Revenue Laws Amendment Bill 2003: hearings

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Finance Standing Committee

22 October 2003
Chairperson: Ms Hogan (ANC)
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Meeting Summary

The SA Institute for Chartered Accountants, represented by Deloitte and Touche, commented in detail on amendments made to VAT, the Customs and Excise Act, Employees Tax, Unemployment Insurance Contributions Act, Income Tax, Secondary Tax on Companies and Capital Gains Tax.

The Charities Aid Foundation Southern Africa and Southern African Grantmaker's Association lobbied the Committee to make it easier for individual South Africans and companies to donate money. They wanted no limits on the tax deductibility of donations.

Price Waterhouse Coopers (PWC) presented their detailed suggestions on the key sections of the Bill.

Noting that there was too much regulation created by the Bill, particularly "reportable transactions" provisions, KPMG provided additional comments not touched on by Deloitte and Touche and PWC. The suggested that proposed legislation on "Ring-fencing of assessed losses" would seem to discourage taxpayers from creating alternative sources of wealth. KPMG felt that the proposed amendments to Section 11 of the VAT Act would disadvantage a branch vis-à-vis a South African subsidiary. In this scenario, a subsidiary would be entitled to make use of the zero-rating provided for in section 11(2)(1) of the VAT Act, while a branch would not.

Attempts by Public Benefit Organisations to seek tax exemption for their subsidiary profitable activities were countered by the Treasury and SARS, who argued that this would defeat the principles of taxation equity. The PBOs explained that any profits from public benefit activities were ploughed back into advancing charitable activities - this was the distinction between themselves and ordinary enterprises. The type of business should not be prescribed, but rather regard given to what became of generated profits.

The Horseracing Industry cautioned against the likely devastating effects of the proposed legislation on their sector. They strongly recommended that ring-fencing not be applied to owners and breeders and that instead, they should rely on normal, proven methods of determining deductible expenses for income tax. Horseracing was distinguishable from other commercial transactions in that its largest source of income was subject to Provincial Betting Tax before direct and indirect participants were assessed on net incomes. They called on the Minister to adopt a holistic, expedient approach to the taxation of their unique industry. The Committee noted that they needed clearer indications of the likely impact of implementing such legislation.

Meeting report

MINUTES
SA Institute for Chartered Accountants (SAICA) submission
Mr Nalliah (Partner of Deloitte & Touche) represented SAICA and commented in detail on the amendments (see attached document).

Dr Woods (IFP) asked about the administrative responsibility of non-executive directors and shareholders. He queried whether this was consistent with the Companies Act. He agreed with SAICA's submission on this issue.

Prof Engel (National Treasury) explained that SARS was billions of rands behind in revenue collection. Many of these problems stemmed from the misuse of VAT and PAYE payments. Instead of paying the revenue to government, companies sometimes found themselves in financial difficulties and then withheld payments. This was a common problem around the world. If the money no longer existed, SARS could not collect. They were trying to ensure that people who collected on behalf of the government respected their responsibilities.

Ms Hogan commented that it stretched the issue very broadly to include shareholders who did not have that kind of information.

Ms Joemat (ANC) commented that PAYE was deducted from workers and therefore should be paid over immediately to the SARS.

Charities Aid Foundation Southern Africa (CAFSA) and the Southern African Grantmaker's Association (SAGA) joint submission
Mr Saldanha (Executive Director) and Ms Yvonne Morgan (Researcher) represented CAFSA, while Ms Colleen du Toit (Executive Director) and Mr Rosenthal represented SAGA. Noting that non-profit organisations do not receive significant donations from individuals, they asked the Committee to consider allowing tax deductibility of donations at source (pre-tax payroll giving). They mentioned examples of companies where small amounts were deducted from employee salaries every month, with employees' permission. They also asked the Committee to consider removing the limit on tax-deductible donations. This would increase the amount of funding for NGOs. They welcomed the changes to Section 18A but included certain concerns and alternative proposals in their submission.

Price Waterhouse Coopers submission
Mr Lermer (Director of International Tax), Mr De Wet (Director of Tax and Legal Services) and Mr Aitchison (Senior Manager of Tax and Legal Services) represented Price Waterhouse Coopers. The key sections covered were Corporate Rules, Foreign and STC aspects, Increases in commissioner's powers, Reportable Transactions and VAT. Due to time constraints, they had to hurry through their submissions. The Committee was assured that further communications between PWC, SARS and the Treasury would take place.

