Tax Administration Laws & Taxation Laws Amendment Draft Bills: public hearings

This premium content has been made freely available

Finance Standing Committee

29 August 2017
Chairperson: Mr Y Carrim (ANC)
Share this page:

Meeting Summary

The Committee held public hearings on the Tax Administration Laws Amendment Bill (TALAB) and the Tax Laws Amendment Bill (TLAB).

PricewaterhouseCoopers’ four main areas of concerns on the tax proposals were: repeal of foreign employment exemption, tax relief of bargaining councils, share buybacks and dividend stripping, and extending the application of controlled foreign company (CFC) rules to foreign companies held via foreign trusts and foundations rules. A repeal of the foreign employment exemption would result in a significant increase in compliance burden for taxpayers and administrative burden for the South African Revenue Service (SARS). Unintended consequences would include the financial implications for expatriates, emigration, capital flight and the competitiveness of South African business. It recommended that Treasury withdraw the proposal to repeal the foreign employment exemption pending a detailed review of the economic impact. PwC expressed concern with current avoidance rules as it felt the scope of application was too limited; 50% threshold was too high, and focus should rather be on the ability of the shareholder to significantly influence whether a dividend stripping transaction should be employed.

South African Institute of Tax Professionals (SAIT) said stakeholders believed this was not a good time to narrow tax relief for business rescue. The proposals would significantly increase the tax charge on debt relief despite the multiple government statements to the contrary. A general academic rule was that an indebted taxpayer is often subject to tax when the debt is cancelled (because the indebted taxpayer is supposedly enriched). However, the practical impact of the proposals was to slow the indebted taxpayer’s recovery to financial health. It urged the Committee to reject these proposals. SAIT emphasised the need for justice in tax administration. SAIT had come up with tax administration proposals but there was no workshop to present them or any formal feedback. Consultations were not as sufficient as they should be. SARS’ foreign tax mechanism was onerous. Even if one did everything correctly, taxpayers struggle two years to get their credit back. That meant a South African working overseas could be liable for paying 75% tax (in South Africa and in the country where he or she is working), and then wait a considerable time for the tax credit.

South African Institute of Chartered Accountants (SAICA) deplored the inadequate consultative processes by Treasury. There had been no consultation prior to the submission of the Bills to the Committee as stakeholder workshops were only scheduled for 4-5 September 2017. The standardisation of the residence basis of taxation and efforts to eliminate double non-taxation was welcome. However the current exemption was a pragmatic solution to an administratively complex alignment. SAICA recommended retaining the exemption but amending it to address the relevant concern of double non-taxation. On the proposal for tax relief of bargaining councils, SAICA acknowledged that providing tax amnesty was sometimes a necessary evil for the greater benefit of the fiscal system as a whole. However, to ensure that the public interest was served, such processes had always been of a general nature so as to not create a precedent that arbitrary tax relief would be tolerated for non-compliance to a select identified group.

South African Institute of Professional Accountants (SAIPA) expressed concern on the proposed tax relief for bargaining councils. It questioned why such relief was not available to all taxpayers, and why the current Voluntary Disclosure Programme (VDP) was not used to provide relief and opportunity to remedy compliance. This proposed relief was effectively an amnesty, and it was unclear how this amnesty would address the risk of repeat non-compliance in future. SAIPA agreed that amendment was required to extend the scope of the section 7C provisions to address avoidance. However, it expressed concern that the proposed amendment was overly broad and went beyond anti-avoidance. It proposed that the bona fide employer share incentive trusts exclusion be broader in scope to allow for exclusion of all bona fide transactions/structures, such as business trusts.

Banking Association of South Africa (BASA) expressed concern about proposed section 24J amendment to TALAB. Section 24J currently provided for an ‘alternative method’ as an alternative to the ‘yield-to-maturity method’. The premise for the proposed removal of ‘the alternative method’ was that GAAP was no longer applicable. Generally Accepted Accounting Principles (GAAP) had not been deleted, but merely replaced by International Financial Reporting Standards (IFRS). Therefore, this removal would have a significant impact on BASA members as it has been relied on to avoid minor discrepancies between tax and accounting. It would also lead to further divergence between tax and accounting, and will require significant system alterations. BASA proposed that the ‘alternative method’ be retained, but aligned to the use of IFRS instead of GAAP.

Capitec proposed amendments to achieve fair tax treatment for all covered persons (banks), mindful of the distinct difference between traditional banks and unsecured lenders. The proposals in their current form did not take into account the difference between covered persons operating in the unsecured lending market versus traditional banks. A different result was achieved for unsecured lenders such as Capitec as opposed to the traditional banks under IFRS 9 read with section 11(jA).

Law Society of South Africa emphasised that the legislature should steer clear of retrospective legislation as such creates additional uncertainty in an already uncertain tax system with the result that taxpayers are not able to properly plan their affairs for fear of retrospective amendments altering the anticipated tax position. An uncertain tax system was detrimental to investment in an economy.

Webber Wentzel supported the submissions by other organisations on CFC rules. It proposed that paragraph (b)(i) in the proposed definition of "controlled foreign company" and section 25(b) and (c) be deleted and that extensive research be conducted before its implementation. The reference to the use of trusts was also only in limited circumstances. More research into comparable jurisprudence ought to be done to ensure that should the CFC definition include trusts, the scope of such definition be limited to ensure that South African resident beneficiaries party to tax structures which are neither abusive nor tax driven, are not disadvantaged under the CFC rules. South African resident beneficiaries should not be in a worse position than if they had held the foreign shares directly.

