Rates & Monetary Amounts & Amendment of Revenue Laws Bill; United Arab Emirates & Singapore Double Taxation Agreements

NCOP Finance

07 September 2016
Chairperson: Mr C De Beer (ANC, Northern Cape)
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Meeting Summary

National Treasury briefed the Committee on the Draft Rates and Monetary Amounts and Amendment of Revenue Laws Bills. The presentation highlighted the tax revenue trends and 2015/16 revenue outcomes. Included in the draft bills was the tax proposals on PIT (personal income tax) particularly the partial fiscal drag relief – the adjustments will raise estimated additional gross tax revenue of R18.1 billion in the 2016/17 financial year. R7.6 billion will come from PIT, R9.5 billion from raised excise duties for fuel levy and environmental taxes, and R2 billion will come from the raised inclusion for capital gains and transfer duties. The adjustments will provide an additional R7.6 billion net in revenue. The second proposal was the medical tax credits, which will provide a R6.6 billion tax relief for medical tax credits targeted specifically towards lower to middle income earners. The inclusion rate for capital gains tax also increased for both individuals and special trusts; and companies, from 33.3% to 40%, and 66.6% to 80%, respectively. The proposals for transfer duties, excise duties, the new proposed tyre levy, environmental related taxes, the SVDP (Special Voluntary Disclosure Programme), and the sugar beverage tax were also outlined.

Members asked about the reasons behind the decline in both PIT and Corporate Income Tax (CIT), and why VAT has remained constant over the years, and if that is associated with the level of poverty and unemployment surging in the country; the impact of the increase in transfer duties in the real estate market; what happens to the money paid for plastic bag levies; tax relief for the disability sector or people with disabilities; donations tax for NGOs; and oversight over the tax treaty agreements.

National Treasury highlighted that the decrease in both the PIT and CIT is not actual, it is based on the forecasts and the expectations set by Treasury. The most efficient tax is on property that is immovable instead of transactions on property acquisitions (i.e. transfer duty). As far as donations tax is concerned, the donor is responsible for paying donations tax for donations made to PBOs. The adjustments in the fuel, tyre levy and environmental related taxes or levies seek to encourage taxpayers to be environmentally savvy. The new proposed sugar beverage tax seeks to curb obesity, and consequently reducing diseases associated with obesity and consumption of sugar.

The tax treaty agreements between SA and Singapore and the UAE seek to prevent double taxation of the same income, tax avoidance and evasion, and create fiscal stability. These agreements will help remove barriers to cross-border trade and investment. Both agreements have been signed by all signatories.

The Committee moved for the adoption of the tax treaty agreements for both the Republic of Singapore and the United Arab Emirates.

Meeting report

Draft Rates and Monetary Amounts and Amendment of Revenue Laws Bills
Mr Chris Axelson, National Treasury Director: Personal Income Tax, provided an overview of the 2016 tax proposals and tax legislative process and the different types of taxes. Most of the revenue generated from the tax system stems from VAT (26.1%), PIT (36.1%) and CIT (17.8%). It is also important to note that CIT has been decreasing since the 2010/2011 tax assessment years, whilst PIT has been increasing gradually and VAT has remained constant over the years. The tax to GDP ratio has shown steady growth since 2010 and close to the highest ratio of 2007/08 (27.6%). GDP growth has been slow down since 2010 affecting tax revenue.

For the 2015/16 financial year the tax revenue is reflected to be lower than expected due to weaker economic growth, the actual revenue was less by R5.58, R10.78, and R3.04 billion from individuals, companies and VAT, respectively. Custom duties was higher than expected. The tax revenue was R11.42 billion less than expected.