KPMG submission
Ms Deborah Tickle, Director of KPMG International Tax, criticised various provisions. On the question of "Reportable Transactions" in section 76, she feared that the current wide definition would create unnecessary uncertainty on what should be reported. This could also potentially result in an onerous administrative burden on "participants" in transactions.

Mrs Tickle also observed that "Tax Shelter transaction" in section 76b was not defined. Since the reporting requirements referred to legitimate transactions, the reference to "tax shelter transaction" seemed ambiguous. Many of the proposed amendments on the Foreign and STC (Secondary Tax on Companies)
were welcomed by KPMG because they clarified existing legislation or were designed to alleviate certain administratively onerous, or economically inequitable, burdens. However, the issue of dividends was raised as a concern.

On the question of "Ring-fencing of assessed losses", she felt the proposed legislation seemed to discourage taxpayers from creating alternative sources of wealth. There were many anecdotes about how individuals' pastimes ultimately developed into profitable businesses. If SARS' view was that a taxpayer was claiming deductions against a hobby, why then were expenses or losses not merely disallowed?

As for the VAT provisions, she said the proposed amendment to section 11 limited the zero-rating of services rendered to a non-South African branch or main business, to the extent that such services were for use outside South Africa. It followed that any services rendered by the local branch or main business to the foreign branch or main business in South Africa would be subject to the standard VAT rate. The result was that a branch would be disadvantaged vis-à-vis a South African subsidiary, since a subsidiary would be entitled to make use of the zero-rating provided for in section 11(2)(1) of the VAT Act.

It was also noted that Sections 20 and 21 amendments dealing with valid tax invoices would be a significant administrative burden

Discussion
Mr Peter Franks (SARS) acknowledged that tax invoices presented many pitfalls in group companies. His office was looking into revising the measure.

Mr Martin Grote (National Treasury) said that taxes on dividends were eliminated when South Africa introduced the resident-based tax system. It was a question of past investment.

Ms Tickle referred to the provision that gave credits from 10%-25%, and asked why small businesses that operated below the 10% mark were being discriminated against. Policy should encourage small operators to "scale up the ladder".

Mr Grote explained that Treasury's dividing line was above exchange control. He acknowledged that the rules were somewhat harsher for small operators.

Non-Profit Partnership, SA Council of Churches, Legal Resources Centre joint submission
Adv. Ricardo Wyngaard said that in a recent meeting with the National Treasury and SARS, his organisation had noted a number of urgent key issues. The concerns identified after consultation with more than 850 organisations over the past 18 months, included:
· the rigidity of Part 1 of the Ninth Schedule and, in particular, the lack of a generic category for public benefit activities comparable to those listed in the schedule;
· extension of Part II of the Ninth Schedule;
· the difficulties encountered by organisations engaged in activities that fell within both parts of the Ninth Schedule;
· limitations on Trading Activities and, in particular, provisions for the de-registration of organisations that exceeded the stipulated trading limitations;
· the lack of a PBO reporting form to capture relevant empirical data on the sector;
· a simple registration and filing procedure for smaller PBOs; and
· the limitations imposed on Section 18A funding PBOs.

Adv. Wyngaard said his clients felt it feasible and appropriate to address these concerns through amendments to the draft Bill. In some cases, more extensive and detailed discussions would be necessary.

Discussion
Mr Franks accused the Non-profit Organisations (PBOs) of attempting to bake their cake and eat it. It would be difficult to reconcile the PBOs' tax exemption on profit-making activities, with general tax principles.

Adv. Wyngaard clarified that he was mainly concerned about the limitations placed on trading activities, particularly de-registration of organisations that exceeded the stipulated trading limitations. He noted that if they were to go by the de minimus rule, then no tax would be raised on trading income up to R100 000 per annum or 50% of the gross receipts by the organisation.

The Chair sought clarity on whether the PBOs referred to a situation where, for example, they provided training for development work while at the same time offering consultant services to supplement donor funding.

Adv. Wyngaard admitted that there was no difference in PBOs' profitable activities, compared to those of ordinary enterprises. The type of business should not be prescribed, but rather regard what became of generated profits. Public benefit activities were vast and generated profits were ploughed back into advancing charitable activities.

Mr Franks insisted that the question of equity arose when the PBO engaged in profitable subsidiary activities.

Mr Grote concurred that, in these situations, policing distinctions became problematic.

The Chair held that provision should be made where PBOs needed to be self-sustaining so as not to be totally reliant on donors. Paying taxes did not mean that PBOs were prevented from engaging in those activities; tax incentives in this area created complications of economic distinction. She sought clarity on the tax implications of training activities.

