Rates and Monetary Amounts Bill & sugary beverages tax; BEPS Multilateral Instrument: briefing

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Finance Standing Committee

23 May 2017
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

National Treasury presented the 2017 Draft Rates and Monetary Amounts and Amendment of the Revenue Laws Bill (the Rates Bill) before the Committee. The Rates Bill gives effect to the tax proposals announced by the former Minister of Finance in his Budget Speech. It deals with changes in tax rates and monetary thresholds, excise duties on alcoholic beverages and tobacco products, sugary beverages tax and SARS reporting requirements.

The Rates Bill proposes Personal Income Tax changes owing to revenue collection pressures due to low economic growth margins. A new top marginal rate and 1% bracket creep adjustment, including all rebates was proposed. An increase in dividends withholding tax rate from 15% to 29% was included. The amendment was intended to reduce the avoidance of the new top higher rate (taxpayers would re-characterise income as dividends). The dividend amendment became effective on date of announcement on 22 February 2017 to limit paying out dividends before the tax rate increase occurred.

Amendments were made to tax rates on inbound foreign dividends. Inbound foreign dividends received by South African residents from foreign companies are subject to tax in South Africa, subject to certain exclusions, for example, 10% or more shareholding in the foreign company. It was proposed that inbound foreign dividends be taxable at a maximum effective rate of 20%.

Treasury proposed changes in withholding tax on immovable property sales by non-residents. In order to align with the increased effective capital gains tax rate, it was proposed that the withholding tax on immovable property sales by non-residents be increased from 5% to 7.5% for individuals, 7.5% to 10% for companies and 10% to 15% for trusts.

Further proposals included in the Rates Bill are:
• Transfer duty relief; increasing the bottom threshold from which transfer duty is paid from R750 000 to R900 000 (at a cost to the fiscus of around R500 million).
• Monthly medical tax credit 6% increase, from R286 to R303 for the first two beneficiaries and from R194 to R204 for the remaining beneficiaries.
• Increase in annual limit for tax free savings accounts from R30 000 per annum to R33 000 per annum, with lifetime limit remaining unchanged.
• Expanded relief for employer-provided bursaries which would see an increase in the remuneration threshold from R400 000 to R600 000, and increases in the limit from R15 000 to R20 000 for qualifications up to NQF level 7 and from R40 000 to R60 000 for higher level qualifications.

The sugary beverages tax (SBT) proposal has been revised to take into account 144 comments received by Treasury as well as inputs during parliamentary hearings. Design changes based on public comments are:
• Introduction of a threshold, such that the first 4g/100ml is exempt (i.e. only sugar content above 4g/100ml will be taxable)
• Proposed SBT rate was lowered slightly from 2.29c/g to 2.1c/g.

Members asked about revenue projections for the sugary beverages tax (SBT) and if there were plans to ring-fence revenue from SBT. Treasury indicated that no revenue projections had been made because it was a challenge to make any forecasts at this stage. Industry projected R4 billion worth of tax revenue, but Treasury does not believe it would amount to that much. Also, ring-fencing would not be legislated but Treasury committed itself to making revenue from SBT available to the Department of Health and other affected stakeholders. The NEDLAC process on the SBT was not going smoothly. It was not a representative discussion as some stakeholders, notably trade unions, were not taking part. It was thus was becoming a limited discussion. Although Treasury was hoping for a speedy process, there were various players with every incentive to delay the process

The second discussion related to Base Erosion and Profit Shifting (BEPS) Multilateral Instrument. The Committee was expected to make comments in the near future, after the documents go through Cabinet. The ratification process was expected to happen at the end of 2017 or early 2018. The Parliamentary Budget Office (PBO) asked about the cost implications of the agreements and asked if Treasury had conducted research on the extent of tax base foregone as a result of the agreements, and how beneficial the protocols would be to South Africa as a developing country.
 

Meeting report

Rates and Monetary Amounts and Amendment of Revenue Laws Draft Bill, 2017: briefing
Mr Ismail Momoniat, Deputy Director-General: Tax and Financial Sector Policy, National Treasury, said the tax proposals were announced by the Minister of Finance in the 2017 Budget Speech. The Draft Bill was published for public comment on 22 February 2017 to deal with tax rates and threshold changes and urgent tax issues. Other more complex proposals were left for the Taxation Laws Amendment Bill (TLAB) and Tax Admin Laws Amendment Bill (TALAB), to be published as drafts for public comment in July. Tabling of the Rates Bill was expected to be in June, in expectation that it can be passed by July. The tabling of TLAB and TALAB was expected to be in October, and expected to be passed by end of November.