Tax Consulting South Africa submitted on the proposed repeal of foreign employment income tax exemption. Such a significant change in policy should only be proceeded with once the full economic impact of it was properly considered and weighed against the policy reasons on the upside of this change. It requested for consideration on whether the proposal should not be more comprehensively weighed against international best practice as it was out of sync with the norm, and would place South Africa at a disadvantage.

South African Expatriates Tax Petition Group said the Budget announcement and release of the Bill proposing the repeal of Article 10, had resulted in a predominant sense of doom and gloom for South African expatriates. A lack of clear definitions of whom and how individuals would be affected by the repeal had generated confusion and fear resulting in anger and decisions being made which will not augur well for South Africa’s future.

Treasury said it had put considerable effort into the proposals. Treasury strongly contested the view that proposals were only unique to South Africa. The repeal on foreign employment income tax exemption was not an abnormal provision, and was applied in countries such as New Zealand and the UK. However, phasing-in would be considered as Treasury would not want to be draconian in its implementation. It was not its intention to scare people into surrendering their passports. He urged people to formalise their tax affairs.

Members noted that the proposal to repeal foreign employment income exemption was a major source of concern. Was there a way of dealing with double or non-taxation, and in the same vein take into account the costs of living variances and additional levies that might be imposed in different jurisdictions? They noted that most tax jurisdictions worldwide had a foreign income taxation policy in place as proposed by Treasury. Externalisation of funds and tax avoidance was rampant and therefore, in principle, Treasury’s proposal to repeal foreign employment income tax exemption had to be supported. All citizens needed to pay tax.

The Chairperson said consultative processes were key. He urged Treasury to consider concessions with stakeholders. Also, tax avoidance was a concern and the corporate sector was complicit in most instances. Treasury’s response to public comments was slated for 12 September. Treasury indicated that the main areas of contention were proposals on share buybacks, section 10(1) on repeal of the foreign income tax exemption, bargaining councils, CFCs and debt relief.

Meeting report

PricewaterhouseCoopers (PwC) submission
Mr Kyle Mandy, Tax Policy Leader: PwC, highlighted PwC’s four main areas of concerns on the tax proposals: repeal of foreign employment exemption, tax relief of bargaining councils, share buybacks and dividend stripping, and extending the application of controlled foreign company (CFC) rules to foreign companies held via foreign trusts and foundations rules. A repeal of foreign employment exemption would result in a significant increase in compliance burden for taxpayers and administrative burden for South African Revenue Services (SARS). Unintended consequences would include the financial implications for expatriates, emigration, capital flight and the competitiveness of South African business. In some cases, the repeal would result in effective double taxation as not all foreign “taxes” were creditable in South Africa. Also, the repeal ignored the significantly higher cost of living in almost all countries in which SA resident individuals seek employment.

Mr Mandy recommended that Treasury withdraw the proposal to repeal the foreign employment exemption pending a detailed review of the economic impact. Any full or partial repeal should be accompanied by mechanisms to alleviate the compliance burden and unintended consequences.

PwC expressed concern with current avoidance rules as it felt the scope of application was too limited; 50% threshold was too high, and focus should rather be on the ability of the shareholder to significantly influence whether a dividend stripping transaction should be employed. Furthermore, the proposal that all dividends paid within 18 months prior to the disposal be included in proceeds was far too broad as normal dividends that are paid in the ordinary course of business would be caught (even where there is no mischief involved). PwC recommended that the rules should apply only to “extraordinary” dividends, such as those contemplated in para 19 of the Eighth Schedule. The 18 month rule also applied to dividends paid before 19 July 2017. The rules should apply only to dividends paid on or after 19 July 2017. The proposals also applied to non-equity shares. However, dividends on such shares do not involve a value strip and should therefore not be a concern from a policy perspective.

PwC was supportive of the proposals for CFC rules to deal with foreign trusts/foundations in principle. However, there were significant problems with the draft provisions, these included: structures using foreign trusts/foundations to avoid the CFC rules are extremely rare in the context of multinational groups – such structures were more commonly used by SA resident individuals using foreign companies to make passive investments; there was no definition of an “interest in a trust”, and it was unclear what this meant, particularly in the context of a discretionary trust. The definition of a CFC in the context of foreign companies held by trusts did not stipulate the threshold for the level of interest in the trust that was required to be held by residents. Also, no rules were provided on how the participation rights of a beneficiary of a foreign trust in the CFC were to be determined. In a nutshell, the proposals gave rise to significant concerns of double taxation. The proposed manner of implementation of the policy required a complete rethink.

In addition, the tax relief for bargaining councils was effectively an “amnesty”. The proposal was some form of special treatment for certain taxpayers and extraordinarily generous, thus raising questions of equity and fairness. Also, the exemption was granted for periods in respect of which returns were not yet even due.

