Rates and Monetary Amounts Bill: Treasury response to non-Health Promotion Levy submissions

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Finance Standing Committee

14 June 2017
Chairperson: Acting Chairperson: Ms T Tobias (ANC)
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Meeting Summary

National Treasury gave a briefing on comments to the 2017 Rates and Monetary Amounts and Amendment of Revenue Laws Draft Bill, received during public hearings. The Bill was first released for public comment on 22 February 2017 which was Budget Speech day. National Treasury and SARS briefed the Committee on the Bill on 23 May 2017, and public comments to the Committee were presented at hearings that were held on 31 May and 6 June 2017. Other than the numerous submissions on the proposed Health Promotion Levy, four submissions addressed other parts of the Bill (three presented orally). Their comments focused on:
• Increase in the Dividends Tax rate;
• Tax rates and monetary thresholds, in particular those relating to –
- Increasing the annual limit for the tax free savings account; and
- Increasing the fringe benefit exemption threshold for employer provided bursaries;
• SARS reporting requirements;
• Enabling better public consultations.

The submissions stated that National Treasury should be offering a favourable Dividends Tax (DT) rate regime for small businesses to ensure that it becomes more favourable to start a small business rather than simply taking up employment. Treasury did not accept this comment. While Treasury acknowledged the fact that tax has an impact on the returns to shareholders, the rate of taxation of dividends is not the long-run determinant of investment in enterprises. Investment is primarily determined by the profitability of the enterprise, and influenced by the dividend policy of the enterprise. Tax policy relief is a blunt instrument to use for incentivising focused business development.

The Committee received comments querying the rationale of the effective date of increase of the DT rate. Despite the fact that corporate South Africa embraced the DT rate increase, there were concerns about the lack of legal mandate under which DT rate increase had been achieved. Some stakeholders felt there exists no reason to implement a retrospective rate change and even less so, a retroactive rate increase as any avoidance concerns are speculative at best. Treasury did not accept the comment. Treasury explained that the tax liability for the DT is triggered when the dividend is paid to the shareholder. This implies that the new 20% DT rate would be triggered when dividends are paid to shareholders on or after 22 February 2017. The proposed increase in DT rate with effect from 22 February 2017 was not retroactive as it did not seek to tax dividends that were paid before 22 February 2017. The proposed increase can be viewed as retrospective only in that it was implemented before the legislation had actually been promulgated. However, other proposals in the Rates Draft Bill, such as changes to personal income taxes, can be characterised in the same manner.

Some stakeholders submitted that one reason given for the increase of DT rate was to address arbitrage opportunities for individuals who could pay themselves with dividends rather than salaries. The individual tax rates were only increased with effect from 1 March 2017 so increasing the DT Tax rate from 1 March 2017 would largely have addressed this risk. Treasury did not accept this submission. The primary risk that informed the immediate effective date of 22 February 2017 was the risk of accelerating dividend payments to benefit from the lower 15% rate that applied before the announcement. Treasury noted the rest of the comments and concerns.

Members supported the Dividends Tax rate increase as the rationale for an increase was strong. On the other hand, some were not convinced by the rationale for the date of the increase. The Chairperson indicated that Members had to ‘agree to disagree’ as the DT rate increase was done in line with global best practice.
 

Meeting report

National Treasury briefing
Ms Yanga Mputa, Chief Director: Legal Tax Design, National Treasury, indicated that the 2017 Draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill (Draft Rates Bill) was first released for public comment on 22 February 2017. National Treasury and SARS briefed the Committee on the Draft Rates Bill on 23 May 2017, and public comments to the Committee were presented at hearings that were held on 31 May and 6 June 2017. With regards to the proposed changes in the Draft Rates Bill (excluding proposed changes to the introduction of the Health Promotion Levy), Treasury and SARS received written comments from four commentators, three of which presented their responses orally during the public hearings.

The public comments raised on the Draft Rates Bill (excluding the Health Promotion Levy) focused on:
• Increase in the Dividends Tax rate;
• Tax rates and monetary thresholds, in particular those relating to –
- Increasing the annual limit for the tax free savings account; and
- Increasing the fringe benefit exemption threshold for employer provided bursaries;
• SARS reporting requirements;
• Enabling better public consultations.

Increase in the Dividends Tax rate
Mr Chris Axelson, Director: Personal Income Tax, National Treasury, said comments querying the policy rationale for the increase of the DT rate were received. It was submitted that National Treasury should be offering a favourable DT rate regime for small businesses to ensure that it becomes more favourable to start a small business rather than simply taking up employment.

