National Treasury and SARS briefed the Members on the two sets of Bills that were already voted on by the Standing Committee on Finance. The brief focused on the main amendments and issues raised during public comments. The main changes are: the Special Voluntary Disclosure Programme has been extended to 31 August 2017, the tyre levy changed for the purposes of complying with section 77 of the Constitution, the cap initially proposed for the employment tax incentive was removed, the learnership tax incentive was increased for NQF levels lower than 7 and decreased for higher levels. Amendments were also highlighted that aimed at anti-avoidance measures; targeting of tax avoidance by employee share schemes and BEPS. Due to the higher education funding crisis, the tax exemption for employee bursaries by employers increased from R250 000 to R400 000. The ruling process for taxpayers who cannot obtain complying VAT invoices from suppliers; tax deductions for mining companies building infrastructure for the benefit of mining communities; and the widening of the independence of the Tax Ombud are also amongst the key changes in the Bills.
The Chairperson noted they will be dealing with the four Revenue and Tax Law bills. On 24 August 2016 there was a briefing meeting on the Bills. In Chapter 4 of the Budget Review the Minister makes the point that over 22 years South Africa has had an efficient tax authority in the developing world. Former Minister of Finance, Mr Nene, said that if growth is not achieved, revenue will not increase. If revenue does not increase, expenditure cannot be expanded, then there is a challenge with the division of revenue. On Tuesday, National Treasury launched the 9th annual edition of the Tax Statistics. The publication indicated that the tax contribution from Small and Medium Enterprises was growing and contribution from larger companies decreased because of exposure to the global environment. The contribution of corporate tax amounts to 60% and comes from 325 large companies. The growth in tax collection since 2008 has been faster than the economic growth because of tax hikes and improved compliance.
The Chairperson requested that the issues raised by the Standing Committee on Finance whilst dealing with the four bills be explained and the responses thereof. The Standing Committee had five weeks to deal with the Bills and the Select Committee only has seven days to do so. The Committee is not there to rubber stamp the Bills and this is the reason that another date has been set besides 7 December 2016 for deliberations.
Mr Ismail Momoniat, Head of the Tax and Financial Sector Policy Division, National Treasury, said the difficulty when drafting the speech for the Deputy Minister is to remind people that the Bills voted on are from the February 2016 budget speech. There are two sets of Bills; the one set is rates and monetary matters and the other set are the tax laws. The Bills always come in a set of two because the Constitution defines what a Money Bill is and further states that the Money Bill cannot deal with any other substantial matters. Therefore, other substantial matters have to be in the Administration Bills. Although the Bills are split, one cannot read one without the other. The focus is on the Explanatory Memorandums which explain the Bills in plain English. The Rates Bills were published on Budget Day, therefore the suggestion is that after the budget process, at least within ten days, to have sessions to deal with the proposals.
2016 Rates and Monetary Amounts and Amendment of Revenue Laws Amendment Bill & Rates and Monetary Amounts and Amendment of Revenue Laws (Administration) Bill
Ms Yanga Mputa, Chief Director: Legal Tax Design, National Treasury, indicated that the Rates Bill deals with rates changes and for the year there was Special Voluntary Disclosure Programme (SVDP) hence there is an Administration Bill. The first draft Bill was released for public comment on 24 February 2016. A second version of the draft bill was released on 12 April 2016 and a third version on 20 July 2016. National Treasury and SARS briefed the Standing Committee of Finance (SCoF) on the revised draft Bills on the 17 August 2016. Public hearings were held by the SCoF on 30 August 2016. National Treasury and SARS briefed the Select Committee on Finance on the revised draft Bills and presented a draft response document to the SCoF on the 7 September 2016. The Bills were tabled by the Minister of Finance in Parliament on 26 October 2016. The SCoF voted on the Bills on 24 November 2016 and they were tabled in the National Assembly on 29 November 2016.
Mr Momoniat reminded the Committee that the Tax Bills are different because there is always publication of the draft Bills to take on board public comments and only tabled once the Bill is almost final.
