Zero VAT report: stakeholder responses; Taxation Laws & Administration Bills: Treasury & SARS response to submissions

Meeting report

The Chairperson welcomed everyone and indicated that the Committee would consider all concrete proposals on the VAT debate. He welcomed Ms N Ntantiso (ANC) as a Member of the Committee.

COSATU submission
Mr Matthew Parks, Parliamentary Coordinator, COSATU, expressed COSATU’s disappointed with government’s VAT hike. It effectively punishes the poor for the sins of the rich. COSATU does not want to see government collapse due to its precarious financial straits. However, these are largely self-inflicted by rapacious political elite and their lecherous friends. Now government has passed the bills to workers to pay. COSATU condemns the VAT hike in the strongest possible terms, and hoped that government is actually listening to the anger of workers and their struggling families. COSATU felt government took the easy route out in seeking to address its burgeoning revenue shortfalls. There were many alternative options to address the shortfalls, albeit requiring harder work and creativity. Nonetheless they existed and still exist. Equally painful, was the fact that this VAT hike, the first in 25 years, is accompanied by a barrage of other tax hikes this year and over the past three years that disproportionally hurt the working and middle classes.  This year’s tax hikes essentially only hurt the poor. Whilst being disdainful of government’s acute lack of sensitivity towards the struggles of workers, COSATU has several proposals with regards to cushioning the blow to the poor by expanding the list of VAT exempt goods.   

COSATU noted and welcomed the VAT Panel Report. COSATU requested government to consider additional interventions to alleviate its dire impact upon workers and their families. The federation is disappointed but not surprised that the Panel did not call upon government to rescind its VAT hike. COSATU maintains that the VAT hike is a slap in the face for the poor.  It is tantamount to dumping the bill for looting by politicians, their families and friends to the poor. The real solution to the budgetary crisis is simply to stop the looting and wastage and recover our stolen taxpayers’ monies. COSATU applauded and supported its proposals to remove VAT from key food products, sanitary and school uniforms. This will provide welcome relief for the poor households.  These are basic necessities for working class families, women and girls and learners. Government must act upon these recommendations and implement them without further delay. COSATU welcomes and supports the Panel’s proposals that the following items be VAT zero rated: white bread; white flour; cake flour; sanitary products, combined with the free provision of sanitary products to women and girls; school uniforms, subject to further investigation to clearly demarcate school uniforms; nappies. The federation was disappointed that the Panel did not propose the inclusion of locally produced poultry. This would be an important boost to a fragile sector. It was also disappointing that the Panel appears not to have considered COSATU’s submission to introduce a progressive sliding scale VAT regime for electricity and water for all households, but in particular the poor and working class. This was a glaring omission and disappointment for COSATU in an otherwise comprehensive and helpful report. Government will need to explain how it will ensure that any VAT exemptions will translate into price cuts for those products. If not then we face the risk that retailers will simply pocket the VAT exemptions and the poor will be ripped off once again.

COSATU urged government to have the political courage to go further than the VAT Panel recommendations. It must provide free domestically produced sanitary pads to all no fee schools, tertiary institutions, clinics, hospitals and any other accessible venues to ensure that all poor women and girls have access to free sanitary pads.  The dignity of women and girls must be protected. They must be supported to be fully participating learners, students and workers and not held back by not being able to afford sanitary pads. 

COSATU was disappointed that instead of explaining how it will stop wasteful expenditure and looting or how it will recover stolen funds; government has rushed to punish workers by raising VAT, fuel levies and adjusting income tax brackets at below inflation levels. COSATU called upon government to reverse these taxes upon the working and middle classes. Parliament and government need to engage with civil society on alternative means to address the many crises the state finds itself in and to place it upon a firm and sustainable path. The federation hoped that Parliament and government will listen to the frustrations and resentments of workers and our proposed alternatives.

South African Medical Association (SAMA) submission
Dr Selaelo Mametja, Head of Knowledge Management, SAMA, expressed the Association’s frustration that the Panel had not taken its submission into full account. Raising revenue by taxing the poor and voiceless was not the best approach. Ordinary South Africans were unable to afford healthcare and an additional tax burden would be regressive. Sin and excise taxes should be raised instead rather than VAT. She pleaded with the Committee to consider zero-rating basic medicines, saying that if the poor could not afford medicine they would simply skip clinic visits, leading to more people with health complications, which would in turn place a greater burden on the public health sector. The recommendation to zero-rate nappies was appreciated.

