National Treasury & SARS on TLAB, TALAB, Rates Bill & Income Tax Amendment Bill

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Finance Standing Committee

03 September 2019
Chairperson: Mr M Maswanganyi (ANC)
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Meeting Summary

The Standing Committee on Finance met jointly with the Select Committee on Finance for a briefing by National Treasury and the South African Revenue Service (SARS) on the 2019 Draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill (Rates Bill); the 2019 Draft Income Tax Amendment Bill; the 2019 Draft Taxation Laws Amendment Bill (TLAB); and the 2019 Draft Tax Administration Laws Amendment Bill (TALAB).

The National Treasury, in presentation, highlighted that the Draft Rates Bill provided tax proposals regarding changes in rates and monetary thresholds to the personal income tax tables. It also adjusted the estimates to eligible income bands that qualified for the employment tax incentive. It increased the excise duties on alcohol and tobacco above inflation. The Draft Income Tax Amendment Bill provided environmental tax incentive proposals for the repeal of the exemption for certified emissions reductions and the extension of the energy efficiency savings incentives.

The Draft TLAB gave effect to tax proposals aligning the effective dates of tax-free transfers between retirement funds with the effective date of annuitisation for provident funds. It adjusted the withholding tax treatment of surviving spouses’ pensions to limit overburdening them with tax payments due to potentially placing them in higher tax brackets that were out of their means. It addressed the abusive arrangements between shareholder companies and target companies that aimed to avoid anti-dividend stripping provisions. It sought to clarify the interaction between corporate re-organisation rules and other provisions of the Income Tax Act. It sought to refine the tax treatment of long-term insurers. It sought to refine the investment criteria for Special Economic Zones (SEZs) as well as increasing anti-avoidance measures within them. It limited the allowable deduction that investors in a Venture Capital Company (VCC) could make. It reviewed the controlled foreign company comparable tax exemption and addressed the circumvention of anti-diversionary rules. It sought to review Section 72 of the Value Added Tax Act that provided the SARS Commissioner with disproportionately discretionary powers in relation to Constitutional considerations.

The Draft TALAB gave effect to taxa proposals that removed the requirement to submit a declaration to a regulated intermediary in respect of tax-free investments. It authorised the SARS Commissioner to prescribe rules that regulated the making of advance foreign currency payments. It aligned time limitations on requesting refunds. It provided model mandatory disclosure rules and non-compliance penalties. It dealt with the digitisation of tax compliance certificates.

The suggested amendments to the SARS Act would account for the recommendations made by the Nugent Commission of Inquiry into SARS. The amendments would be dealt with in Parliament by early 2020. The amendments related to governance issues at SARS, the appointment and removal of SARS commissioners, as well as the creation of a deputy commissioner position. Other tax-related bills included separate legislation that would be introduced in 2020 which aimed to strengthen the role of the Tax Ombud.

Members asked if there was any intention to ring-fence the Carbon Tax and Health Promotion Levy. Given many examples of horrifying abuse by evangelical churches in particular; how many had been de-registered for tax exemption? They asked about controlled foreign companies and how the reduction in income tax on multinational companies would affect or benefit the country from a revenue perspective.

Meeting report


Opening Remarks
The Chairperson welcomed everyone to the joint meeting. Three apologies were received from Members. He handed over to the presenters from National Treasury and SARS.

Briefing by National Treasury and SARS
Mr Ismail Momoniat, Deputy Director-General: Tax and Financial Sector Policy, National Treasury, began by requesting the Chairperson’s permission to change the order in which the four agenda items would be addressed. He asked to begin with the Draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill (Rates Bill); then move to the Draft Income Tax Amendment Bill; followed by the Draft Taxation Laws Amendment Bill (TLAB); and end with the Draft Tax Administration Laws Amendment Bill (TALAB). It was the first time the Committee was meeting to consider laws in its new term. He explained the tax process to the Committee. The rationale was that unlike most Bills that were tabled and brought before the Committee; the three were not tabled. They were brought as draft bills which allowed for inputs and revisions, and were tabled after this process.

Legislative mandate for taxation
Section 213 of the Constitution established National Revenue Fund. Once revenues were in this Fund, they were then allocated through a budget appropriation or in some cases through direct charge. Appropriation bills were not examined, the Committee dealt with “one side of the balance sheet”. Key sections to consider were sections 73 and 77 of the Constitution which obligated that only the Minister of Finance could introduce “Money Bills”, which were tax or appropriation bills. Section 77(3) constrained how Parliament could interact with Money Bills, which was different to other legislation. 

Legislative process
Section 76 of the Constitution gave the National Council of Provinces (NCOP) almost equal say as the National Assembly (NA). Technical or substantive amendments required detailed motivations, processes for consultation with the Minister of Finance, as well as numerous implications. The tax policy process enabled Parliament to have a say throughout the processes. Draft bills would be introduced first; they were not tabled or introduced formally in the House, but published by Treasury on its website. The TLAB and TALAB Bills were normally published in July/August. The Rates Bill was usually published in February along with the Budget. There would then be a briefing in September for the Committee. In October, after hearings, there would be a response document to public comments, which then informed the final bills which would actually be introduced to the House.