South African Institute of Tax Professionals (SAIT) submission
Mr Keith Engel, Chief Executive: SAIT, submitted that the Institute had extensively engaged stakeholders on the proposals. SAIT and stakeholders believed this was not a good time to narrow tax relief for business rescue. The proposals would significantly increase the tax charge on debt relief despite the multiple government statements to the contrary. A general academic rule was that an indebted taxpayer is often subject to tax when the debt is cancelled (because the indebted taxpayer is supposedly enriched). However, the practical impact of the proposals was to slow the indebted taxpayer’s recovery to financial health. He urged the Committee to reject these proposals.

SAIT said that the share buyback anti-avoidance proposal went too far. Dividends in the ordinary course as well as pure preference share dividends would be unfairly hit and taxed. Also, innocent redemptions and share buybacks were also caught up. He pointed out that banks do not cancel debt lightly. In severe circumstances, banks may cancel debt in exchange for the debtor’s shares in the hopes of revival. This conversion was previously tax-free, but the proposals imposed tax on the debtor, regardless of the share value vis-à-vis the debt. The proposals sought to deal with perceived avoidance. The Bill was aimed at share-value mismatches where the shares issued are over-valued. However, practically, only the perceived mismatch should trigger tax (like section 24BA). He asked if the mismatch was really such a problem if the value problem stemmed from insolvency.

In cases of intra-group business rescue in the form of intra-group debt cancellations, groups often cancel internal debt between group members to clean-up the internal books, especially during difficult economic times. This cancellation was previously tax-free, but the proposals on the Bill generally removed this treatment. This scenario was not liable to any abuse as the current rule eliminates the creditor loss as well as the potential debtor gain. Should the creditor pay the external expense directly, the creditor would have had the tax benefit. In essence, such transactions simply move the external expense (when the group should be perceived as a single economic unit). Therefore, the amendments needed to be reconsidered.

SAIT commented on new proposals to provide specific relief for distressed dormant group companies. The requirements for relief were excessive and will unnecessarily delay the cleaning up of groups. Also, the non-activity requirement was unrealistic as it may be breached by annual tax or regulatory compliance. The period of non-activity (at least three years) was unnecessarily long and unrealistic.
 
The proposal to regulate distributions received by South African resident beneficiaries from foreign trusts seemed to be aimed at family wealth even though this was not explicitly foreshadowed in the Budget Review.
The drafting appeared unintentionally wide, and would deter repatriation and violates participation exemption. A growing attack on wealth drives the wealth away. Business was being assaulted from all sides in tough economic times.

Ms Erika de Villiers, Head of Tax and Policy, SAIT, said there really was a need for justice in terms of tax administration. Her organisation had come up with tax administration proposals but there was no workshop to present them or any formal feedback. Consultations were not as sufficient as they should be. She pointed out that the SARS foreign tax mechanism is onerous. Even if one did everything correctly, taxpayers struggle two years to get their credit back. That meant a South African working overseas could be liable for paying 75% tax (in South Africa and in the country where he or she is working), and then wait a considerable time for the tax credit.

South African Institute of Chartered Accountants (SAICA) submission
Mr Pieter Faber, Senior Executive: Tax, SAICA, deplored the inadequate consultation process by Treasury. There had been no consultation prior to the submission of the Draft Bill to the Committee as the stakeholder workshops were scheduled only for 4 and 5 September 2017.

The standardisation of the residence basis of taxation and efforts to eliminate double non-taxation was welcome. However the current exemption was a pragmatic solution to an administratively complex alignment. SAICA recommended retaining the exemption but amending it to address the relevant concern of double non-taxation. Should the exemption be repealed as proposed, it noted the serious ramifications for both employees and employers in implementing such repeal without providing for any replacement regime that mitigates such negative ramifications. These include punitive negative tax cash flows for employees and significant cost of administration and doing business for employers.

On the proposal for bargaining councils, SAICA acknowledged that providing tax amnesty was sometimes a necessary evil for the greater benefit of the fiscal system as a whole. However, to ensure that the public interest was served, such processes had always been of a general nature so as to not create a precedent that arbitrary tax relief would be tolerated for non-compliance to a select identified group. The current proposal gave relief to two separate parties, namely partially tax exempt bargaining councils and also their employees. SAICA expressed concerned about the relief to the latter outside the current Fourth Schedule remedies. It recommended that the relief for the bargaining councils be separated from the relevant employees, who from the proposed relief seemed to have defrauded the fiscus by not declaring such income in their personal tax returns. Relief should be dealt with in terms of current measures or measures of broader application.

On relief for dormant group company debt waivers, SAICA welcomed the proposal which addresses a pragmatic problem experienced by the lack of alignment of the relief for group debt capital waivers with revenue waivers. However, the way Treasury proposed doing this alignment by defining a very restrictive concept of ‘dormant’ undermined the purpose of the proposal. SAICA recommended that the current capital relief provision be retained and that the principle just be extended to the revenue equivalent. If Treasury intended to refine the relief it would not have to do it in such a narrow manner that the provision loses the scope of its current relief.

On the share buybacks proposal, SAICA noted that Treasury was seeking to address avoidance in capital gains tax through the use of dividend tax provisions applicable to share buybacks. SAICA supported the principle-based proposal. Tainted dividends that should be addressed were those that are causally linked to the share sale. However, the proposal was not just principle-based but also rule-based, and the latter creates various anomalies that results in dividends that are not connected to the sale of shares being caught under the anti-avoidance provision. The broad scope of the rules also would result in instruments such as redeemable preference shares now be treated as within the scope of the proposal. SAICA recommended narrowing the scope of the rules-based test to avoid the relevant anomalies.