Fair Play submission
Mr Lionel Adendorf, Spokesperson, Fair Play, urged Parliament to propose the inclusion of chicken on the list of items that will be added to the zero-rated basket. He argued that it was the preferred form of protein for the poor and an exemption would help prevent malnutrition. The Committee should not discriminate against chicken. The nutritional benefits of chicken made it an essential component of a healthy diet, to address issues such as the prevalence of stunting in South African children due to malnutrition.

Fair Play believed that zero-rating chicken would be a simple and effective mechanism to provide targeted relief for lower-income households. For these households, chicken is not a luxury but a necessity. The benefits of VAT-free chicken, particularly for lower-income households, are overwhelming. It is South Africa’s most popular meat; it is nutritious and is the major protein source for poor people. VAT-free chicken will therefore bring immediate economic and nutritional benefits to the poor. As for the concerns about the cost of VAT-free chicken, a comprehensive revision of the current VAT-free basket will indicate where savings can be made to be able to afford chicken. There are outdated items in the basket, such as R1 billion worth of pilchards that are being imported, with no benefit to the fiscus. The discussion in Parliament should be about the best way to implement it and relieve the burden on those who suffer most from rising food prices. Combating malnutrition should be a national priority, and chicken is the highest-protein meat source per rand spent. Adding nutrient-rich food such as chicken to the VAT-free basked would bring relief to the poor and address the shocking statistics that show that 1.5 million children in South Africa suffer from often irreversible stunting. Fair Play also urged consideration of the wider economic benefits of expanded chicken production which would follow reduced chicken prices. This could include 11 000 new jobs, R1 billion in tax revenue and an additional R3.7 billion to gross domestic product.

Pietermaritzburg Economic Justice and Dignity Group (PEJDG) submission
Mr Mervyn Abrahams, Pietermaritzburg Economic Justice and Dignity Group, opposed VAT on all foods and expressed concern that apart from starches no additional nutritionally rich foods had been included. Protein in the form of peanut butter, chicken and other meats should be considered. It appeared that the Panel privileged the loss of revenue to the fiscus, and in doing so, did not pay sufficient attention of securing affordable nutritious food to the benefits to the populace. The Group supports the starches which have been identified for zero-rating. There was concerned that apart from starches no additional nutritionally-rich foods have been included. The inclusion of protein for example has not been sufficiently conceptualised as essential for nutrition, health and wellbeing. A more reasonable consideration of chicken and other meats for zero-rating given protein’s importance in the diet and the current deficiencies on the plate due to affordability would be supported. Animal proteins, unlike vegetable proteins, provide a complete protein and contain all the essential amino acids required by the body, including haem iron in a form which is more easily absorbed by the body. It does not seem reasonable to hold the whole country at ransom given that the state has been unable to regulate and crack the oligopolies in the poultry value chain. The poultry industry was forced to comply with a reduction in brining levels in 2017. It seems to us that all major players in the food value chains are prone to various forms of skulduggery to varying degrees. The state must bring them all to heal. Zero-rating chicken and meats will provide the state with a direct entry point to regulate these monopolies and the quality of the produce.

The recommendation to increase Child Support Grants and Old Age Grants was supported. The Child Support Grant should be increased to a level which allows mothers to feed their children properly. The Group’s data shows that the food component alone in the grant is costed between R530 and R669 a month; the grant would have to be higher than this because mothers use the grant for other child expenses, and not just for food. Old Age Grants similarly are a critical income to support families and subsidise insufficient wages. Pensioners had indicated that they would require a living pension from R6 000 and above, at this level families may be able to secure proper nutrition and basic goods and services; ensure better health and education outcomes, whilst also providing money to spend and invest in the local economy. This, pensioners say, will support a recovery in the economy and provide for broad transformation of the economic structures currently framing the country.

