The Davis Tax Committee chaired by Judge Dennis Davis briefed the Members on reports done and yet to be completed on issues surrounding tax. It was highlighted that small medium and micro businesses are not promoted by the tax system. The small businesses corporations are not receiving the generous tax and depreciation rates and being received by businesses that are not largely creating employment. The skills development levy compliance is cumbersome and small businesses seem not to claim back. The issue of BEPS and illicit financial flows was also raised and noted that South Africa cannot come up with unilateral solutions since these are global issues. The general view was that tax does not solve all the problems and before increasing tax all factors have to be considered. Estate duty can be enhanced and raise more revenues. Tax administration of SARS was also discussed and the notion of tax payers’ bill of rights was mentioned. It was also noted that it is possible to raise the extra required R28 billion without damaging the economy. The Davis Tax Committee is also considering wealth taxes and has advised the Minister of Finance on the Border Management Agency Bill and the funding of tertiary education.
Members made comments about the role of the Tax Ombud, administration of SARS, wealth tax, sugar tax, benchmark studies, tax avoidance by using trusts, raising VAT in the current economic conditions, estate duty burden on the middle class and “black tax”. Questions were asked about estate duty enhancement, South African laws and enforcement against BEPS and illicit financial flows, NPA’s expertise in the prosecution of BEPS and illicit financial flows cases, and carbon tax.
Judge Dennis Davis, Davis Tax Committee chairperson, introduced his colleagues from the Davis Tax Committee (DTC) and briefed the Committee. He indicated that the key areas of the report will be on the DTC reports that were already handed in. The DTC was appointed in 2013 and is expecting to complete its work by next year. One of the difficulties faced is that there have been more requests. The mandate of the DTC is very broad and the emphasis is to inquire into the role of the tax system in the promotion of inclusive growth, employment creation, development and fiscal sustainability. DTC prepares reports that are submitted to the Minister and the Minister has to grant approval for publication. There has been 179 submissions received to date, 176 meetings have been held on a range of topics. The DTC encourages comments on interim reports. The DTC gets support from international organisations such as the World Bank and International Monetary Fund because they have technical competences that South Africa does not have as well as run modelling that cannot be done in South Africa. The DTC continues to look at the effective tax burden and the effectiveness of investment incentives in South Africa. The studies have to precisely look at the effects of a tax and its impact on investment. There has been already a detailed study of the value added tax gap. DTC has tested South Africa’s VAT on what is expected from 14% VAT and what one really gets. Judge Davis remarked that he had expected the gap to be rather large then it would have been easy to determine how to find another R100 billion. This was not the case. The reason the VAT system is one of the most efficient in the world, is because there is a narrow band zero rating and a narrow band of exemptions. It is the first time that it has been ever done in South Africa. In relation to the Mining and Petroleum tax reports, it was perfectly clear the skewed nature of expertise where the mining houses have expertise but that does not mean that everyone else has. In the reports there has been aid from people from SARS.
Davis Tax Committee progress
Judge Davis said the DTC has produced two reports on Small and Medium Enterprise, two reports on base erosion and profit shifting and two reports on Macro analysis. The Macro Analysis report, which is on the DTC website and has been peer reviewed by a range of economists and gives a map of the type of tax system that South Africa should be looking at in the upcoming years in light of the mandate, that is, a tax system that is legitimate, efficient, promotes job creation, promotes investment and inclusive growth in the economy. There has been one VAT report, and it is in the process of finalising the second VAT report which will hopefully be ready shortly. There have been two reports on estate duty which has capital gains tax implications. There has been three reports on mining.
The Minister has been advised on the Border Management Agency Bill and also on free education. The Minister and the SARS Commissioner had asked the DTC about income and the Customs Excise Act. The DTC was very clear that there should be no change, the R300 billion at stake, is a significant amount of money. The suggestion is not that if it goes to another Department it will not be done efficiently, but it would be taking a risk. He re-read the Katz Commission report which echoed this when it recommended the consolidation of customs, excise and revenue, back in the day. It is terribly important to ensure that that which is working should not be changed. He is strongly of the view that SARS should continue to run customs.
On tertiary education, DTC thought that it is appropriate to make tentative recommendations to the Minister. If there is to be tertiary education funding, the money has to come from somewhere and it is better for it to come from people investigating the tax system. DTC came to the view that it is impossible in the present tax system and state of economy to actually say that education can be funded on a free basis for every single person in South Africa. DTC is also of the view that there is an imperative to ensure that far more people who are worthy to go to tertiary institutions and who are clearly under financial pressure, earning a figure of roughly R120 000 per year, that they should in fact be funded. DTC made a series of concrete recommendations on how to fund education and ensure a vindication of our constitutional obligations under section 29. DTC tried to steer a path saying on the one hand, the present status quo is not satisfactory; on the other hand, it is naïve/irresponsible for people to claim that it is easy to find the R60 billion which will be required for tertiary education at this stage given the finances in this country and the competing claims such as from pre-primary education, health care and so forth. The Davis Tax Committee review has put it in an entirely different position than the Katz Commission during the 90s, given both the state of the economy and the demands which are more acute now in a political sense than they were in the 90s.
The VAT report has to be completed and shall do so hopefully by early next year. On oil and gas the report is close to being in the final stage. There is a committee dealing with public benefit organisations. The testing is whether the tax dispensation on educational institutions and charitable organisations both in relation to the income tax for these institutions and the deduction thereof is satisfactory under the present system. It raises profound questions, once feedback from some of the members is received in the sub-committee, the report will be completed shortly.