Annual tax process starts on budget day
The Bills under discussion were required to inform the February 2020 Budget. Whilst appropriation bills had been approved by the House, the bills had not yet featured in Parliament. Tax proposals tended to be highly market sensitive. This was why there were never prior consultations. Even within government it was a limited consultation. The President was fully consulted, and Cabinet was briefed towards the end of the budget process. Tax announcements were therefore only made once a year – in the budget speech and budget review. Chapter four of the budget review dealt with big tax and revenue proposals for the budget. Annexures C and B dealt with more technical proposals, whereas Chapter four dealt with bigger policy proposals.

Consultation on the structure of tax began immediately after budgeting. A budget announcement would be made, then a budget review would be conducted. Thereafter there was a detailed consultation on the TLAB and TALAB Bills. The TLAB and TALAB bills were split in the Constitution. The TLAB was a Money Bill. Other matters could not be dealt with substantively in a Money Bill. TALAB was not a Money Bill. Both bills went through a section 75 process. Consultations on rate changes was more limited. For this reason, Treasury published a Draft Rates and Monetary Thresholds bill on Budget Day.

There were tight timelines; the Bills needed to be passed by both parliamentary Houses before they rose at the end of 2019. Over December, Treasury would then endeavour to see that the President considered both Bills and signed them into law. Due to these time limitations, it made sense for joint meetings by both finance committees to be held.

Mr Y Carrim (ANC, KwaZulu-Natal) pointed out that a memorandum of understanding had been signed between the two committees regarding joint meetings whilst maintaining independent oversight functions.

Mr Momoniat said that after presentations of the Bills to the committees, there would be public hearings. Treasury would not respond immediately to these. Normally two weeks later, a response document would be issued.

Tax Bills – how best to engage with them
Tax amendments were mostly additions and deletion to tax laws. These were mainly the Income Tax Act, the Value Added Tax (VAT) Act, the Customs and Excise Act, the Carbon Tax Act, and the Tax Admin Act.

Role of the National Treasury in tax process
Treasury’s role according to its annual performance plan (APP) was largely on tax policy and revenue estimates. Legislation was typically conducted by the Minister of Finance. It was still under the auspices of Treasury to bring legislation to the Committee.

Role of the South Africa Revenue Service in tax process
SARS was responsible for the collection of revenue. Treasury worked very closely with SARS but had to provide full autonomy in terms of administration.

Discussion
Mr Carrim said that on matters of process, both committees had received briefings on Money Bills.

Ms D Mahlangu (ANC, Mpumalanga) sought clarity about the procedure as relating to the NCOP. Did public consultation occur after the budget was presented? Was it a legislative or procedural issue? After the NA had presented or taken a decision on a Bill, would it only then be sent to the NCOP? The NCOP could legally decide to disagree, the Bill would be sent back to the NA. What happened after this? What did the Act say legally? Would the process start afresh?

Ms P Abraham (ANC) asked about the timing of consultations on the structure of the text. Would this be done irrespective of the administration at the helm? There needed to be confidence in the pronouncements of the Minister of Finance. What would happen if there was a different Minister with whom Members disagreed with on policy?

Mr Momoniat said that there was no final answer to the questions. The NCOP had the right to run the process however it wanted to. If the NCOP were to make amendments, the Bills would go back to the NA. It was then up to the NA to decide on the type of process it wanted to run. The NA could decide to accept/reject/amend changes made by the NCOP. It would not go back to the NCOP thereafter because these were Section 75 bills. Having a joint agreement helped these matters. The Standing Committee on Finance would then make clear how long it would take with bills, allowing the committees to come to an understanding. When it came to public consultations, the Committee still looked at the formal consultations. After public hearings, Members would hear directly from people what the views were on amendments. Members would also be hearing from Treasury recommending how the Committee would respond to proposals due to the complexity of issues that were being dealt with. It was not reasonable to expect everyone, even on the side of Treasury, to understand all the issues. Tax advisors presented the Committee with arguments for possible recommendations every July. So, the Committee would get all the arguments, and would essentially need the “Wisdom of Solomon” about what to do on every contested issues. Treasury put this before Members, and it was up to them to accept or reject Treasury proposals.

Consultation was on tax announcements and changes, as well as administration amendments, rather than on Rates Bills. These consultations took place between Budget Day in February and July, where it was discussed what exactly would be changed, clause by clause, and how these would be amended. When the Bill was published, the second round of consultation was the first time for many companies in particular to see how amendments would be done. These engagements on wordings would involve the Committee as well. This meant that there were two different processes. One was conceptual, which took place pre-July. After this, it was consultation regarding the actual words in clauses. What was written down would be interpreted by SARS.

Mr Carrim said that what had been done in the past due to it often being impossible to finish deliberations in-committee was to set up a tax subcommittee comprised of two ANC Members, one DA  and one EFF Member. Once the Bill was with the Select Committee, it was under the NCOP. When it came to consultation with Treasury, they did consult extensively, despite disagreements with the Standing Committee often. When it came to the Rates Bill, consultation was not a prerequisite anywhere in the world due to the possibilities for hoarding. The other two Bills still had room for discussion.