PEJDG felt that the Panel Recommendations were not enough to deal with the food affordability crisis. It is clear that the problem cannot be addressed just by adding 3 more foods into the zero-rated basket. The Group would have liked a consideration of other mechanisms such as: removing VAT off all foods; subsidising some critical foods to secure proper nutrition, this may include Maas, milk, eggs, peanut butter, oily fish, brown bread and maize meal; an intervention strategy to regulate the food value chains and particularly the retailers and the charges for foods on supermarket shelves; considering food as just one expense amongst many others and looking at how where the state has some control on the cost of these goods and services, that the state intervenes to reduce costs e.g. transport to work; scholar transport and electricity prices. This would free up more money to be allocated to food; present the real picture of the extent of the food affordability crisis to galvanise immediate political intervention to arrest short-term and long-term consequences of the apparent status quo of wavering and stalling and tinkering. Core to this is to elevate the problem of stunting in children as a political problem requiring intervention post-haste as it can move very quickly into a catastrophe, this includes serious intervention into the hammering being taken by women’s bodies as they carry the full burden of the economic crisis by cutting back on nutritious food, which is going to undermine the public health care system in a very substantial way.

In conclusion, tax policy should focus on collecting tax from those who can afford it. Food is not a commodity and it should not be subject to tax. It is better for all of us to be able to eat properly and to be healthy as this provides a basis for a strong society and strong robust economy. If there is a need to recover revenue from food, then it is better if it be recovered off luxury foods which working class households do not buy and the wealthy do buy. It seemed however that the problems around revenue lie in (1) the low wage regime; (2) the low level of corporate compliance with company income tax; and (3) problems of tax collection which lie with SARS. In focusing around getting revenue we suggest that these areas be targeted. The Group was of the opinion that tinkering around with zero-rated foods is not the best way to approach the food affordability crisis as VAT is just one of the elements that are causing food to be unaffordable; and further removing VAT from some foods, is not enough to address the crisis.

Budget Justice Coalition (BJC) submission
Ms Paula Proudlock, BJC & Children’s Institute, UCT, expressed concern about the negative effects the increase to the VAT rate was having on poor and low-income households. The simultaneous increases in the fuel levy – which impacted negatively on food and public transport costs - was also concerning. As a result, poor and low income households are struggling to afford nutritious food and transport to school, work and health facilities. The harsh spending cuts prescribed in the technical guidelines for the Medium Term Expenditure Framework will exacerbate the situation. The Coalition again re-iterated its objection to the February 2018 decision to increase VAT and called on Treasury and Parliament to reconsider this decision. If Parliament ultimately agrees to the VAT increase by the passage of the Rates and Monetary Amounts Amendment Bill, it calls on National Treasury and Parliament to implement comprehensive mitigating measures that recognise the full extent of the financial crisis being experienced on a daily basis by the majority of poor and low-income earners.

Zero-rating only an additional six goods as recommended by the Panel, will not amount to adequate mitigation. We recommend further items be considered by Treasury and Parliament as well as increased investment in social programmes that impact directly on the household budgets of poor and low income households. For additional items to be considered, further information will need to be supplied by the Panel: while the Report presents generous detail and demonstrates clear rigour of analysis regarding the eight items identified, it does not provide any information on the other 58 items.  This makes it difficult for stakeholders to engage in informed debate with the Panel recommendations and methodology. For example, some of the 58 items may pass the more significant tests and therefore be good candidates for zero-rating. This detail would also enable a comparison with the items identified for zero-rating in recent research by the Institute for Economic Justice (IEJ). We therefore request the Panel make this detail public to promote a more informed debate going forward. 

The Budget Justice Coalition made recommendations on mitigating measures as follows:

Zero rating
-Retain the existing 19 items that are zero-rated.
-Zero-rate the six items identified by the Panel.
-Include chicken in the basket of zero-rated items.
-Consider zero-rating the items that scored highly in the Institute for Economic Justice’s report and the Panel’s analysis (information not yet available), with priority given to: sorghum meal/powder; other canned fish; powder soup; instant yeast; soya product (excluding soy milk); tea; candles and matches; and coal (including anthracite).
-Investigate peanut butter for zero-rating given the role it plays in the school feeding scheme and ECD centres, and generally as a source of protein for children.

