be channelled through the normal budgetary processes. He was surprised that when he had asked the previous week about the shareholders of REDISA, the short answer received was that there were no shareholders. Why was the question not fully answered to indicate the existence of KTC, the management company? It was very distressing to have people come before the Committee and give half answers. REDISA is present and could they please respond to who the directors of REDISA are and who the directors and shareholders of KTC are, present and past. He was disquieted that DEA reports a lot of delinquency on the part of REDISA, but not much on what the Portfolio Committee on Environmental Affairs or the DEA itself had done to correct this. If no business plan was presented, then he would think that the Minister of Environmental Affairs would have met with the REDISA board. On the R665 million cash reserve, REDISA had indicated that it would not have funding, contrary to DEA and Treasury’s assertions; what was REDISA’s response? If it was not enough, then the Committee would have to know what the money was being spent on.
The Acting Chairperson said Members were drifting from the focus of the Committee, which was the appropriation and therefore its oversight responsibility on some entities may be limited. Committees may summon anyone to appear before them, but she wanted to ensure this was within the mandate given to this Committee. This would not mean that questions asked would not be responded to by REDISA.
Adv Frank Jenkins, Senior Parliamentary Legal Advisor, said he had been asked to comment on the submission by REDISA that the Bill fails the rationality test. When one challenges a decision of government, there are two avenues as the law stood: failure to comply with the Promotion of Administrative Justice Act or the principle of legality. The principle of legality essentially requires compliance with the empowering statute, fundamentally the Constitution and part of that is whether the decision taken was rational. REDISA argued that the Bill would not pass constitutional muster because of both procedural and substantive flaws. The procedural aspect centres around consultation, which to him was a premature argument given that Members were dealing with a draft Bill before a Committee, where consultation was happening. Treasury further indicated that consultation had been had before. The substantive concern was that there is a misunderstanding somewhere, because REDISA was saying there was no alternative funding and the fee is not a tax. He would argue that the fee had become a tax, because if it was always a tax then there are problems with the initial legislation. The argument that there will be no alternative funding is based on REDISA’s belief that there will not be sufficient funding from DEA, but that would be a putative argument. All these things need to be disclosed and considered to come to a full determination of rationality. Therefore, in his view that point had not been reached and delving prematurely could take Members off track as the Acting Chairperson had warned. He was therefore not convinced that the Bill fell short constitutionally. Looking at the organ of state angle, given that REDISA was performing a public function, gave room for oversight. The Auditor-General would not be able to audit, despite this, because REDISA is not really an entity established by law. There may be a shortfall with this and transparency and accountability are critical when fulfilling a public function, funded through public money.
Mr B Topham (DA) on the question of double taxation on retreads, said his understanding was that the levy would only be imposed on the new rubber used in the retreading process. If that is the case, then there would be no double taxation, so would it be levied on the entire retreaded tyre? Previously, the Committee had requested Treasury to enquire from DEA whether there is a funding model in place to fund REDISA’s work. From the response, he felt that there was, with the six months’ cash flow and incorporation into the normal budgetary process in 2017, subject to compliance with those requirements. REDISA was an example of why anomalies should not be created, because there is the PFMA which creates all the mechanisms to keep public-type entities accountable. Therefore, he proposed that Treasury ensure that the past financial statements and audit opinions are brought before a parliamentary committee for oversight.
Mr P Mabe (ANC) said the way DEA has structured the report is indicative of not wanting something to work, because there is not even a single line which indicates that REDISA has done something good in the past three years. DEA did not indicate the reason there are no government or industry representatives, was because the Minister’s gazetted approval of the REDISA plan accepted this. This was because the law required industry to belong to an approved plan, but not necessarily the REDISA plan. It may be important to have a joint sitting with the Portfolio Committee on Environmental Affairs, as many of the issues raised by DEA are operational and the Committee should not be drawn into these. Further, seeing as there are other interested parties, especially civil society, comments should be solicited from the general public as well.
The Acting Chairperson said DEA had raised matters beyond whether REDISA was adequately funded, however the concern of the Committee was the constitutionality of the legislation, the consultation process and the objections REDISA has raised to the proposals. Therefore, issues around governance, including not providing documentation and the composition of the board, should be parked until the joint sitting where Members will be able to appropriately raise these matters. She asked REDISA to respond.