Ms Mputa said that the Monetary Bill contains adjustments and for the year 2016 there is the SVDP. The adjustments are:
• Increase in the amounts of the bottom three personal income tax brackets
• Increase in the primary rebate for individuals
• Additional new top bracket for the transfer duty rate
• Increase in the value of medical tax credits
• Increase in the inclusion rate for capital gains tax
• Increase in the excise duties for alcohol and tobacco
• Introduction of an environmental levy on tyres
• Special Voluntary Disclosure Programme (SVDP).
The main discussions in the Rates Bill were on the SVDP and tyre levy.
Rates Bill: SVDP
The SVDP is meant to provide a further opportunity for non-compliant taxpayers who still have undisclosed assets abroad to voluntarily disclose their offshore assets and income before the new global Common Reporting Standard (CRS) takes effect from September 2017. One of the concerns raised is that it is too cumbersome and has to be simpler. The other concern was that the inclusion rate of 50% is too high and will limit the uptake. Based on the concerns raised, the proposed Bill that was tabled moves away from the need to calculate the seed capital and investment returns, as originally proposed and instead requires only one amount to be determined. Applicants would need to calculate the highest aggregate value of all their assets between 1 March 2010 and 28 February 2015 that were derived from undeclared income. The inclusion rate is 40% of the highest aggregate value, which will be included in taxable income and subject to tax in South Africa. Based on the comments received, there are also exemptions. There are certain taxes that will not form part of the SVDP: income tax, estate duty and donations tax. However the future income will not be exempt. VAT, skills development levy (SDL) and unemployment insurance fund will be excluded from the SDVP because they are not taxes on income.
Rates Bill: Tyre Levy
The Rates Bill introduces the tyre levy. The tyre levy is not a new levy because it used to be collected by means of a fee. It came to National Treasury’s attention that the fee falls under section 77 and is a levy and has to be collected through the tax process not charges. Section 77 of the Constitution says every levy charged should be done through a Money Bill. Treasury took the amount of the fee that was collected and this was then put under the Money Bill. The tyre levy will be collected via customs and excise tax. In the previous draft the collection was to be effective from 1 October 2016 but due to the delay in finalising the Bill, it was proposed to be 1 February 2017. During the comments stage, there was an concern about retreaded tyres so in order to address the issue, retreaded tyres will be exempt.
Rates Administration Bill
Mr Chris Axelson, Director: Personal Income Taxes and Savings, National Treasury, added that the Administration Bill is short and simple because of the existing machinery for the voluntary disclosure programme. The key is the period of application for the SVDP. The original proposal was for it to run from 1 October 2016 until 31 March 2017. It was criticised because originally the intention was to disclose all amounts not declared in the past and look at investment income earned as well. People said it is a huge amount of work and cannot be done in six months. It was simplified to look at the asset value at the end of the period, people still said it is a short period, so it was then revised to 30 June 2017. People were still uncomfortable, so the final version extends it to 31 August 2017.
The Chairperson enquired the reasons for the public asking for more time.
Mr Axelson responded that people are saying that it is complicated stuff and the money is offshore, it is quite expensive to get the records and the legislation has not yet been promulgated. The programme officially opened on 1 October and some people have applied and a lot of people will not apply until the law is in place. Realistically speaking, the law might come into effect in January 2017. The programme has lost the original three months of the window period so it is also one of the reasons the dates had to be pushed up. The other reason is the complexities that have been put on the table. The programme cannot go later than 31 August 2017 because the automatic exchange of information commences in September 2017. The Administration Bill also points out there will be no penalties for coming forward. SARS will not pursue criminal prosecution for a tax offence where an application for SVDP is successful. However if it is money obtained from, for example, drug dealing, one can still be prosecuted. The SCoF also proposed a formal reporting provision which is inserted.
Mr O Terblanche (DA) asked if there will be no increase in the tyre levy and if the amendment is just a change of process.
Ms Mputa responded that this was the correct assessment; previously it was a fee but falls under section 77 so it has to be done through the tax collection by the Minister of Finance under a Money Bill so it is being transferred to the Money Bill process.
The Chairperson asked if there is any progress on the sugar tax.
Ms Mputa responded that Treasury issued a paper on sugar tax and there were public consultations, so that is still in the process of public hearings and will be formalised through either the Excise or Income Act.
Mr F Essack (DA) enquired about the change of dates for individuals.