Luxury rating
-Implement a higher VAT rate of 25% on luxury items.

Social programmes
-Increase the amount of the Child Support Grant to the level of the food poverty line (R400 to R547).
-Prioritise the finalisation of the policy on comprehensive social security and commit to timeframes for implementation (including providing income support for 18 to 60 year olds).
-Commit to direct provision of sanitary products to women and girls in poor and low-income households and initiate a meaningful participatory process to identify the most effective distribution mechanisms.
-Commit to implement a conditional grant for scholar transport by April 2019, with a budget adequate to ensure subsidised transport for all scholars in need.
-Investigate increased subsidisation of public transport.
-Clarify the details of how the school nutrition programme could be expanded to improve its reach and impact to enable meaningful engagement on the proposals.
-Investigate increasing the per capita ECD subsidy to improve nutrition for children under 5 and salaries for ECD practitioners who are currently working below the national minimum wage.

Institute for Economic Justice (IEJ) submission
Mr Neil Coleman, Co-founder, Institute for Economic Justice, added on the submission by the Budget Justice Coalition. He called for a 25% VAT rate for luxury goods, which could generate about R9.6 billion. SA had to try to find ways to plug revenue shortfalls as tax collection has lagged. This problem had further been exacerbated by State Capture, which has reduced revenue to the fiscus. It should not result in punishment of the poor. The general public had nothing to do with that failure. He queried why the Panel had only analysed eight items instead of the initial 66 for zero-rating.

The IEJ indicated that increasing VAT makes the South Africa tax mix more regressive because it increases the share of tax paid by poor and low-income households in the overall tax mix. Increases to VAT also reduce the disposable income of all households, including poor and low-income households. Further, raising VAT can stifle economic growth as household disposable income falls and domestic demand is depressed.

The VAT increase has undoubtedly made the South Africa tax mix more regressive and lowered the disposable incomes of poor and low-income households. It has also undermined the imperatives to reduce poverty and inequality. It has been compounded by steep increase in price of fuel, in part due to increases in the fuel levy, which have driven up the cost of transport. Significant financial strain is therefore placed on a population in which 55% live in poverty. It is untrue that this was the only tax instrument available to National Treasury and comes against the backdrop of significant declines in personal and corporate income tax rates and low taxation on wealth and income therefrom. This is an untenable situation. One means through which to ameliorate the impact of the VAT increase is through zero-rating. This report has shown that zero-rating is currently, by and large, a well targeted instrument, disproportionately benefiting poor and low-income households. There are a number of products that are good candidates for further zero-rating. Not only would this ease the burden on poor and low-income households but it would also be a significant boon to female-headed households. The report also shows that a higher VAT rate of 25% on luxury items could raise up to half of the revenue foregone from further zerorating. Finding means through which to relieve the financial burden on poor and low-income households is a national imperative.


South African Poultry Association (SAPA) submission
Dr Ziyanda Majokweni, Acting GM: Broiler Organisation, SAPA, supported the principle contained in the Panel Report that the benefits of zero-rating should not be absorbed by producers or retailers. SAPA also noted the Panel’s recommendation (paragraph 4.2.6) that the government should establish mechanisms to ensure that retailers pass the full value of the VAT relief through to consumers and commit to cooperate fully with such mechanisms. The South African Poultry Association’s vision is to create a viable and sustainable industry contributing to economic growth and development, employment and food security, based on successful producers adhering to environmental and ethical production norms and generating sustainable profits. In this regard: South African poultry producers, as represented by the SAPA and the Broiler Association, are committed to ensuring that any VAT savings as a result of the zero-rating of primary chicken are achieved in the supply and passed on to our customers. South African poultry producers firmly believe that the South African poultry industry is well developed and competitive, with sufficient checks and balances at retail level to ensure full transparency and self-regulation through the force of competition. South African poultry producers see the ultimate gain for the country, the consumer and for the local chicken industry. The zero-rating of chicken would add to food security and alleviate some malnutrition in South Africa as chicken would be the only meat product on the zero-rated list. An increase in demand-side growth in chicken production volume would have an array of downstream benefits for the local chicken industry such as increased job creation, especially in impoverished rural areas.