Tax administration is a massive topic for all sorts of reasons. There is a sub-committee and there is already tentative drafts on various aspects. There is a sub-committee working on government funding as well as the National Health Insurance scheme while working with the Department of Health on its funding. A critical issue is tax incentives and whether they are efficient to meet our economic objectives. Corporate tax income is being looked at and DTC has yet to look at wealth taxes and taxation of trusts which is separate from the estate duty report.
The sub-committee has also produced two reports on smaller and medium enterprises (SMMEs) which was based on thirty seven submissions, sixteen sets of comments and meetings. The main finding was that SMMEs are not promoted by the tax system. It is naïve to think that fiddling with the tax system will propel SMMEs into the centre of the economy. It is not however to suggest that in fact there are no issues that cannot be dealt with. DTC is of the view that the system is by and large not inadequate. DTC has met with the Minister of Small Business Development. The Minister accepted recommendations to retain the turnover system for micro businesses (turnover up to R1 million per annum) with simplification and more generous taxes. DTC holds the view that the generous tax and depreciation rates for small businesses corporations (SBCs) (turnover up to R20 million per annum), costing the fiscus R1.36 billion per annum, is not reaching the majority of SBCs and should be replaced by a refundable compliance rebate to give all SBCs an equal benefit for the cost of complying with tax laws. The reason is that when the system was tested the thought was who receives the money, and it discovered that it is the state agencies and professional bodies and it is not where employment creation comes from. The state agencies do not create huge levels of employment and the general dispensation for SBCs does not see the benefit go to corporations which to a large extent seem to be the ones who generate employment - which is desperately needed. It is for that reason that DTC thought that the money should not be wasted and thus give everyone some form of rebate to ensure that compliance with tax laws can in a sense be free as possible for this group. They are brought into the system, as they grow, they then generate more tax. DTC is also of the view that the skills development levy gives some significant problems for small businesses. The understanding is that once a wage is beyond R1 000 then there has to be payment of the levy. The difficulty with the levy is that the levy is supposed to be rebated back in order to promote training of the staff but the compliance burden on small businesses is so onerous that they never seem to be able to claim the levy back. They are paying it as a tax and not getting the benefits of training staff and there has to be a way to ensure that they can claim back their share of the levy when promoting staff training which is the objective of the exercise.
Judge Davis said that the DTC website has several detailed recommendations on base erosion and profit shifting accredited to Professor Oguttu, Chair of the BEPS sub-committee. He handed over to her.
Base erosion and profit shifting (BEPS)
Prof Annet Oguttu, Tax Law Head, UNISA and DTC Chair of BEPS sub-committee, noted that BEPS came to the forefront after the global financial crisis. The basis was taxpayers and multinational companies that manipulate the gaps in the interaction of different countries' tax systems so that they can reduce the amount of taxable income which results in shifting profits to other jurisdiction where there is little or no economic activities taking place there.
BEPS has arisen because domestic and international laws that have been developed for decades have not kept pace with the economic environment and modern business models that are now in place. There is now a lower degree of economic interaction that is happening across borders and that is how multinational companies and/or taxpayers have been able to manipulate the system. BEPS is very technical and quite elaborate. The corporate income tax system is at stake. In order to address the BEPS issues the Organisation for Economic Cooperation and Development (OECD) came up with a package of measures. The final measures were released in 2015 and the purpose is to ensure that the profits are taxed where the economic activities generating these profits are actually performed. There is a whole list of fifteen action plans and the essence behind this is that the measures are designed to be implemented domestically and through tax treaty provisions that are supposed to be coordinated. They are intended to ensure that there is stronger monitoring and strengthening of transparency so as to align the taxation of taxable profits with the location of economic activities. The measures ensure that tax authorities are able to apply their tax laws effectively.
The OECD brought together about forty four countries on equal footing and these were mainly OECD member countries and OECD BEPS associate countries including G20 countries of which South Africa is a part. The countries came up with a consensus on how to resolve BEPS. South Africa worked together and participated in the outcomes of the OECD BEPS work. The DTC has worked on BEPS from a South African perspective. It has to be acknowledged that although there is abundant substantial evidence that BEPS behaviour has happened world-wide, there is no solid conclusion on how much BEPS actually occurs internationally. Countries like the United Kingdom tried to come up with the report to determine tax gap in the UK and in a micro-economic report DTC tried to come up with the amount of taxes that are actually being lost. There has also been several studies and data that indicate there is increased segregation between the location of actual business activities and where profits are reported for tax purposes. Although the question of how much revenue is lost is highly interesting for the public, there has been a lot of concern and public outcry about the tax being lost.
For the studies that are currently in place, there are various methodological flaws regarding the estimates that some of the studies have come up with to determine the exact revenue lost. There is no accurate estimates of how much taxes are actually being lost. Some of the famous reports that countries have attempted to come up with are figures that indicate BEPS particularly from the developing countries perspective and how much revenue is being lost. However, they come up with a proxy of how much BEPS is and illicit financial flows. A report focusing on South Africa has estimated that the country has lost billions in revenue in the last decade, specifically due to corporations taking revenue out of the country, including wealthy individuals. A report issued in 2012 states that about R2.1 billion left the country under the radar.