Ms Mahlangu said that the processing of the Bills became unfair for the NCOP in terms of timeframes, depending on the time they would have spent with the NA. This was the reason for requiring teamwork. Once the NA started introducing the Bills or the process of amendment, the NCOP needed to be invited so as to be a part of the whole process.

Mr Carrim said that the committees would confer all the time. Sometimes the committees would step back because they were independent Houses. Joint briefings should be standard. There was nothing to lose. The NCOP would only receive the amended bill. The value of having joint public hearings was that the NCOP would hear public submissions that would otherwise not reach the NCOP. Joint meetings would allow for understanding of why certain positions were taken.

Mr Momoniat said it would be music to Treasury’s ears for there to be a formal agreement between the NA and NCOP. It was a practice that needed to continue and evolve over time. No House should feel pressurised in terms of time.

2019 Draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill (Rates Bill)

2019 Budget tax proposals
Mr Chris Axelson, Chief Director: Economic Tax Analysis, National Treasury, said that the budget came out with changes to rates. Many of these rate changes and revenue raising changes were contained in the Draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill. At the time of the 2019 Budget, Treasury had estimated that there would be a R42.8 billion shortfall for the 2018/19 financial year. The Minister of Finance, Tito Mboweni, had agreed that an additional R15 billion needed to be raised. 

Tax proposals aim to raise R15 billion
Large tax revenue shortfalls and new expenditure pressures required tax policy interventions to raise the additional government funding. The main tax proposals included: a) not adjusting personal income tax brackets for inflation, rather increasing the primary, secondary and tertiary rebates by 1.1 percent; b) not adjusting medical tax credits for inflation; c) increasing the eligible income band for the employment tax incentive; d) increasing excise duties on alcohol and tobacco above inflation; e) increasing the health promotion levy rate in line with inflation; f) increasing the general fuel levy below inflation by 15 cents per litre; and g) a new carbon tax levy on fuel. This had coincided with the introduction of the Carbon Tax on the 1 June 2019.

Largest revenue increase is from personal income taxes
A table from Chapter Four of the Budget Review showed that the main item where the R15 billion would be raised from was not adjusting personal income tax brackets for inflation.

Mr Momoniat said that these were just the changes that were shown. The total was R1.422 trillion after tax that had been raised.

Increasing reliance on personal income taxes
Most of the additional revenue for the financial year had come from personal income tax, which was a continuing trend with what had been done in recent years. The proportion of total revenues was high.

Draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill, 2019 (Rates Bill)
The Rates Bill gave effect to the tax proposals dealing with tax rates and monetary threshold that were announced in the February 2019 Budget. These related to Income Tax, Excise Duties, and the employment tax incentive. A lot of these measures were implemented immediately. Some were effective from 1 March, often when relating to personal income tax. Some were from 1 April which coincided with the fiscal year. The fuel levy often increased on the first Wednesday of April.

Increase in personal income tax of R12.8 billion from not adjusting for inflation
Tables showing how personal income tax would be paid in 2018/19 versus in 2019/20 showed that increases were achieved by not adjusting for inflation as had been done in previous years. Treasury had increased the primary rebate which affected tax free rebates. There had been a slight increase in the tax rates ratios for those above the age of 65.

No increase in medical tax credits, to assist funding of NHI and provide additional general tax revenue
The majority of the relief from the 1.1 percent increase of primary rebates went to lower income groups. Medical tax credits remained the same per month at R310 for the first two beneficiaries and R209 for additional beneficiaries. Not adjusting the medical tax credits raised the most from middle income groups.

Above inflation increases in alcohol and tobacco excise duties to raise R1 billion
It was not in legislation but was a policy of Treasury to try to target excise burden for wine, beer and spirits to 11%, 23% and 36% of the weighted average retail selling price. There was also a targeted excise duty on tobacco of 40% of the retail selling price of the most popular brand. Again, this was not legislated but was a policy direction. Excise duty amounts had been increased above inflation to raise additional revenue.

Employment tax incentive, and other measures not in the Rates Bill
Employment tax incentive eligible income brackets had not changed since the 2014.  Treasury had done an inflationary rate change for 2019.

Measures not in the Rates Bill
The Health Promotion Levy (HPL) had been increased by inflation to 2.21 cents per gram of sugar above the threshold of 4 grams of sugar per 100ml as of the 1 April 2019. There had been an increase in the general fuel levy of 15 cents per litre from 3 April 2019. This would decrease expected tax revenue by R500 million due to the increase being below inflation.
 
Discussion
Mr Carrim said the joint committee would get a much better sense from public inputs about the important aspects and pros and cons of each of the points that had been presented.

Dr D George (DA) said that page 23 of the presentation showed no increases in medical tax credits to assist the funding of the National Health Insurance (NHI). Had Treasury factored in the cost of the NHI incoming legislation?

Mr Momoniat said Treasury had not. Any amendments even to the NHI Bill had to come to the Committee first. Treasury was working on a policy document to publish in a few weeks on the potential impacts cost wise and the method for funding. With major proposals like the NHI, it was important to take funding and legislation into account with a comprehensive approach to such matters.

Carbon tax amendments
Carbon tax amendments were in the Income Tax Amendment bill, not the Rates bill.