PricewaterhouseCoopers (PwC) submission
Mr Lesley O’Conell, VAT Partner, PwC, said the current list of zero-rated items should be reconsidered to include ones that are consumed by the poor. The VAT rate is not adjusted often, and with VAT rate increases, the zero-ratings ought to be adjusted to reduce the impact on the poor. Historically, additional items were added, not taken off the list. Considerations and challenges of zero-rated items in relation to tax policy were as follows:
VAT system is not too complicated and easy to administer; efficiency, as a small change in rate (1%) leads to great amounts of additional revenue; people and companies in SA are VAT compliant due to ease of administration and strict regulations and penalties for non-compliance (fines or jail time). The Panel recommendation on the use of grants to assist the poor also aligned with the Davis Tax Committee’s. Other nutrition programs can lead to corruption and add to administration costs. Zero-rated items should benefit the poor as well as the poor working class. Therefore only items disproportionately consumed by the poor should be considered. Tax as a whole (including income tax) should be progressive, thus the need for a balance between revenue loss and assisting the poor.

SA Chamber of Baking (SACB) submission
Mr Geoff Penny, Executive Director, SACB, weighed in on making white bread zero-rated. He said this decision would enable poor consumers to choose the product they prefer. Poor consumers should be given the opportunity to shop with dignity. Food insecurity in South Africa is unacceptably high. Although there is sufficient food produced in South Africa, an extremely large portion of the country’s population is food insecure, often quoted as high as 25%. The Department of Health is in the process of implementing improved fortification to maize and wheat products, which includes bread, to address micro-nutrient deficiency and malnutrition in South Africa. These health issues are most prevalent in the poorer sectors of the population. Making bread even more affordable by zero-rating white bread, the poorest and most vulnerable sectors of the population will be afforded better nutrition.

Bread is a staple foodstuff. The top ten food items that lower income households spend most money on include Brown bread at number three and White bread at number eight. The wheat value chain, including the baking industry, will benefit marginally from white bread being zero rated. Those who will benefit most will be the lower income and poorer sectors of the population. The consensus view in the industry is that zero rating white bread is the right thing to do. Should VAT be removed from white bread the prices of white and brown bread would be similar. This negates any argument that price will determine whether poor consumers will purchase white or brown bread. Zero rating white bread should result in consumers, especially poor consumers, being able to choose which product they would prefer. This is regarded as important as in most food purchasing decisions poor consumers have little or no choice. Poor consumers should be given the opportunity to shop with dignity. At the time of the initial zero rating of Brown bread it was incorrectly assumed that poor people ate brown bread by choice.

On the economic impact if white bread is zero-rated; the overall benefit for the wheat-to-bread value chain is likely to be relatively small. A movement from brown bread to white bread purchasing and consumption is likely, but the attraction to consumers will be that they are now able to have greater choice when buying bread. This is often referred to as “shopper’s dignity” where poorer people will have greater choice. In that more White bread will be sold and millers will produce more White bread flour, which will result in a modest increase in wheat milled, with the knock-on benefit to agriculture. Any growth in the industry will therefore be beneficial to the entire value chain from the farmer, grain storage operators, millers, bakers and retailers, ending with the consumer.

On the case for zero-rating white bread flour and cake flour, should the same logic be applied for zero-rating Brown bread flour, serious consideration should be given to zero-rating white bread flour as the key ingredient in the production of white bread? White bread flour and Cake flour is used extensively in the “home baking” sector in poorer communities. Although not in the “top 10” of staple foodstuffs, white bread flour is regarded a key staple foodstuff used in the homes of poor people. White bread flour (and in future cake flour) provides the same nutritional benefits as it is fortified. Township-based micro-food enterprises derive as much as 50% of their revenue from sales of scones, dombolo bread, queen cakes and magwinyas (“vetkoek), amongst others. These products are baked using White bread flour and Cake flour. Home baking, especially in townships, is the fastest growing segment in the flour market.