Treasury did not accept this comment. While Treasury acknowledged the fact that tax has an impact on the returns to shareholders, the rate of taxation of dividends is not the long-run determinant of investment in enterprises. Investment is primarily determined by the profitability of the enterprise, and influenced by the dividend policy of the enterprise. Tax policy relief is a blunt instrument to use for incentivising focused business development. It has broad impact by design, and is therefore not a good instrument for limited intervention. The dividend withholding tax applies to dividends received by shareholders, and a carve-out for dividends received from a subset of companies would be inequitable.

Rationale for effective date of increase of Dividends Tax rate
The Committee received submissions querying the rationale of the effective date of increase of the DT rate. Despite the fact that corporate South Africa embraced the DT rate increase, there were concerns about the lack of legal mandate under which DT rate increase had been achieved. There existed no reason to implement a retrospective rate change and even less so, a retroactive rate increase as any avoidance concerns are speculative at best. It should be Treasury policy to adhere to the principle of prospective legislative amendments at all times, including rate changes, except in exceptional circumstances such as material tax evasion practices, which is not applicable in the current instance.

Treasury did not accept the submission. Mr Axelson explained that the tax liability for the DT is triggered when the dividend is paid to the shareholder. This implies that the new 20% DT rate would be triggered when dividends are paid to shareholders on or after 22 February 2017. The proposed increase in DT rate with effect from 22 February 2017 was not retroactive as it did not seek to tax dividends that were paid before 22 February 2017. The proposed increase can be viewed as retrospective only in that it was implemented before the legislation had actually been promulgated. However, other proposals in the Rates Draft Bill, such as changes to personal income taxes, can be characterised in the same manner.

He added that, all over the world, it was not uncommon for taxation measures to commence from the date of the budget announcement, rather than the date of a transaction or enactment of legislation. Generally, there is acceptance that amendments to tax legislation may apply retrospectively, where the government has made an announcement of its intention to introduce legislation with sufficient detail of the proposal and subsequent legislation providing for commencement with effect from the date of announcement.

Some stakeholders pointed out that a reason given for the DT rate increase was to address arbitrage opportunities for individuals who could pay themselves with dividends rather than salaries, yet the individual tax rates were increased only with effect from 1 March 2017. Therefore, increasing the Dividends Tax rate from 1 March 2017 would largely have addressed this risk.

Treasury did not accept this comment. The primary risk that informed the immediate effective date was the risk of accelerating dividend payments to benefit from the lower 15% rate that applied before the tax announcement.

Practical implementation concerns of the DT rate increase
Mr Axelson noted that some stakeholders identified the need to be cognisant of the manner in which both industry and SARS are required to respond to an immediate tax rate change, with the attendant risk of errors for industry due to lack of adequate testing of systems. Consequently, Treasury should not resort to such immediate tax rate changes as a matter of policy and should rather entertain such a practice on an exceptional basis. Where such rate changes were necessary due to exceptional circumstances, it would be assumed that SARS have sufficient lead time to ensure that they can practically consider and resolve implementation challenges.

Treasury noted the comment. Treasury and SARS had considered and discussed the practical implementation of the proposal before and after the announcement by the Minister in order for SARS to be ready to administer the increased DT rate. The first dividends tax returns to be submitted with the new 20% rate were due by 31 March 2017 and payment of dividends tax for February 2017 was also due only on 31 March 2017. SARS updated the dividends tax return and its systems on 10 March 2017, in time for the 31 March due date for the submission of returns and payment of dividends tax that included dividends tax on dividend payments from the 22 February Budget Speech date to the end of February. Dividends Tax information on the SARS website was updated on 24 February 2017 to reflect the Budget Speech announcement.

Treasury noted the rest of the comments from the four submissions (see document).  

Discussions
Mr D Hanekom (ANC) commented that Treasury’s responses to the submissions were helpful. He supported the DT rate increase to 20% for a start. The rationale for a DT increase was strong. Also, the basis for applying rate changes from the time of announcement was well reasoned, and the rule applied to other forms of taxes as well. Was there any overarching legislation that could clearly provide for effecting a Rates Bill upon announcement, to avoid such contestation in the future?

Ms Mputa replied that Treasury strives towards making taxes simple and certain. In response to Mr Hanekom, she said there currently was no overarching legislation; and to not have proposed such was an oversight on the part of Treasury. She added that legislation is allowed to be retrospective if it addresses arbitrage as a loophole.

Mr A Lees (DA) was not convinced by the rationale for the date of the DT rate increase.

Ms T Tobias (ANC), Acting Chairperson, said political parties should find each other on tax related issues and revenue collection. It is the poor that suffer once revenue collection dampens. Treasury’s arguments were practical, not political. Members had to ‘agree to disagree’ on the rationale for the effective date of increase of the DT rate as it was in line with global best practice.

The Acting Chairperson, in closing, indicated that discussions on the other component of the Rates Bill – the Health Promotion Levy – would be on 21 June 2017.

The meeting was adjourned.

 

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