Raising taxes as indicated in the 2016 Budget Speech was to ensure the sustainability of SA’s public finances given its low economic growth. Revenues had gradually deteriorated through the 2016/17 fiscal year. Monthly revenues continually undershot the monthly forecasts through the year, widening to an over R35.5 billion shortfall by February 2017. The final outcome was slightly less than the projected shortfall of R30.4 billion at the time of the 2017 Budget Speech. The major contributors to the shortfall were personal and custom/import tax. Further, the tax to GDP ratio had declined slightly to 25.8%. It had increased steadily since 2009/10 but now showing some signs of decline. South Africa’s tax to GDP ratio is quite high compared to other African countries and is on the lower end compared to OECD countries.

The 2017 Rates Bill gives effect to the tax proposals announced by the Minister of Finance in the Budget Speech. It deals with changes in tax rates and monetary thresholds, excise duties on alcoholic beverages and tobacco products, sugary beverages tax and SARS reporting requirement. The Rates Bill proposes Personal Income Tax changes, because of revenue collection pressures due to low economic growth margins. He noted the announcement by the Minister of Finance that R28 billion additional revenue was required by Treasury. A new top marginal rate and 1% bracket creep adjustment, including all rebates was proposed. In comparison to other African countries, South Africa is in the top tier for personal income tax collection.

An increase in dividends withholding tax rate from 15% to 29% was included. The amendment was intended to reduce the avoidance of the new top marginal rate (since taxpayers might re-characterise income as dividends). The dividend amendment became effective on date of announcement on 22 February 2017 to limit paying out dividends before rate increase occurred. Also, amendments were made to tax rates on inbound foreign dividends. Inbound foreign dividends received by South African residents from foreign companies are subject to tax in South Africa, subject to certain exclusions, for example, 10% or more shareholding in the foreign company. Given the proposed increase of dividend withholding tax on domestic dividends, it was suggested that the exemption and rates for inbound foreign dividends be adjusted in line with the new rate. It was proposed that inbound foreign dividends be taxable at a maximum effective rate of 20%.

Treasury proposed changes in withholding tax on immovable property sales by non-residents. Generally, non-residents are liable to capital gains tax on the disposal of immovable property owned by non-residents in South Africa. In order to ensure compliance, a withholding tax is levied on the disposal of such immovable property by non-residents. This withholding tax is not a final tax but an advance payment of tax to be set off against normal tax liability of the non-resident. In order to align with the increased effective capital gains tax rate, it was proposed that the withholding tax on immovable property sales by non-residents be increased from 5% to 7.5% for individuals, 7.5% to 10% for companies and 10% to 15% for trusts.

Further proposals included in the Rates Bill are:
• Transfer duty relief; increasing the bottom threshold from which transfer duty is paid from R750 000 to R900 000 (at a cost to the fiscus of around R500 million).
• Monthly medical tax credit 6% increase, from R286 to R303 for the first two beneficiaries and from R194 to R204 for the remaining beneficiaries.
• Increase in annual limit for tax free savings accounts from R30 000 per annum to R33 000 per annum, with lifetime limit remaining unchanged.
• Expanded relief for employer-provided bursaries which would see an increase in the remuneration threshold from R400 000 to R600 000, and increases in the limit from R15 000 to R20 000 for qualifications up to NQF level 7 and from R40 000 to R60 000 for higher level qualifications.

Mr Mpho Legote, Director: VAT, Excise Duties and Sub-National Taxes, indicated that Treasury proposed changes in excise duties and fuel levy, with R5.1 million expected to be raised through increases in excise duties, the general fuel levy and environmental taxes. An increase of 30c/litre in the general fuel levy and 9c/litre in the Road Accident Fund (RAF) levy was proposed. Excise duty rates on alcoholic beverages were expected to increase between 6.1% and 9%, with excise duty rates on tobacco to increase between 8% and 9.5%. He pointed out that total tax (General + RAF) for petrol continues to decrease as a proportion of the petrol price, in spite of increases in general fuel levy and RAF. Diesel also saw a decrease in taxes as a proportion of price.

Mr Erwin Obermeyer, Treasury Specialist: Legislative Research and Development, outlined the proposed Sugary Beverage Tax (SBT) process. SBT was first proposed in the 2016 budget, followed by a discussion paper in July 2016 for public comment. The current revised SBT proposal took into account 144 comments received by Treasury as well as inputs during parliamentary hearings.