Background to carbon tax amendments
The 12L energy efficiency saving tax incentive had a sunset date which ended in 2020. This provided relief to mining, iron and steel, and other energy intensive uses. It also committed to the recycling of revenues from the carbon tax. The 12L energy efficiency savings tax incentive was extended through the first phase of the carbon tax until 1 January 2023.

2019 Draft Income Tax Amendment Bill

Repeal of the tax exemption for Certified Emission Reductions
Clause 1 of the Draft Income Tax Amendment Bill: Section 12K of the Income Tax Act related to the repeal of Section 12(k) of the Act which related to a tax exemption for certified emission reduction. This meant that the carbon tax offset of the reductions.

 
Technical Carbon Tax Amendments in the 2019 Draft TLAB
Amendments had been made to clauses 83-92 of the 2019 Draft TLAB-Sections 1, 3, 4, 5, 7, 8, 9, 13 and Schedules 1 and 2 of the Carbon Tax Act. The thresholds that applied to be liable for the carbon tax was amended to include levels that met and/or were above the threshold, not only those above the threshold to be eligible for taxation. Taxpayers could use different methodologies to report emissions for the Bill to be more inclusive. These were tiers 1, 2 and 3. For tiers 1 and 2, taxpayers needed to use the schedules and emissions factors set out in Schedule 1.

Technical changes had been made to formulas for determining the total emissions of a taxpayer, particularly to clarify the units that were used, converting kilograms to tonnes, among others. Changes had been made to how the carbon tax would increase over time using CPI figures to adjust the tax annually. This had been changed to make use of the latest available data which had previously not been available. Also, clarifications had been made to the basic tax-free allowance for fossil fuel combustion.

Mr Momoniat added that tax was a dynamic process and needed to constantly be amended or updated.

Other non-Budget tax-related measures to be dealt with separately from this Tax Laws process

Ms Yanga Mputa, Chief Director: Legal Tax Design, National Treasury, said that the 2019 Draft Income Tax Amendment bill had two provisions relating to environmental tax incentives.

Other tax-related bills expected in next few months
Mr Momoniat said that these were not part of the annual tax laws process. The Nugent Commission proposals had emerged raising amendments to the SARS Act, which would be tabled very early in 2020. These included proposals relating to governance of SARS and the role of the Inspector-General, as well as processes for the appointment and removal of the Commissioner and Deputy-Commissioner(s) of SARS. Cabinet had largely adopted the recommendations.

Separate legislation strengthening the Office of the Tax Ombud was also expected to be tabled in 2020. This had been left until 2020 due to the election year and the difficulty to have a whole new Bill. These provisions were part of the Tax Administration Act and needed to be formalised.

SA/Kuwait Tax Treaty
The protocol amending the tax treaty between South Africa and Kuwait related to the fact that the current tax treaty between SA and Kuwait had stalled since changes to the secondary tax on companies protocol had been changed to a dividend tax at shareholder level in South Africa in 2007. South Africa was unable to implement the dividends tax at shareholder level due to the tax treaty with Kuwait having a zero-rate withholding tax on dividends. If Kuwait did not sign the protocol by September 2019, South Africa would have to terminate the tax treaty, requiring parliamentary approval. Kuwait had since shown willingness to sign the protocol, which would require ratification once it had been signed.

Discussion
Mr D Ryder (DA) asked if the proceeds from the Carbon Tax, the Health Promotions Levy, and the freezing of the medical credits were ring-fenced. There were reasons to tax these things. Was there an intention to ring-fence the taxes? Was it quantifiable and measurable over time so as to see how much had been collected in terms of the Carbon Tax and how much had been spent directly on environmental issues as a result of that?

Dr George said that it was pleasing that the SA-Kuwait matter had been resolved. Were the other tax agreements affected in the same way or only the 10 mentioned in the presentation?

Ms M Mabiletsa (ANC) said that the wisdom of Solomon had guided Treasury on the Kuwait matter. 

Mr Axelson replied that on the ring-fencing of revenues and quantification, Treasury tried to quantify all the revenues. This was in the statistical annexure of the Budget. Annexure B of the budget review quantified expenditures from tax incentives. For example, the 21L energy efficiency saving tax incentive that had been extended had been seen as a revenue recycling measure for the carbon tax even though it was published before the carbon tax. There was no “sugar tax”; the sugary beverage tax as a health promotion levy had not been specifically earmarked or ring fenced. Freeing of medical tax credit had been announced in 2018 and received a below inflationary increase which provided R4.3 billion over the next three years to fund the NHI. In 2019 Treasury had gone further and not increased it at all, which made additional funds available for the NHI. Treasury did not recommend fixed earmarking. He said they were open to soft earmarking.

Mr Momoniat replied that Treasury did not like excise taxes; they were inefficient. Generally, the budget process was a very transparent information process, including the amounts collected. The carbon tax had been put in place to reduce emissions by changing behaviour and this was the rationale regarding those taxes.

Ms Mputa said on the SA/Kuwait matter, it was only those 10 issues. The rest had been signed and ratified.
 
2019 Draft Taxation Laws Amendment Bill (TLAB)

Ms Mputa said that the TLAB issues dealt with tax technical proposals.