Mr Franz Tomasek, SARS Group Executive: Legislative, responded that the rates changes being made relate to the year of assessment ending February 2016. Individual tax runs from 1 March till the end of the year. There are different submission dates for filing returns, before there always used to be one date, but there was a change when e-filing came into the picture so there are now three dates. The first date is for people who are filing manually, then there is close of the season for people who e-file which is in November then provisional taxpayers are at the end of January.
2016 Taxation Laws Amendment Bill (TLAB) & Tax Administration Laws Amendment Bill (TALAB)
Ms Mputa noted that the Bill deals with administrative tax proposals. The Bills were published for public comment on 8 July 2016. National Treasury and SARS briefed the SCoF on 24 August 2016. On 14 September the SCoF held public hearings on the Bills. On 21 September 2016 National Treasury and SARS presented a draft response document to the SCoF containing a summary of responses to the comments received on the Bills. A second batch of the 2016 draft TLAB containing changes to the learnership tax incentive and employment tax incentive was published for public comment on 25 September 2016. National Treasury and SARS briefed the SCoF on the second batch on 11 October 2016. The 2016 TLAB and TALAB were tabled by the Minister in Parliament on 26 October 2016. On 9 November 2016, the SCoF held public hearings on the second batch. On 16 November 2016, a draft document containing a summary of responses to comments on the second batch was presented to the SCoF. The SCoF voted on the TLAB and TALAB on 24 November 2016 and they were debated in Parliament on 29 November 2016.
The key issues discussed in the TLAB were the employment tax incentive (ETI) and the learnership tax incentive (LTI).
Mr Axelson indicated that the ETI was introduced in January 2014. It was set to expire on 31 December 2016 and then a change has been made. It is the way incentive will be done going forth where a date is set and has to be reviewed to see if it is working since it is the use of taxpayers’ money. A review was done led by a task team, a number of research papers were put together and a breakdown of the claims from the incentive according to sector, age and size of firm. It was discussed and there was no full consensus agreement with NEDLAC, and it proposes an extension for two years so as to gather additional data. ETI is indeed creating employment for the youth and there are minimal negative consequences from the incentive. Businesses supported a two year extension and some parts of labour supported it but one part of labour disagreed that the incentive should be allowed to be claimed for labour brokers. The main issue was that National Treasury and government should restrict the incentive from labour brokers. There were long discussions with the SCoF and public hearings on the matter. Treasury’s position was that if there is a sector of employment that should not be incentivised then it should be targeted. There were discussions with COSATU on the matter and engagement is still ongoing. Treasury has been working with the Department of Labour which is of the view that labour relations legislation should be driven through the Department of Labour. The Department of Labour presented to the SCoF and agreed that if there are potential adverse outcomes they should be dealt with through labour legislation. The SCoF felt that there should be an extension.
There was a cap of R20 million on the incentive as National Treasury was worried about the fiscal effect. According to the research done, one could clearly see that there were job gains amongst smaller firms but was difficult to see job gains in the larger firms. The methodology used indicates that there is additional employment for smaller firms by comparing firms to each other. The smaller firms that took the incentive clearly showed that they created employment. Almost all the larger firms took the incentive and there was nobody to compare to and there were problems of sample sizes as well. The preliminary research does indicate that the ETI is having a positive impact. Due to the fact that there was no evidence that large firms are generating employment, it was strongly argued in the public hearings that if there is cap it would negatively impact on employment. If the cap was put into effect, then the large firms would get rid of jobs. It was then agreed to remove the cap.
Learnership Tax Incentive
This incentive was set to expire for learnership agreements that were entered into after 1 October 2016. If one had entered into a learnership agreement before 1 October and it extended past 1 October, the LTI can still be claimed. A review was done which was published on the National Treasury website. It shows that the LTI is creating a lot of opportunities for training. However, it was difficult to tell if the prospects of those individuals had improved over time. The LTI has improved skills development to drive employment forward. It was suggested that there be an extension of the learnership programme for another five years but the value of the incentive was slightly changed so as to use taxpayers’ money wisely. For individuals who have a qualification level of NQF level 7 and above, Treasury was of the view that such persons already have good qualifications and are likely to get employment and succeed in their careers. Therefore the value of the incentive has been decreased from R30 000 to R20 000 for those individuals. For individuals with NQF levels 1 to 6, the incentive value has been increased from R30 000 to R40 000.