On relief for dormant group company debt waivers, SAICA requested that Treasury retain current para 12A(6)(d) and duplicate it in section 19 as current form was pragmatic and was used for other commercial situations other than for dormant companies. If current relief is not retained, then: time period of four years would be too long as companies will be forced to retain dormant companies for such period to qualify. Also, the restriction on asset transferral to or from the dormant company should be removed. The effective date was noted as 1 January 2018. SAICA recommended that it apply to debt reductions that occur on or after 1 January 2018.

South African Institute of Professional Accountants (SAIPA) submission
Ms Faith Ngwenya, SAIPA Technical and Standards Executive, supported the preservation of the tax base by avoiding circumstances of double non-taxation, and to limit opportunities for tax evasion. It also agreed with the intention to align with the world-wide tax treatment. However, it expressed a number of concerns. Although the proposed implementation date was 1 March 2019, there were legal, practical, and administrative issues that need to be addressed. On the proposal to repeal Section 10(1)(o)(ii) in the Income Tax Act on the foreign source remuneration exemption, the proposal would increase the compliance and administrative costs. While a tax credit could be available to avoid double taxation, the significant difference was that the foreign source remuneration would increase the taxpayer’s taxable income, and could significantly inflate the tax liability on other incomes and capital gains. The taxpayer’s foreign source remuneration may be greater than would have comparatively been earned in South Africa, but the cost of subsistence was generally also much greater. The effect of foreign exchange rates could further inflate the tax liability. The taxpayer would not get a deduction or credit for such subsistence costs (often in addition to the subsistence costs and financial burdens back in South Africa, where he/she still maintains a home and dependents). Where the taxpayer is employed by a South African employer, that taxpayer will be subject to tax in the source State and in South Africa (generally as employees’ tax), which meant that the taxpayer’s cash flow would be adversely impacted, and would increase the administrative burden and risks for SARS on assessment due to increased instances of refunds.

In addition, the increased instances of Treaty interpretation, supporting documentation required, and the added burden when filing and assessing taxes must be considered. Where the taxpayer is required to file provisional tax estimates, the taxpayer cannot merely rely on an exemption, but will now need to include the foreign source remuneration and estimated foreign tax credits. Due to the complexities, an increase in under estimation penalties and interest, and increase in disputes was anticipated. Some taxpayers may attempt to avoid the complexity and tax outcome, and to give effect to this, would retain their foreign sourced income and wealth offshore, which will be a pure loss to society.

The foreign tax credits available may not be sufficient to recognise the real taxation incurred by the taxpayer. The foreign tax credits would be limited to direct tax applied against the foreign source remuneration. However, other States have different taxing systems, and different means to collect tax revenues. Where a State utilises indirect taxes and other employee/employer contributions, and less reliance on direct taxes, such will effectively jeopardise the resident taxpayer, and even increase the overall employment costs. SAIPA believed the repeal of the exemption may result in more incidents of immigration.

On the proposed tax relief for bargaining councils, SAIPA did not object, but questioned why such relief was not available to all taxpayers, and why the current VDP (voluntary disclosure) was not used to provide relief and opportunity to remedy compliance. This proposed relief was effectively an amnesty, and was unclear how this amnesty would address the risk of repeat non-compliance in future.

SAIPA agreed that amendment was required to extend the scope of the section 7C provisions to address avoidance. However, it expressed concern that the proposed amendment was overly broad and went beyond anti-avoidance. It was proposed that the bona fide employer share incentive trusts exclusion be broader in scope to allow for exclusion of all bona fide transactions/structures, such as business trusts.

Discussion
Mr A Lees (DA) noted that the proposal to repeal foreign employment income exemption was a major source of concern. Was there a way of dealing with double or non-taxation, and in the same vein take into account the cost of living variances and additional levies that might be imposed in different jurisdictions? It could be the case that individuals working abroad might find themselves in a worse-off position as compared to persons receiving the same earnings in South Africa.

The Chairperson indicated that Treasury response to public comments was slated for 12 September.

Dr Dumisani Jantjies, Deputy Director: Finance, Parliamentary Budget Office, noted the pushback from industry on the proposal to repeal foreign employment income exemption. The different camps needed to strike a balance to ensure the proposal would not result in double taxation. Inherent complexities needed to be unpacked and a blanket approach towards implementation of the proposal would not be helpful.

Ms Gloria Mnguni, Finance Analyst, Parliamentary Budget Office, identified the two separate concerns about the repeal of foreign income exemption: the cost of living and income differences. Both issues needed to be unpacked separately. She disagreed that such a policy might prompt extensive emigration as expressed by some quarters. What would be the impact of repeal on revenue collection?

Mr F Shivambu (EFF) noted that most tax jurisdictions worldwide had a foreign income taxation policy in place as proposed by Treasury. Externalisation of funds and tax avoidance was rampant. In principle, Treasury’s proposal had to be supported. All citizens needed to pay tax.

The Chairperson said consultative processes were key. He asked if consultations by Treasury had been adequate. He urged Treasury to consider concessions with stakeholders. Also, tax avoidance was a concern and the corporate sector was complicit in most instances.