Personal Income Tax and Savings
Reviewing tax treatment of surviving spouse pensions related to Clause 48 of the Draft TLAB: Paragraph 2 of the Fourth Schedule to the Income Tax Act. Upon the death of a family member, the surviving spouse was entitled to receive an annuity from the retirement fund. This pension was taxable in the surviving spouse’s hands by the retirement fund. If the surviving spouse also received a salary or other form of income, it was included in the spousal pension in determining their tax liability. The segregation of income often pushed them into higher brackets. This was a particular issues as most surviving spouses did not foresee the additional tax liability. It was proposed that tax rebates no be taken into account when calculating taxes to be withheld by retirement funds on the spousal pension.

Mr Axelson dealt with tax treatments of bulk payments to former members of closed funds which related to Clause 46 of the Draft TLAB: Paragraph 2D of the Second Schedule to the Income Tax Act. Funds that had been closed which still had funds in them that were due to members. There was no mechanism in the Income Tax Act for those funds after the retirement fund was to be paid to a beneficiary in a tax-free manner. This had been attempted to be solved in 2009 by publishing a special notice to allow this in particular circumstances. The proposal was that the funds would still be available. This required a provision in the Act to make the payments of amounts that were held by fund administrators on behalf of deregistered funds to qualify for tax exemption provided they met the criteria laid out by the Finance Minister in the 2009 government Gazette 32005.

Exemption relating to annuities from a provident or provident preservation fund related to Clause 14 of the Draft TLAB: Section 10C of the Income Tax Act. If one received an annuity and did not receive a deduction on the amount that was used to contribute to that annuity, the annuity could be received tax free. If this was not received, the individual would be taxed twice in a sense. This was allowed for pension and pension preservation funds, and retirement annuity funds. It was not allowed for provident or provident funds because there was no requirement to annuitise. It was an objective of government to get provident and provident fund members to annuitise, so it was proposed that member show received annuities qualified for the same tax exemption status that was applicable to other retirement funds.

Ms Mputa said that extending the scope of amounts constituting variable remuneration related to Clause 3 of the Draft TLAB: Section 7B of the Income Tax Act. Night pay/overnight pay were amounts that were not catered for in this section. It was proposed that the section did not apply to specific amounts but amounts bearing certain generic characteristics that were listed in the Act.

General Business Taxes

Addressing abusive arrangements aimed at avoiding anti-dividend stripping provisions related to Clauses 23, 51, and 59 of the Draft TLAB: Section 22B, Paragraphs 12A & 43A of the Eight Schedule to the Act.
The Act contained anti-avoidance rules with dividend stripping aimed at preventing tax free extraction of profits by companies using exempt dividends. Changes had been made in 2017 which had seen abusive schemes aimed at circumventing the changes. It was proposed that the anti-avoidance rules would not only apply when a shareholder company disposed of shares in a target company, but would extend to apply in cases where shares were issued by the target company and the effective interest in the target company was reduced or diluted as a result.

Correcting anomalies arising from applying anti-value shifting rules related to Clause 28 of the Draft TLAB: Section24BA of the Act.
Accounting reporting standards differed from income tax reporting standards. There was no value shifting that was occurring, only difference between the reporting standards. It was proposed that changes be made in the tax legislation so that anti-value shifting rules were not triggered in these circumstances, only in ones where high value assets were transferred in exchange for low value shares.

Refining provisions around the special interest deduction for debt funded share acquisitions related to Clause 30 of the Draft TLAB: Section 24O of the Income Tax Act.
Companies may have been unable to acquire direct controlling interest in an operating company. There was uncertainty regarding indirect controlling interest, acquired through shares in a controlling company in relation to the operating company, and whether a company could continue to claim special interest deductions in this case. It was proposed that instances where an unbundling transaction involved a company that had previously held indirect controlling shares interest in a holding company would result in a direct controlling share interest in an operating company and that company could continue to claim the special interest deduction. 

Clarifying the interaction between corporate reorganisation rules and other provisions of the Act (1) related to Clause 38 of the Draft TLAB: Section 41 of the Income Tax Act.
There were provisions in the income tax act during mergers and acquisitions for tax-free transfers of assets between companies that were part of the same group. These provisions did not address how exchange items and interest-bearing instruments were to be treated during situations of corporate restructuring because there was not clarity whether tax treatment of interest-bearing instruments or tax treatment of exchange items provisions should take precedence during corporate restructurings. It was recommended that corporate reorganisation rules be changed so that they not override the application of both tax treatment of interest-bearing instruments and tax treatment of exchange items. 

Clarifying the interaction between corporate reorganisation rules and other provisions of the act (2) related to Clause 41 of the Draft TLAB: Section 9D of the Income Tax Act.
This related to the need for harmonising the timing of de-grouping charge provisions for intra-group transactions and controlled foreign companies. When a company left a group while retaining an asset that had been acquired within the previous six years, a de-grouping charge was triggered to negate the Income Tax Act provision for tax-free asset transfers during corporate reorganisation. This meant there was misaligned in the timing of the de-grouping charge in the corporate reorganisation rules and controlled foreign company rules. It was proposed that the timing of the de-grouping charge of the controlled foreign companies be aligned with the timing contained in the corporate reorganisation rules so as to ensure anti-avoidance measures.