The issue is that there is a distinction between BEPS and illicit financial flows (IFFs). BEPS refers to multinational organisations taking advantage of the weaknesses in the legal system and trying to ensure that they shift profits out of the country using legal methods. IFF, which is not recorded, are criminal activities such as tax evasion and various efforts to take taxes/income out of the country. The main difference between the two is the legality and illegality of the capital flight out of the country. The distinction is made in the BEPS report. In coming up with a report on BEPS from a South African perspective, DTC consulted various stakeholders such as the OECD, business societies, civil society, trade unions, tax practitioners and National Treasury. There were meetings with the stakeholder and various submissions were received on BEPS. The first interim report was issued in 2014 covering the action plans that the OECD has worked on. The BEPS report was released to the Minister in September and is awaiting his approval. In drafting the report, it was recognised that it is important to take into perspective the matters pertinent to South Africa especially national sovereignty, the constitutional perspective, the National Development Plan, protection of the tax base, protection of the competitiveness of the economy, tax administration, importance of exchange controls and the legislation in place to prevent base erosion before the report. It is important not to come up with unilateral recommendations without taking into consideration what is happening internationally and may result in double taxation. DTC was of the view that before providing the report, clarity had to be provided on South Africa’s international tax policies. The recommendations DTC came up with were not from a reactionary approach about what is happening globally but it had to take cognisance of the special circumstances that South Africa as a country is facing considering that the country portrays aspects of a developed and a developing country as well as that it is an emerging economy on the African continent. The country’s administrative capacity had to be considered, its trade partners and its socio-geopolitical circumstances. The conceptual framework had to take into perspective factors pertinent to South Africa.
It was recognised that the OECD fifteen action plans which are quite technical and detailed, deal with different dimensions of international tax planning by multinationals which could affect countries in different ways depending on whether they are capital importing or capital exporting countries. South Africa falls in both positions so there are some action items relevant to the country from the perspective of being a capital importing country and capital exporting country. Most action plans have an implication on South Africa, due to a range of issues that have to be dealt with being a country that portrays aspects of being a developing and developed country. There was a need for a balance in the way in which the BEPS action plans are approached. It was important to encourage the competitiveness of the economy as well as ensure that there is no base erosion taking place. The detailed recommendations regarding the action plans can be accessed in the DTC report. A number of recommendations were taken on by National Treasury and SARS. For example, there is a recommendation about a provision that was resulting in South Africa eroding its tax base. It was recommended that the provision be withdrawn and it was actually withdrawn in the 2015 taxation laws amendments with effect from 1 January 2016 and instead there is a tax rebate for taxpayers. Recommendations on modified income tax returns were made so that it provided proper indicators about the curtailing of BEPS and this was taken on board as was a recommendation about expanding and up-skilling the SARS Transfer Pricing Unit. There were also recommendations on country-by-country reporting legislation which was also adopted.
Judge Dennis noted a carbon tax report was submitted to the Minister on 29 October 2015 based on forty five submissions, the report was then released on DTC website and drew six sets of public comments. National Treasury published the Draft Carbon Tax Bill in November 2015 subsequent to the DTC report. Treasury’s Carbon Tax Policy paper provides no detail on revenue to be expected from carbon tax as proposed. Treasury subsequently mentioned R13.7 billion per annum which would be recycled back into the economy. DTC is of the view that carbon tax is not yet ready for implementation and is aware of the impact of a delay in its introduction with its laudable objectives. It may be better to initially introduce tax with zero liability in order to ensure that problems of reporting will be addressed. This will then permit rigorous modelling to be undertaken to test, in particular, the potentially regressive effects and recycling options as well as implications for employment and the concomitant development of solutions to circumvent these potential problems.
The study on estate duty has been a fascinating exercise. There were three options: scrap estate duty and rely on Capital Gains Tax (CGT); refine the system; and implement a wealth tax. The government asked DTC as a result of deliberations to look into wealth tax. The question was what is to be done in the interim. There was a view that there is a huge distinction between CGT and estate duty. CGT in DTC’s view is a deferred income tax. One gets a gain, and when the gain actually actualises, the tax is paid thereafter. The economic evidence universally recognises CGT as an income tax on a deferred basis. Estate duty at present is also a capital tax, DTC’s view is that estate duty should in fact be enhanced. The view is based on the grounds that estate duty will raise some additional money, more than it does at present. At present there is no reason to pay any estate duty because it is to circumvent. A country with a Gini-coefficient as it is and the unequal balances, there has to be some tax on the accumulation of wealth. It seems wrong in principle not to have it. The notion is that middle class persons should not be punished and are those who pay a lot of taxes in any event. They do not have dividend flows and big capital gains and so forth and yet they pay significant taxes. Inter-spouse abatement; if everything is bequeathed to a spouse, there is no estate duty paid on everything bequeathed and this has created a huge amount of tax planning opportunities for people and erosion of the base. The view is that it should be ensured that the primary abatement is increased to R15 million and can be more. The whole idea was that the surviving spouse will get for instance R15 million, R15 million would in the context of South Africa mean that a decent house of R5 million will be totally free of any estate duty. There would be still R10 million free of estate duty and about R600 000 to R700 000 a year being earned on that. It protects people that perhaps need protection. What is shocking is that there were several emails from billionaires who objected strongly to the recommendation. It is about time that people, in a country like ours, start realising that there are burdens that have to be shouldered if citizenship is being exercised in a proper way. DTC suggests that the estate duty is increased to 25% of the dutiable value of an estate exceeding R30 million. There is a series of recommendations with regard to donations tax.
The focus on trusts is where estate duty is concerned. Most estate plans are done as follows: someone sets up an estate plan, takes a certain amount and gives it as a loan to a trust, the trust then invests the amount. The argument is that if there is continuation of control of the trust then it should belong to such a person. Other countries have used different techniques to do the same thing, to attack trusts where they are crudely being used to shield money which form part of the estate. It does not mean that DTC has fully dealt with the question relating to income tax and trusts. The recommendations are not fully complete, because DTC is awaiting SARS to provide the figures they have on trusts in order to see what is happening to income tax as far as trusts are concerned. In relation to income tax, where trusts are being ultimately used to income split, there has to be ways to deal with the issue more aggressively. At the same time, DTC is cognisant of looking at the question of trust in circumstances where trusts are legitimate to protect, for example, insolvent persons and children. DTC is in the process of significantly looking at the question of local trusts and discretionary trusts; there are detailed descriptions in the presentation. DTC is clear that the estate duty and the question of the donations tax to spouses as well as abatement should be implemented expeditiously and is of the belief that there would be more money there for the fiscus.