Ms Yanga Mputa, Chief Director: Legal Tax Design, National Treasury, replied that Treasury felt consultative process had been extensive. Treasury would respond to the more than 100 comments received from the public on its scheduled 12 September appearance before the Committee. She emphasised that the effective date of the repeal of foreign income exemption was postponed to 2019 to enable Treasury to deal with the administrative technicalities and difficulties identified by submissions.

The Chairperson said the perception the Committee was getting was that stakeholders were bewildered by the proposals, hence the implication was that the proposals were outlandish. He asked Treasury to comment. Do a significant number of countries have such a policy in place as well?

Ms Mputa replied that residents were taxed on their worldwide income. When the relevant tax was introduced in 2001, Treasury indicated that the exemption was subject to review in due course. However, Treasury had noted with concern that the exemption was being abused. The two year grace period would be useful in devising mitigation strategies to address unintended consequences. A number of countries do have a foreign employment income tax policy in place. However, the US had an exemption threshold for foreign income earned. Treasury was exploring the same avenue.

The Chairperson commented that opposition against the repeal of foreign employment income tax exemption was rational. With depressed economies, people are constrained and would want to avoid extra tax burdens. The right balance had to be found.

Mr Mandy said the unique circumstances of the country had to be taken into account. The number of South African expatriates was not known, and aspects such as the higher cost of living associated with living overseas should be taken into account when Treasury considers repealing the exemption. Even if the number were known, many of such expats had ceased being South African tax residents. Most countries being dealt with were far more expensive than South Africa, for example the UK and the United Arab Emirates (UAE). These factors needed to be taken into account. He also pointed out that South Africans working abroad will not receive a tax credit for making contributions to social security in the countries where they work. In addition, a number of expats were maintaining two households, which came down to duplication in living costs for them.

Mr Engel said the challenge was the different perceptions about the realities that would be obtained by this proposal and the lack of information. Employers especially in Africa were worried that the repeal of foreign income exemption would mean double taxation. There was a feeling that certain political groups got more preference than others. However, he was supportive of the proposal to close down avoidances such as share buybacks.

Mr Faber said SAICA was in support of dealing with double and non-taxation. However, the real issue was how this could be done without bringing further problems. Stakeholders were in a position to assist Treasury in identifying such unintended consequences.

SAIPA said they would not support any policy that could enable individuals to avoid paying taxes. Conversely, the numerous complexities of the proposal had to be taken into account. The unintended consequences would be unpalatable and unraveling them would require collaborative effort.

Mr Chris Axelson, Director: Personal Income Tax and Savings, National Treasury, said Treasury was open to discussion and proposals for future amendments. There was a lot of confusion on the repeal of foreign income tax; it was not about citizenship but tax residency.

Banking Association of South Africa (BASA) submission
Mr Leon Coetzee, BASA Chairman: Direct Tax Committee, submitted on proposals affecting banks. BASA believed Section 11(A) / Clause 17(1) (a) of the TLAB: Allowance for impairment losses for covered persons should refer to IFRS 9 as opposed to ‘Regulation 67’ of the Banks Act. Reference to Regulation 67 of the Banks Act should rather refer to the definition of ‘credit impaired’ as per Appendix A to IFRS 9 as this definition fully aligns to Stage 3, and materially at the same levels as ‘amounts in default’ as per Regulation 67 of the Banks Act. This will eliminate the need for banks to design and run two complex impairment models. Banks were currently investing huge sums of money in the design and testing of the new IFRS 9 credit models. These new models were extensively audited by both internal and external audit. The combined external audit fees for the transition from IAS 39 to IFRS 9 was estimated to be in excess of R100 million (banking industry wide).

Mr Coetzee proposed an increased allowance of 100% on Stage 3 of IFRS 9. BASA agreed with the proposed 25% allowance applicable on Stages 1 and 2. However, its understanding was that post-impairment recoveries were taken into account in the setting of the proposed 85% allowance. The modelling used in the determination of IFRS 9 Stage 3 ‘credit impaired’ amounts already took post-impairment recoveries into account. To only allow a 85% allowance on IFRS 9 Stage 3 would therefore lead to ‘double counting’ of the same post-impairment recoveries.

Currently, no provision for the phase-in of the cash-tax effect of the difference between the current SARS / BASA ruling dispensation and that proposed under section 11(jA). Due to the proposed reduction of PSI (stage 2) from 80% to 25% and SI (stage 3) from 100% to 85%, the cash tax effect should be phased in over a period of at least three years, in the same manner as was allowed when section 24JB of the Income Tax Act became effective. Also, the formula-based allowance generally available to all taxpayers in terms of section 11(j) may provide a better outcome than the current ‘special banking dispensation’ proposal.

BASA expressed concern about the proposal to remove the ‘alternative method’. Section 24J currently provides for an ‘alternative method’ as an alternative to the ‘yield-to-maturity method’. The premise for the proposed removal was that Generally Accepted Accounting Principles (GAAP) was no longer applicable. GAAP had not been deleted, but merely replaced by IFRS. Therefore, this removal would have a significant impact on BASA members as it has been relied on to avoid minor discrepancies between tax and accounting. It will also lead to further divergence between tax and accounting, and will require significant system alterations. BASA proposed that the ‘alternative method’ be retained, but aligned to the use of IFRS instead of GAAP.