National Treasury on Rates and Monetary Amounts and Amendment of Revenue Laws Bills
To mitigate the shortfall on expected revenue, the 2016 tax proposal adjustments that have been made will raise an estimated additional gross tax revenue of R18.1 billion in the 2016/17 financial year. R7.6 billion will come from PIT, R9.5 billion from raised excise duties for fuel levy and environmental taxes, and R2 billion will come from the raised from higher inclusion for capital gains and transfer duties. Only partial fiscal drag relief has been provided to counter the impact of inflation. To minimise the impact on individuals with lower incomes, only the bottom three taxable income brackets have been adjusted (by 3.4%), as well as the primary rebate (by 1.8%). If the bottom three brackets and the rebates were increased by the rate of inflation, a R13.1 billion relief would have been provided, but instead only R5.5 billion of relief was provided. Therefore, the adjustments will provide an additional R7.6 billion in revenue.

The medical tax credits were also adjusted upwards by 6 percent in line with inflation to provide a tax relief of R1.1 billion. This relief plus the fiscal drag relief of R5.5 billion will provide a R6.6 billion tax relief targeted towards lower to middle income earners.
The inclusion rate for capital gains has been increased for individuals, trusts and companies from 33.3% to 40% for individuals and special trusts, and from 66.6% to 80% for companies and other trusts. It is important to note that the increase alone for individuals and special trusts will raise an additional R2 billion.

The proposed increase for transfer duties from 11% to 13% effectively from 1 March 2016 will raise about R100 million in additional revenue.

Excise duties and fuel levy
Mr Mpho Legote, National Treasury Senior Economist, noted that R9.5 billion will be raised through increases in excise duties, general fuel levy and environmental taxes. Excise duty rates on alcohol beverages have increased between 6.7% and 8%, and fuel levy was also effectively increased from 6 April 2016. A new proposed tyre levy of R2.30/kg net will be implemented effectively from 1 October 2016, and this levy will replace the current fee that is collected by REDISA. It is also important to note that in a bid to curb the surge of obesity due to overconsumption of sugar, a tax on sugar-sweetened beverages will be effectively introduced from 1 April 2017. This is because the beverages do not have nutritional ingredients at all, they are actually unhealthy so the proposal aims to mitigate the health issues stemming from diseases associated with obesity. About 200 comments have been received from the public and are currently being processed by the National Treasury and workshops and conferences will be hosted to provide feedback.

The plastic bag levy also increased as well as the incandescent globe tax to encourage the manufacture and use of energy efficient light bulbs. Motor vehicle emissions tax also increased to encourage fuel efficiency labelled motor vehicles and technology. As a result of these adjustments, additional revenue is expected to be generated.

Revised Special Voluntary Disclosure Programme
The Draft Bill dealing with the SVDP has been revised several times after rounds of public comment. It is essentially giving taxpayers an opportunity to come forward and declare their assets, those domestically and abroad in offshore accounts. This must happen within the proposed window period if taxpayers do not wish to pay heavy fines and penalties, because when the new proposed nine month window period expires, South Africa will kick start the process of exchanging tax information with all the countries that it is in agreement with.

A detailed response was provided by Treasury to the comments raised at the public hearing held Standing Committee on Finance the previous week (see document). Both the Committee and the public had raised concerns that the 50% exemption of the original offshore assets for taxation should be revised to a higher percentage to encourage people to come forward. The window period has been extended to nine months solely because obtaining information from overseas to submit to SARS can be a long process, therefore, increasing that window period to nine months will give people enough time. Offshore assets acquired before and disposed of before 1 March 2010 may also apply for relief.

Mr F Essack (DA, Mpumalanga) asked for clarity on slide 12, about the fiscal shortfall in PIT and CIT. If taxes have been growing steadily over the years, why is there a shortfall? On Slide 15, he expressed concern about the impact of the increase in transfer duties on the real estate market nationally. He asked if half of the tax fuel levy goes to government or rather, how is the generated revenue from levy distributed. Lastly, what is the rationale behind increasing tax levies on double-cab vehicles (slide 29)?

Mr O Terblanche (DA, Western Cape) stated that the manufacturing and disposal of plastic bags have become a serious problem in the country and, therefore, something needs to be done because it is affecting the environment on a serious note. He suggested that an incentive for people to come and hand in plastic bags to do away with the problem needs to be introduced. Thirdly, he wondered if the motor industry sector’s taxes are not too severe as there is already a lot of taxation within the motor vehicle sector. He asked if this reflects an intention to drive it away. He cautioned that vehicles and real estate seem to be more heavily burdened with taxes, and noted that something needs to be done.