Mr Franks said that training would be exempt as it was an activity for the public good. Where such events generated income, they could not be exempt.

The Chair concurred that to exempt profitable training would create insurmountable complications for the fiscus.

Adv. Wyngaard clarified that his clients were not seeking exemption from tax per se, but rather they were unhappy with the limit imposed on the scope of training activities.

The Chair said that the Committee would look further into the PBOs' concern.

Submission by Barkers Attorneys, representing the Horseracing Industry
Adv. Basil Thomas said he represented a labour-intensive industry; it was reliably estimated that about 200 000 people depended on it for a living. There is an inherent danger in generalising the horseracing industry with other secondary trades referred to in the draft legislation and explanatory notes, as this would be too imprecise.

Adv. Thomas explained that the activities of owners and breeders were clearly distinguished from the activities of, for example, part-time farmers. While the latter could allow costs against income and were able to build up their farms to create a capital benefit, owners and breeders had no assurance that their horses would have any capital value in the future. Where a horse gained value through success on the track, the fiscus benefitted in Capital Gains Tax on its sale, or in VAT on the sale of its progeny if it went to stud, and in income tax from those persons who earned income indirectly from success.

Adv. Thomas said the Minister's reference to ring-fencing in the Budget Speech had already had an adverse effect on horse sales. This illustrated the danger of a generalised statement by a high ranking official. Ring-fencing should not be applied to owners and breeders. They should instead rely on normal, proven methods of determining deductible expenses for income tax. Horseracing was distinguishable from other commercial transactions in that its largest source of income was subject to Provincial Betting Tax (PBT) before direct and indirect participants were assessed on net incomes. He called on the Minister to adopt a holistic, expedient approach to the taxation of this unique industry.

Discussion
Mr Tarr (ANC) expressed concern that the submissions were not based on empirical studies. He wondered, for example, whether an owner would in fact stop breeding as a result of the new measures.

Dr Woods said the arguments did not present the bigger picture. The horseracing industry claimed to lose millions of rands - he wondered why anyone would incur such losses merely for pleasure!

Adv. Thomas said that his clients had agreed with SARS and Treasury that:
- the horse racing industry was not a solid organisation but a very fluid situation where people came and went in an unpredictable fashion;
- people suffered on an individual level and not as a group;
- breeders were encouraged to cherish the part-time vocation of exporting horses; and.
- why go for the expenditure in the first place? It was discretionary spending since it was a sport where some participated for the sport per se and others for profit.

Ms Mabe (ANC) sought to establish how open the horseracing industry was to new entrants, particularly emerging entrepreneurs from formerly disadvantaged groups. She asked if the industry was representative of the country's population demographics.

Adv. Thomas said that the horseracing industry was represented countrywide, with racetracks in at least five provinces and betting across the country. As for the new entrants, people from all works of life were welcomed. The reality was that there was a substantial financial constraint attached to membership, which was often beyond the reach of ordinary income earners.

The Chair sought clarity on the likely effect on employment in the horse breeding industry if the proposed tax measures affected this hobby-based activity.

Mr Franks said that there was unfortunately no data to measure all the returns from horse breeding. In discussions with industry players, he had only managed to establish membership of around 200 000.

Mr Kosie Louw (SARS) observed that SARS had been studying and engaging the industry for some time. Returns depended on the number of bets made by punters, not breeders.

The Chair expressed disappointment at the dearth of information on the industry, particularly year-on-year profit margins. Horse breeders were not treated as farmers and therefore international research would have clarified the tax implications in this regard.

Mr Tarr (ANC) said the law should apply equitably but that as far as ring-fencing was concerned, the jury was still out on its appropriateness.

Mr Franks acknowledged that the industry may or may not incur a loss in its business but it is important that an analysis of subsidisation should be undertaken to determine the inability of the industry to afford the taxes.

The Chair asked SARS and the Treasury to look into not only the question of income, but also employment generation.

Mr Franks noted that there had been years of argument as to whether domestic expenditure on hobbies should receive subsidies, noting that income tax was based on the availability of money assumption. If one subsidised the rich, then one could fall into the pit of defeating the golden principle of equitable taxation.

Adv. Thomas clarified that horseracing did generate income but also greatly contributed toward the creation of employment. He undertook to secure empirical evidence, although he cautioned that this would not be easy. The allegation that the state would lose R700 million per annum was an unfounded generalisation and the proposed legislation could have unintended consequences.

The Chair said that the Committee was clearly uneasy about the likely impact of the proposed legislation on the horseracing industry, but that the issue was very complex.

The meeting was adjourned.

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