Clarifying the interaction between corporate reorganisation rules and other provisions of act (2) related to Clause 38 of the Draft TLAB: Section 41 of the Income Tax Act.
This related to the need to amend the corporate reorganisation rules to cater for company deregistration by operation of law. Companies qualified for relief in terms of the corporate reorganisation rules via tax-free asset transfer between companies that were part of the same group only regarding liquidation, winding up or de-registration, one or more companies was required to cease after the completion of the transaction. These requirements did not account for de-registration by operation of law. It was proposed that the corporate reorganisation rules be changed to account for statutory de-registrations in terms of the Companies Act. This would ensure alignment of the Income Act provisions and the Companies Act. 

Discussion
Dr George referred to slide 140 which spoke about surviving spouses’ financial burdens. Would the same apply to living annuities and annuities in addition to the pension funds as many surviving spouses were paid via those particular products?

Ms Abraham said she had an interest in the surviving spouse matters. She feared that the legislation superseded the will. She asked about the will provisions versus the surviving spouse’s annuities and whether legislation or the will took precedence / superseded the other. She asked if Section 24(J) and (I) of the Act could be unpacked.

The Chairperson asked where the churches and other religious bodies making a lot of money were placed in this. These bodies were registered as NPOs but were operating as businesses without paying taxes.

Ms Mputa replied that pension funds would apply to all surviving spouse retirement funds. It was more defined within the legislation. On the matter of the will versus legislation, the will superseded the law. Section 24(J) and (I) were merely accounting principles put into tax law. SARS would talk about the income of public benefit organisation (PBOs), as that was an administrative, not policy issue.

Ms Ronel Mosehane, Senior Specialist: Legislative R&D, SARS, said that Section 24(J) was an issue of the timing of accrual of interest. An example was if there was a loan from a bank, SARS would attempt to apply accounting principles in order to determine how to calculate and include or deduct the interest in determining the taxable income from the loan. Section 24(I) dealt with exchange items. An example was foreign denominated loans. For a loan in US dollars rather than in Rands, Section 24(I) would be used to determine the calculation and inclusion or the deduction of foreign exchange gains or losses in determining the taxable income. These were mostly accounting rules which were trying to be aligned to income tax legislation.

Mr Franz Tomasek, General Executive: Legislative R&D, SARS, replied that churches and other PBOs that were not operating as they were supposed to would be in violation of the conditions allowing for their tax-exempt status. These conditions included applying funds that were received for the purpose for which the organisation was tax exempt. If SARS became aware of violations, it could revoke the tax exemption. There was also a provision in Section 50 of the Income Tax Act that said that if remuneration paid to an office bearer was “excessive” in regard to what was generally considered reasonable in that sector, the tax-exempt status would be revoked. A separate but related question was about trading activities in PBOs. In cases were PBOs were doing the work they were ‘supposed’ to be doing, as well as running businesses or business activities whose profits were injected into the organisation to continue their ‘good work’, the business undertaking would be subject to tax. SARS tried to police the boundaries to ensure there was not abuse.

Dr George commented on pension funds. When it came to pension funds, the trustee was the deciding factor, not the will. He did not know if this had been a misunderstanding but thought it should be mentioned.

Mr G Hill-Lewis (DA) said that given many examples of horrifying abuse by evangelical churches in particular; how many had been de-registered for tax exemption?

Mr Tomasek said it was not a question he could answer being from the policy side, but SARS could try and obtain the information for the Committee. The Committee was proceeding on the assumption that many PBOs were receiving tax emption status. This was not necessarily the case.

Mr Carrim said it signalled a very important issue that could not be settled in the meeting, that it was the poor and disadvantaged who paid for “business churches”. These operations had repeatedly appeared for abuse of women etc. This was a government-wide issue. What the previous Committee had done with the Property Rates Bill was that where there were bona fide religious places that were used as places of worship, they could not be taxed in terms of property rates. He had been the most vigorous proponent of this as an atheist. The problem that the previous Committee had when dealing with property rates was that while the place of worship could not be taxed, if a section of the property was used as a bookshop, for example, to accrue a profit, that part of the religious site was taxed. There were not just churches, there was the Islamic Propagation Centre, which hired out parts of their properties and raised huge profits and were trying to escape paying taxes in terms of the property rates tax. Any profit/revenue raising effort linked to commercial transactions had property rates issues attached to it. The Chairperson had identified an issue that needed to be addressed – these operations were making super profits. The Committee needed to engage the Social Development Committee and others to address this.

Mr Momoniat said Members should hope these people were honest when they answered their tax forms.

Mr S Du Toit (FF+) asked about the poor taking on the tax burden. On average for the general public, what percentage of the Rand went to tax and stayed in peoples’ pockets?

Mr Axelson replied that everyone was different. The way that National Treasury normally looked at matters relating to the question was using the tax-to-GDP ratio. This looked at how much gross domestic product the country was producing in one go (around 26%, or around 28/9% when using different definitions and municipal technicalities). This was a bit lower than the OECD average, but was higher than other countries on the same per capita basis.  