Capitec submission
Mr Trevor Baptiste, Accountant: Capitec, proposed amendments to achieve fair tax treatment for all covered persons (banks), mindful of the distinct difference between traditional banks and unsecured lenders. The proposals in their current form do not take into account the difference between covered persons operating in the unsecured lending market from traditional banks. A different result was achieved for unsecured lenders such as Capitec as opposed to the traditional banks under IFRS 9 read with section 11(jA). The Explanatory Memorandum to the TLAB explained the proposed amendments in terms of the categories under the current BASA Directive, in a form which traditional banks would treat their current SI provision as stage 3 whereas Capitec would treat their SI provision as stage 2 under IFRS 9. The current proposed amendments resulted in a significant increase in deferred tax asset of an estimated R1.5 billion for Capitec’s 2019 year assessment. The risk weighting of a deferred tax asset for capital adequacy purposes was 250%, resulting in a decrease of Capitec’s current Capital Adequacy Ratio of 2.5%.

Capitec recommended that Treasury reconsider its position on the appropriate level of allowance granted; 100% on all stage 3 IFRS 9 impairments and 100% on all stage 2 IFRS 9 impairments for unsecured lenders. Where reference to the Banks Act remained in section 11(jA) of the Income Tax Act, Capitec recommended that reference to Regulation 23(8) be also included in order to accommodate those covered persons utilising the standardised approach.

Law Society of South Africa (LSSA) submission
Ms Lizette Burger, LSSA Professional Affairs Manager, in submission, noted that the proposed section 7C(1)(ii) inserts reference to a company which is “a connected person in relation to the trust referred to in sub paragraph (I)”. The mischief which is said to be addressed by this proposal was the circumvention of section 7C by way of loans to companies which are held by trusts. This was explicitly stated in the Explanatory Memorandum. The proposed change however went beyond what was necessary to address this circumvention. It will also include companies not owned by trusts but which are merely connected to them. This went further than was necessary to address the mischief. It would include for example: a company which is a beneficiary of the trust; a company which is owned by another beneficiary of the trust; and a company in partnership with the trust.

LSSA submitted that the words utilised be limited to address the advancing of interest free or low interest loans to companies which are owned by trusts. The wording used was also capable of being interpreted as including loans advanced by one company to another where some or all of the shares of those two companies are owned by a trust. Inter-company loans within a trust setting do not give rise to any avoidance and may give rise to a multiplicity of donations tax consequences where in truth no additional avoidance is involved.

The proposed clause (f) exemption for share schemes in terms of the proposed section 7C(5)(h) was welcome as it will avoid the inadvertent application of the anti-avoidance rules to bona fide share incentive schemes. However, the following factors might inadvertently limit the scope of this relief: In terms of section 7C(5)(h)(1)(aa) the loan involved could also have been advanced by a natural person; the loan could also have been advanced to a company for purposes of the share scheme; it was possible that the instruments in question were in fact equity shares and not only instruments which relate to or derive their value from underlying shares; and it was not entirely clear that the provision includes participation which is extended to become a beneficiary of such a trust when regard is had to the words “offered by the trust”.

LSSA recommended that this carve-out to the exemption ought to be eliminated or alternatively that a de minimis should be introduced to avoid the perceived (but not clearly demonstrated) avoidance. As currently drafted, the entire scheme would be disqualified from the relief if a family member acquired a tiny portion of the equity offered in terms of the share incentive scheme. This could be mitigated by introducing a de minimis rule, for example, 5% or 10% to be held by family.

On Section 10(1)(k)(i) of the Income Tax Act exempting a dividend from income tax, the exemption was subject to various provisos including, inter alia, sub-paragraph (ff) which excludes from the exemption a dividend received by or accrued to a company in respect of a share borrowed by that company. As a result of this proviso a dividend received by or accrued to a company on a share obtained in terms of a securities lending arrangement was subject to income tax.
 
With effect from 1 January 2016 the definition of a “collateral arrangement” was introduced into the Income Tax Act in terms of the Taxation Laws Amendment Act No 25 of 2015. Based on the Explanatory Memorandum to this Act, it was intended that a similar tax dispensation as applies to securities lending arrangements be introduced for the outright transfer of collateral. However, the provisos to section 10(1)(k)(i) were not expanded to include a proviso that excludes a dividend received by or accrued to a company in respect of a share obtained in terms of a “collateral arrangement” from the exemption. It was recommended that section 14(1)(d) of the draft TLAB be expanded to include a proviso that excludes: a dividend received by or accrued to a company in respect of a share obtained in terms of a “collateral arrangement” from the exemption in section 10(1)(k)(i) of the Income Tax Act.
 
In conclusion, as a firm principle, the legislature should steer clear of retrospective legislation as such creates additional uncertainty in an already uncertain tax system with the result that taxpayers are not able to properly plan their affairs for fear of retrospective amendments altering the anticipated tax position. An uncertain tax system was detrimental to investment in an economy.
 