As far as wealth taxes are concerned, it is a tricky issue and controversial. A high proportion of South Africa’s wealth is held in retirement funds – about R3 trillion. The question is how to deal with the funds because there should be no disturbance of savings and aspects of ordinary people funds. In addition to views in the media, “populist economists” suggest that if there is a wealth tax, trillions can be accrued to the fiscus. DTC has serious doubts about that and the intention is to provide a sensible thought-out report in relation to wealth taxes. It is taking into account that transfer duty already yields about R8 billion and as indicated it is a form of wealth tax, therefore DTC is investigating the issue. DTC is of the view that estate duty should be strengthened until such time National Treasury agrees to variation or perhaps recommendations to be made to wealth tax.
Tax administration has really become a major issue and he is of the view that it is not the duty of DTC to deal with controversial issues that have hit the press. They have to be fully investigated. The job of DTC is to look at tax administration as a whole. In the 1990s the Katz Commission made an enquiry and set up SARS as an independent body. It was decided that SARS be taken out of Treasury. Part of the problem faced by the Katz Commission was that all of the tax revenue people were on the public administration books and therefore the salary structure of highly specialised people in the Revenue Service was governed by public administration. The Katz Commission found that there was a massive haemorrhaging of significant skills therefore it was suggested that SARS be an independent body. If so wished, pay more to get better skills and ensure that SARS is a first rate institution. It is fair to say SARS became a real jewel in our governance. The question is whether in the year 2016 the model still holds. Going forward, is the model operating at SARS promoting the needs of our economy and the principles of accountability, transparency, and integrity in the ways the Katz Commission thought it should? There have also been significant changes to the governance structure. In 2002 the SARS Act was changed to ensure that the appointment of the Commissioner was made by the President and not the Minister of Finance. Most lawyers think that if one has the power to appoint, therefore one has the power to dismiss, which is the President. The SARS Act in 1998 has a supervisory board to look over SARS and it is drawn from various sectors of South Africa’s civil society, apart from permanent members. In 2002 it was significantly altered and the overall supervisory body no longer continues to exist. DTC is of the view that the way in which other Commissioners are appointed should be looked at. For example, in Australia there is a body of taxation which is an independent body and looks at the activities and reports to the Minister and Parliament. DTC is looking at best international practice. DTC is also looking at the current operating model. DTC wants to know if in fact all the BEPS recommendations by Prof Oguttu can be implemented. If money is being lost, the question is whether the recommendations made can be implemented. DTC intends to engage with SARS on whether its operating model can fulfil its duties as it should be done, according to the recommendations. DTC is also keen on looking at the question of high net worth individuals. The Commissioner has in fact mentioned that they are particularly interested in a specialised investigative unit with regards to high net worth individuals. Similarly, DTC wants to look if IFFs, as mentioned by Prof Oguttu, are entirely different from the question of transfer pricing. Therefore there is a need to know how SARS is coping with these questions and if its operating model meets the standards compatible with best international practice.
Mr Thabo Legwaila, Head of Tax: Africa (Citibank) and part of DTC, added that DTC had considered over the past few months the fact that there is a lot that needs to be researched about taxpayer morality and compliance. DTC had discovered that there is a lot of discontent amongst South African taxpayers with regards to their relationship with SARS, usage of tax money, interaction with SARS in general and the perceived powers SARS has that are not well balanced with taxpayers’ activities and rights. There has been consideration that there have been a number of cases where taxpayers believe that SARS has too much power to the detriment of the taxpayer. The DTC Secretariat and Mr Legwaila attended a taxpayer rights conference in Washington in 2015, where there were discussions with tax authorities and taxpayers. It was found that the rights of the taxpayer have to be embellished. There is an Office of the Tax Ombud that ensures that the SARS processes and systems are applied appropriately in ensuring that the taxpayers are not disadvantaged. However, it was found that all over the world there is recognition of the fact that taxpayers’ rights need to be outlined and documented properly. DTC is doing a report on this and it is almost completed. It recommends that there needs to be a taxpayer bill of rights which is the new trend in the different countries. It has also been considered that the powers and the rights of the Tax Ombud need to be embellished in a way that would allow the ombud to go beyond the systems and look into aspects of the taxpayer and tax authority relationship. DTC also recommends a bit of assistance by the Tax Ombud in objecting to, defending and requesting further information on tax matters where the taxpayer might not be in agreement. The report will be aimed more towards one aspect that it is believed that when taxpayers know their rights, they are more willing to comply with tax authorities and feel less aggrieved.
Judge Dennis added that he is aware that Parliament and Standing Committee on Finance has been looking at the Special Voluntary Disclosure Programme which DTC recommended very strongly. DTC is convinced that there is a lot of money out there and it was perfectly clear that in a comparative study on Argentina and Indonesia, the special voluntary disclosure programmes they introduced have been successful. The programme has been successful because the world has become a smaller place and people are lot more nervous after disclosure of the Panama Papers.
The DTC is aware that the Minister has suggested that there is a need for an extra R28 billion for 2016/17 and of the view that this is possible to raise without damaging the economy. If the economy grows at about 5% every year, there would be enough tax. There is always the issue of the tax to GDP ratio, there is a lot of “nonsense” spoken about the concept and speaking about it with the authority of the World Bank and IMF. When the World Bank and IMF was approached on the appropriate ratio of tax to GDP for a country like South Africa, and they enquired on the type of country we want for South Africa. The notion behind the question is that, if one needs a State that will deal with infrastructure and public expenditure to reconstruct the society, there is a higher tax to GDP ratio than a country which already has its infrastructure running. There is no magic formula and the focus should be on what tax is used for.