Taxation of Financial Institutions and Products
Ms Mputa dealt with clarifying inconsistencies in the current Real Estate Investment Trusts (REIT) tax regime related to Clause 31 of the Draft TLAB: Section 25BB of the Income Tax Act. The REIT made the provision for a flow-through principle regarding income and capital gains that were solely taxed in the hands of the investor and not the REIT. In return for this, REIT could claim qualifying distributions to its investors as a deduction against its income. Definitions of qualifying distributions of rental income did not include unrealised exchange gains or losses that arose from the forward exchange contracts entered into by a REIT in order to hedge exposure to foreign currency fluctuations in real estate investments made outside of South Africa. In order to address the limitations this created, it was proposed that the definition of rental income be changed to include any foreign exchange gains that arose from an exchange item relating only to a rental income of a REIT. 

Refinement to taxation of risk policy funds of long-term insurers related to Clause 33 of the Draft TLAB: Section 29A of the Income Tax Act.
A risk policy was generally defined to exclude a contact of insurance in terms of which annuities were being paid. There were instances in which a risk policy resulted in the payment of benefits in instalments that could only be determined at the time that a claim arose, and this did not result in a separate policy that paid annuities. Where a policy was initially allocated to a risk policy and paid benefits in the form of an annuity, the transfer of assets and liabilities from pertaining to the risk policy fund to the untaxed policy fund was required. This transfer created administrative burden for the insurer. It was proposed that contract of insurance in terms of which annuities were being paid from the exclusion in definition of risk policy to ensure that risk policy remained allocated to the risk policy fund even when policy proceeds were paid in the form of an annuity be removed.

Tax Incentives
Reviewing the allowable deduction for investors investing in Venture Capital Company (VCC) related to Clause 17 of the Draft TLAB: Section 12J of the Income Tax Act.
The VCC regime allowed for an upfront tax deduction no matter how much was invested. The 2018 amendment had been made to close abusive structures using the regime for abusive trading between an investor that invested in a VCC and a qualifying company in which the VCC took up shares. Taxpayers were further attempting to undermine the VCC tax incentive programme to benefit from excessive tax deductions. In these cases, ultra-high net worth people would invest before the tax year ended with disproportionately high amounts into VCCs to reduce their taxable income. It was proposed that the VCC tax incentive regime reintroduce a limitation to the amount that could be deducted from taxable income in respect to taxpayers investing in VCCs.

Reviewing Special Economic Zone (SEZ) tax incentive rules related to Clause 18 of the Draft TLAB: Section 12R of the Income Tax Act.
The Act had been promulgated in 2016, however, companies had begun operation / entered into agreements in SEZs before the Act was passed, since it had been introduced in 2013. Businesses were being relocated into the SEZ to benefit from the tax incentives without making new investments and jobs (which were eligibility criteria). Companies were producing goods for sale from the SEZ to connected companies in South Africa outside of the SEZ, defeating the policy that was made for export orientation. It was proposed that there be strengthening of anti-avoidance measures. If a company was selling from the SEZ to a connected person outside of the SEZ, it should not be selling more than 20%. New businesses or expanded businesses should go to the SEZ, not relocating businesses.

Discussion
Mr Hill-Lewis asked for further clarity on the SEZ matter. Did it mean that only 20% of a company’s business could be sold to local companies and above this be focussed on exports?

Ms Mputa replied that the anti-avoidance measure was saying that the SEZ could not sell more than 20% of products to connect persons or subsidiaries of the business.

Mr Hill-Lewis said there were certain SEZs that had sector-specific focuses and were definitely selling locally. For example, Atlantis had been designated specifically to focus on renewable energy investments where foreign companies were moving into the SEZ and building photovoltaic cells and wind towers for installation in South Africa. Would this disqualify them because this would defeat the purpose of the SEZ? 

Ms Mputa said they could sell locally; but could not sell to connected people above 20%. Selling locally to unconnected people still qualified for the 15% tax rate.

Mr D Ryder (DA) asked about the VCC provisions. Taking into account that access to capital was one of most cited reasons for business stagnation, he thought that that VCC provision would be something to be encouraged with the view to growing the economy. He was concerned that there was a horizon of 2021 for the VCC provisions. What were the reasons for this? He could see how it was being abused when the previous cap had been too low and was now too high, with super-high net worth people dumping at the last minute to avoid tax, but could a middle ground be found, maybe with a timing requirement for VCC.

Ms Mputa replied that the sunset clauses were included in all tax incentives in income tax act. These were normally for 10 years. This even applied to the SEZ. When tax incentives were provided, they needed to be re-evaluated to see if they could account for the intended benefits. The issue of the cap was that the VCC was otherwise subjected to abuse.

Mr Ryder asked whether it was the best way.

Ms Mputa said she did not know but Parliament would guide the actions in relation to the cap.

Mr Momoniat said that Treasury would prefer a system with low rates rather than tax incentives. Incentives were inefficient and open to abuse. With the VCC there was a sense that the abuse was large.

The Chairperson asked that the Committee be provided with the presentation slides and the presenters complete in time so that the Committee could break in time for an important meeting in the NA. 