Webber Wentzel submission
Mr Graham Viljoen, Director: Tax Practice, Webber Wentzel, proposed the removal of all the requirements that a ‘dormant company’ will need to meet and that there be only one requirement that the dormant company will need to meet, this being that the dormant company has not carried on a trade for the minimum of one year. This was a requirement which would also align the requirement in section 19 to the existing section 20 on carrying forward the balance of assessed losses. As it was also uncertain what was meant by the exemption not applying in respect of debt incurred, directly or indirectly by such company in respect of any asset disposed of by the debtor company in terms of the corporate rules, it was also proposed that examples of such debt be recommended for inclusion in the Explanatory Memorandum.

On the proposal that would align section 19A with section 23M, the amounts of capitalized interest which were converted to debt and which trigger interest withholding tax must be taken into account to prevent double taxation on the same economic value of such interest. Further, it was proposed that the definition of "recoupable interest" specifically exclude interest which had been paid and which was not part of the capitalized amounts converted to equity. The recoupment of one third of the interest over a period of three years must be clarified. Webber Wentzel proposed that section 19B not apply where the de-grouping occurs as a result of the termination of the legal existence of the issuer company from winding-up or deregistration. In addition, it proposed that the requirement to remain in the same group of companies for five years be replaced with a requirement for the creditor company to retain, together with any connected person, a controlling interest in the issuer company.

On the proposed amendments to section 22B/ paragraph 43A: subscription/ buyback and dividend stripping, Webber Wentzel recommended the following amendments to section 22B and paragraph 43A: inclusion of a "carve-out" in relation to a disposal of shares arising from the liquidation or deregistration of the company effecting the distribution and a disposal of shares by way of an application of the corporate rules; exclusion of in specie distributions from the ambit of these rules; creation of a link between the dividend and an action by another party in acquiring ownership of the shares in the company effecting the distribution; to only include dividends or proceeds received or accrued on or after 19 July 2017 within the ambit of these rules; and exclude funding instruments such as preference shares from the ambit of these rules.

Mr Viljoen proposed that the wording of section 8G be reconsidered and, in particular, be harmonised with the explanation given in the Explanatory Memorandum. Furthermore, a foreign acquirer must be entitled to choose to invest cash in subscribing for new shares in a South African entity and to extract as a return of capital and free of dividends tax liability the amount which it contributes as capital in South Africa.

Ms Joon Chong, Partner: Tax Practice, Webber Wentzel, supported the submissions by other organisations on CFC rules. She proposed that paragraph (b)(i) in the proposed definition of "controlled foreign company" and section 25BC be deleted and that extensive research be conducted before its implementation. The reference to the use of trusts was also only in limited circumstances. More research into comparable jurisprudence ought to be done to ensure that should the CFC definition include trusts, the scope of such definition be limited to ensure that South African resident beneficiaries party to tax structures which are neither abusive nor tax driven are not disadvantaged under the CFC rules. South African resident beneficiaries should not be in a worse position than if they had held the foreign shares directly.

Discussion
Dr Jantjies said the real concerns vis-à-vis benefits from the proposed legislations had to be identified.

Ms Mputa directed her comment to BASA and Capitec. Banks were highly regulated and their concerns well understood. The consultative workshops on 4 and 5 September would hopefully iron out the identified contentious issues. On proposed redresses to share buyback schemes and dividend stripping, Treasury had noted the comments, and the response document would take them into account. Furthermore, debt relief created bad incentives and loopholes. It was meant to assist companies in distress and to curb avoidance at the same time. However, if some of the proposals were found to be too restrictive, they could be reviewed. She pointed out that South Africa has had CFCs since 2001, then called controlled foreign entities, long before the base erosion and profit shifting framework.

Mr Coetzee appealed for fairness in the application of the mooted provisions.

Ms Chong asked if it was possible to postpone section 25(b)(c) amendment for a year to allow for more extensive research and analysis of scope in further detail.

Ms Mputa replied that section 25(b)(c) was part of the section 90 package of amendments and once fine-tuned could be looked into.

The Chairperson said Treasury should respond to the concerns raised. However, asking Treasury to engage with stakeholders did not mean that it should give in. A give and take approach was suggested. The Committee would ultimately decide. He asked Treasury to take the consultative workshop as far as it possibly can before appearing before the Committee.

Ms Mputa indicated that the main areas of contention were proposals on share buybacks, section 10(1) on repeal of the foreign income tax exemption, bargaining councils, CFCs and debt relief. Treasury was well within the consultative process timeframes.

Tax Consulting South Africa submission
Mr Jerry Botha, Managing Partner, Tax Consulting SA, submitted on the proposed repeal of foreign employment income tax exemption. Such a significant change in policy should only be proceeded with, once the full economic impact thereof is properly considered and weighed against the policy reasons on the upside of this change. There appeared to be no information readily available on the extent to which South Africans abroad transfer money to South Africa to support local family, own property in South Africa, gain overseas work experience which is re-applied back home and otherwise, economically and socially, contribute to South Africa through their international activities.

Where there was any suggestion that tax compliance is not up to scratch for expatriate employees, an unjust policy move would further alienate the tax base. Non-compliance does not get corrected with an unjust rule of which there was no equivalent in the world. Non-compliance gets corrected by a world class Revenue Authority which finds those who are non-compliant and holds them fully to account for the benefit of all South Africans.