The DTC does not consider increasing the VAT rate as a revenue-raising measure at this point. There needs to be a national debate on VAT because of the awareness that VAT has regressive implications. Several tax commissions have raised the legitimate point that the important question is what the money is used for. If the money goes back to the people who need it the most, then to some considerable extent it might be progressive rather than regressive. The reality is that there is no any other tax that can raise such a significant amount of money. If the VAT increment is introduced now, there will be a depressing short term effect on growth and this is not advisable with the present state of the economy. The suggestion is not that there can never be a VAT increment; the view is that the possibility of increasing VAT has to be looked into. Tax does not solve all problems. When increasing tax, economic growth and employment have to be taken into account as well as inequality. The wording of tax legislation can only be understood by a genius and this issue has to be looked into as well. The DTC is of the view that if there is a taxpayers’ bill of rights, accountability and one ensure that expenditure works well, it does facilitate the way in which the tax system can work better and people will feel more comfortable about paying significant sums of money.
Ms T Tobias (ANC) remarked that her interest is the role of the Ombud to look at issues that taxpayers have raised and the need to promote taxpayer morality, looking at the Katz mode and whether it is relevant in the current circumstances. Ms Tobias suggested that there needs to be a debate on the matter and to do checks and balances on whether the system is beyond reproach as well as compare notes with other systems. For example, the NDP was conceived solely on the basis that government needs outside stakeholders to have a share in shaping policies. The NDP is on the basis of the establishment of a committee of people not necessarily serving in government, to advise on policy matters. The issue of how SARS can remain a solid organisation needs to be looked into, given the past experience of unfortunate situations. The consideration of VAT as a source of income was raised when the Minister presented the MTBPS. It is a very difficult matter to engage in at the moment but she is of the belief that VAT can make a contribution. The Committee should look into the possibilities of the role VAT can play. She suggested Judge Dennis be invited to make presentations on wealth tax. As it stands, it has to be reviewed given that it will intrude on savings for retirement. If one is a South African working abroad, the retirement income will not be taxed.
Mr D Maynier (DA) remarked that in 2015 Judge Davis mentioned a tax revolt and expressed concern about it and the presentation notes that tax needs to be spent wisely and prudently and many people would think that this is not the case. He asked whether Judge Davis is still concerned about a tax revolt. In the presentation it appeared that at the request of the Minister there is a new investigative unit that has been launched. There is the project reviewing tax administration which traverses on the appointment of the Commissioner and possibly the division of powers between the Minister and the Commissioner. It means that there is a risk that DTC inserts itself into the bigger “civil war” in the country and asked is there is concern that it might compromise DTC and its other work. Mr Maynier said there was mention of sugar tax and whether it was served before the Committee or not. He said the presentation mentions that the DTC report on tertiary education is being submitted to the Minister. The whole Committee would agree that it would be in the public interest that the report, and not only the final report, be made public and that it also be served before the Presidential Commission of Inquiry into Higher Education and Training Funding.
Mr A Lees (DA) said that it is interesting that people benefit from the small businesses tax regime and it is not what it was intended for. The current Tax Laws Amendment Bill which will be passed makes sure that personal liability companies are now being included as per practice despite the law not aligning it since the regime was introduced. Perhaps that amendment should not be passed. The skills development levy (SDL) question is a valid issue as small businesses fail to access that money. He asked if the DTC has looked at the cost of SDLs and how much goes back to the people who pay the levies.
Mr Lees said that there is a difference between BEPS and IFFs. If one looks at BEPS and the amount of work going into international tax agreements surely in that sense it should be easy to identify where the potential movement of funds will take place. South Africa’s corporate tax is 28% and the UK is 42%, the money will not go to the UK on that basis. He asked if BEPS is easier to deal with than the IFFs. In terms of estate duty, the inter-spousal abatement surely is a temporary respite because the wealth moves from one spouse to the other, and when the surviving spouse dies the taxes are paid. He asked why this is such a big issue. The question of redeeming money to form part of the estate, moves the tax burden from the trust to the estate, therefore in the end the tax is now available at point of death and is not taxed in the trust. He asked why it is important for it to be brought in the estate rather than the tax revenue flow in the trust.
Mr S Buthelezi (ANC) commented that there is an issue with the Minister of Health about the sugar tax and the concern has always been that there is never consideration of what happens to the economy and how other industries are affected, especially in the context of job creation and employment. In respect of tax governance, Judge Davis is citing what is happening in Australia which is all well and good. The point is that in the choice of countries that are benchmarked, there is a default to the First World, and it is needless to say that their challenges are very different from South Africa. It is not necessarily anti-West, but it would make sense to also look into jurisdictions which are emerging economies, for example, look into Africa and see if there are better tax jurisdictions.
Ms P Kekana (ANC) remarked that for everything that confronts the country, particularly because the context for the sugar tax is for a healthier lifestyle, but there are other unintended consequences and she is of the view that a holistic view of the economy should be considered. It has been raised that the whole value chain will be affected by the sugar tax. There has to be a way to look into these things other than using tax as a solution. She is not entirely opposing the sugar tax, as she is worried about obesity and challenges that go with it but the broader economic issues have to be looked into.
Looking at the DTC comments on how South Africa has been dealing with BEPS, Ms Kekana said there was a debate by the Committee on BEPS and it was of the view that there are laws to deal with the issues but there was also the view that there are no laws equal to the task. She asked if South Africa’s laws are equal to the task, if there was a missing link and if the capacity of SARS and law enforcement units is able to deal with it.