The Chairperson enquired about the success rate since the implementation of the programme.
Mr Axelson responded in the report that can be provided to the Committee shows how much was claimed by the different types of firms and sectors. It is evident that the majority of the claims are in the finance, manufacturing and retail sectors which was costing around a billion per year. There is also a double up of the incentive if a learnership agreement is completed. The report shows the breakdown between learnership agreements where people were claiming each year and learnership agreements where agreements were actually being completed. The report shows those who have achieved an additional qualification/ certificate after completion.
National Treasury proposed an extension and it was welcomed by labour and businesses.
Ms Mputa indicated that the next issue on the TLAB is the alignment of tax charging provisions to enable the Minister of Finance to change the tax rates in all the Tax Acts. In the 2016 TLAB there are amendments whereby the Minister is allowed to change the tax rates in all the tax Acts administered by SARS. It makes provision for the rates announced by the Minister in the annual budget to apply from the effective date announced by the Minister subject to Parliament passing the legislation giving effect to that announcement within 12 months of that announcement. The proposed amendment is similar to the provisions available in the Income Tax Act and Customs and Excise Act. During the public hearings taxpayers and commentators wanted to check the constitutionality of the proposal and a legal opinion was obtained from the State Law Advisor which was submitted to the SCoF.
The TLAB also introduced measures to prevent tax avoidance through the use of trusts. The proposed amendment is an anti-avoidance measure aimed at limiting the avoidance of Estate Duty and Donations Tax through the use of interest free loans to a trust. Taxpayers transfer their wealth without paying estate duty and donations tax. In the earlier versions of the Bill the provision said that if an interest free loan is transferred to a trust, the interest forgone will be regarded as income. During the public hearings, the public commented that National Treasury is using the wrong instrument. Changes were made and the interest forgone will be regarded as a donation. The public also commented that there are many uses of a trust and not only for tax avoidance. Thereafter, taking into account the concerns raised, exemptions were introduced, for instance, trusts created solely for the benefit of minors and persons with disability.
The TLAB also introduced addressing the circumvention of rules dealing with employee based share incentive schemes. The provisions are not targeting broad based employee schemes but employee share schemes whereby if one is a director/CEO and have shares in the company and thereafter receive dividends. There will be shares in the company and those shares will never vest to an individual but receive dividends because dividends are taxed at a rate of 15% as opposed to income which is taxed at a rate of 41%. In the earlier version of the Bill, the provision said that any income received will be regarded as remuneration. During the public hearings, the comment was made that some of the schemes are not meant for anti-avoidance therefore the anti-avoidance measure should target the specific schemes. In the revised Bill some of the concerns raised during the public hearings will be addressed and the Bill will only target employee share schemes meant for anti-avoidance.
TLAB also addresses double non-taxation arising from cross border hybrid debt instruments. It was a proposal in chapter 4 of the Budget Review and goes with the base erosion and profit shifting (BEPS) issue. South Africa is part of the G20 and the OECD BEPS project. The legislation was there in 2013; taxpayers have created schemes where non-resident and resident dividends are characterised as interest so that the interest is tax deductible. It is looking closely at the issue because interest will be tax deductible and not taxable on the person receiving interest in another country. The measures will apply to South Africa residents only.
Tax treatment of long term insurers is still undergoing discussions since 2015. The amendment was introduced last year but Parliament said it should be further discussed. The new Insurance Act is changing the regulator for long term insurers and short term insurers. The reporting will change based on the new law. The new Insurance Act is not yet signed, therefore it gives more time to make the changes. On 9 November 2016 the Solvency Assessment and Management (SAM) Tax Task Group made presentations to the SCoF. On 14 November 2016 National Treasury and SARS met with stakeholders. It was discovered that the explanatory memorandum clarifies the issues in a simpler way. Parliament indicated that if there are to be technical changes, the meetings will take place in 2017.
