VAT Panel Recommendations; Taxation Laws Amendment Bill & Tax Administration Laws Amendment Bill: briefing

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Finance Standing Committee

16 August 2018
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

The Committee met with National Treasury for a briefing on the Taxation Laws Amendment Bill (TLAB) & Tax Administration Laws Amendment Bill (TALAB) Bills. The highlights of National Treasury’s proposed amendments to the two Bills were as follows:

Taxation Laws Amendment Bill (TLAB)

Clause 1- Alignment of tax treatment of withdrawals from preservation funds upon emigration or repatriation on expiry of work visa

The current provisions of the Income Tax Act only allow members of a retirement annuity fund to access and withdraw the full value of their post-tax retirement benefits upon emigration or repatriation on expiry of their work visa, while members of a pension preservation fund or provident preservation fund are restricted from doing so.

 As a result, when members of a pension preservation fund or provident preservation fund emigrate from South Africa and such emigration is recognised by the South African Reserve Bank for the purpose of exchange control or upon repatriation on expiry of their work visas, they are not entitled to receive a lump sum payment from their pension preservation or provident preservation funds. In order to promote the policy of uniform approach on the tax treatment of all retirement funds, it is proposed that the tax treatment of different types of preservation fund withdrawals be aligned to allow members of pension preservation funds and provident preservation funds to access and withdraw the full value of their post-tax retirement benefits upon emigration or repatriation on expiry of their work visas.

Taxation of financial institutions and products

Clause 47- Tax treatment of amounts received by or accrued to portfolios of collective investment schemes (CIS)
In order to provide clarity and certainty with regard to the tax treatment of CIS, the following changes were proposed in the Act:

One year holding period rule

Treasury proposed that distributions from CIS to unit holders derived from the disposal of financial instruments within 12 months of their acquisition should be deemed to be income of a revenue nature and be taxable as such in the hands of the unit holders if distributed to them under current tax rules.  

First in first out method

Where a CIS acquired financial instruments at various dates, the CIS will be deemed to have disposed of financial instruments acquired first. The first in first out method will be used to determine the period the financial instruments were held for the purposes of the one year holding period rule.

Tax Administration Laws Amendment Bill (TALAB)

Income Tax Act

Clause 2- Repeal of requirement to submit returns by persons receiving exempt dividends

To ease the compliance burden in respect of dividends tax, it is proposed that the requirement to submit a return by a person receiving a dividend that is exempt from dividends tax be repealed.

Customs and Excise Act

Clause 8- Prevention of forestalling in respect of excisable goods

To prevent the practice through which abnormal volumes of products are moved from warehouses into the market to avoid increases in excise duty rates, it is proposed that a new provision is inserted aimed at combatting forestalling before an anticipated increase in the rates of excise duty and allowing the Commissioner to limit the quantities of excisable goods that may be entered for home consumption during a controlled period leading up to the anticipated increase.

National Treasury gave an update on the Report by Independent Panel on VAT zero-rating. The Independent Panel that was appointed by the Minister of Finance to review the list of VAT zero-rated items delivered their report to the Minister on 6 August 2018. The main panel recommendations are that white bread, bread flour, cake flour, sanitary products, school uniforms and nappies be zero-rated. For each of the recommendations, the report suggests Treasury does further work to ensure that the benefits of zero-rating are not captured by producers. The Report also suggested roll-out of free sanitary products to the poor is accelerated and the potential use of expenditure programmes to mitigate the impact on poor households. Subsequently, the Minister had requested public comments on the Report, to be submitted by 31 August 2018. The Minister will present Government’s response to Panel Report after taking into account public comments and parliamentary hearings, including a final list of zero-rated items in draft legislation to Rates Bill.

A Member commented on the proposed VAT increase. On proposed additional items to be zero-rated, media reports were to the effect that this would come with a R4.8 billion revenue sacrifice. Where was Treasury looking into recovering this amount?

The Chairperson said there should ideally be public hearings on VAT before the Bills are processed. He would confer with the programming committee so that a date for the hearing could be set. The VAT was extremely contentious, thus the need for extensive consultations. Treasury had to be realistic about the timeframes of passing the TLAB and TALAB, and be mindful of the need for further debates, especially on the VAT. The Committee was constrained time-wise, but the target was to finish everything by 17 September.