Ms T Tobias (ANC) noted that she was interested in Judge Davis view on trusts. It is very common for everybody to avoid tax and trusts are vulnerable to being used for split income so that collection can be minimal. It is possible that over time the structure of trusts can lead to tax avoidance. In the context of how South African trusts are structured, she asked if it is a possibility that they can be used to avoid tax.
Ms Tobias noted the role of the Minister in the appointment of the Commissioner. In our system the appointment is made by a higher office but the accountability should be related to the Ministry, because the Minister deals with day to day running of entities of government. She asked Judge Davis how it should be shaped to empower the Minister to perform oversight responsibilities adequately without limitations.
Dr Dumisani Jantjies, Deputy Director: Finance, Parliamentary Budget Office, commented that there is a perceived protectionism in the global economy driven by countries like the UK with Brexit, USA, the French elections in May. The concerns of world institutions like the World Economic Forum, International Chamber of Commerce, United Nations Conference on Trade and Industry, is the meaning of this for recovery after the recent downturns. It has led to the resuscitation of the plurilateral agreement rather than multilateral agreements on international investments. South Africa has also been seen to be going inward-looking in regards to recent investment legislation. On BEPS, one of the concerns of the African countries is Action 6 by OECD on treaty abuse. It is a big issue for developing countries, particularly as most of them are mining extracting countries. The question is whether in dealing with treaty abuse, comfort is provided in perceived multilateral agreements on investments. The concern is how to address the tensions of the developed and developing countries in relation to rules around investments which do affect the economies.
On carbon tax, Dr Jantjies attended a workshop by National Treasury and there is consensus that it is a good move by South Africa to deal with environmental issues and so forth. The concern that came to the fore was policy coordination. There was a discussion on whether the approach is aligned to South Africa’s industrial policy and whether this can be clearly identified. Another issue raised was whether carbon tax can be potentially seen as a subsidy. When looking into the model, other industries would phase out and others phase in – which can be seen as subsidising other industries and seen as an issue according to the Agreement on Subsidies and Countervailing Measures. There was industry concern around the tax itself and uncertainties. There was a discussion on estate duty and the question was about the purpose of estate duty and its impact on the middle class because there seems to be a lot of uptake by the middle class which was not the intention of the estate duty. The argument is that it does not contribute to revenue that much compared to other tax instruments. In the carbon tax discussion the use of the revenue was raised, whether it would be recycled back into the economy or whether it is about plugging the hole in the budget. On the DTC report on higher education, he asked whether it is free for all or for those qualifying, and if it covers the full cost of study.
The Chairperson noted that National Treasury still has to process these matters and he is not certain on how much DTC can say until the matters are processed. The discussion should be ongoing and he is of the view that the Committee should meet with the DTC at least twice a year. The Committee is looking into ways of being more productive and yet also recognise that people must be free to speak. He is of the view that as the committee programme becomes more onerous, there has to be a balance between people raising a thousand questions and getting a hundred answers and also look at the structuring of the meetings. Of course, DTC needs to use the IMF and the World Bank because they have the expertise but they also have a certain perspective and he asked if there are no alternative agencies that can give views and also have the technical expertise.
The Chairperson was struck that DTC says VAT is effective and asked it to elaborate on the reasons. On the Border Management Authority, the two Ministers have met and are going towards some compromise. He asked if looking into BEPS was the mandate of DTC or it chose to do so. He enquired why DTC is not looking into IFFs as well. The Mbeki Report mentioned that over $50 billion is leaving the continent and he asked DTC to comment on the figure and its views on how IFF and BEPS is been tackled in South Africa and the categories of individuals when dealing with the BEPS report. One of the issues that came up is the so called “black tax”. Africans feel that the tax system is not sensitive to historical and cultural legacy issues, as they are beginning to enter classes they were historically excluded from and yet have all these taxes. The SARS governance issue came up and the SARS ‘rogue intelligence unit’ and he asked if there should be some governance structure or some board. It was raised that in the revenue service of other developing and developed countries, there is some sort of governance structure, even if the President appoints the Commissioner, whatever the law says, if the Commissioner should be answerable to the Minister that should be so. There are grey areas in this regard and surely there should be some sort of relationship between the Minister and the Commissioner that should be clarified in the law. In the media it is now reported that the new Commissioner has appointed a similar investigative unit which the Committee has to address at some point.
Judge Davis responded that DTC cannot speak about sugar tax because it was not its recommendation and had nothing to do with it. The tax caught him by surprise and they have real doubts about taxes that are supposed to change behaviour, particularly ones that are regressive. There are taxes on beer and cigarettes yet those are things that make working class life bearable and this leaves serious questions. He was not certain how much the sugar tax will bring in. It is clear that it brings in a lot of money because it is a regressive tax. He said he cannot answer the questions on sugar tax.
VAT has to be debated because it is the easiest source of revenue that is available but one has to be careful about the regressive effects. This is something that can be solved yet it is the reason for the idea that VAT is something that cannot be tampered with, and it is straining our tax system. A report will be produced and he would be interested in coming back often to the Committee to engage on these issues.
If there is a perception that money is not going to where it is designed to go, there will be problems of taxpayer behaviour. Taxpayers cannot be taken for granted. The greater the integrity throughout the system, the more likely there is greater tax morality. There is no doubt that if we were certain that the money would go to x, y, z, people would pay more. It is not for DTC to investigate particular questions, it is understood that the Commissioner has instituted some investigation into the Mr Makwakwa case and it is not for DTC to comment on. The DTC can get involved in questions of broad policy.