In conclusion, marginal benefits will accrue to the wheat-to-bread value chain including agriculture and rural communities. Food insecurity in South Africa will be reduced. Poor people’s health status will benefit by being better able to afford fortified White bread such that government initiatives to improve the health status of South Africans will be more effective through more people being able to purchase (afford) a fortified product. This would also correct the apartheid era notion that poor people eat brown bread. Poor people will at least be given an opportunity to choose. Overall, poor and low income households will be better off.

Discussion
Ms T Tobias (ANC) appreciated the inputs from stakeholders. The suggestion that conditional grants be increased was fundamental. She asked PwC to propose tax compliance methodologies which would enable robust differentiation and definitions of consumer products. Price signals had to be taken into account when suggesting additional items for zero-rating. She asked why whole chicken was being proposed for zero-rating instead of the innards which are popular with low-income households. 

Ms N Ntantiso (ANC) said fundamental contexts had to be taken into account when considering implementation of the VAT hike and additional items for zero-rating. A reasonable balance had to be found between the need to increase revenue, and addressing poverty and inequality in wealth distribution. 

Mr A Lees (DA) noted that most stakeholders appeared to be accepting the VAT increase. The impact of the hike on the poor was going to be significant. Also, child support grants were far too low and no scientific method was used to determine the current level. An increase was entirely achievable through reprioritisation without resorting to a VAT increase that would impact the poor significantly. It was the right thing to do. On the suggested items for zero-rating, was the call for zero-rating of chicken not a means of achieving that which could not be done through the African Growth and Opportunity Act (AGOA) negotiations by industry?

The Chairperson commended the quality of inputs. Overall, the majority would agree with most inputs in principle. Whatever concessions are made on the zero-rated list, it should disproportionately benefit the poor. Given practical constraints, the presenters would have to respond to Members’ comments in writing within seven days. The Committee would like to have a paper done on whether there was scope to raise revenue alternatively within the Money Bills Act. The Committee would also look into setting up a subcommittee which will engage more rigorously around submissions by stakeholders. The subcommittee will ideally meet during the constituency period and take the issues forward.

Dr Majokweni argued that whole chickens should not be subject to VAT, as opposed to just having portions like chicken feet and gizzards zero-rated. This would give consumers more choice. Also, chicken innards would be difficult to quantify as the products are predominantly sold in informal markets. She pointed out that chicken accounts for 13% of food expenditure for lower-income households, and thus the call for the inclusion of whole fresh or frozen chicken products and portions. The proposal was certainly not a claw-back from AGOA. 

Mr Coleman appealed to Parliament and Treasury to be creative in coming up with solutions. He implored stakeholders and the Committee not to find obstacles in this debate. 

Mr Aderndof called for a review of the current list to ensure it is in line with current consumer needs and preferences. He reiterated the call for the zero-rating of locally-produced chicken. He criticised the fact that the current list of 19 zero-rated items was not reviewed. If there were a thorough review of the list the Panel would have taken some items off the list, and would have included new household items which are being used by these poorer households.

The Chairperson said the VAT increase could not be reversed- for practical reasons, at this stage. The Committee would consider a timeframe for the VAT, after consultation and consideration of stakeholder inputs, and explore whether there is value in having a subcommittee that would look into the various issues during the constituency period. However, there was no obligation for Parliament to do more than it had already done. He called for Treasury to interrogate the submissions more seriously than they had previously.

Response by National Treasury and SARS to submissions received for the draft Tax Administration Laws Amendment Bill (TALAB) and the draft Taxation Laws Amendment Bill (TALAB)

Ms Yanga Mputa, Chief Director: Legal Tax Design, National Treasury, took the Committee through Treasury’s responses to submissions received on the TLAB and the TALAB.

Clarification of the tax treatment of doubtful debts
For companies using IFRS 9 accounting standard for financial reporting purposes, it was proposed that 25 percent of the loss allowance relating to impairment as contemplated in IFRS 9 excluding lease receivables contemplated in IFRS 9 be allowed as deduction. The allowances allowed in a year of assessment must be added back to income in the following year of assessment. For companies not using IFRS 9 accounting standard for financial reporting purposes, it was proposed that an age analysis of debt be used in this regard.  As a result, it was proposed that 25 percent of the face value of doubtful debts that are at least 90 days past due date be allowed as deduction. The allowances allowed in a year of assessment must be added back to income in the following year of assessment. For example, debtor fails to make full payment for 90 days after due date of an amount that is payable. The debtor is 90 days in arrears and the full debt becomes doubtful then 25% of the debt is allowed as a doubtful debt in terms of the proposed section 11(j) of the Act. A comment was received that the proposed amendment is overly prescriptive and it was recommended that the current discretionary legislation should be retained. The comment was not accepted. Government took a decision in 2015 to move to self-assessment system and remove all discretions that were given to the SARS Commissioner through the tax legislation. 