TLAB provides relief for mining companies spending on infrastructure for the benefit of mining communities. It is being done because the requirements of the Mineral and Petroleum Resources Development Act makes it compulsory for mining companies to submit social and labour plans (SLPs). SLPs are aimed at assisting with the development of mining communities which typically involves a company agreeing to build infrastructure. The current tax provisions allow mining companies to deduct certain capital expenditure in equal amounts over a period of ten years only if that capital expenditure relates directly to employees and not the wider community. In order to further assist the mining companies, it is proposed that the current incentive on capital expenditure on infrastructure development be extended to cover infrastructure expenditure incurred for community development. In order to be eligible for tax deduction, the infrastructure should reflect what was agreed to between the mining company and the Department of Mineral Resources.
The SCoF requested that Treasury looks at employer bursaries for employees’ relatives. The Income Tax Act makes provision for tax exemption of all bona fide bursaries or scholarships granted by employers to employees’ qualifying relatives subject to certain monetary limits. There are monetary limits because it is a tax avoidance measure. The SCoF said because of the educational crisis in the country the limits should be reconsidered. The 2016 TLAB increases the monetary limit for qualifying employees from R250 000 to R400 000. The SCoF also suggested that the limit be increased but indicated that more research needs to be done. Income tax is progressive, the more money one has, the more tax is paid. The bursary amount for grade R to grade 12 was increased from R10 000 to R15 000 including NQF levels 1-4. Exempt bursaries or scholarships for NQF levels 5-10 increased from R30 000 to R40 000.
Tax Administration Laws Amendment Bill (TALAB)
Mr Tomasek indicated that the VAT system is when a supplier charges VAT and then deducts VAT paid to suppliers and pays the net amount over to SARS. It often happens that VAT is over paid and one receives a refund from SARS. Therefore, it is very important that the invoices that the supplier has are solid for purposes of SARS audits. There are strict requirements in the VAT Act on what the invoices should indicate. The problem is suppliers who do not meet the requirements therefore the input cannot be claimed. A rulings process has been created for alternative documentary proof that may be used as a last resort. There is a five year window period to claim a refund. Due to the interaction of the Tax Administration Act and the VAT Act, a question arose as to whether it applies to a late return. It was clarified that no refunds may be made in respect of a return that is submitted more than five years late.
Mineral and petroleum royalty payments
There is a system of provisional tax payments on mineral and petroleum resources royalties. The amendments effect alignment of the Fourth Schedule of the Income Tax Act. In the initial draft it was proposed that the final return be within six months after the end of the year. Mining companies were uncomfortable about this and pointed out that their tax returns only needs to be filed after every year, so it has been left as 12 months.
Independence and effectiveness of the Tax Ombud
Internationally there are two main models: the one associated with the revenue services and the other equivalent to the Public Protector’s office. The reason it is done is because the Tax Ombud is quite a small office and to have it standing on its own is a bit inefficient. South Africa follows the first model. The Tax Ombud has been operating for a couple of years. A number of amendments were proposed to make the Office of the Ombud more independent. It has been proposed that the tenure be extended from three to five years; the Ombud appoints staff directly in terms of the SARS Act; and office expenditure will be from a budget approved by the Minister. Currently the Ombud investigates systemic issues that have been complained about. The Ombud pointed out that sometimes they hear about matters that are not complained about. Thus the amendment is to the effect that the Ombud may investigate systemic issues at own initiative at the approval of the Minister or by request of a Minister. Taxpayers and SARS are to indicate reasons if Tax Ombud recommendations are not accepted.
Mr L Gaehler (UDM) commented that the VAT system has been destroying small businesses because sometimes they do not get their VAT declaration forms submitted in time. As a result, they have incurred penalties and enquire if there is any assistance that can be given to small businesses because some of them have major problems.
Mr Tomasek responded that there was a slightly different system which was not rulings based. People are penalised because VAT is being claimed even though there is no invoice. It is a bit difficult to assist them but it is possible going forward as long as they get the ruling.
The Chairperson adjourned the meeting and dealt with housekeeping.
- Taxation Laws Amendment Bill: A version
- Taxation Laws Amendment Bill: B version
- Rates & Monetary Amounts Amendment of Revenue Laws (Administration) Bill: A version
- Rates & Monetary Amounts Amendment of Revenue Laws (Administration) Bill: B version
- Rates & Monetary Amounts & Amendment of Revenue Laws & Administration Bills briefing
- Taxation Laws & Tax Administration Laws Amendment Bills briefing