International Tax
Ms Mputa said the most important issue on international tax was reviewing comparable tax exemption of controlled foreign companies related to Clauses 10 of the Draft TLAB: Sections 9D of the Income Tax Act. There was currently a comparable tax exemption where South African multinationals that operated offshore and paid at least 75% tax in the offshore company, then that income was not included in South African taxable income. This allowed companies to be comfortable offshore. Most companies operating in the United Kingdom which was South Africa’s largest trading partner had seen these taxes reduced. This was forcing South Africa to review comparable taxation and also reduce the taxes from 75-65%.

Value Added Tax

Mr Tomasek said VAT related to reviewing section 72 of the VAT Act related to Clause 71 of the Draft TLAB: Section 72 of the VAT Act. Section 72 allowed the SARS Commissioner to modify the Tax and VAT Act which was a unique provision cater for difficulties. This allowed the Commissioner to allow exemptions about zero ratings. It was a broadly drafted provision. Questions had arisen about whether this was compatible with the constitutional scheme in South Africa, where a Director General equivalent (the SARS Commissioner) was able to override Parliament.

A number of dramatic restrictions had been proposed to be made on the Commissioner’s actions. It was proposed that the Commissioner’s power to grant an exemption or zero rating be deleted. There was a qualifier to this that the Commissioner could not substantially increase or reduce the amount of VAT that became due or payable. These were unique issues and appeared to be from a transitional period that had not been done away with. He had unfortunately been nowhere near the legislative process when it had been brought in. It had been carried over from the General Sales Tax Act that had preceded it.

Ad Valorem Excise Duty on Motor Vehicles
Mr Axelson said the proposal had been made in Chapter Four of the budget. The policy background was that the Excise Duty was a tax on final goods that had been meant as a luxury tax. There had been calls in 2018 for a luxury VAT tax. Treasury’s response had been that there was already an ad valorem excise duty regime which was supposed to be applied on luxurious products and had a higher rate. It therefore acted the same way without the added difficulties of having a multi-tiered system. There was a progressive rate for vehicles produced up to 30%. Locally and imported vehicles had different bases for calculation of this rate. The ad valorem amount currently charged on imported vehicles was higher than locally manufactured. It was proposed that the ad valorem rate be changed to address this.

2019 Draft Tax Administration Laws Amendment Bill (TALAB)

Income Tax Act
Mr Tomasek said that currently a reduced rate could be received on the withholding tax that South Africa imposed on royalties and interest if it was in terms of double-taxation agreement concluded with another jurisdiction. In order to get it, the recipient needed to provide declaration of qualification for the treaty relief to the person paying it. This was currently a per-payment basis and became difficult when considering monthly royalty payments. It was proposed that there be a 2-year declaration period for this.

Customs and Excise Act
Illicit financial flows were on the Committee’s mind. One of the aspects was the issue of advanced payments where importers went to authorised dealers for upfront funding to deliver goods and the goods did not enter the country. Authorised dealers had a proposal that applicants for advanced payments be issued with reference numbers to track these issues.

Tax Administration Act (1)
There was a notice period of seven days to take the State to court. This provided difficulties for legal teams to resolve issues within this period. There was a proposal to extend this to 21 business days with the option to seek urgent permission form the court to reduce this notice period to seven days where necessary. Common reporting standards across jurisdictions would track income across jurisdictions where South Africa had treaties with. Mechanisms to circumvent these reporting requirements had seen the OECD formulate “model disclosure” rules. It was proposed that the ability for the Minister of Finance to incorporate these model disclosure rules to be part of the CRS regulations, failure to report in this manner would impose a penalty from SARS.

Tax Administration Act (2)
Tax compliance certificates had shifted over time towards electronic means. It was proposed to update the law to cater for this switch.

Discussion

Mr I Morolong (ANC) asked about controlled foreign companies and how the reduction in income tax on multinational companies would affect or benefit the country from a revenue perspective.

Ms Mputa said that South Africa had controlled foreign company rules whereby South African residents who owned more than 50% of a foreign company was taxable in the South African system as it had a worldwide system of taxation. Treasury did not want people to hide their income by saying they had a foreign company, and the income would be attributable to them. If the company was operating in a high tax country (for instance, 75% tax in the country) it would be administratively burdensome to pay tax in South Africa and the foreign country as there needed to be foreign tax credit. Companies could not be operating in high tax countries and be trying to avoid tax; they were there for legitimate business reasons. If company was acting in high tax country and paying 75% of tax in the high tax countries, it was therefore not taxable in South Africa. Because high tax trading partners such as the United Kingdom had reduced their tax levels, the reduction to 67% to keep up with global trends and competitiveness had been suggested.

Mr Carrim, in closing, thanked the Treasury for the presentation. The day’s meeting’s content was the most difficult part of the Committee’s work and if Members were feeling ill at ease it was fine as the previous Committee had gone through the same in 2014. Things would be much more simplified at the public hearings. Members could also turn to the researchers or turn to the most active member of the Committee, Linda Ensor, who worked for Business Day. She had been to more Committee meetings than all Members and would be able to explain much to them. He warned Members to be careful as she represented monopoly capital and big business. Her attendance rate was 110%.

The meeting was adjourned.

 

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