Mr Botha shared the view expressed by Treasury and SARS officials that there was wide spread non-compliance by certain segments of South Africans abroad. Tax Consulting was, however, not aware of any research shared that expatriates are less, or more, compliant than any other segment of society. Reciprocally, Treasury and SARS must acknowledge the many compliant South African taxpayers who make full and correct disclosure of their tax liability.

Mr Botha beseeched the Committee to consider that there may be more harm done than good when a policy change of this magnitude was implemented, contrary to international best practice and South Africa specific research. He relayed some specific concerns which underlined the severity of unintended consequences. These included limiting the opportunities of the youth and those seeking to gain international experience, and limiting those with a retirement plan and risk of alienating their return to South Africa. There are many South Africans who work internationally, not by choice, but as a simple means of supporting a family back home. They are on rotation, working a fixed period outside, often on site, and then returning home for a couple of weeks. Branding these expatriates as not paying tax anywhere was a simple misunderstanding of how these projects work. Where projects are concluded by international sponsors or direct or indirect government enablement, special tax dispensations are agreed upfront. This was an example of using tax policy to stimulate growth. Hence, South African workers will be placed at a significant competitive disadvantage where a tax cost layer is added.

Mr Botha requested consideration on whether the proposal should not be more comprehensively weighed against international best practice as it was out of sync with the norm, and would place South Africa at a disadvantage. The proposal, if seen through, would encourage the breaking of ties with South Africa, as, to the contrary, with recent examples in India and the White Paper of the Department of Home Affairs, ties with its citizens abroad should be strengthened. Tax Consulting SA was averse to recommend that a component of the tax residency test, being the “ordinarily resident” test, which had for so long been part of the law should be repealed.

South African Expatriates Tax Petition Group submission
Mr Burger Pretorius, South African Expatriates Tax Petition Group, said the Budget announcement and release of the Bill, proposing the repeal of Article 10, had resulted in a predominant sense of doom and gloom for South African expatriates. A lack of clear definitions of whom and how individuals would be affected by the repeal had generated confusion and fear resulting in anger and decisions being made which will not augur well for South Africa’s future. Most of the Group’s members were average working-class citizens and the prevailing fear was not due to having illicit funds or assets that SARS might lay claim to but that they would not be able to pay the taxes if deemed tax liable by the repeal of article 10. Those residing in so called zero or low tax regions, facing the reality of high consumption based taxes, were confused by the lack of clarity on tax deductibles, exchange rate factors, to name but a few. The most pertinent display of this fear and concern came from the spouses and extended families in South Africa itself who fear that without the support of those residing abroad they would become financially destitute.

Panic and pre-emptive decisions were being made. Many South Africans, now working abroad, appear to be left with two options. These being cutting financial ties with South Africa completely and abandon its economy or return to a South African job market that is already under pressure to provide jobs for all. Both these choices were not good for South Africa. A large number of the Group membership was initiating emigration procedures, draining the resource pool of millions of man-hours of experience and skill sets. In addition, many UAE “permanent residency based” South Africans had started obtaining TDAs -Tax domicile certificates to contest that they are not tax residents of SA or ordinary residents. Greater clarity was required from both Treasury and SARS. A viable alternative exemption system should be proposed if article 10 is removed.

Discussion
Mr Lees directed his comment to the South African Expatriates Tax Petition Group. Although a Facebook page could not constitute empirical evidence, it did give an indication of the concerns and anxieties. It was agreed that double or non-taxation was an issue of concern. However the best mechanism to deal with the concerns was debatable. He urged Treasury to look into the real concerns being raised. People abroad should not rush into surrendering their passports and tax residencies as Treasury and the Committee well understood their concerns.

Ms Gloria Mnguni asked if all members of the South African Expatriates Tax Petition Group were South African citizens or if there were individuals from other regions in solidarity as well.

Mr Pretorius replied that the Group comprised of people from all over the world. These were neither tax avoiders nor evaders, they were common people confused by the proposals.

Dr Jantjies said he was sympathetic to some of the concerns being raised. He suggested breaking down and disaggregating the repeal of foreign employment income exemption. Had a cost-benefit analysis on the repeal been done?

Mr Lees noted that some employees abroad were on employment contracts and changing laws midstream could be detrimental. That should be taken into account.

The Chairperson asked Treasury to respond to the view that it did not conduct enough research on the proposed repeal.

Mr Axelson pointed out that there was considerable thought before Treasury came up with proposals. He strongly contested the view that the proposal was only unique to South Africa. The repeal on foreign employment income tax exemption was not an abnormal provision. Australia, Canada and New Zealand had exactly the same provisions. Proposals were not completely out of line to what was going on in the rest of the world. There are however special exemptions in countries such as the UK, with a 349 days residency test. South Africa currently had a 183 day test. The proposal was not based on citizenship but tax residency. The US had a lot stricter provisions in taxing foreign income. Also, migration statistics were not very indicative as they do not show tax residency. In the case of a residency based tax system such as South Africa’s, people were required to pay their share of taxes. Concerns were being listened to and unique circumstances would be considered. Phasing-in would be considered as Treasury would not want to be draconian in implementation. It was not its intention to scare people into surrendering their passports. He urged people to formalise their tax affairs.

Mr Botha appreciated Treasury’s clarification and encouraged ongoing engagement.

The meeting was adjourned.

Present

Share this page: