Tax Administration Laws Amendment Draft Bill & Taxation Laws Amendment Draft Bill: briefing

Meeting report

Overview of tax process

Mr Ismail Momoniat, Head of Tax and Financial Sector Policy, National Treasury, told the Committee that the draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill (Rates Bill), published on Budget Day (22 February 2017), and the draft Taxation Laws Amendment Bill (TLAB) and Tax Administration Laws Amendment Bill (TALAB) published on 19 July 2017, give effect to the tax proposals announced in the Budget. The two bills contain more complex, technical and administrative tax proposals. The draft tax bills had been published for public comment and the Committee would convene public hearings prior to their formal introduction in Parliament. A response document would then be presented around September/October, after which the above draft bills would be revised, taking into account public comments.

Ms Yanga Mputa, Chief Director: Tax Policy, National Treasury, referred to the aligning of tax provisions that would enable the Minister of Finance to change withholding tax rates in all the tax Acts. She pointed out

that even though in most countries -- including South Africa -- most rates and threshold changes took place on the day of the announcement and began to be implemented before the tax laws were enacted, which was about ten months after the announcement. Treasury proposed that the withholding tax rates announced by the Minister in the Budget should apply from the effective date of announcement, subject to Parliament passing the legislation giving effect to that announcement within 12 months of that announcement. The proposed amendment was similar to the provisions available in the Customs and Excise Act.

Discussion

Mr A Lees (DA) asked about the withholding tax. Was implementation prior to Parliament’s approval legal? What were the implications of implementation? Was it going to be backdated?

Ms Mputa replied that implementation of the withholding tax prior to Parliament’s approval was not illegal. The intention was to codify it into the law.  

Personal Income Tax

Clause 14 of the Draft Bill (Section 10(1) (o) (ii) of the Act) - Repeal of foreign employment income exemption

Mr Chris Axelson, ‎Director: Personal Income Tax and Saving, National Treasury, said that South Africa had moved to residence-based income tax in 2001. South African tax residents were therefore taxed on their worldwide income. Since 2001, South Africa had extended coverage of Double Tax Agreements (DTAs) – which assigned taxing rights to “source” and “residence” jurisdictions and eliminated double taxation. However, if residence states imposed tax on the same income, it was required to provide relief from double taxation by way of a foreign tax credit or exemption. The exemption created circumstances of double non-taxation, where no (or very little) tax was applied in the foreign country and no tax was applied in South Africa. It was a significant departure from the residence-based principle of taxation. Treasury proposed that the current section 10(1) (o) (ii) exemption be repealed. As a result, all South African tax residents would be subject to tax on foreign employment income earned in respect of services rendered outside South Africa, with relief from foreign taxes paid on the income under section 6quat of the Act.

Clauses 95-100 of the Draft Bill (Part II of the Act) - Tax relief for bargaining councils regarding tax non-compliance

Ms Mputa said it had come to government’s attention that some bargaining councils had not been deducting Pay-As-You-Earn (PAYE) from a large number of members for holiday, sick leave and end of the year payments. Others had also not been paying income tax in respect of the growth/returns generated from the financial investments of the bargaining council. The bargaining councils’ non-compliance with tax legislation potentially extended back a number of decades. Based on the consultation process with the Department of Labour, most of these bargaining councils would be at risk of closure or would suffer severe financial distress if high penalties and interest were imposed for non-compliance. Given the unique circumstances of this case, the 2017 draft TLAB proposed the following degree of relief for Bargaining Councils:

• Non-compliant bargaining councils will be required to pay a levy of 10% of the total PAYE that should have been deducted from all payments made to their members between 1 March 2012 and 28 February 2017;
• Non-compliant bargaining councils will be required to pay a levy of 10% of the total untaxed investment income between the aforementioned period.

The relief would apply in respect of the five-year period, starting from 1 March 2012 to 28 February 2017. The five-year period was linked to the period for recordkeeping requirements in terms of the Tax Administration Act. Non-compliant bargaining councils were also expected to submit a return and pay the levy to the South African Revenue Service (SARS) on or before 1 September 2018 to benefit from the relief. Also, relief did not apply if the bargaining council complied with employees’ tax withholding obligations, if tax was assessed by SARS before 23 February 2017, or tax was paid for the period 1 March 2012 to 28 February 2017.

Discussion

Mr Lees asked which bargaining councils were involved in the said non-compliance.

Ms Mputa replied that non-compliant bargaining councils would be identified as they came forward. There were about 40 bargaining councils and the non-compliant ones were yet to be determined.

Clause 4 of the Draft Bill (Section 7C of the Act) - Refinement of measures to prevent tax avoidance through the use of trusts

Mr Axelson said that in 2016, an anti-avoidance measure aimed at curbing the transfer of assets to trusts through the use of low or interest-free loans, had been introduced in the Act. This anti-avoidance measure had deemed the benefit received by a trust of paying interest in respect of low interest or interest-free loans at a rate lower than the official rate of interest, to be a donation that was subject to donations tax, at a rate of 20%. However, it had come to the government’s attention that taxpayers had already devised schemes to attempt to circumvent this anti-avoidance measure by making low interest or interest-free loans to a company held by a trust that was a connected person in relation to the company. In order to counter this abuse, the 2017 draft TLAB had made provision for the scope of this anti-avoidance measure to be extended to cover interest-free or low interest loans made to a company-connected person in relation to a trust.

In view of the fact that this anti-avoidance measure intended to close a loophole created as a result of the 2016 tax amendments, Treasury proposed that this provision should come into operation at the date of the publication of the 2017 draft TLAB for public comment. In addition, Treasury proposed that employee share scheme trusts should be excluded from the application of this anti-avoidance measure, as they were not set up for estate planning purposes.

Clauses 72 & 73 of the Draft Bill (Sections 8C and 8C (1A), paragraphs 64E, 80 and 80(2A) of the Eighth Schedule to the Act) - Clarifying rules relating to the taxation of employee-based share schemes

In 2016, changes had been made in the Act to introduce anti-avoidance measures preventing taxpayers from disguising high salaries through the use of restricted shares or share-based incentive schemes, which had given rise to dividends which were taxed at lower rates of 20%, instead of a salary taxed at the then higher rate of 41%. The 2017 draft TLAB proposed to clarify the interaction of the above-mentioned provisions by inserting a new paragraph 64E of the Eighth Schedule, which made provision for amounts included in an employee’s taxable income in terms of the anti-avoidance provisions of section 8C(1A).

Clause 14 of the Draft Bill (Section 10(1) (q) of the Act) - Increase in thresholds for exemption of employer provided bursaries to learners with disabilities

In order to cater for the limited resources in the majority of schools in South Africa for facilities to properly accommodate learners with disabilities, Treasury proposed that a new exemption threshold for employer-provided bursaries in respect of learners with disabilities be introduced as follows:

• The monetary limit in respect of exempt bursaries for learners with disabilities be set at R30 000 per annum in the case of Grade R to 12, including qualifications in the National Qualifications Framework (NQF) levels one to four;
• The monetary limit in respect of exempt bursaries for learners with disabilities be set at R90 000 per annum in the case of qualifications at NQF levels 5 to 10.

Discussion

Mr Lees agreed that people with disabilities had greater financial barriers to attaining education. However, how was the disability exemption going to work in practical terms? The degree of disability should be taken into account.

Mr Axelson said the Income Tax Act definitions of disability would be used in this particular instance. Distinctions on the degree of disabilities had not been determined.

Clauses 1, 61 and 64 of the Draft Bill (Section 1 and paragraphs 2 and 7 of the Second Schedule to the Act) - Preservation of retirement benefits after reaching normal retirement date

Mr Axelson indicated that from 2014, members of retirement funds were allowed to postpone ‘retirement’ by keeping their benefits within their funds past the ‘normal retirement age,’ subject to the rules and regulations of each individual fund. This helped members who were able to continue work, or support themselves alternatively, to preserve their benefits as long as possible. While members may retain benefits within respective funds, they may no longer make contributions to those funds – or transfer the funds.

Treasury proposed that employees be allowed to transfer their benefits into a retirement annuity fund for later consumption. Transfers to preservation funds were not currently included in the proposal, since it could result in the withdrawal of all the benefits in a lump sum, rather than preservation, leading to additional complexities. The effective date of the proposal was 1 March 2018.

