The draft Taxation Laws Amendment Bill (TLAB) and Tax Administration Laws Amendment Bill (TALAB) came under close scrutiny from a wide range of stakeholders from the public and private financial sectors, and a number of proposals for changes to the amendments were put forward. Much of the focus was on the issues of the proposed section 7C, dealing with avoidance of estate duty, section 8CA aiming to restrict equity employee share schemes, and the anomaly with section 12E, involving the exclusion of personal liability companies.
With section 7C the major issue was that the provision affected all interest free loans to connected trusts, regardless of the underlying intentions. It was also argued that with proper enforcement of the present provisions in the Income Tax Act, the avoidance of tax could be curbed and the existence of both sets of provisions could lead to double taxation. Lastly, it was asserted that the proposed amendments ran contrary to the recommendations of the Davis Tax Committee.
With section 8CA, the concerns centred on the lack of symmetry in the tax treatment, given that the dividends received by an employee under the scheme were treated as remuneration, but the employer did not receive a deduction for the payment. Further, it was said that this would disincentivise those schemes which had genuine, beneficial aspects, including those being used for broad based black economic empowerment (BBBEE).
The section 12E anomaly arose from the updating of cross references to the Companies Act in 2011, which had inadvertently excluded personal liability companies from small business tax relief. National Treasury had proposed backdating the amendment to 1 March 2016. However, stakeholders were concerned about the potential for tax liability and resultant penalties payable between 2011 and 2016. They therefore argued for further retrospectivity, back to the origin of the anomaly.
Several comments were also raised regarding the mandate to initiate investigations and the staffing of the Tax Ombud. It was argued that there should be greater independence and efficiency for the Tax Ombud, as its current reliance on claims-initiated investigations was reactive, and staff essentially seconded from SARS compromised the Ombud’s independence.
Aspects raised by individual stakeholders included:
- The CFO Forum noted concerns with the timing of royalty returns for mining companies, which created an added administrative burden due to the timing mismatch with income tax returns.
- SAIT raised concerns around the mechanical rigidity of the section 8F hybrid debt provisions, and encouraged wholesale reconsideration, rather than targeted relief for subordinated loans only. Further, several aspects around incentives were raised, including the Research and Development incentive and Special Economic Zones.
- SAICA’s points centred on the stringency of the controlled foreign company rules, which were being exacerbated by not allowing the use of foreign group losses in qualifying for the high tax exemption. Concerns were raised about the reintroduction of section 44 of the Value Added Tax Act.
- PwC’s raised an issue around the constitutionality of allowing the Minister of Finance to announce effective tax rates in the Budget, in light of the Constitutional Court holding that the raising of taxes was a plenary power of Parliament, which could not be delegated to the executive.
- Discovery Life focused on the valuation of risk business for life insurers, given the change from the Financial Services Board’s regulated basis. It spoke to the consensus reached between stakeholders and SARS around an adjusted International Financial Reporting Standards (IFRS) basis.
- KPMG raised concerns around section 8CA, focussing on the practicalities of switching off dividends tax and switching on employees tax in the context of the proposed regime, and the associated difficulties. Further, inputs were made on the Research and Development incentive and Special Economic Zones, contrary to the views of SAIT.
- Webber Wentzel added comments on section 8CA as well, specifically focussing on the lack of symmetry in the tax treatment of restricted equity dividend payments, disposals and gains.
The discussion saw Members raise limited questions of clarity, and discussions were mainly concerned with the Tax Ombud’s mandate and powers.
Mr Chris Coetzee, CFO Forum Representative, said the CFO Forum was a grouping of the chief financial officers of various major JSE-listed and state-owned companies, whose aim was to contribute positively to the development of South Africa’s policy and practice in financial matters affecting large business.
A written submission had been presented by the CFO Forum covering certain aspects of the draft Taxation Laws Amendment Bill (TLAB). Its recommendations included a revision of the proposals around the taxation of employee share scheme dividends and gains under the proposed section 8CA and s10(1)(k). Many broad-based black economic empowerment (BBBEE) schemes had dividend flows as a key factor in their viability. If these dividends were to be taxed as normal income, without the company receiving a deduction, this could result in an unfair situation and possibly jeopardise the viability of these schemes. Further, it suggested extending the section 12 H learnership incentive past 1 October 2016, and for group relief -- in particular, section 45 -- to be expanded to include relief provide for section 8(5) recoupments.
Mr Coetzee referred to the proposed section 9D amendment to disallow the consideration of certain foreign losses. Due to timing differences between foreign tax law and South African tax law, there could be a situation where a company paid taxes in South Africa in an earlier period and subsequently had a year-end loss. This meant it ought to have qualified for the high tax exemption, but had not. Further, in foreign jurisdictions, group taxation relief is a well-established principle and therefore section 9D ought to recognise this. If the above two aspects were not properly factored into the TLAB, this might result in higher combined or double taxation for South African multi-nationals, reducing their competitiveness.
The amendment to section 36 (11), to allow mining companies’ deductions for infrastructure expenditure under their social and labour plans, was welcomed for providing clarity. However, a deduction period of shorter than ten years should incentivise mining companies’ spending on community infrastructure and housing.
On the filing of a royalty tax final return under the Mineral and Petroleum Resources Royalty (Administration) Act, Mr Coetzee said the current provision had been changed from a six month period to a 12 month period, effective from the 2014 tax year. This was because a shorter filing period resulted in a costly administrative burden for the taxpayer and the South African Revenue Service (SARS). The burden arose because the royalty computation and return numbers and the income tax return numbers were interdependent. Finalisation of the income figures for corporate income tax required a time-consuming analysis, necessitating the 12-month period for the corporate income tax return. Where a royalty return is filed provisionally six months after year end, these numbers are not yet finalised, meaning that another return would have to be submitted at the end of the 12-month period. The provisional payments were due at the same time as corporate income tax and therefore royalty tax is effectively paid in a given year, adjusted through a refund or additional payment the following year. In sum, reducing the royalty tax return period would result only in an increased administrative burden.
South African Institute of Tax Professionals (SAIT)
Mr Piet Nel, Head: School of Applied Taxation, SAIT, referred to section 8CA, and said SAIT agreed with the CFO Forum that dividends paid ought to be deductible, if it was deemed to be income. SAIT’s major concern was that the proposed amendments would be backdated. It was only fair, where people had entered into schemes based on existing law, that they were taxed accordingly -- not bringing in a new law, and changing the rules of the game. Therefore, SAIT proposed the effective date for these amendments be 1 March 2017.
On the changes to the return on capital, SAIT was concerned that a capital gain may arise and the law should make it absolutely clear that if it was taxed as income, there was no double tax in the sense of an additional capital gains tax inclusion. Further, under the proposals, no deduction was to be allowed to the employer for amounts treated as income in the hands of employees, under a share option scheme. Section 8CA proposed introducing a deduction, but SAIT felt this ought to follow the cash that flowed between the employer and an employee. If an employer paid a dividend which was then treated as remuneration in the hands of the employee, the deduction should be granted to the employer. That would be the same as the treatment of bonuses under section 7B, where the cash landed in the hands of the employee, and the employer got a tax deduction.
Mr Nel said section 7C introduced an anti-avoidance measure which mirrored existing specific anti-avoidance provisions already found in the Act, including those dealing with capital gains. SAIT believed that interest-free loans on their own, did not achieve tax avoidance. The current legislation in place dealt with the avoidance properly. So if SARS ensured these were properly enforced, then there would not be a problem.
SAIT was concerned about the retrospectivity, because it was not clear whether the proposals would apply only to schemes coming into force after 1 March 2017. This should be the position, in SAIT’s view. Further, foreign trusts should be excluded from section 7C, because they were already covered by section 31. When there was a receipt or capital gain to a trust, there were three possible treatments. Firstly, if there is a donation, the donor picks up the tax. If not, then the tax consequences were based on vesting. If there is a vested trust, then the beneficiaries would pay the tax immediately under section 25B. If there is a vested capital gain, then there is an inclusion at 80%, and this is taxed in the hands of the beneficiary. Where there are no vested rights and there is a discretionary trust, which is where the Minister’s concerns lie, the tax follows a vesting event. If there is a donation, such as an interest free loan, then the income would be taxed in the hands of the donor. Section 7C would tax the same interest benefit.