Design changes based on public comments are:
• Introduce threshold with first 4g/100ml is exempt (i.e. only sugar content above 4g/100ml will be taxable).
• Proposed SBT rate was lowered slightly from 2.29c/g to 2.1c/g.

The revised design tax lowers the tax compared to the initial proposal, increasing the price of a regular can of Coca-Cola by 46 cents and a 1 litre bottle by R1.39. He emphasized that SBT was the first step in the fight against obesity and its challenges. The idea was not to phase out sugary drinks such that people lose jobs.

Ms Lynn Moeng, Department of Health Chief Director: Health Promotion, said the Department of Health (DoH) was saddened by the proposed downward revision of SBT as it was a critical step towards tackling obesity. However, SBT was not the only intervention being mooted. DoH was looking into a host of population-based interventions, and there was need for resources to carry out effective awareness campaigns. It was also critical for industry to assist people in making healthy choices.

Discussions 
Mr B Topham (DA) commented that the proposed increase in dividends withholding tax rate would instill discipline in companies and ensure that they declare dividends every year. He asked if there was any evidence of tax refunds being held back by SARS.

Mr Dumisani Jantjies, Deputy Director: Public Benefit Organisation (PBO), identified the need for creativity in the administration of the Corporate Income Tax. Industry would have to be incentivized to bring about economic growth.

Mr D Maynier (DA) asked about the Corporate Income Tax rate of South Africa’s top ten trading partners. He emphasised the need for South Africa to remain competitive.

The Chairperson asked how Treasury and SARS  got the 2016/17 revenue collection targets so wrong. It was a separate issue that needed to be discussed to prevent misleading forecasts in future.

Mr Obermeyer replied that there was no evidence of tax refunds being held back. SARS would be in a better position to make a comprehensive comment on tax refund-related matters.
 
Mr A Lees (DA) asked about revenue projections for the sugary beverages tax (SBT). He was curious why Ms Moeng felt SBT would lead to additional resources for the Department of Health as there was no proposal to ring-fence revenue from the SBT. He agreed that SBT was a measure towards behavioural change. However, he felt the tax was being rushed instead of bringing in other interventions simultaneously, such as warning labelling on tobacco products among other measures. The idea that SBT on its own would have a meaningful impact on obesity was a little far-fetched. It was going to take a huge amount of other interventions and lifestyle changes. The bottom line was that SBT would have an impact on the economy. For Members to support the tax strictly on the basis of tackling obesity was a bridge too far.

Mr D Hanekom (ANC) said the job loss argument brought up against SBT, mainly by the sugary beverages industry, was not convincing. He pointed out that SBT would not only tackle obesity but diabetes as well; which is one of the non-communicable diseases on the increase. He asked what was being done to introduce other interventions such as compulsory labeling and health warnings. SBT would have a much greater effect if combined with other measures. Also, what was the nature of discussions within the National Economic Development and Labour Council (NEDLAC) on the SBT?

The Chairperson asked how SBT proposals would affect jobs and emerging sugar-cane farmers. Why did Treasury bring proposals without a socio-economic impact assessment? Bringing proposals without a socio-economic impact assessment compromised the credibility of proposals. Also, he pleaded with Treasury to carry out the NEDLAC process as expeditiously as possible. The Rates Bill would be expected to be passed after the NEDLAC process.

He commented that discussions around SBT and health concerns were pretty banal - those arguments were exhausted during public hearings. He asked if there was a possibility of ring-fencing a part of the revenue from SBT to cater for workers and cane-growers who could be affected by imposition of the tax.

Mr Momoniat agreed that SBT was not the only channel in tackling obesity, but was a big one. Scientific evidence was powerful and some countries had taken the SBT path. However, no revenue projections had been made because it was a challenge to make any forecasts at this stage. Industry had projected R4 billion worth of tax revenue, but Treasury does not believe it would amount to that much. Also, Treasury avoided making revenue projections initially as the debate could be lost if SBT was misconstrued as a purely revenue-generating initiative.

In response to the Chairperson, Mr Momoniat said Treasury conducted a socio-economic impact assessment, and estimated job loss figures suggested by SBT opponents were exaggerated and untrue. The NEDLAC process was not going smoothly as desired. It was not a representative discussion as some stakeholders, notably trade unions were not taking part. It thus was becoming a limited discussion. Although Treasury was hoping for a speedy process, there were various players with every incentive to delay the process.

On ring-fencing SBT revenue, Mr Momoniat said Treasury had committed itself to making funds available to the Department of Health, and affected stakeholders. However, ring-fencing would not be legislated.