Matters like IFFs are very serious, DTC has interacted with the Mbeki Committee and made a presentation to the Committee and had serious engagements, however DTC cannot comment on whether the figures are accurate. One of the problems faced is that there are all sorts of figures, but there is no doubt that they are substantial. If that has been taken up, DTC should be able to ask the Commissioner about how he is dealing with the IFFs, if the model is good enough and can be applied properly. There is a lot in the public domain about the SARS rogue unit, but the truth is around the world they have special units to deal with IFFs, there is nothing illegal about it. The intention is to ensure that the DTC comes up with the best recommendations to deal with the broad principle questions.
The DTC should not only look at countries such as Australia and England; the point is taken seriously about broadening the scope. There are many countries in the world, for instance Australia, that have an independent body which provides information to the Minister and the Parliament so that there are layers of accountability, which is critical because if one looks at the various pieces of legislation that SARS administers, it has enormous powers. There is no reason why the principles of integrity, accountability and transparency should not be applied. He is quite certain that the DTC will provide precedents of developing countries.
It is not for DTC to publish its reports; the Minister has to do so. The DTC sat down after being concerned about funding of tertiary education and puzzled out what a solution would look like. It is not certain that R60 billion is the correct figure but it has to be around that figure taking into consideration, lodging, books and colleges as well. The DTC made a number of suggestions and will write to the Minister and put forward the suggestions.
The problem with trusts is that it is an income splitting device and all over the world people are worried. If one has an asset and knows that it will grow rapidly, transfer it to the trust before it grows. All the growth gets taken up in the trust, but if the trust is under the control of the person who transfers the asset, that person is getting away from estate duty while enjoying the fruits of the asset. The worry about spousal abatement is that if the usufruct is towards the surviving spouse then to the children, it saves a considerable amount of estate duty.
Wealth tax is currently under investigation, the study is done because if not, there will be no taxation on wealth at all.
In relation to SMMEs, it is worrying because when the DTC looked at who gets the benefit of the R1.36 billion, the company getting the benefit is not the ones generating jobs.
On carbon tax, the DTC was not initially certain of its effects but one has to be certain that the tax will not fall onto poor people. While looking at the model that was submitted, DTC could see what they are trying to suggest but the issue should be interrogated carefully before coming to final conclusions.
The IMF and the World Bank are not the only group that can be consulted; they are extraordinarily helpful on econometric models which give mathematical indication of certain aspects. It is very hard to find someone else who has the money and the expertise to do so.
When the report on VAT was finalised, the mathematical models done showed that our system is efficient using sophisticated economic models after obtaining information from National Treasury and SARS. The reason we get a good yield is because there is a narrow band of zero rating and a very narrow band of exemptions so there is one rate.
The DTC does not suggest that BEPS is more important than IFF, the point is that other countries have realised that we are in a different context. From a world perspective, the level of disclosure of IFFs is in a different space than it was in 2003. Frankly the money is needed and people have to be brought in.
The DTC dealt with the Minister Finance on border management, recommendations were made and DTC has not liaised with Home Affairs. The DTC view is that it should remain exactly as it is.
BEPS was part of the DTC mandate and BEPS was central to the agenda of most countries. Part of the problem is an international regime which is excluding the developed world. One of things that can be discussed is how as a BRICS country, one can institute debate in the broader world community about tax systems that in a sense are more advantageous to the developing world other than the developed countries.
There have been no submissions on the black tax and so he would prefer not to say much about it, although it would be interesting to engage on the issue.
The Chairperson remarked that there is a feeling that the people responsible for IFF are getting away with it and he would like to see people inside the court system to set an example. The Panama Papers process looks like it is slow, there has to be people in the court system. He asked if DTC has any proposals on what government can do. His colleagues in mining indicate that this is where a lot of BEPS occur. He asked if this is accurate or not and whether economies based on commodities are vulnerable to BEPS, more so than elsewhere.
Judge Davis agreed with Dr Jantjies that BEPS is to a large extent very much in the modern era linked to intellectual property and shifting of royalties to tax havens. Economies like ours which are extractive have a lot of shenanigans occurring. The understanding is that the Commissioner is very concerned about the issue. In the Panama Papers there were many South Africans there. How the issue is dealt with depends on the National Prosecuting Authority. In the Competition Commission, the Minister introduced legislation to deal with cartel behaviour, the same issues are arising there. The question is whether there is expertise to deal with this. If there is an intention to prosecute IFFs, there have to be prosecutors who have commercial expertise. The solution is to look at the NPA and get a targeted group to deal with the cases. This is an issue that should be debated.
The Chairperson noted that he needs ideas on what can be done to bring the parties together such as SAPS and the mining industry.
Ms Tobias remarked that the limitations when IFF takes place, is that the security cluster must be involved. The problem is that it is not certain whether the NPA has the expertise to pursue such cases. She was of the understanding that when it was said a special unit is to be set up within SARS, it was going to be a facilitation of process through legislation to empower SARS to do special investigations that relate to this. In the event that SARS believes it is an important case to pursue and the NPA believes it is not an important case, then the intended results will not be achieved. There has to be suggestions on how to strengthen the role of SARS without diluting it.
Judge Davis noted that he agrees with Ms Tobias. On tax administration, there have been engagements on how to strengthen the role of SARS and the intention is to engage further. The object of the DTC is to make SARS a better institution. It is correct that the institutions are linked because although there can be specialised unit within SARS, that investigation will eventually give rise to a prosecution. Therefore, it also has to be ensured that the NPA is able to prosecute the cases.