Mr Richard Marcus, Attorney for REDISA, said REDISA had prepared a specific, detailed response to the questions raised by Members at the public hearings on the Draft Rates Bill. Those will deal with many of the technical and governance queries by Members. On the representations received from Treasury and DEA, the draft was received late on 5 September 2015 and it would be more appropriate for REDISA to respond to the final response document. The Acting Chairperson had indicated that REDISA would receive the opportunity to make a detailed written response at that point. REDISA stands by its submission on constitutionality and was concerned that a number of factual allegations made by DEA are factually incorrect as regards the performance and governance of REDISA. These would be demonstrated in the written response and REDISA was concerned that this would taint the Committee’s consideration of the work it had done. Its response would be based on its audited financial statements, which should demonstrate to Members that REDISA is a properly managed organisation, which takes its responsibility to manage waste tyres seriously; applying a worldwide acclaimed model. He therefore wanted to confirm that REDISA would be afforded the opportunity to make a detailed response upon receipt of both Treasury and SARS final response documents.
The Acting Chairperson said Members would look at what REDISA had submitted and she hoped Treasury would confer with REDISA in considering the concerns. Further, the governance and other issues raised would be dealt with in a later joint session. Therefore, those issues should be parked for later engagement.
Ms Makotoko said what DEA wanted to indicate was that it was unable to play its oversight role, given that REDISA is a company outside of the PFMA.
On constitutionality, Ms Mputa said Treasury agrees with Adv Jenkins’ summation, but has also requested an opinion from counsel so as to have an outside opinion.
Special Voluntary Disclosure Programme
Ms Mputa replied about the concern that the time period for special voluntary disclosure programme (SVDP) applications was too short, saying Treasury accepts this and will recommend extending the period from six to nine months, being from 1 October 2016 to 30 June 2017. This is because the common reporting standards begin in September 2017, perhaps the period could go up until a month before then.
Ms Mputa said there was a submission that the current SVDP relief proposed of 50% of the highest value of the aggregate of all assets, was too high. This would cause cost concerns and weighing up the costs versus benefits of the SVDP for taxpayers. Treasury partially accepts this, because it is an opportunity for taxpayers to regularise their affairs before common reporting standards become effective and at issue is achieving the right balance between incentivising non-compliant taxpayers with those who have been compliant all along. Therefore, it will recommend reducing the inclusion rate to 40%.
Mr Franz Tomasek, SARS Group Executive: Legislative Research and Development, said submissions had argued that going back five years for market value was too onerous. Previously, taxpayers would have to look at the income wherever it came from and therefore simply looking at the asset value change. When dealing with financial instruments, valuations are not that onerous and dealing with a company which holds financial instruments, then the value flows through the company. For property, these are historical values as opposed to current values which are more challenging. There is all the historic information required to comparatively value. Therefore, the position is that government has already made a substantial concession and it is not that difficult to get valuations.
Mr Tomasek referred to resetting the base cost for capital gains tax, saying the SVDP already deals with a partial taxation and therefore it is arguable whether this needs to be done or not. This serves as a proxy for this and is not meant to alleviate future obligations, therefore the comment is rejected.
Mr Tomasek said with trusts the question was what tax rate would be applied and the taxpayer’s rate would be applicable, because they would be deemed to hold the trust assets.
On donations tax and estate duty, Mr Tomasek said the suggestion was that since the 2010 SVDP had an exclusion from estate duty for trust assets deemed to be held by the taxpayer, this should be included in the proposed SVDP. However, there was a specific exemption in the 2010 SVDP and the intention is to specifically include such assets for estate duty.
On why value added tax (VAT) and employees tax were excluded, Mr Tomasek said those two taxes, unlike personal income tax, are collected by a third party in the form of the employer or customers. Therefore, the intention is to specifically exclude them, because it becomes much more difficult to defend the pocketing of these amounts which ought to have been collected from third parties. Further, there was a normal voluntary disclosure programme for these taxes.
Mr Tomasek said there were a number of comments suggesting that the reporting obligations for certain advisors needed to be dealt with. This needed to be dealt with within international standards and the Financial Intelligence Centre and Independent Regulatory Board for Auditors are in the process of preparing guidance on this, and that would be released soon.
Mr Tomasek said information obtained by SARS in terms of international tax agreements would be excluded from the SVDP, but the exclusion only applies in respect of an asset that has already been disclosed to SARS under these agreements. Therefore, the taxpayer would not be prejudiced as they would in the end receive the same relief under the SVDP.
Mr Tomasek said the suggestion is that pending audits should still allow taxpayers the best benefit. However these comments overlooked the significant exclusion in allowing SVDP treatment where the taxpayer can prove the item would not have been picked up by the audit. The price then would be that there is a slightly less generous treatment with penalties.
Mr Tomasek said a comment was made about provisional tax penalties, because this would apply to the 2015 tax year and provisional estimates would have been incorrect. This was changed the previous year already for where a voluntary disclosure programme was applied for and granted.
Tax Rates and Monetary Thresholds
Ms Mputa said there were three small issues around rates and thresholds. There was a suggestion that the thresholds be looked into annually. Treasury’s position is that the key thresholds are addressed annually for inflation, being the personal income tax tables, fringe benefits threshold, and small business tax thresholds. Other thresholds are merely set for administrative purposes. Secondly, the thresholds for the incentive for employers to provide bursaries to employees or their relatives, was not included in the Bill. Treasury indicates that this was catered for in the Draft Taxation Laws Amendment Bill (Draft TLAB). Lastly, on increasing the inclusion rate for capital gains tax, comments were received indicating this apply to transactions entered into before 1 March 2016 with conditions fulfilled only after then. Treasury’s response was that this increase is the same as an increase in personal income tax and therefore no vested right relief is granted. A further comment was capital gains tax collections are volatile and should not be relied upon as a revenue stream. Treasury rejects this, because taxing of capital gains is there for equity reasons and also to protect the personal income tax base. Collections have also been fairly stable for the past few years at around R10 billion. It was argued that the low inclusion rates around capital gains was to compensate for the lack of indexation and increases in the inclusion rate and the effective tax rate on nominal returns raises the question of whether inflation indexation should be introduced. Treasury notes this comment, but indexation may come with complications and would require full consideration. Lastly, there was the comment that the increase in the inclusion rates for capital gains will lead to a decrease in savings and effective rates may disincentivise capital disposals. Treasury did not accept this, because the academic literature does not necessarily support this and the increased effective rate will yield increased revenues, despite any disincentivisation.
Mr Topham asked whether the period for the SVDP was increasing, but the start date remained in October. Secondly, would the capital gains base value become the value which the penalty was paid on?
Mr Lees asked for clarity on the mechanism for amnesty, preventing another arm of state from prosecuting. What would stop the South African Police Service charging, despite SARS having an amnesty agreement. He asked about the Bill where the Minister is given authority to increase rates and could some indication be made.
The Acting Chairperson said perhaps Treasury should consider inflation indexation, because capital gains taxed without regard to inflation is not optimal.
Ms Mputa said the Minister would be recommended to increase the period from six to nine months, with the same implementation date. To Mr Lees, she indicated that the provisions dealing with the change of effective rates was in the Draft TLAB.
Mr Tomasek said the police would not be able to charge, because when SVDP is granted the law operates to say the income was exempt; so there is nothing to prosecute. However, if the income was obtained illegally then that is a separate matter.
Mr Chris Axelson, Director: Personal Income Tax and Savings, National Treasury, said there was a very long section in the briefing document on capital gains tax presented to the Committee in 2001 on indexation. This could be relooked into, as inflation has gone up quite a lot, so taxpayers are doing much better by holding on to assets than would be the case under an indexation regime.
Mr Tomasek added that the reason indexation is not done is that it is horribly complicated. One commentator pointed to Australia as a country which indexes, but they did away with it in 1999. A submission was made by an Australian professor to the Committee at the time on the complexities. On the base cost, he said if the asset was acquired before, there are rules which determine the appropriate cost, otherwise it is the cost of acquisition.
Mr Topham asked on other charges being brought on disclosed matters, whether SARS’ confidentiality requirements would preclude them sharing such information.
Mr Tomasek said if it was a serious offence such as drug dealing, then there is an exception to the secrecy requirements under which the Commissioner, with the consent of a judge in chambers, may share the information.
The Acting Chairperson then closed the meeting.
- Formal Ratification: Tax Treaties With Singapore, United Arab Emirates and Zimbabwe
- Double Taxation Conventions / Agreements Formal Ratification: SARS presentation
- Protocol amending theTax Information Exchange Agreement Preliminary Hearing: SARS presentation
- Draft Response Document from National Treasury and SARS
- National Treasury: Draft Response Document Draft Rates and Monetary Amounts and Amendment of Revenue Laws Bills
- REDISA Written Response to Members Questions from 30 August 2016