Ms Moeng said there had been suggestions around putting health warnings on beverages, and it was an important element. Also, marketing and labeling regulations were being worked on and had to be fast-tracked.

Base Erosion and Profit Shifting (BEPS) Multilateral Instrument
Mr Lutando Mvovo, Director: International Tax Strategies, National Treasury, gave a background to the BEPS multilateral instrument process. On 5 October 2015, the OECD presented a final package of the BEPS measures, which went on to be endorsed by the G20 Finance Ministers on 8 October 2015. The implementation of the BEPS final package requires changes to the model tax conventions and double tax agreements (DTAs) based on the model conventions; it is estimated that there are between 2 500-3 600 DTAs concluded globally.
The Multilateral Instrument (MLI) was negotiated by an ad Hoc Group, set up in accordance with the BEPS Action 15 Report. The overall goal of the MLI was to swiftly implement the tax treaty-related BEPS measures as it would be burdensome and time-consuming to renegotiate each of the DTAs in order to incorporate tax treaty related BEPS measures. The MLI does not introduce new policy measures as the substance of the tax treaty related BEPS measures was already agreed upon as part of the final BEPS package under Actions 2, 6, 7 and 14 of the BEPS Action Plans. The MLI will not act as an amending treaty protocol but will apply alongside existing tax treaties, to implement and apply BEPS objectives and principles.
 
Ms Oshna Maharaj, Senior Manager: International Development, SARS, outlined the contents of the BEPS multilateral Instruments:

Action 2- Hybrid Mismatch Arrangements
Part II of Action 2 addresses income earned through transparent entities that are not treated as taxpayer, such as partnerships. It recommends the inclusion of a provision that ensures that the benefits of tax treaties are granted in appropriate cases to the income of these entities; and these benefits are granted where neither State treats, under its domestic law, the income of such entities as the income of one of its residents. South Africa will choose to apply this provision.

Action 6-Treaty Abuse
To deal with increased concerns that dual resident entities are involved in tax avoidance, Action 6 recommends that cases of dual residence under DTAs be resolved on a case-by-case basis. This tie-breaker rule replaces the current rule based on the place of effective management; over 20 of the South Africa’s 78 DTAs include the new tie-breaker clause. South Africa will adopt this provision.

Article 8 of the MLI- Dividend Transfer Transactions
Action 6 proposes a minimum holding period of 365 days before entities can benefit from a preferential rate of dividends, and the purpose is to avoid the manipulation of the preferential rate of dividends. South Africa will choose to apply this provision.

Action 7- Artificial Avoidance of Permanent Establishment Status
Artificial Avoidance of Permanent Establishment Status through Commissionaire Arrangements and Similar Strategies deals with an arrangement through which a person sells products in a country in its own name but on behalf of a foreign enterprise that is the owner of the products. South Africa entered a reservation on this Article.

Ms Maharaj indicated that South Africa will opt out of the Action 14 article on Mandatory Binding Arbitration within the context of the Convention. This is an optional part of the Convention and no notification of application was required. Lastly, overall review and monitoring process of the BEPS implementation of the minimum standard will take place within the context of the Inclusive Framework on BEPS Working Party 1 and Forum on Tax Administration (FTA).

Discussion
The Chairperson appreciated the presentation and asked what was required of the Committee.

Ms Mvovo replied that the Committee was expected to take part in the treaty ratification processes by making comments, after the documents go through Cabinet. The ratification process was expected towards the end of 2017 or early 2018.   

Mr Topham felt the presentation was ‘a complete waste of time’ as he failed to understand it.

Mr Jantjies commented about the cost implications of the agreements. He asked if Treasury had done some research on the extent of tax base foregone as a result of the agreements. What role did South Africa play in MLI negotiations? How beneficial would the protocols be to South Africa as a developing country?

Mr Mvovo replied to Mr Topham that Treasury understood the complexity of the agreements and had informal discussions with international tax experts who also had difficulties in understanding the instruments. The complexity was a result of the instruments seeking to incorporate global concerns from both developed and developing countries. The purpose of MLI was to amend existing treaties, particularly those that are BEPS related. He said that agreement with explanatory statements would be made available to Members. He said South Africa took tax base erosion seriously and instruments to defend South Africa’s tax base were in place.

Ms Maharaj added that the agreements were highly complex as they sought to amend bilateral agreements into multilateral agreements. A consolidated tax framework would be produced after the ratification processes, for robust tax administration by SARS.

The Chairperson advised Treasury to meet with Mr Jantjies and PBO for more in-depth discussions on the agreements.
 
The meeting was adjourned.
 

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