Prof Oguttu added that the convergence between BEPS and IFFs is a very important issue and is being addressed both nationally and internationally. The Panama Papers were disclosed and saw the likes of David Cameroon merely getting a slap on the wrist for estate planning and the Prime Minister of Iceland having to resign because of this. It is important to get a convergence between IFF and BEPS. As the international tax framework stands now, the two are different and the approaches to resolve the two are different as well. The DTC report did not shy away from addressing the IFFs. It is important to understand that the way the international fiscal framework stands right now, the two are different issues. The discussion on the convergence of the two has to be international, not issues that South Africa comes up with on its own because these are issues that take place internationally.
The problem at the United Nations level is that there has not been a universal agreement of what an IFF is, its boundaries and what it really covers. The insight is that it covers movement of money between countries in ways that contravene the laws and the regulations of the countries involved. It covers organised crime, money laundering, customs fraud, tax evasion, terrorist financing including bribery. Ultimately, the overarching activities are not recorded and cannot be used in public funds and are found in private investments. The issue around it is the secrecy involved and the secrecy comes into connection with BEPS. BEPS is multinationals using legal methods to circumvent the laws of the country involved including the lack of proper tax administration and the capacity to fully to assess international tax risks.
The OECD does acknowledge that even in BEPS there are cases of illegal abuse, although it is said that these are exceptions to the rule. When looking at the Panama Papers and all the secrecy involved, there are a lot of questions. The important thing to note is the secrecy involved and the secrecy behind it is the reason there are tax havens whereby people invest into those countries so that the domestic legislation will not be able to deal with it. It results into the blurring of the dividing line between illegal tax evasion and tax avoidance. Due to secrecy involved BEPS and IFFs impact on revenue collection. The overarching issue that should be dealt with is the flow of capital and whether it is illicit or not.
When dealing with IFFs one is looking at criminal prosecution and crime intelligence. The approach for dealing with the two differs in the current domestic and international fiscal framework. The work of the OECD has been to deal with BEPS that arise out of capital flight, because of the secrecy involved. The automatic exchange of information will be very helpful. Article 26 in double taxation treaties is supposed to encourage exchange of information between countries and it has been taken a step further and there is automatic exchange of information. There is legislation in South Africa that was enacted in 2015 to encourage automatic exchange of information. Where there is no treaty with a specific country, for example several tax havens do not sign double tax treaties; there are agreements on exchange of tax information. A multilateral agreement developed by OECD has opened for other countries to join which will assist in exposing these issues. There is also country by country reporting. One of the most important matters that falls within the purview of SARS on IFFs is tax evasion. If SARS picks up that it is tax evasion, the matter can be passed on for criminal investigation. If it is tax avoidance, there is legislation to deal with the matter. It has been the focus of DTC to look into the current legislation. South Africa actually has robust ways to deal with some of the BEPS issues, comparable to developed countries. It should not be forgotten that even if these are illicit issues, there is the special voluntary disclosure programme to deal with the secrecy involved. There are rules to regulate activities of tax practitioners and should not be forgotten that there are the centre of schemes that taxpayers get involved in. It is important to acknowledge the steps that have been taken, otherwise if the tax gap in South Africa is measured there will be thoughts that there are trillions of dollars and yet it is certain amount.
The question is whether the focus should be on BEPS or so much on IFFs. The domestic systems in South Africa are not perfect but are comparable. The biggest concern with the South African tax laws is that they are mixed up and create loopholes to manipulate the system. One of the major issues that SARS can deal with is customs fraud. This falls under IFFs and is where trade mispricing falls. Trade mispricing is an IFF issue and not a BEPS issue and is different from transfer pricing. There is a lot of misunderstanding, transfer pricing is not the same as trade mispricing. Trade mispricing is customs fraud whereby there is receipt and underpricing and this is a concern when it comes to commodities. Transfer pricing is a BEPS issue and deals with multinational pricing on goods and services they transfer between one another. If the issues are confused, one will get nowhere. The DTC BEPS reports create clarity on the issues. The way things are going there has to be a discussion at an international level and South Africa cannot take unilateral decisions. The BEPS report provides solid recommendations. OECD recommends that treaties as they stand right now cover tax evasion and prevention of double taxation. They do not deal with double non-taxation. The OECD recommends that the treaties should cover treaty shopping and limitation on benefits (LOB) provisions. There are double tax treaties on the one side then there are bilateral investment agreements on the other hand. South Africa has come up with a new policy that is reviewing the BITs. In the BITs there are arbitration provisions that taxpayers can get involved in and has created a way in which taxpayers can beat the system which is a major concern of developing countries. The concern for South Africa is the silos in the system. The national executive has to ensure that a treaty comes into effect. The Department of Trade and Industry, SARS and National Treasury have to deal with double taxation. Discussions are taking place to ensure that treaties are to the advantage of South Africa and there are several treaties being negotiated.
Mr Legwaila added that DTC has looked at SARS and its structure; the concern is that the work done will go to waste if SARS does not have enough human resources for administration. After looking at the numbers, SARS does not have sufficient skills and need embellishing. It is not only SARS that has a problem, tax authorities throughout the world have the same problem too. It is important that the integrity of SARS needs to be maintained and kept with all the powers that it has. For various reasons it has been found that the Border Management Agency cannot intervene in the powers of SARS.
Ms Tobias requested that the BEPS report be furnished and suggested that there is a joint meeting with the Portfolio Committees on Trade and Industry and International Relations to discuss treaty abuse and look at recommendations that can be made to bilateral investment treaties (BITs).
Judge Davis noted that the BEPS reports are on the DTC website.
Mr Ismail Momoniat, Head of Tax and Financial Sector Policy Division, Treasury, indicated that National Treasury does not always agree with DTC but it is the job of the DTC to provide independent advice.
The Chairperson dealt with housekeeping and thereafter adjourned the meeting.
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