Meeting report

The Chairperson welcomed everyone and indicated this was the initial foray on the Taxation Laws Amendment Bill (TLAB) and Tax Administration Laws Amendment Bill (TALAB) Bills. The Committee took the two Bills as a priority as they had a huge impact on society.

National Treasury presentation on Taxation Laws Amendment Bill (TLAB)
Ms Yanga Mputa, Chief Director: Legal Tax Design, National Treasury, took the Committee through a presentation on Treasury’s proposed amendments to the TLAB Bill as follows: 

Clause 1- Alignment of tax treatment of withdrawals from preservation funds upon emigration or repatriation on expiry of work visa
The current provisions of the Income Tax Act only allow members of a retirement annuity fund to access and withdraw the full value of their post-tax retirement benefits upon emigration or repatriation on expiry of their work visa, while members of a pension preservation fund or provident preservation fund are restricted from doing so.
As a result, when members of a pension preservation fund or provident preservation fund emigrate from South Africa and such emigration is recognised by the South African Reserve Bank for the purpose of exchange control or upon repatriation on expiry of their work visas, they are not entitled to receive a lump sum payment from their pension preservation or provident preservation funds. In order to promote the policy of uniform approach on the tax treatment of all retirement funds, it is proposed that the tax treatment of different types of preservation fund withdrawals be aligned to allow members of pension preservation funds and provident preservation funds to access and withdraw the full value of their post-tax retirement benefits upon emigration or repatriation on expiry of their work visas.

Clauses 68 & 71- Clarifying the tax treatment and obligations of funds managed by Bargaining Councils
In 2017, changes were made in the tax legislation to grant tax relief to non-compliant bargaining councils. However, moving forward, bargaining councils were expected to be fully tax compliant and will not be afforded any relief. Based on public consultations held with bargaining councils and the Department of Labour to discuss the way forward regarding the correct tax treatment of funds managed by bargaining councils, the following changes were proposed in the 2018 Draft TLAB Bill:

  • The employer is required to withhold PAYE from employer contributions to the funds administered by the bargaining councils in respect of employees who are members of those bargaining councils. Employee contributions directly to the funds administered by the bargaining councils will not be subject to PAYE withholding as such contributions can only be made from after tax income. As both employer and employee contributions to the funds administered by the bargaining councils will have been subjected to PAYE withholding, any payments made by the funds administered by the bargaining councils to their members will be tax free.
  • Bargaining councils that did not get an official confirmation of income tax exemption from SARS should pay income tax in respect of amounts received or accrued to them.

Clause 69- Removing taxable fringe benefit in relation to low or interest free loans granted to low income earning employees for low cost housing
In order to encourage employers that empower their low income earning employees through home ownership, in 2014, changes were made in the Income Tax Act to remove the taxable fringe benefit in respect of employer provided housing for the benefit of low income earning employees, provided that the employees’ remuneration does not exceed R250 000 per annum and the low cost housing has a market value not exceeding R450 000.   
The 2014 changes do not apply in cases where a low income earning employee receives a loan from the employer to fund the acquisition of low cost housing. As a result, if an employer provides a low/ interest free loan for the acquisition of a low cost housing instead of providing low cost housing to low income earning employee, the provision of a low/ interest free loan gives rise to a taxable fringe benefit in the hands of that employee.
In order to support Government’s policy of the provision of housing, the 2018 Draft TLAB proposes to remove the taxable fringe benefit in respect of low/ interest free loans not exceeding R450 000 provided by an employer to a low income earning employee with remuneration not exceeding R250 000 per annum, provided that the loan is granted solely for the acquisition of housing.

General business taxes
Clauses 36 & 79- Refining anti-avoidance rules dealing with share buy backs and dividend stripping
In 2017, changes were made in the Income Tax Act to strengthen the anti-avoidance rules dealing with share buy backs and dividend stripping. Under the new rules, exempt dividends received by a shareholder company are treated as proceeds or income in the hands of that shareholder company only when the shares in respect of which an exempt dividend is received are disposed of, if that shareholder company received extraordinary dividends within a period of 18 months prior to or as a result of that disposal. As part of the 2017 amendments, the following provisions were included in the Income Tax Act:

Firstly, a specific rule was included in the legislation defining what constitutes an extraordinary dividend in the case of preference shares. Secondly, a provision was included in the legislation in order to ensure that these anti-avoidance rules override the corporate re-organisation rules. This was done to ensure that taxpayers do not use the corporate re-organisation rules in order to avoid these anti-avoidance rules in respect of dividends stripped out of a target company. It had come to Government’s attention that the above-mentioned changes may affect some legitimate transactions and arrangements. In order to address these concerns, the following amendments were proposed in the Income Tax Act:

Preference Shares
It is proposed that a new definition of “preference shares” be introduced in the Income Tax Act for purposes of the anti-dividend stripping rules. In addition, a clarification has been inserted in the anti-dividend stripping rules to clarify the meaning of extraordinary dividend in respect of a preference share.

Interaction between anti-dividend stripping rules and corporate re-organisation rules
It is proposed that the anti-dividend stripping rules should override corporate re-organisation rules only in cases where the corporate re-organisation rules are abused by taxpayers. The dividend stripping rules will in terms of this proposal apply only when a company disposes of shares within 18 months after acquiring those shares in terms of a reorganisation transaction. Dividends received in respect of those shares within the period of 18 months prior to that reorganisation transaction by persons that are connected parties in relation to that company will in terms of a claw-back provision be subject to the dividend-stripping rules.

Taxation of financial institutions and products
Clause 47- Tax treatment of amounts received by or accrued to portfolios of collective investment schemes (CIS)
In order to provide clarity and certainty with regard to the tax treatment of CIS, the following changes were proposed in the Act:

One year holding period rule
Treasury proposed that distributions from CIS to unit holders derived from the disposal of financial instruments within 12 months of their acquisition should be deemed to be income of a revenue nature and be taxable as such in the hands of the unit holders if distributed to them under current tax rules.  

First in first out method
Where a CIS acquired financial instruments at various dates, the CIS will be deemed to have disposed of financial instruments acquired first. The first in first out method will be used to determine the period the financial instruments were held for the purposes of the one year holding period rule.

International taxation
Clause 1- Addressing an overlap in the treatment of dividends for income tax and transfer pricing purposes
Currently, there is a potential overlap between the treatment of a dividend as defined in the Income Tax Act and the treatment of an amount deemed to be a dividend under the transfer pricing provisions of the Income Tax Act. 
Consequently, an amount deemed to be a dividend in specie as a result of a transfer pricing secondary adjustment may, depending on the facts and circumstances of the case, already constitute a dividend as defined in the Income Tax Act. This overlap may also have the unintended result that tax treaty relief in respect of dividends tax being available in respect of an amount deemed as a dividend in specie as a result of a transfer pricing secondary adjustment may be available under some treaties. In order to address this anomaly, it is proposed that clarity should be provided in the Income Tax Act that an amount deemed as a dividend in specie as a result of a transfer pricing secondary adjustment is excluded from the definition of dividend in the Income Tax Act, thereby excluded from obtaining treaty relief in respect of dividends tax under some treaties. In turn, consequential amendments should be made in the Income Tax Act so that the above-mentioned amount deemed to be a dividend in specie as a result of a transfer pricing secondary adjustment should be regarded as a dividend subject to dividends tax at a rate of 20 percent.  
 
Value added tax (VAT)
Clause 89- Insertion of the definition of “face value of a debt transferred” under the provisions dealing with irrecoverable debts
A VAT registered vendor is in terms of section 22(1) of the VAT Act, permitted to claim a deduction for VAT on taxable supplies of goods or services that have been written off, if those taxable supplies were provided on credit, and the debt is irrecoverable. If the vendor cedes or sells the debt book in respect of the debt that has been written off on a non-recourse basis to another vendor, for example a collection agent or bank, for an amount that is less than the amount owing, then the sale of debt is exempt from VAT and the vendor is not required to make any adjustments to the previous VAT deduction. It has come to Government’s attention that some vendors (for example collection agents or banks) that buy the book debt in terms of the above-mentioned arrangement then attempt to claim a further VAT deduction if they write off all or part of this debt in future.  This results in a double VAT deduction, which is against the intention of the legislation as seen in the definition of “face value of a debt transferred” in the Explanatory Memorandum to the Taxation Laws Amendment Bill, 1997. The Explanatory Memorandum provides that the ‘face value’ of a debt transferred is, for the purpose of section 22(1), the net value of the account receivable at time of transfer, after adjustments have been made for debit and credit notes and after taking into account the input tax claimed on the bad debt amount already written off by the (first /supplier) vendor. In order to address this anomaly and prevent the double VAT deduction, it is proposed that amendments be made in section 22 of the VAT Act by inserting a definition of “face value” to take into account the policy rationale explained in the Explanatory Memorandum to the Taxation Laws Amendment Bill, 1997.

SARS Presentation on Tax Administration Laws Amendment Bill (TALAB)
Mr Franz Tomasek, Group Executive: Legislative Research & Development, South African Revenue Service (SARS), took the Committee through a presentation on proposed amendments to the Tax Administration Laws Amendment Bill (TALAB) as follows:

Income Tax Act
Clause 2- Repeal of requirement to submit returns by persons receiving exempt dividends
To ease the compliance burden in respect of dividends tax, it is proposed that the requirement to submit a return by a person receiving a dividend that is exempt from dividends tax be repealed.

Customs and Excise Act
Clause 8- Prevention of forestalling in respect of excisable goods
To prevent the practice through which abnormal volumes of products are moved from warehouses into the market to avoid increases in excise duty rates, it is proposed that a new provision is inserted aimed at combatting forestalling before an anticipated increase in the rates of excise duty and allowing the Commissioner to limit the quantities of excisable goods that may be entered for home consumption during a controlled period leading up to the anticipated increase.

Tax Administration Act
Clause 19- Notification of commencement of an audit
To ensure that a taxpayer is notified at the start of an audit, as part of efforts to keep all parties informed, and to distinguish between a verification and an audit, it is proposed that the provision of an audit engagement letter by SARS is made mandatory.

Clause 27- Deregistration of tax non-compliant tax practitioners
To ensure that registered tax practitioners are tax compliant, it is proposed that, if a tax practitioner has outstanding debts or tax returns repetitively or for a continuous period of at least three months during a period of six months and does not remedy the non-compliance within the period specified in a notice delivered by SARS, the tax practitioner be deregistered; the tax practitioner may be reregistered once he or she remedies the tax non-compliance and the above conditions are no longer met.

Update on Report by Independent Panel on VAT zero-rating
Mr Ismail Momoniat, DDG: Tax and Financial Sector Policy, National Treasury, gave an update on the Report by Independent Panel on VAT zero-rating. The Independent Panel that was appointed by the Minister of Finance to review the list of VAT zero-rated items delivered their report to the Minister on 6 August 2018. The main panel recommendations are that white bread, bread flour, cake flour, sanitary products, school uniforms and nappies be zero-rated. For each of the recommendations, the report suggests Treasury does further work to ensure that the benefits of zero-rating are not captured by producers. The Report also suggested roll-out of free sanitary products to the poor is accelerated and the potential use of expenditure programmes to mitigate the impact on poor households. Subsequently, the Minister had requested public comments on the Report, to be submitted by 31 August 2018. The Minister will present Government’s response to Panel Report after taking into account public comments and parliamentary hearings, including a final list of zero-rated items in draft legislation to Rates Bill.

Discussion
Mr A Lees (DA) commented on the proposed VAT increase. On proposed additional items to be zero-rated, media reports were to the effect that this would come with a R4.8 billion revenue sacrifice. Where was Treasury looking into recovering this amount?

Mr Momoniat addressed questions relating to the findings of the expert panel on the zero-rated value-added tax items. He indicated that apart from considering the panel’s report, Treasury was also working on its own estimates to determine if the revenue gap would only be R4.8 billion if all items were included, or if there could be an upside risk of additional amounts. Treasury would use this opportunity to also carry out formal consultations with other departments such as Health and Basic Education in relation to the additional items recommended for zero-rating. The big issue of the revenue gap would most likely be dealt with in the medium-term budget. The Minister may announce expenditure adjustments, or tax adjustments if there is a gap. On the tentative timelines for the processing of the two Bills, revenue was needed; so whatever is done, Treasury would want the Bills passed by the end of the year.

The Chairperson said there should ideally be public hearings on VAT before the Bills are processed. He would confer with the programming committee so that a date for the hearing could be set. The VAT was extremely contentious, thus the need for extensive consultations. Treasury had to be realistic about the timeframes of passing the TLAB and TALAB, and be mindful of the need for further debates, especially on the VAT. The Committee was constrained time-wise, but the target was to finish everything by 17 September.

The meeting was adjourned.

Present

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