The Chairperson noted that as the SAIT represented professionals, they ought to be given some latitude with regard to time and the same would apply to the South African Institute of Chartered Accountants (SAICA) and the Law Society of South Africa (LSSA).
Mr Nel continued by saying a trust was not a legal person in common law. A trust was treated as a taxable entity, to allow SARS to tax undistributed profits in the trust. If a trust was funded through an interest free loan account, the courts have held that there is an element of gratuity in that, and any income earned in the trust is deemed to be the income of the donor, especially if there is a payment to minor children or a discretionary mechanism in the trust. The current proposal states that if there is an interest free loan, and even where section 7 applies, attributing the income back to the person, another deemed interest would be imposed on the lender. Further, interest would be taxed and if that is not recovered, then it would be deemed a donation to the trust after three years.
Prof Keith Engel, Chief Executive: SAIT, said the concern here was that where money is put into a trust, this must be paid for, and the typical way trusts do so is by way of a loan account. The question was whether the loan is real or not. If it is real, then market value principles needed to be applied. The amendment in essence says that if a loan were given out on the market, the lender would charge interest, so it is introducing domestic transfer pricing rules. Most of the middle and upper middle class, when doing estate planning -- which is not always done because of tax -- typically fund their trusts through interest free loan accounts. The problem is that from a point of pure theory, an arms-length charge should be charged, i.e. the loan plus interest. The proposed system is imbalanced. Presently, taxpayers have reasons to keep money in local trusts and if the amendment is carried through a way around it would be to take the money off shore. Presently, if a loan is made to a local trust, the growth in that trust is going to be taxed locally. However, if it is taken off shore, then all the growth is tax free, but the problem is transfer pricing, which would impose an interest charge. Currently there is a trade-off: domesticly, growth is taxed, but there is no problem with the loan; offshore, the loan becomes a tax problem, but the assets can grow tax free. The proposed regime basically tightens up on the local trusts and if an on-shore trust structure is created, then the gains are taxed and the loan is a tax problem. This leaves the only choice being to take the trust off shore, because then the gains would not be taxable. If this amendment was happening in isolation, it would be a good idea, but in the present system it threw the system off balance. The problem for SARS really was not being able to tax the off shore gains, because the main problem was not the loan.
Prof Engel referred to hybrid debt instruments, saying this was base erosion and profit shifting (BEPS) stuff. Hybrid debt was where a foreigner made a loan to a South African resident, but it was not really a loan and operated like shares. The purpose of section 8F was to say that if it really looked like a loan, then the taxpayer would not be given debt treatment, because with loan treatment the taxpayer could reduce the tax base with artificial interest payment deductions. The problem with the current section 8F was that a selective approach was taken, with trails of false debt listed. This had been continually adjusted, and the problem was that it is mechanical in operation, allowing the most abusive taxpayers to plan around it. However, the people caught by it were the ones not paying such close attention, and some of these had been people subordinating loans. Much of this had been done because professional organisations had instructed them to do so, and for no other reason. They had now been inadvertently caught by section 8F, and there was a proposed amendment to remedy this. SAIT was suggesting that rather than go after the symptoms of the problem, the Davis Tax Committee’s (DTC’s) approach should be followed -- that if there was debt treated as debt in South Africa, but treated as something else abroad, those should be gone after. SAIT would propose scrapping section 8F and going after the specific tax problem, because this would raise more revenue and cause less annoyance.
On the issue of securities being used as collateral, Prof Engel said the previous year there had been an amendment to the effect that when someone transferred listed shares, these could be used as collateral. In the brokerage world, everything was on margin account and when money was borrowed through derivatives, then margin had to be put up and the best margin was cash. The previous year, National Treasury (NT) had allowed listed securities to be used as collateral without having a bad tax consequence, but the problem was the best form of collateral was cash, then debt, then shares. This year’s amendments were moving in a good direction, by allowing government-owned debt. SAIT would argue that all listed debt should be good margin. The other thing which should be picked up was state-owned enterprise debt, because externally this was viewed as being included in government-owned debt, especially as much of it was government guaranteed.
The problem with incentives was that there were many incentives which were complicated and did not work very well. The difficulty was that the incentives should be kept simple. SAIT’s view on the new incentive for supporting renewable energy infrastructure was that there were already incentives under section 12B for renewable energy, so they should all be put there and kept simple. Further, he emphasised that the Research and Development (R&D) incentive did not work. It was almost impossible to get, and increasingly people were not wanting to enter into it, so taxpayers were asking for a normal deduction under section 11 (a), because the incentive was not worth the administrative burden.
Regarding the Energy and Savings Initiative, the intention was to offset the future carbon tax by reducing carbon emissions. SAIT had a problem with this incentive, because it required approvals, and under the SARS interpretation note, before the project begins, approval is required. SARS is effectively trying to turn the approval process into the R&D incentive process. Part of the problem with many of these initiatives was that they were not discrete projects -- they were on-going, making it difficult to keep going back, asking for pre-approvals. SAIT would suggest not having a pre-approval process, although there could be some form of a more effective approval method. The 2016 amendments to the R&D incentive allowed for retroactive approval, which is very complicated. SAIT argued that if there was going to be an approval process, allow the taxpayer to make a claim, not use it and once they get the approval, free it up later, rather than going back and amending prior returns.
Prof Engel said the section 12 I was probably one of the most popular incentives, despite the potential for deadweight loss, and was the one that foreign investors were most interested in, as it gave extra and accelerated deductions for putting in big capital projects. What happens is that there is money allocated per project and many people end up not meeting the requirements and much of the money ends up not being used. SAIT was saying that the Department of Trade and Industry should allow a grant for unfunded approvals. The grant should be given, and should the money not be used, then the money could be allocated. There would be an upfront approval and if there was money available, then the incentive would be granted and that way the amount would be fully used. Special Economic Zones (SEZs) were not really working and part of the reason was that these had been chosen for political reasons, because certain towns wanted the industry located there. Regardless, no one was going to put their entire business in an SEZ -- only select aspects would be put in. However, under section 12R and 12S, taxpayers could not use this incentive if the whole business was not there, as there could not be connected personal relationships. Frankly, the money may be better put back into section 12 I, and doing away with Special Economic Zones.
With regard to small business relief, a technical problem had come up a few years ago, with the small business corporation provisions. A change in Companies Act in 2008 had gone unnoticed and the personal liability companies no longer existed. These tended to be professional service companies, such as architects, doctors and dentists. Many doctors were complaining, because they had to be personally liable for their mistakes. In this space, the intent was for the owner to assume a greater degree of liability, but because of the anomalous changes in the law, these persons would no longer qualify for small business relief from 2008. NT had recognised this and had fixed it from 1 March 2016. However, there was still the problem of people sitting with an eight-year liability, because they had not in fact qualified for an incentive which they had made use of. This was a major problem, because of penalties and interest, so the taxpayers were asking for the relief to be back dated.
Prof Engel said that with mining companies, giving relief for community and labour plan infrastructure was not an incentive, because this was a tax write-off for accounting purposes. This had been the case for many years, until NT had intervened. SAIT suggested restoring the old regime, to make the accounting and tax match.
Mr Nel said SAIT supported the Tax Ombud’s proposed amendments to the Taxation Administration Laws Amendment Bill (TALAB). A major concern which taxpayers had, was the time periods for objections and failing to meet stringent deadlines. SARS then rightly applies the law, and bars the taxpayer from lodging late objections, meaning the dispute cannot be resolved. SARS in principle has three years to amend an assessment, while taxpayers only have 30 days to object. What was being found in practice was that SARS would send a review request, the taxpayer sent the information and SARS amended the assessment without alerting the taxpayer. SAIT proposed extending the period to six months, or making it easier to object, and that the initial period be extended to 90 days.
South African Institute of Chartered Accountants (SAICA)
Prof Osman Mollagee, Chair: National Tax Committee, SAICA, said the Institute had concerns around section 9D, South Africa’s rules on controlled foreign companies (CFCs). The CFO Forum’s submission raised matters around the treatment of losses. However, SAICA had a broader concern around the complexity and burdensome nature of the CFC rules. South Africa had moved a long way from having them purely be a deterrent for tax avoidance and was clearly now in the zone of stunting the growth of our multi-nationals, with an impact on the country’s growth. Of the roughly 200 countries in the world, only 35 had CFC rules, with only two being in Africa. South Africa had CFC rules which were by world standards the best in class, and harsher than China, the UK and USA. When South Africa sat in the BEPS working groups, there was nothing that other countries could raise about its CFC rules.
However, when it came to aspects like reducing compliance burdens, South Africa was worse off than its competitors. SAICA’s concern was that looking at South Africa’s growth objectives, the CFC rules placed a tighter leash on South African multi-nationals than other countries did on theirs. While the rules may be very good CFC rules, they were not appropriate for South Africa’s mixed economy and hindered local companies. This was the kind of legislation that is so sophisticated that SARS cannot enforce it without foisting a massive compliance burden on the multi-nationals. In addition to the specific points on group losses, SAICA felt there was a need for simplification of rules. There was no need to be as harsh or leading edge for our economy. There were many opportunities for simplifying rules, such as resurrecting the designated company list.
Mr Peter Faber, Senior Executive for Tax, SAICA, said SAIT had already given the background to the small business corporation anomaly. This was a big issue and if the proposal went ahead as it stood, it would cause a major problem for many professional persons. Financially, it would have a very detrimental effect. Further, as no policy change was intended, the anomaly was caused by merely updating references to the Companies Act. The proposed amendments would create a retrospective liability stretching over a number of years. NT was concerned that if it made the amendment retrospective, it would result in a lot of refunds, but the information SAICA had from its members was that this would not be the case. The reason for this was that everyone had missed the anomaly and the majority of the taxpayers would not be in a position to claim a refund, because they had already been assessed on the basis that they did qualify since their 2011 tax years. The relief sought by SAICA was retrospective relief, or at a minimum the exclusion from penalties and interest on any liability which arose from this, given that it was five-plus years and the penalty regime currently in place would result in the tax liabilities doubling. SAICA therefore requested the Committee to consider that as an alternative to retrospectivity.
Prof Mollagee, referring to employee share schemes and dividends, said the point was that in some cases employees held shares and in certain circumstances those dividends were taxed like remuneration. This was a policy position, but the simple problem was that there ought to be parity in the treatment between the employer and employee. What about the expense to the employer, and should the dividend not be treated as remuneration? The tax liabilities could become astronomical and what would be seen was that the schemes which were not tax-driven would stop.
Mr Faber said SAICA welcomed the proposals to make the Tax Ombud more effective by allowing it to engage employees and seek more independence from SARS. SAICA’s view was that doing so did not infringe on the Tax Ombud’s mandate, neither did it encroach on the mandate of the Public Protector. The idea with the mandate was that it was to assist SARS in the collection of revenue in a more efficient way and through a fairer administrative procedure.
Regarding legislative support by the Tax Ombud to the Committee, SAICA believed it was appropriate that the mandate of the Tax Ombud should be extended regarding administrative matters. The debate raised the previous year had been whether the Committee would be able to trust the facts put before it by the Tax Ombud. SAICA believed that as the Tax Ombud engaged on both sides, it was in a position to comment on those facts and the manner in which the law was applied. Those insights would be valuable, so the proposals should be extended to include an advisory capacity to Parliament. Secondly, accountability was necessary for the Tax Ombud, the taxpayer and SARS, and accountability measures were ineffective if there were no time periods specified. In practice, this was the most frustrating aspect and there should be time periods either for SARS to respond, the taxpayer to do something, or the Tax Ombud to do something. The process was there to resolve matters in a collaborative manner, but it should be efficient as well. Thirdly, the current proposal was for the Minister to request the Ombud to investigate a matter, but SAICA would urge that the Tax Ombud be able to request approval from the Minister. Lastly, on taxpayers having to give reasons when they did not accept a response from SARS, from a principled position the point of the Tax Ombud was to look at the administrative action on the side of SARS, and it did not make sense for the taxpayer to give reasons, especially because where they did not accept, the process moved on to litigation, which was where any reasons for disagreement should be raised. The overall relief sought was an extended mandate for the Tax Ombud to assist the Committee, inserting the required dates and timeframes, and the other technical challenges.
Mr Faber referred to the reinsertion of section 44 dealing with VAT refunds, and said the Tax Administration Laws Act (TALA) had been created to deal with common procedural aspects. Now NT was going back to the Value Added Tax Act, which was re-creating the problem which was to have been solved by the TALA. The reinsertion of administrative provisions into taxing statutes seemed to be a trend. Further, administrative aspects were not being pulled into the TALA -- for example, registration. Why was South Africa still registering taxpayers under the underlying Acts? This overcomplicated something as simple as the registration process. Further, the proposal seemed to be the reinsertion of the repealed legislation verbatim. The question then was why repealed legislation was being brought back. There was also a disparity with what the explanatory memo stated the intention of the proposal would be. The memorandum stated that the amendments were to limit the claim of inputs to the period of incurral. A period of incurral was more of an income tax concept -- how would this be achieved by reinsertion of the old wording? The concern was that the repealed provision had a proviso which was not applied in practice, that the input had to be claimed. Was NT therefore trying to implement a policy change through an administrative process? What made VAT special -- surely the same rules should apply to all refunds? SAICA’s concern was that this was evidence of a regression in the legislation, and it therefore proposed that the Committee reject the proposals until proper consultation had been held. This aspect had not been raised at NT workshops, so why was government backtracking from the aligned position?
The Chairperson said the range and complexity of issues raised in the public hearings would mean that the work of Members was going to be more onerous. Further, he would raise with the Minister that Treasury must take into account the capacity of the Committee to deal with its legislative load. Tax issues in particular were complex, and the Committee was not going to pass bills which they did not understand. The Committee had to be cautious, because it did not know who was right, and ought to send the amendments back.
Price Waterhouse Coopers (PwC)
Mr Kyle Mandy, Tax Policy Leader: PwC, said the actual concern with section 7C was around interest free loans to trusts. NT was concerned, because these could be used as the most basic estate planning technique to avoid estate duty and donations tax. PwC was not opposed to something being done to address this, but was concerned about the manner in which this was done. NT was proposing to include a deemed amount of interest, which would be subject to income tax in the hands of the lender. The trouble would be the numerous unintended consequences. This also ran contrary to what the Davis Tax Committee (DTC) had proposed in its most recent report on estate duty, which encouraged avoiding forms of domestic transfer pricing. This was exactly what was being done with the proposed amendments, as it imposed domestic transfer pricing on loans to trusts. The real concern was that this was the wrong instrument for the job, because an income tax instrument was being used to address avoidance with estate duty and donations tax. This was what would cause unintended consequences. The proposal in its current form did not work, meaning it should be entirely withdrawn.
Alternative anti-avoidance mechanisms needed to be looked into, many of which were raised with Treasury in the workshop, and one raised by the DTC. However, what could not be done would be to continue with the proposed section 7C. Some of the concerns included the legitimate purposes underlying some trusts, including BBBEE, which were commonly funded with interest free loans. This proposal would make such schemes unviable. Further, there were other existing provisions which were aimed at curbing this type of avoidance, including the attribution provisions under sections 7 and 25. This captured income which had been trapped in discretionary trusts or diverted to minor children. Therefore, there was potential for double taxation with a section 7C deemed inclusion and an attribution under the other rules. Another point was that the proposed section 7C was discriminatory on the grounds of religion, because under Sharia law the charging of interest on loans was prohibited. The proposed amendment was also easily circumvented -- for example, if the taxpayer’s intention was to place income in the hands of minor children, then they could simply make an interest free loan to the minor. Further, arm’s length commercial arrangements were also relevant, because trading trusts were often funded through interest free loans, which was more akin to equity in a company. No distinction was made as far as the nature of the trust. Essentially, the cause of the unintended consequences was that Treasury had adopted a one size fits all approach, and had assumed that all trusts were used for the avoidance of estate duty, which was patently not the case.
Regarding employee share incentive schemes, PwC was not opposed to the policy of taxing dividends linked to employment as remuneration. That policy was sound, but the issue became one of symmetry in the tax system. If amounts were to be taxed as remuneration on one side, then the other side should be receiving the same treatment. In the absence of doing so, significant distortions were created, moving away from the principle of neutrality. PwC therefore felt that matching deductions for employers should be provided for the taxation of the dividends, and capital gains accruing to employees. Another aspect was the administrative and compliance challenges which would arise from this amendment. The proposal extended to taxing the dividends as part of employees’ tax, and while PwC did not have a principled objection, there would be administrative challenges in achieving that, especially with the 1 March 2017 effective date. The reason was that changes would need to be made to payroll systems and more importantly, changes would have to be made with regulated intermediaries to have the ability to exempt those dividends from dividends tax.
The small business regime anomaly was about fairness and equity. Government could not tax people at rates which it did not intend to apply to them. Treasury needed to think carefully about subjecting those people to rates which were not intended, as a policy.
Mr Mandy said the issue regarding changes in tax rates was that a number of amendments were proposed in the TLAB which effectively gave the Minister of Finance the power to effectively announce changes to tax rates in the Budget. Those rates would then continue to be effective for a period of 12 months, unless Parliament passed legislation within that period to give effect to the changes. If no legislation was passed, then they would fall away at the next period. PwC did not have a problem with giving flexibility to tax rates in principle, but the current formulation was unconstitutional. During the course of the previous year, the Shuttleworth case had seen a challenge to the exchange duty levies imposed by the South African Reserve Bank. The Constitutional Court had set out what in its view was a tax, and what the powers of Parliament were in relation to the powers of the executive. The power to impose taxes was a plenary power of Parliament, which could not be delegated to the executive. PwC’s concern was that this would effectively amount to a delegation of Parliament’s plenary power to raise taxes to the Minister of Finance, even if for a limited period. It would therefore strongly recommend this aspect be recommended for constitutional opinion before any of these proposals were considered.
Mr Mandy said up to this point, no public consultation had been held by SARS on the TALAB. There were a number of contentious proposals in the Bill, some which were not suitable for discussion with the Committee, given their highly technical nature, and which could be better resolved with SARS. PwC requested an instruction from the Committee that the consultations be held.
With the Tax Ombud, PwC was supportive of the proposal to extend its powers and mandate. However, residual concerns included the Tax Ombud having to request permission from the Minister to conduct investigations. This did not make sense, as the Ombud was best placed to determine if there were systemic issues requiring investigation. The mandate of the Tax Ombud should be broadened to include the administrative review of tax Acts and to make recommendations in that regard. PwC’s view was that the Tax Ombud was already entitled to do so, but was not compelled to do so. It should be made definitive in the provisions, that the Tax Ombud be required to review tax administration legislation. Lastly, with reference to the powers of the Tax Ombud, the recommendations were not binding on SARS or taxpayers, and in some other jurisdictions, such as the United States, in certain circumstances their equivalent of the Tax Ombud could make binding recommendations. These included where the taxpayers would be faced with serious hardship. PwC felt it apt to have the Tax Ombud empowered to make such rulings in certain circumstances, particularly given the challenges some taxpayers faced in getting refunds out of SARS.
Ms Taryn Greenblatt, Head: Tax and Discovery Life Accounting Discovery, said that to date, tax for life companies had followed the regulated basis as dictated by the Financial Services Board (FSB). This basis was changing to Solvency, Assessment and Management (SAM) from 2017. Industry, SARS and Treasury all agreed that SAM was an inappropriate basis for calculating tax and a new basis needed to be found for taxing life companies. Treasury’s proposal the previous year had been to use International Financial Reporting Standards (IFRS), meaning that tax would be based on the life company’s financial statement.
There were significant problems with using IFRS as a tax basis, largely because the current reporting standards allowed different treatment for insurance assets arising out of risk business, which in actuarial terms were called negative liabilities. Some entities recognised these negative liabilities as an intangible asset, which valued cash flows many years into the future. Taxing this intangible asset would be akin to asking a salaried employee to pay tax on all their expected earnings upfront and, should they change employment, asking them to pay upfront again. It was therefore evident that using a pure IFRS basis would have unintended consequences for industry. It would cause a very severe impact on certain entities and could even threaten their existence and the viability of protection business. It would prejudice insurers who selected an accounting treatment in the past and would result in a material acceleration of tax payable, without changing the actual quantum of tax charged. Further, significant cash flow deficits could be caused for certain insurers, because IFRS was not consistent across companies. Lastly, it would give an undue advantage to large, multi-product companies which could offset their insurance assets, given their portfolio composition, historic business or different policy treatment.
Ms Greenblatt said the following must be considered for the setting of the new tax basis: the fiscus must be protected, there must be stability in the tax base year on year, the numbers used in the tax return must be independently verifiable, growth in industry must be encouraged, there must be tax certainty for companies and the availability of protection cover to policy holders must be maximised. Industry, Treasury and SARS had reached consensus on this matter at a consultative meeting held on 1 September 2016. It had been agreed that life tax would be based on IFRS with one adjustment: assets arising from risk business were to be disregarded, subject to two provisos. Firstly, to protect the fiscus, an insurer should do so only if this had been done in the past when reporting to the FSB. Secondly, to make the adjustment verifiable, an insurer must recognise these assets separately on the IFRS balance sheet. Therefore, the new position would be an adjusted IFRS. Alignment to IFRS could be expected when the final accounting standard for insurers became effective. This was expected in 2020.
Discovery Life was in support of this approach, as a fair, effective and practical solution. It achieved the objective of protecting the fiscus, did not prejudice a particular insurer and the numbers could be independently verified. The changes therefore must reflect that assets arising from risk business, i.e. negative liabilities, were disregarded for tax purposes. Discovery was appreciative of the engagements with the FSB, SARS and NT to date, and looked forward to the draft Bill reflecting this position.
Mr B Topham (DA) said that, subject to correction, IFRS had never been used as a basis for taxation -- it had always been the definition in the Income Tax Act around when income was earned or accrued. Therefore, that would presumably not change and so negative liabilities would not have accrued yet, not being taxable. He asked SARS to comment on why the negative liabilities would be taxed.
The submissions on interest-free loans and trusts were clear. He would like SARS to speak to the VAT refund and whether it had to be specifically requested under section 44(1). His big issue was that SAICA and SAIT both had points on CFCs and local multi-nationals. His understanding was that the CFCs were good for South Africa, because they produced long-term income for SA. These provisions had been put in place to stop multi-nationals avoiding tax, with two exemptions which would keep multi-nationals safe. There was the high tax exemption and the foreign business establishment test, which would be passed by almost all multi-nationals. The question should then be whether the scope of the foreign business establishment test should be increased, to allow legitimate small businesses to get on to the world market. That for him would be a better argument.
The Chairperson said the Committee and related Committees felt very strongly about BEPS and anyone suggesting towards weakening the provisions was contrary to Members’ feelings that these rules should be made stronger.
Ms Gloria Mnguni, Finance Analyst Parliamentary Budget Office, responding to PwC’s comments, said it had been mentioned that section 7C recommendations were not in line with the DTC recommendations. Firstly, these were only advisory, and her reading of the recommendations gave the same tax effect as the proposed amendments. The holder of the loan account would be deemed to be subject to annual taxation, at least at the official rate of interest. On trusts, when people wanted to put forward the legitimacy of trusts, they always made reference to how useful they were to BBBEE schemes. Therefore, had Treasury thought of specifically excluding such schemes?
She responded to the CFO Forum on section 36, where it had been mentioned that they welcomed the new provision, but would like the deduction to be accelerated from ten years to five years. Surely, as this is directed towards the employees, although other communities’ members may use the facilities, the acceleration would not be reflective of the population using the facilities. On offshore trusts being excluded from section 7C, because they were covered by section 31, she was of the view that if applied correctly they should yield the same result, and what was important was to specify which one took precedence. Generally on the future of trusts, given all the developments, did trusts still have a place in South Africa? Lastly, on section 9D, the primary objective was to exempt CFCs where foreign taxes had been paid. However, if a CFC had a loss, how could the applicability of the exemption be logically explained?
Dr M Khoza (ANC) said SAICA had made a very bold statement about the non-alignment of these tax amendments with South Africa’s growth objectives. What specific aspects were being referred to, and how so? As Members were concerned, as politicians, about the low growth it would be amiss not to enquire. SAIT had argued that there had been an omission when the Income Tax Act was aligned with the Companies Act in 2008, resulting in small businesses experiencing a frustrated expectation -- what was NT’s take on that?
The Chairperson said the Committee had previously raised the need for tax support and SAIT had offered it. The Committee had considered it and had felt like it might be a conflict of interest. He was interested to hear SAICA say the Tax Ombud could provide some support to check the veracity of statements made. This was something which the Committee should look into, because support from an entity like the Tax Ombud would be more independent.
Prof Mollagee again extended the offer of assistance by SAICA. On the fundamentals of income tax and IFRS, even though it was true that actual accrual and incurral were the fundamentals, for many years the practice had existed of IFRS results being taken as the tax results. The best example was in banking, with section 24JB. On CFCs, he referred to the Chairperson’s point that government had a general view that BEPS should be doing more, and would not be keen on submissions which required doing less. Focusing purely on the Organisation for Economic Cooperation and Development’s (OECD) BEPS Action Plan, there were 15 action points which were very different, and a country could not take the position that with all of them, more needed to be done. His concern was why SA should have an obsession with being best in class, in comparison to other jurisdictions. This may be fine with transfer pricing, but with CFCs this was different. Perhaps Members would be interested to ask the SARS officials who were in the OECD’s CFC working group in Paris about what the rest of the world thought about SA’s CFC rules. This was one area where South Africa was not lagging behind and was throttling its expansion, by being too harsh. The concept of CFCs as an anti-avoidance measure was important under the BEPS agenda and SAICA was not talking about scrapping the provisions. The point was rather about simplification. The foreign business establishment exemption asked whether there was substance, which was fine in principle. However, where the CFC rules attempted to include income, then the foreign business establishment allowed an exemption, but section 9D (9)(a) made some exclusions to the exemptions. Further, section 9D also provided for exclusions from the initial inclusion calculation, subject to the exemptions and the exclusions to the exemptions. That level of complexity was the kind of thing which put South African multinationals way behind. For example, our high tax exemption was harsher and more complex than places like the UK, USA and China, and was pretty much the exact same as what was required in Germany with a notional re-calculation of what the South African tax liability would have been. Were we really saying that our multinationals were on an equal footing with Germany’s? SA therefore needed to look at what the minimum standards are and look at loosening the rules, because this would not encourage tax avoidance and would in fact encourage expansion.
On South Africa’s growth objectives, SARS imposed a massive compliance and administration burden on multinationals, which required them to restructure, reprice and do things completely differently when looking to take over a foreign group or expand abroad. This kind of restructuring would not be required by Chinese competitors or Australian competitors, which was where the impact on growth with these rules lay. In conclusion, SAICA was not arguing for a scrapping, rather just a simplification which would work better for South Africa.
Mr Nel referred to foreign trusts and section 7C. What was being said with section 31 was that if a loan was made by a South African resident to a trust, this deemed a market-related interest rate, which was also done by section 7C. However, if the loan was denominated in a foreign currency then the interest rate would be much lower than the South African rate. Section 7C duplicated that and brought in what was commonly referred to as the fringe benefit rate. This was double taxation, and the order of which one applied needed to be clear. On the future of trusts, SAIT was of the view that trusts were not predominantly used to avoid tax, and there were really sound reasons for using trusts: asset protection, looking after physically impaired children, and public benefit organisations. The tax consequences had been harsh in the past and had been no deterrent to their use.
Mr Mandy referring to section 7C and the comment that Treasury’s proposal was not in line with the DTC, quoted from page 30 of the DTC’s final report on estate duty: “in the first interim report, the DTC recommended that no attempt be made to implement some form of transfer pricing regulations relating to domestic trust arrangements. Submissions received by the DTC indicate support for this recommendation. The DTC reaffirms its view that domestic transfer pricing legislation is not the answer in this instance”. The report goes on to recommend changes be made to section 3(3) of the Estate Duty Act, to specifically address the situation where low interest loans were advanced to trusts. The recommendation was in essence that the assets of the trust be attributed back to the lender. The effect is rather cryptic, but then either interest would be charged subject to tax or the assets of the trust would be subject to estate duty in the hands of the lender. The second question related to excluding BBBEE trusts, but the difficulty was that there were many legitimate uses of trusts, not just for BBBEE purposes. Employee share incentive schemes in general commonly made use of trusts. Trusts could be used to make provision for a delinquent child and there were so many possibilities that it was impossible to exclude all those which should be excluded on merit.
Mr Coetzee, on the Service and Labour Plan spend, said generally this spend extended beyond just the employees of the mining company to the broader community, which was why it did not fall under the section 36(11) deductions.
Mr Topham said had not heard a good reason for not allowing the group losses, because a multinational which was a legitimate company would not have to worry about this, because it was really just an anti-avoidance provision. Was there a good reason in the case of a CFC which was not a legitimate operating company to have the proposal scrapped?
Prof Mollagee said there is no reason not to allow group losses, because the reason that companies were not paying tax was because they were making losses abroad. If the principle was that they would not be taxed in South Africa if they were paying taxes abroad, but one of the reasons they were not paying taxes was because they were making losses, that should be an acceptable reason. He agreed that there was no reason to not allow the losses.
Mr Mohammed Jada, Director: KPMG, referred to section 7C, and said there were already existing rules in the Act which provided for effective policing of avoidance. Trusts could be used for avoidance, but there were section 7 attribution rules -- how would SARS be in a better position to identify the areas of abuse? From a practical position, section 7C should not be introduced in its present form, because it consolidated everything under one income tax provision, when many different taxes were at play. Estate duty and donations tax were also relevant, and therefore the problems should be dealt with in those specific taxes. It did have unintended consequences, as had been mentioned. Rather than rushing into the introduction of section 7C, government should reconsider the existing provisions. Further, consideration should be given to making these reportable arrangements, which would be a means for SARS to get the information on abuse, so if loans greater than R10 million were made on an interest free basis, that would have to be reported. This would give SARS the information necessary to determine whether mischief was taking place.
Ms Beatrie Gouws, Associate Director: KPMG, said the policy imperative on employee share schemes was understood as the taxation of employment-related payments as income, basically imposing an employees’ tax obligation on the employer. Members had heard from other submissions on deductions and other aspects. KPMG wanted to discuss the practicalities, because the dividends’ withholding tax and employees’ tax were completely different taxes. SARS needed to switch off the dividends’ withholding tax on certain payments and needed to impose an employees’ tax obligation on the payer of those dividends. In time, the tax instance was different. Who would be the entity which withheld employees’ tax, how would the holder of the share be identified, and would it be in the same month? Systems for dividends’ withholding taxes were substantially different from a payroll system, in the timing, obligations and how it was monitored. At this point, the legislation had not shown consideration of how the practical implications of switching off dividends withholding tax and switching on employees tax would operate. By the time the proposal came before the Committee, it would be in legislation and persons who needed to make systems changes would have to do so on legislation which was not fully passed.
Ms Gouws, on retirement income earned off shore, said an example would be a company with headquarters in South Africa, and even where its employees worked abroad it continued to contribute to their South African retirement fund. While they were abroad, they would be taxed on the retirement fund contributions made, in the foreign jurisdiction, either due to the services being rendered and sourced abroad, or the taxpayer becoming resident abroad. The employer in South Africa did not receive a deduction because the services were not rendered for its benefit. While the build-up was occurring, the money in the retirement fund was not taxed. Whether the taxpayer became a resident again or not, the portion on which someone enjoyed a deduction would be split between foreign services rendered, which were tax free having been taxed abroad, and South African services, which were to be taxed. However, from 1 March 2017, irrespective of whether one had already retired or were still in the retirement fund, if the person became a South African tax resident or had remained so all along, the person would now be taxed on the services rendered off shore and the remuneration built up in that fund. Two things could happen as a result: firstly, the taxpayer did not come home, because they would be taxed if they did; and multinationals would not set up South African retirement funds, because this would catch the local funds. At this point there did not seem to be parity and it would not be fair, because it would affect people already in retirement. Previously, grandfather provisions for persons in or close to retirement were considered, but in this case that was not being considered and KPMG would urge this.
Mr Jada, said Minister Pandor had set up a task team on the R&D incentive, which had presented its final report in May 2016, and which had then been discussed with National Treasury. There had been a tremendous effort forwards, but he did not believe there had been enough time to engage on what amendments needed to happen. Applications had been submitted more than three years ago, the tax years had prescribed, and NT’s only proposed amendment was to allow taxpayers to go back and re-open assessments or returns. This was a good step forward, but there were some practical challenges, because some people would end up having to pay penalties for overpayments of provisional tax which they should not have paid, given the deduction. Another possibility was to have a once-off catch-up deduction, which avoided the need to go back and waive prescription for a specific piece of legislation. Prof Engel had said the R&D incentive ought to be scrapped, which Minister Pandor would likely take umbrage to, because a lot of companies had worked through the issues and were very much on board. The Department of Science and Technology had made great strides to improve the incentive. This was the only R&D incentive in Africa and if it was removed, then the investment would be lost. He would suggest that the incentive be allowed to run its full term, allowing the good work done to flow through to the companies which had been patiently waiting.
On Special Economic Zones, he said this was one of the key goals aimed for by the Department of Trade and Industry. This was a move away from the large industrial development zones, to more regional, focused economic zones. If a taxpayer wanted to set up in a zone, this had to be specially located and designated. A prime example was the Dube trade zone, where if a taxpayer carried on a certain business in the Dube trade zone it would automatically apply a 15% tax rate. This was being done to encourage investment and job creation. There was another rule which provided that if a taxpayer bought or sold more than 20% of its goods from a related party, the 15% tax rate was taken away. This was a concern, and KPMG did not understand where the rule had come from. He would suggest that if the concern was about diverting profits from a 28% company to a 15% company, to apply domestic transfer pricing rules, to ensure those transactions were at arm’s length. The 20% limit should not be in place, because today companies had various related subsidiaries performing various aspects of the business. By putting this rule in, investment was encouraged, at the expense of needing to change one’s entire logistics supply chain. Further, practically what was found in engagements with the DTI was that the 15% rate had to be applied for. However, on KPMG’s reading, there was a disconnect, and if the DTI wanted to put in place an approval process, this should be pursued. The concern was time, because 2014 was when the legislation had been put in place, but only promulgated in 2016. People were already making investments and there should be interactions between the DTI, NT and KMPG to ensure the efforts were not undermined.
Adv Eric Mkhawane, CEO: Office of the Tax Ombud (OTO), said the Office had recently been established, following the promulgation of the TALA. The Tax Ombud was appointed by the Minister under section 14 of the TALA and was accountable and reported directly to the Minister. The mandate of the Office was to review and address any complaint made by a taxpayer about a service, procedural or administrative issue arising from the application of a tax Act by SARS. That placed the Tax Ombud in a watchdog position regarding SARS, but the problem arose where the Ombud’s independence was compromised. The funding for the OTO came from SARS, which meant that SARS was the subject of its oversight, yet it controlled the funding. This did not inspire confidence in the independence of the Tax Ombud. Proposals had been made, resulting in the draft proposed section 15 (4), which adds: “the expenditure connected with the functions is paid out of the funds of SARS, in accordance with a budget approved by the minister”. This did not resolve the problem, because the funds were still those “of SARS”, indicating that the funds still belonged to SARS. It was understood that the intention was to change the situation. The Tax Ombud’s proposal would be that it read “funds held by SARS”, because then SARS did not have ownership of the funds, with the Minister still determining the budget. The Tax Ombud believed this proposal would eliminate any concern that the OTO was not independent.
The Tax Ombud was not able to initiate investigations into any aspects of its mandate, and had to be reactive. The Tax Ombud thought it may be useful to look at other jurisdictions, so it had benchmarked with the Canadian model, from which the bulk of the Tax Ombud legislation was drawn, and had also looked at the USA and Australia. In those jurisdictions, similar bodies had the power to initiate investigations, which made the process fair. If the Tax Ombud were to initiate investigations, then it could interrogate a number of issues within the institution to determine the genuineness of a complaint. Those jurisdictions were good examples of the value which the OTO could add to a tax administration. Following the proposals made, a clause had been introduced which would allow the Tax Ombud to review, at the request of the Minister, any systemic or emerging issue related to service matters’ procedural and demonstrative issues. This meant that the Minister must approve every systemic investigation, reducing them to dealing with operational issues. There may be a fear that if the Tax Ombud was given wide powers to initiate investigations, there could be abuse. The Tax Ombud doubted this argument, because all the entities were subject to the Minister, who would be able to deal with any complaint of abuse. Further, the Minister had those powers to request an investigation regardless. If the concern was abuse, the Tax Ombud proposes that investigations be pursued with the approval of the Minister.
Mr Gert van Heerden, Senior Manager: Legal Office of the Tax Ombud, said the prior approval of the Minister was so that the Tax Ombud could still initiate. The reason behind the Tax Ombud wanting to initiate investigations was that a lot of people did not want to complain, because they feared victimisation. The Tax Ombud picked up many things through stakeholder engagements, and needed to be able to deal with these concerns, especially where they were systemic and impacted on many taxpayers, and which were not coming in through formal complaints. The Tax Ombud still wanted to be able to initiate and if there were concerns about abuse of power, then there could be a request for approval.
Law Society of South Africa (LSSA)
Mr Robert Gad, Chairperson: LSSA Tax and Exchange Control Committee, said the tax and exchange control committee represented the interests of attorneys. The LSSA had made written submissions and he would focus on three main points.
First, section 12E, clause 30 of the TLAB, defined the type of entities which qualified for beneficial tax treatment as small business corporations, with reference to the Companies Act. In 2011, when the Companies Act 2008 had come into force, it appeared that the definition was inadvertently to exclude personal liability companies. These were the types of companies used by many professionals. It seemed common cause that this exclusion of personal liability companies was unintentional and was referred to as an anomaly. Only recently had this anomaly become apparent to both taxpayers and government. The effect of this anomaly was to subject small firms, which operated as personal liability companies, to a much higher tax rate for the relevant years than they should have paid. Taxpayers may have therefore inadvertently underpaid, because they were under the impression that the law had not changed when in fact it had. The TLAB proposed to correct the error from March 2016. This was welcomed, but LSSA submitted that once it became clear that the change had been unintentional, it should have been corrected from its inception, which was in 2011. If this was not done then a whole group of small businesses would suffer hardship by attracting a tax liability between 2011 and 2016, which had been completely unforeseen.
The proposed changes to the taxation of share incentive schemes under clauses 13, 14 and 24 (e) of the TLAB would have the effect of subjecting to income tax all dividends on restricted share schemes, while allowing some limited deductions for employers. The LSSA submitted that this proposal should be reconsidered or reformulated, as it clearly represented a major policy shift in the approach to the taxation of share incentive schemes. It went far beyond addressing a limited category of mischief identified by the Minister of Finance, which dealt with a particular kind of dividend stripping to avoid being taxed on these instruments. It seems to be accepted as a policy shift, because it affected both the way beneficiaries and employees were taxed under the scheme. The LSSA submitted that these kinds of dramatic policy shifts which affected taxpayers in locked-in contracts, ought to have only a prospective effect. Therefore, if these rules were accepted, this should be only from 1 March 2017. This type of approach was not unprecedented -- when section 8C had been brought in, it had affected instruments issued only on or after that date. Secondly, the LSSA submitted that the proposals went beyond what was necessary to curb the mischief identified. It would subject many taxpayers to a much higher level of taxation, because they would not be subject to dividend tax at 15% and would be subject to income tax at up to 41%. The LSSA submitted that a targeted approach to avoidance was better than a shotgun approach.
Thirdly, the proposed deductions to be allowed to employers were very limited. The proposals taxed dividend receipts as income. No other taxpayers paid income tax on dividends, but the employers would not have this as a deductible expense. The LSSA proposed that as dividends were being treated as income in the hands of the employee, the employer should receive a symmetrical deduction. Further, the proposed deduction of only certain costs were too limited and technically flawed to offset the hardship. If these proposals were enacted and dividends were taxable, all costs should be allowed as a deduction by the actual employer.
Mr Gad said the proposed introduction to section 7C in clause 12 of the TLAB was in the context of planning around estate duty, which was a topic considered extensively by the DTC. The second report of the DTC on estate duty had recently been released and identified specific areas of concern around trusts and estate duty. It proposed targeted remedies to address estate duty avoidance should be considered by the Minister of Finance. The proposed section 7C jumped the gun, and may be incompatible with certain DTC proposals. If so, the amendments pre-empted the possibility of considering the report fully and therefore section 7C should be held back, pending a holistic consideration of the DTC report. Further, section 7C was an imprecise instrument targeting all interest free loans to trusts, and not only the avoidance of estate duty. In some cases, the amount of tax triggered would far outweigh any potential estate duty saving, and in others it would have completely no effect on estate duty. Thirdly, the proposed section would in effect be retrospective, as existing loan arrangements would be subject to tax. The LSSA submitted that such dramatic changes should be accompanied by an opportunity to unwind loans and trusts in a tax friendly way. They should allow taxpayers to regain control of their assets in a tax friendly way or make the proposals effective to apply only to new structures.
Mr Dan Foster, Director: Tax, Webber Wentzel, said he would focus on the proposed section 8CA, the deduction for restricted equity instruments, and surrounding provisions. From 1 March 2017, all amounts accruing on restricted equity instruments would become taxable income. This had been justified on a matching principle, as the employer would receive a new deduction for funding the scheme and the employee would be taxed on all the gains. Webber Wentzel had no objection to this in principle, but there technical flaws.
The amendments would apply to existing schemes, for which there had been no deduction. The deduction crucially excluded the issue of shares, which was not expenditure actually incurred. The vast majority of restricted equity schemes were created with the issue of shares, and a deduction would not be. Secondly, dividends were taxed twice: once as profit, and again as income, which was a punitive result. A fairer overall result would be to apply the rules only to new regimes, because people were locked into existing schemes. BBBEE schemes were almost always done as restricted share schemes so that there was certainty of the percentages held by black participants, and had to be locked in for the long term. Often the dividends the black staff received were the only benefit they got. Further, these schemes were often heavily leveraged, meaning there was even less money to pay dividends, so if the dividends were taxed at income tax rates, these dividends became even smaller. Even for the lowest paid employee, this meant an extra 3% tax. Effectively, it would be better to simply be paid a bonus, or have a phantom share scheme. However, the problem was that a phantom share scheme would be completely useless for BBBEE, as there was no ownership, so on one hand black ownership was being encouraged, but on the other hand the tax system was discouraging this.
Mr Foster said the proposed solution would be, rather than simply giving a deduction up front for start up costs, that whenever any amounts were paid in terms of these schemes -- dividends, capital gains, return of capital or gains on vesting or disposal -- whatever amount was taxed in the hands of the employee should be deductible by the employer. This would lead to complete symmetry, in the same tax year and avoid the problem of valuing shares. There would be a mismatch of rates, with the employer receiving a 28% deduction, and with the employee being taxed at between 18 and 41%, but that was the case with all remuneration. If the principle was to tax restricted equity dividends as remuneration, the deductions should be allowed, as with all remuneration, for it to be fair.
South African Institute for Professional Accountants (SAIPA)
Mr Ettiene Retief, Chairperson: National Tax Committee, SAIPA, referred to section 12E, and said SAIPA felt there was no issue with it being effectively backdated, because it was not the intention of the legislature to exclude these entities. However, at the same time section 42, which dealt with the asset for share transactions, made reference to the same kind of definitions and there was an inconsistency there, because of the reliance on the definitions in the Companies Act.
The amendments to section 44 of the VAT Act restricted the vendor to claim certain inputs in certain periods. The issue was not so much the underlying reasons for this change, rather it was not being able to ascertain the extent of the risk, because certain items were not indicated. Practically there was a problem, because vendors could not always file within the period, as they needed supporting documentation. The VAT Act under section 16 stated one was not entitled to claim input tax if one was not in possession of the paper work. If taxpayers had to wait until they get this, but could claim only in a certain period, then they would have to refile the prior return to get the refund. One of the problems which had not been addressed, despite amendments towards correcting VAT invoices and expanding the idea of what a VAT invoice is, was that the VAT Act did not address how to remedy a VAT invoice. For example, section 20 stated that it was not legal to issue more than one VAT invoice for the same supply. The supplier issues a VAT invoice, but something is incorrect, such as the VAT number, but to fix this many times the company has to issue a credit note, although this should not be done. They then go back and reissue another invoice for the same supply, despite this being unlawful and still having the faulty initial invoice. Government had not addressed that issue in the legislation, while the amendment to allow alternative documentation to be used for VAT invoice purposes was very prescriptive. It had again been announced in the Budget Review that these provisions would be reconsidered, because taxpayers were looking for a provision which gave the commissioner discretion to accept a faulty VAT invoice. Once those types of things were in place, then it would be fine to fix when the input could be claimed, and the like. Government could not fail to fix a paperwork issue which was a prerequisite, and still expect taxpayers to follow a timeline.
Mr Retief said a comment had been made that when a recommendation was made by the Tax Ombud, it should be known whether SARS was going to accept the ruling. SAIPA proposed a prescribed timeline within which SARS had to indicate whether it accepted the ruling, allowing for the next step to take place. With regard to objections, SAIPA was quite happy with the increase from 21 to 30 business days, but in practice there were a number of reasons why it was not possible for taxpayers to object within 30 days, especially bearing in mind that in almost all cases, the burden lay with the taxpayer, not SARS. To understand the assessment, formulate a position and weigh up a burden of proof was already a lot, assuming that there was adequate notice. With SARS having three years to amend an assessment and a far greater period to consider the first objection, there was no reason to not be fairer to the taxpayer by extending that 30 day period to 90 days. The concern was if that route was not chosen, it was already being seen that SARS was quite restrictive in allowing condonation under the existing 21-day rule. What would prevent SARS from even more aggressively refusing condonation? The reality was that the taxpayer was being jeopardised by the situation, with no legitimate reason being given why they should not be allowed 90 days to allow an objection, without giving reasons for late submission.
Ms T Tobias (ANC) asked the Tax Ombud how the issue of funding coming from SARS would affect its performance. Secondly, on the initiation of investigations, the Tax Ombud was making a policy proposal that they ought to be proactive in investigating. Was there a thin line between the Minister’s powers and what they would do? In the current form, had it been the Minister who initiated investigations, and how had it affected the Tax Ombud’s ability to do investigations? She asked NT for comment on the initiation of investigations by the Tax Ombud, to see what would be in the minds of those being investigated. She suggested a different platform to engage certain stakeholders present on the issue of the R&D incentive, also involving the Committee on Trade and Industry. She wanted enough time to consider the important incentives, to try and demonstrate their effectiveness. Having gone to China to see how they did their Special Economic Zones, she had a serious view on these issues and did not want them to be brushed over.
Mr Topham asked SARS to clarify the amendment to section 44 of the VAT Act, because he thought it was clear that vendors had five years to claim an input refund. Further, he sought confirmation that the provisions in the requirements for VAT invoices were to make it easier to rectify a faulty VAT invoice.
Ms Mnguni, referring to the Tax Ombud on independence, said section 15 (1) of the TALA spoke to recruitment through the SARS Act, which she felt was equivalent to secondment. How was oversight conducted by SARS officials over themselves? Secondly, section 17A limited the authority of the Tax Ombud with regard to a review of legislation -- did this limitation extend to OTO staff in their personal capacities, because they were well placed to give valuable input? Thirdly, she asked Treasury to clarify section 8CA, on income being converted to the donation, if a trust was not able to pay back the lender within three years, did that not equate to double taxation? Lastly, section 8CA (2) referred to a deduction being allowed on expenditure incurred which would be spread evenly over the longest possible vesting period. How would this be addressed where the scheme did not have a specified vesting period?
Dr Dumisani Jantjies, Tax Director: Parliamentary Budget Office, said section 7C seemed to be very interesting. He was trying to convince himself on the double tax aspect of the section. What would the tax treatment have been, had the loan not been interest free? Further, estate duty seemed like a small amount to revenue contributions, and did SARS see the combating of avoidance increasing this in any way?
Mr Mkhawane, on funding, said people always wanted to know how the Ofice was formed, how effective it was and how independent it was, before even lodging a complaint. Operationally, the Tax Ombud may be independent and reviews the complaints independently, but once people see the Tax Ombud is were funded by SARS, they question the independence. This was a credibility issue. On the initiation of investigations, he said Mr Van Heerden had mentioned fear of victimisation and some people were too intimidated to approach the Tax Ombud. The Tax Ombud may know of a problem, but unless a complaint was launched, this may not be looked into. The underlying idea was to add value to SARS and was less about policing, so it was not investigating in the strict sense. The intention was to review the issue, deal with it and make a recommendation to SARS. The ability to initiate an investigation had to go a long way. The Minister had not requested the Tax Ombud to do any investigations so far.
The secondment of staff under section 15 (1) was one of the problems which the OTO faced regarding independence, because it meant that everyone except the Tax Ombud was an employee of SARS. Proposals had been made and the current section required consultation between the Commissioner and the Tax Ombud, which meant that the Commissioner must agree with any staff who were going to the OTO, and the body subject to oversight determined who was employed at the OTO. The consultation aspect had been removed. The OTO was not an entity which could contract and employ per se, which was one of the problems. On exclusions from review of legislation, considering the comment made earlier, with small tweaks, the Tax Ombud would be able to make input to the Committee.
Mr Retief referred to the efficiency of correcting VAT invoices, and said SAIPA was not saying the current legislation changed any of that, because changes had already been made. Those dealt with correction of consideration, the supply itself, and extensions of what was accepted as documentation. The problem was that none of those invoices dealt with the correction of VAT invoices themselves, or gave a discretionary power to accept alternative documents. Those aspects were not addressed and now the legislation was making it that in certain circumstances the taxpayer would have to file a return from a previous year. Government must first deal with the ability to meet the requirements for a valid VAT invoice and then one could prescribe limiting when this could be claimed. Further, what the certain circumstances were, needed to be known, so that it went through a formal process rather than regulations.
Ms Tobias asked Treasury where the mandate of the Tax Ombud was located, because in her perception the initiation of investigations may apply to the current mandate, more than to tax matters.
The Chairperson said his tentative view was to agree with the Tax Ombud, because it was reasonable. Treasury ought to indicate to what extend there had been consultation, to what extent the comments were reasonable, and to what extent things had been heard before and disagreed with.
National Treasury’s Initial Response
Mr Cecil Morden, Chief Director: Economic Tax Analysis, National Treasury, said the comments would be responded to in detail the following week. The consultations had been quite extensive and a meeting was planned for the following day on two topical issues: sections 7C and 8CA. The concerns raised on those two issues had been noted and Treasury had already begun to work on an appropriate response.
On the R&D incentive, he was glad to hear that progress had been made. A very heated consultative process with the Department of Science and Technology and stakeholders had been held the previous week. Treasury had indicated how it planned to deal with the comments of the committee formed to consider the matter, and the Department of Science and Technology were also streamlining their administration.
Mr Franz Tomasek, Group Executive: Legislative Research and Development, SARS, said the comments on mining royalty returns timing had been noted, and were being taken on board. On the issue of there being no time periods, there were time periods, but not for everything. The SARS Commissioner at the tax indaba had announced that the SARS Service Standards would be out by the end of 2016. This would give everyone a benchmark from which to proceed with a dispute. On objections, people tended to miss that all that was being changed was the period for the extensions on reasonable grounds. The point being raised was for a longer period, without having to ask for an extension. That was dealt with in the rules, which SARS had signalled would be changing, because there were already too many condonation requests. SARS would be extending the initial period for an objection to come in.
On VAT refund changes, SAICA was essentially correct that the old provisions were being reinstated. This was because with a normal income tax refund, taxpayers had to go back to the original to change it, which worked fine under the TALA. VAT, however, had a wrinkle to it and was driven entirely by the concerns raised around getting the right invoice only in a subsequent period. With VAT, you could claim the input in a later period and that is where the problem was, because there must be some bounds as to how far on the input could be claimed, so the amendment was seeking to ensure there was a five-year window period within which to claim the input. The cut-off had existed previously and was being reinstated, because VAT worked a little differently.
On the Tax Ombud, going back to the original work done, there had been two models for a Tax Ombud. One was associated with the local revenue authority and the other model was where the Tax Ombud function was housed in the equivalent of the Public Protector. The Katz Commission had argued for the UK approach, which was a purely contractual approach, and the joint standing committee at the time had felt that a subset of the Public Protector model was best. Subsequently, the Tax Ombud had been established closer to a contractual model, based on the Canadian model. SARS was quite amenable to many of the changes proposed, and it may not have got everything with the Tax Ombud correct. Something which must be borne in mind was that there was an appropriate process, and the funds must live somewhere. What one of the amendments was intended to state was that although the funds were housed somewhere, this was under a budget approved by the Minister, so it being housed somewhere did not impact on the Minister having approved a specific budget for the Tax Ombud. Perhaps the wording could be improved, but that was the intention.
On initiating reviews, the concern was how that process was managed, where some form of hearsay was used to begin an investigation. On consultation, SARS had called for written comments and was looking at the written comments, but because of the pressures of appearing before the Committee and running the tax indaba, SARS had not managed to arrange a workshop with stakeholders. The feedback had been heard, and this could still be arranged.
Mr D Maynier (DA) said he would like a comprehensive response the following week on the constitutional issue raised by PwC.
The Chairperson said listening to the pressures under which Treasury and SARS were working, this was of their own doing. Treasury was a great Department in his view, but they gave themselves too much to do and could not manage their own programme before the Committee. He had raised this with the Minister the previous day. Perhaps NT did need to have the workshop with the stakeholders before it presented its responses to the Committee. Further, the Committee had momentum with the ‘Twin Peaks’ Bill. It would deal with the Revenue Laws Amendment Act report back by National Treasury. The Social Security Reform Paper would be tabled in the National Economic Development and Labour Council (NEDLAC) within three months. This had not been done and should not take long, but he would formally write to both Ministers. He needed a mandate from Members to write a letter referring to the decision taken on 10 March 2016, regarding the Social Security Reform Paper, its dissatisfaction with progress, and requesting clearer deadlines. Secondly, the Committee had agreed to look at the employment incentive issue, and it may be useful to postpone that session until the next term. Members indicated their agreement. Further, he asked how it would affect National Treasury if the response to the present public submissions was similarly postponed.
Mr Morden asked when the response document would be postponed until?
The Chairperson said Tuesday 11 October 2016, the first day of the next term.
Mr Morden said much of the work-shopping had been done, and there was only one small portion where there was still some consultation under way around the TALAB. That was not substantive to the extent of delaying the process, and would be held the following day.
The Chairperson said Treasury should be heard, and the workshop would be held on 11 October, meaning that this kept space for the ‘Twin Peaks’ Bill.
He then declared the meeting adjourned.
- CFO Forum submission
- ENSafrica submission
- Cliffe Dekker Hofmeyr Inc submission
- Law Society of South Africa submission
- Tax Ombud submission
- Webber Wentzel submission - draft Taxation Laws Amendment Bill, 2016
- South African Institute of Chartered Accountants submission
- South African Institute of Professional Accountants submission
- Tobacco Institute of Southern Africa submission
- Webber Wentzel submission