Comments were received that the proposed amendment should not differentiate between banks and non-bank lenders because these taxpayers use the same accounting standards and may use substantially the same methodologies to determine their doubtful debt provisions. The proposed amendment is anti-competitive because larger non-bank lenders must compete with bank lenders in a commercial space and yet bank lenders are receiving significantly higher tax allowances.  It is therefore proposed that non-bank lenders be afforded the same tax treatment given to banks through section 11(jA) of the Income Tax Act. This was partially accepted. Banks that are registered in terms of the Banks Act are regulated prudentially more intensively and intrusively than other financial service providers, including that they are subject to stringent capital, liquidity and reporting requirements. These regulations are formulated with the principal objective of protecting depositor’s funds and ensuring the continued operating of critical economic functions including transaction and payment services. These regulations therefore seek to ensure the continued prudent operation (solvency) of banks through significantly intensive, intrusive and effective supervision. No such framework currently exists for non-bank lenders, which are regulated only by the Non Credit Regulator in terms of the National Credit Act, 2005 currently not supervised by the Prudential Authority for safety and soundness or the FSCA for market conduct. With regards to the banking sector, there is also integration between IFRS 9 impairment allowance calculation process with existing capital calculation and reporting requirements under Basel III standards. In the case of a bank, the expected credit loss is to be covered by provisions and unexpected loss is to be covered by capital. Therefore, at some point the doubtful debts provisions may have a result that lead to a reduction of the equity and retained earnings available for Tier 1 capital which in turn may reduce the Tier 1 capital ratio. Whilst Government is in the process of introducing appropriate prudential regulations for non-bank credit providers, and for tougher market conduct regulations for both bank and non-bank financial sector providers, in terms of the Financial Services Regulation Act, these will only be progressively implemented, and will require review as to their effectiveness.

In order to mitigate the impact of the proposals on non-bank lenders, who are not intensively and intrusively regulated prudentially Treasury brought forth several proposals. However some stakeholders believed many taxpayers had more favourable past rulings from SARS and this proposal will result in a material cost to the affected taxpayers due to the reduction of the allowance percentage to 25 percent. It was proposed that a transition rule be considered in this regard. The comment was partially accepted. It is understood that the rulings were given to these taxpayers based on the commercial realities at the time which may still exist even now. At issue is that these rulings were giving these taxpayers higher allowances rates (of up to 100 per cent of the doubtful debts for accounting purposes) which will disadvantage these taxpayers because the allowance will now be a lower percentage. In order to mitigate the impact of the proposed amendments with respect to those taxpayers who received rulings from SARS, it is proposed that transitional measures, for example, a phase-in period be introduced in the tax legislation. 

In order to address some concerns submitted by taxpayers and the oral presentations made on the Draft 2018 TLAB workshop held on 4 September 2018, the non-bank lenders requested a separate meeting to discuss these issues in detail. This request was accepted. A follow-up meeting will be arranged with all organisations that submitted comments on this issue before the tabling of the bill to ensure that we come to an amicable solution. Over and above the issues raised above, taxpayers should also state the cash tax impact (by using last year’s financial statement figures) after taking into account the proposed allowance so as to determine an appropriate phasing-in period. 

Consequential amendments resulting from application of debt relief rules
Treasury received comments that the redetermination of income tax recoupments, capital losses and/or capital gains which were determined and accounted for on the disposal of assets in a prior to when a “debt benefit” arises was not clear. It should be clarified as to whether the proposed provision will apply to all capital assets or only allowance assets. In addition, it should be clarified whether a redetermination should be made if the asset is disposed of in the year that the “debt benefit” arises. This was accepted and amendments will be made to paragraph 12A of the Eighth Schedule to the Act to clarify that the redetermination rules apply to both capital and allowance assets.

A comment was received that the proposed amendment to close the donations tax loophole meant to ensure that donations tax is paid in order for a debt to be excluded, adds unnecessary complexity for individuals as it can lead to partial application in the instance that a donation exceeds the annual exclusion of R100 000. In addition, a similar amendment in the Estate Duty Act No. 45 of 1955 that require estate duty should be actually payable on a forgiven debt has not been included. This results in lack of symmetry. This was not accepted. The requirement that donations tax should be paid on a donated debt for such a donated debt claim to be excluded from the debt relief rules will remain. Failure to put in this requirement will mean that no tax is levied on a donated debt claim. A similar amendment has not been made in the Estate Duty Act. To make such amendment in the Estate Duty Act requires much more intensive changes.  As such, amendments in the Estate Duty Act will be considered in the 2019 legislative cycle.

Mr Franz Tomasek, Group Executive, South African Revenue Service (SARS), took the Committee through responses to some of the highly contested proposals as reflected in stakeholder comments.
 
Income Tax: business (incentives)
Review of Venture Capital Company rules
It had come to Government’s attention that there are some administrative and technical issues in the tax legislation that are an impediment to further uptake of the VCC tax incentive. As a result, it was proposed that amendments be made in the Income Tax Act to address these administrative and technical issues. In addition, concerns had been raised including reports in the public domain regarding alleged abusive tax structures using the VCC regime. For example, immediately before the 2018 Budget, some companies were advertising tax structures in the media using the current VCC regime. In an attempt to close these abusive schemes, it is proposed that the following amendments be made in the Income Tax Act: limit the abuse of trading between an investor that invested in a VCC and a qualifying company in which the VCC takes up shares; and either a VCC or a qualifying company may not issue more than one class of shares from the year of assessment during which that company started trading and any time after that.

Comments were received that the proposed amendment to the controlled company test still does not adequately address all the uncertainty in current legislation, because based on the new proposed wording, the legislation is still ambiguous whether the controlled company test only applies between VCC’s and the target QC or if any other interest in the QC (directly or indirectly outside the VCC investment) will influence the outcome of the relevant test. This comment was accepted. Proposed wording to the controlled company test will be amended to further clarify policy intent.

Comments were received on closure of abusive schemes. To limit the abuse of trading between an investor that invested in a VCC and a qualifying company in which the VCC takes up shares, it was proposed that the definition of qualifying company be amended. It was submitted that the proposed amendment is too wide in its impact and might unintentionally limit legitimate business transactions, including but not limited to:           essential BEE-related supplier development; scaling ability of current qualifying companies’ businesses; and administrative burden of unintentional and unbeknownst trading with a tainted party. This was partially accepted. The high risk of abuse of allowing trading between a VCC investor and a qualifying company in which the VCC takes up shares remains a concern. In order to limit the impact of the proposed 2018 amendments on legitimate transactions and target the mischief in question, it is proposed that changes be made in the 2018 Draft TLAB so that the amount received or accrued by the qualifying company from any transactions between a VCC shareholder (together with connected persons) be limited to less than 50 percent of the aggregate amount received or accrued from the carrying of a trade. In addition, it is proposed that this limitation only be applied after a period of 36 months from the date that the VCC acquires an interest in a qualifying company.  The 36 month waiting period was proposed to specifically assist enterprise supply chain development. 

Discussion
The Chairperson welcomed the responses and invited brief comments from stakeholders present.

Mr Robert Gad, Chair: Tax Committee, Law Society of South Africa, noted the responses to comments on the treatment of doubtful debts. He welcomed further engagements as they would be useful. The scope and terms of reference of the Treasury workshops should be clarified and expanded. The Law Society looked forward to continual interactions. 

The Chairperson said the Committee would continue with discussions on TLAB and TALAB the next day. On the Rates and Monetary Amounts Bills, the only contentious aspect left was the VAT. Therefore, the Committee could informally adopt all the other policy issues while the VAT increase was being discussed further.

The meeting was adjourned.