General Business Taxes

Clause 48 of the Draft Bill (Section 36 of the Act) - Addressing the tax treatment of debt relief for the benefit of mining companies

Mr Axelson said the 2017 draft TLAB proposed that specific rules dealing with the tax treatment of debt that was reduced, cancelled, waived, forgiven or discharged, be introduced for mining companies. This would align the rules dealing with the treatment of debt-funded capital assets for mining companies, with the other tax rules applying in respect of other sectors.

Clauses 30, 31 and 68 of the Draft Bill (Sections 19, 19A, 19B and paragraph 12A of the Eighth Schedule to the Act) - Addressing the tax treatment of conversion of debt into equity and artificial repayment of debt

In order to assist companies in financial distress, the 2017 draft TLAB made provision for the conversion of debt into equity, provided that the debtor and the creditor were companies that formed part of the same group of companies. To ensure that this concession was not abused, Treasury proposed that any interest that was previously allowed as a deduction by the borrower in respect of that debt be recouped in the hands of the borrower, to the extent that such interest was not subject to normal tax in the hands of the creditor.

Clauses 33 and 70 of the Draft Bill (Section 22B and paragraph 43A of the Eighth Schedule to the Act) - Addressing tax avoidance involving share buy backs and dividend stripping

In order to curb the use of share buyback schemes, as well as circumvention of dividend stripping rules, the 2017 draft TLAB proposed that the current dividend stripping rules be broadened to also cover share buyback schemes. As a result, the dividend stripping rules would apply in the following circumstances:

• The person disposing of the shares in another company must be a resident company;
• The company disposing of the shares (together with connected persons in relation to that company) must hold at least 50% of the equity shares or voting rights in that other company, or at least 20% of the equity shares or voting rights in that other company if no other person holds the majority of the equity shares or voting rights; and
• An exempt dividend was received or accrued within 18 months prior to the disposal of the target company shares or an exempt dividend was received or accrued by reason of, or in consequence of, the disposal of the target company shares.

In view of the fact that this was an anti-avoidance measure aimed at preventing the erosion of the tax base, Treasury proposed that the provision should come into operation on the date of publication of the 2017 draft TLAB for public comment.

Clause 5 of the Draft Bill (Section 7D of the Act) - Interaction between the “in duplum” rule and the tax legislation

It had come to government’s attention that anti-avoidance provisions in the Act may be undermined on the basis of the “in duplum” rule applying to loan or funding arrangements. Some taxpayers may rely on the rule to distort the quantification of the tax benefit derived from a zero or low interest loan or funding arrangement between the connected persons. They argued that there was no tax benefit in respect of a period during which the “in duplum” rule applied, as no interest could accrue or be incurred during that period.

Treasury proposed that the Act be clarified so that the anti-avoidance rules for zero or low interest loans should apply, in spite of the application of the “in duplum” rule.

Taxation of Financial Institutions and Products

Clause 43 of the Draft Bill (Section 24JB of the Act) - Changes to the tax treatment of banks and financial institutions due to the introduction of IFRS9

Mr Franz Tomasek, Group Executive: Legislative Research and Development, SARS, said that in 2018, the financial reporting of financial assets and liabilities would no longer be governed by the International Accounting Standard 39 (IAS39), but by the International Financial Reporting Standard 9(IFRS9).

In order to take the accounting standard changes into account, the 2017 draft TLAB proposed to align the tax treatment of banks and some other financial institutions, as referred to in section 24JB, with IFRS9, subject to certain exceptions.

Tax Incentives

In order to encourage support of the UN agencies operating in South Africa, Treasury proposed that the Act be amended so that specified UN agencies operating in the country in terms of the UN-SA Strategic Cooperation Framework should qualify for tax-deductible donations in terms of section 18A of the Act.

Value added tax (VAT)

Clause 75 of the Draft Bill (Section 8 of the VAT Act) - VAT vendor status of municipalities

Ms Mputa said that the local government elections which took place on 3 August 2016 had resulted in structural changes, such as the disestablishment or merger of certain municipalities. As a result, the affected municipalities had either to cancel their VAT registrations or apply for new VAT registrations, and transfer assets where applicable. In order to address the unintended consequences as a result of structural changes to certain municipalities, Treasury proposed that transitional measures be made in the VAT Act.

Clauses 75, 76, 77 and 81 of the Draft Bill (Sections 8,9,10 and 18C of the VAT Act) - Clarifying the VAT treatment of leasehold improvements

Currently, the VAT Act did not provide guidelines in respect of the VAT treatment of leasehold improvements effected by the lessee to a leasehold property during the period of a lease agreement. The lack of clarity in the Act had led to inconsistencies in the VAT treatment. Therefore, Treasury proposed that amendments be made in the VAT Act to clarify that leasehold improvements by a lessee on leasehold property qualified as a taxable supply of goods to the lessor, subject to certain conditions.

Tax Administration Laws Amendment Bill (TALAB)

Mr Tomasek took the Committee through Tax Administration Laws Amendment Bill (TALAB) proposals.

Income Tax Act

To prevent practical difficulties, where interest payable by SARS accrued over more than one year of assessment, SARS proposed to mitigate administrative penalties for micro-businesses that had grown sufficiently to migrate into the small business corporation system (clause 4 of the Draft Bill: section 48C of Income Tax Act).

To facilitate and simplify the calculation and administration of employees’ tax, SARS proposed that only the portion of travel expenses reimbursed by an employer that exceeded the rate fixed by the Minister, be regarded as remuneration for PAYE purposes (clause 9 of Draft Bill: paragraph 1 of the Fourth Schedule).

To clarify the application of the annual cap on contributions to retirement funds, SARS proposed that R350 000 be spread over the tax year (clause 10 of the Draft Bill: paragraph 2 of Fourth Schedule). In addition, as ‘remuneration’ in the Fourth Schedule now included dividends, a proposal was made to have the person paying such remuneration to be considered an employer, and deduct PAYE in respect of dividends.

Tax Administration Act

To clarify transitional rules for the accrual and calculation of interest until Chapter 12 of the Tax Administration Act came into operation, SARS proposed that interest apply to income tax understatement penalties under the Tax Administration Act, in the same manner that interest applied to additional tax penalties under the tax acts (clause 32 of Draft Bill: section 270 of the Tax Administration Act).

In conclusion, SARS proposed that the Minister determine dates on which the relevant provisions came into operation per tax type (clause 33 of Draft Bill: section 272 of the Tax Administration Act), as a means to facilitate the phased implementation of the new interest scheme under Chapter 12 of the Tax Administration Act.

Update on NEDLAC process for Health Promotion Levy (HPL)

Mr Axelson said that Treasury had met with the National Economic Development and Labour Council (NEDLAC) secretariat on 11 July, as per the Committee’s recommendations. Both labour and government had given an indication of support for the proposed independent study. However, business had responded positively to the proposal only at the NEDLAC task team meeting on 4 August. Government had convened an interdepartmental committee comprising of Treasury, the Department of Agriculture, Forestry and Fisheries, as well as the Department of Trade and Industry, to develop a mitigation plan. The plan had been presented to NEDLAC and was currently under consideration. Government expected the task team process to be completed by 25 August, for submission to the NEDLAC chamber. There could be an agreement, but it seemed unlikely that independent research could be done within the timeframe required. Therefore, Treasury was proposing that the independent research be conducted after implementation of the HPL as part of an impact study and monitoring and evaluation exercise.

Mr Momoniat said there had been significant progress within NEDLAC. The NEDLAC process was very slow, as other parties had every incentive to delay any tax proposal from Treasury. He emphasised that when it came to any tax matter, government and Parliamentary timeframes should not be determined by the consultation process. Such processes could take forever if left to consultation. At some point, decisions had to be made. He agreed that bringing other departments within the NEDLAC taskforce had enabled stakeholders to come closer to reaching an agreement, although it had not yet been finalised.

The Acting Chairperson noted the conflicting interests within the HPL discourse, such as the health concerns and unintended consequences, such as job losses and its impact on the sugar industry. If both interests could find each other, that would be best. However, negotiations could not go on forever -- at some point decisions had to be made.

Mr Momoniat added that the envisaged mitigation plan answered a lot of questions about the economic effects of the tax. He expressed optimism that stakeholders would strike a compromise.

The meeting was adjourned.