Mr S Mohai (ANC, Free State) asked if there are provinces that are on the verge of introducing levies such as the e-toll to generate provincial revenue, and if not, to what extent have provinces engaged on this.

Mr L Nzimande (ANC, KZN) stated that the indication in the presentation was there has been a steady growth of tax rate increases for PIT. He asked about the underpinning factors that have caused VAT to remain constant over the years particularly in revenue generated from it. Does it reflect the level of poverty and unemployment in the country? The tax revenue generated from CIT has been declining, does that mean there has not been growth in the industry? With regards to the NGO sector and disclosure for donations tax – what are the implications of the proposed increases? Lastly, what are the proposed benefits or tax relief for the disability sector or people with disabilities?

Mr L Gaehler (UDM, Eastern Cape) asked about what happens with the money paid for plastic bag levies, does it go back to local municipalities since the disposal of these plastic bags occurs within their proximity, or is it channelled back to environmental protection measures. Secondly, about the Davis Tax Committee and the proposal put to it about a super tax for the super rich, what happened with the proposal, and will it ever be implemented?

Mr Legote replied that each year the forecasts for PIT and CIT are ‘over forecasted’ or overstated which is something that happens every year particularly in relation to the wage rate which directly affects PIT. Economic growth and wage increases have not been increasing in line with the forecasts, hence, both PIT and CIT reflected a decline in tax revenue generated. Those declines do not reflect an actual decrease but by how much the expectations are off. VAT has been consistently stable over the years, this is because people are generally more inclined towards consumption (they are consumers). One of the main reasons why CIT has not been growing as anticipated is because companies’ profits and revenue can be volatile, and due to this volatility, it is difficult to forecast. It is also worth noting that companies assessed tax loss can be carried over to the following year if a company is not in a financial position to pay it off in the current year.

With regards to the real estate market, the most efficient tax is on property that is immovable instead of transactions on property acquisitions (i.e. transfer duty). About the donations tax, donations to PBOs (Public Benefit Organisations) – similar to NGOs – but such organisations must be approved as PBOs by the Commissioner to fall within the regime set up for PBOs for tax purposes do not attract donations tax, but the tax must be paid by the donor. Taxation related to people with disabilities or organisations of that nature has not been changed, except for the medical aid tax credits. Lastly, he stated that the Davis Tax Committee proposal on the super rich has been published, all the relevant information is contained in the proposal.

Mr Legote noted that on fuel levy (slide 25), both petrol and diesel, this always depends on their prices at the time, some of the revenue generated goes towards the Road Accident Fund. One will notice that percentage contribution is different for both petrol and diesel because of differences in their prices. The tax instruments at national level and provincial level are different. It was discussed in depth whether the national tax instruments should be fragmented across the different provinces. Issues of ring-fencing came up.

The plastic bag levy was introduced to deal with plastic bag littering, and so increasing the rate would encourage recycling and re-use as seen happening in the past. As a result, retailers introduced re-usable plastic bags, however, this was not enough. So much more still needs to be done to curb the littering of plastic bags. The money generated from the levies is made available to the Department of Environmental Affairs to mitigate environmental problems caused by the plastic bags.

With motor vehicles, when the CO2 emissions tax was introduced, the perspective was stemming from air pollution and other environmental defects generated by motor vehicles to incentivise manufacturers of fuel efficient vehicles. If the emissions are 120g CO2/km and less, then there is no tax levy involved accrued by the taxpayer. However, if the vehicle produces emissions above 120g CO2/km, the tax will kick in, and normally those emissions are generated by double-cab motor vehicles. The rationale behind this idea is to encourage fuel efficient double-cabs to be manufactured in order to curb environmental issues. With regards to the tyre levy, National Treasury seeks to encourage recycle, re-use, and recovery of the tyres because they also have a lot of environmental issues involved as far as manufacturing and disposal are concerned. The VAT system is very broad based and does not have a lot of dynamics, it is quite a steady system, as a result there would not be a lot of volatility in its growth – which means consumption has been perhaps quite constant, hence, its constant growth rate.

The Chairperson noted that the Rates and Monetary Amounts and Amendment of Revenue Laws Bills still had to be referred to the Committee.

National Treasury briefing on the tax treaties with Singapore & United Arab Emirates
Mr Luthando Mvovo, Director: Tax Policy, National Treasury, explained that the purpose of the tax treaties from a policy point of view included the prevention of double taxation of the same income; creating fiscal stability; and preventing tax avoidance and evasion by exchanging information and assisting in tax collection.

South Africa – Singapore Tax Treaty
The tax treaty between South Africa and Singapore came into force on 5 December 1997, during that time, South Africa was still on a source based system of taxation and did not have capital gains tax system. Hence, the current tax treaty between SA and Singapore does not cover important aspects such as an article dealing with taxation on capital gains. So the modernisation of the tax treaty in line with the latest international model was necessary. The renegotiation addressed areas that were identified to be weaknesses in the old tax treaty such as potential for dual residence structures, zero rate on interest, absence of capital gains articles, exchange of information etc. The agreement was signed by South Africa on 23 November 2015, and by Singapore on 30 November 2015.

South Africa – United Arab Emirates Tax Treaty
Mr Mvovo stated that this is a new tax treaty initiated by South Africa. It aims to enhance economic relations between South Africa and the UAE, and to also expand SA’s tax treaty network in the Middle East. One of the many reasons for the tax treaty was there is a growing presence of South African companies in UAE. As it stands, there are currently approximately 206 South African companies doing business in the UAE from across different sectors.

The UAE has become a significant source of investment and home to a sizeable SA expatriate community, notably SA is the 19th largest investor in the UAE, and currently the UAE stands as the 24th largest investor in SA. The agreement was signed on 24 November 2015.

SARS briefing on Double Taxation Agreements with Singapore & United Arab Emirates
Ms Oshna Maharaj, SARS Senior Manager: International Development and Treaties, stated that the purpose of the agreements from SARS’s perspective was to remove barriers to cross-border trade and investment. The Agreement between South Africa and UAE covers various articles with titles such as Resident, Permanent Establishment, Dividends, Interest, Royalties, Mutual Agreement Procedure, Exchange of Information, and Miscellaneous Rules. She highlighted that the competent authorities shall endeavour by mutual agreement to resolve the situation of taxpayers subjected to taxation not in accordance with the provisions of the Agreement. Competent authorities of the two States are authorised to resolve by mutual agreement problems relating to the interpretation or application of the Agreement and to consult together for the elimination of double taxation cases not provided for in the Agreement.

The Agreement between South Africa and Singapore also covers Residency, Permanent Establishment, Dividends, Interest, Royalties, Mutual Agreement Procedure, Exchange of Information, Miscellaneous Rules.

The Chairperson asked who oversees the tax treaty agreements.

Ms Maharaj said it is SARS and National Treasury.

Mr Essack asked for some clarification about paragraph 2 in Article 6 of the tax treaty between SA and UAE.

Ms Maharaj replied that it relates to rental income and if an UAE enterprise buys property in SA it will not be included under paragraph 4 of Article 6 of the Agreement because it is for its own use not for rental purposes such as the UAE embassy.

The Chairperson noted that the Committee has officially received both tax treaties between South Africa and Singapore and UAE and requested that Members move for the adoption of the agreements.

The Committee approved that tax treaty agreements be recommended for ratification by the House.

Land Bank board nominations
The Chairperson noted a letter dated 16 May 2016 from the Minister of Finance inviting stakeholders to nominate a candidate for the Board of Directors of the Land Bank. The Committee along with the Standing Committee on Finance issued a statement to all media platforms inviting people to put forward nominations by 9 September 2016. The closing date is 16 September 2016, and the process will be completed before Parliament goes for its constituency period on 23 September 2016.

The minutes of 16, 17 and 24 August 2016 were adopted without change.

The meeting was adjourned.

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