Revenue Laws Amendment Bill 2003: hearing

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Finance Standing Committee

23 October 2003
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Meeting report

FINANCE PORTFOLIO COMMITTEE
24 October 2003
REVENUE LAWS AMENDMENT BILL: HEARINGS

Chairperson:
Ms B Hogan (ANC)

Relevant documents
Revenue Laws Amendment Bill: Draft of 8 October
Afrikaanse Handelsinstituut Submission
Banking Council of South Africa Submission
Deloitte & Touche Submission
South African Chamber of Business Submission
South African Council of Churches Submission

SUMMARY
The primary concern raised in the submissions focused on the definition of "reportable transactions" and the link between the confidentiality agreement and the assumption of the tax implications of the transaction. During the discussions on the submissions Members sought clarity as to whether SARS had released practice notes on the proposed amendments, the reasons for not employing advanced rulings in the Bill, whether it would be problematic for churches to report the transactions of the agreement was not related to the church itself, the reason for not imposing tax requirements on directors of private companies as well.

MINUTES
Afrikaanse Handelsinstituut
General concerns
Mr Boonzaaier, Chairperson: AHI Tax Policy Committee, raised the following general comments contained in the submission (document attached), which they had raised before:
- insufficient time was allowed for proper consideration of often voluminous and very complex amendments
- the cost of complying with the administrative requirements of taxation legislation was becoming increasingly prohibitive for all businesses in general.

He proposed that, in the future, business should be consulted before the amendments of attached legislation are drafted. He felt this would prevent the sort of problems that arose with the drafting of the present amendments.

The Chair explained the drafting process of legislation. When the Minister tables the budget, he spells out in the budget what changes in tax legislation would take place in the following year. Thereafter, the drafting process takes place, and the drafts are continually circulated. She asked if business was excluded from the circulation process.

Mr Boonzaaier responded that his proposal suggested that, prior to the drafting of the legislation, business be engaged in the debate process with regard to the amendments.

The Chair responded that tax legislation was a particularly sensitive type of legislation. Advanced knowledge of what would come through tax legislation, was not desirable in many instances. It was more or less the prerogative of the Minister to decide on the legislation that would be passed. That did not mean that business could not be consulted. However, there could certainly not be a discussion on what tax legislation would be coming through for the next year.

Mr Martin Grote, Treasury Chief Director: Tax Policy, wanted to highlight that National Treasury and SARS should come in to a lesser extent. Treasury would meet throughout the year with the accounting fraternity of all accounting firms. They aimed to have two to three meetings per year, to facilitate discussions throughout the year.

The Chair said that Mr Boonzaaier's request would not be easily met. She felt that the consultative network of people with whom the AHI was engaging, should be included in the drafting process. She again explained that in the budget, the Minister tables the legislation relating to tax policy and changes in current tax legislation. Then, the legislation gets developed, and towards the end of the year, it comes before Parliament. That is the period in which consultation takes place between the various interested parties. At that stage, she agreed with Mr Boonzaaier that it would be important to engage the participation of representative bodies such as Champs and Bousse. She could not conceive, however, of a process wherein the Minister consults with the bodies prior to the tabling of the budget, with regard to what would be contained in the budget, as that would create unfair advantages for those people inside the consultative network.

Mr Boonzaaier conceded there would clearly be situations which would require the development of, for eg., the capital gains structure. Here, he again suggested that it would be more valuable to debate the issues beforehand, rather than to proceed with draft legislation, and inviting comments on the legislation. There were clearly sensitive issues which could not be widely published, and he accepted that.

The Chair made an appeal to ensure that Chambers of Business South Africa and Business South Africa were included as part of the process in future.

The Chair informed the Committee of a Parliamentary ruling that legislation must be available in its final form to the public ten working days before it was due. She felt that when Chambers of Business South Africa and Business South Africa were more "in the loop" of consultations, the AHI would have less of a problem.

Prof K Engel, Treasury: Tax Consultant, explained that Treasury tried to engage as much as they could on the time issues. They had been meeting with the major groups, and "bringing them on board" according to the interest which they showed. Treasury has been attempting to improve the process. they used to just circulate prior drafts on the e-mail of the small groups. Now, even before the ten-day consultation, they issue on both the Treasury and SARS websites all draft legislation. More effort now goes into the preparation of the explanatory memo.

The Chair said the fact that there were properly representative and united business associations, that would make the consultative process much easier.

Mr Boonzaier stated that the fact that government and business engaged before the finalisation of the Financial Charter has yielded a much better product than, for example, the Mining Charter. He stated that the point being made was that business should be engaged beforehand when major changes were being proposed, as that debate would be very valuable.

The Chair noted Mr Boonzaier's concern.

Comments on specific provisions
Mr Boonzaier raised the AHI's specific concerns contained in Points 3.1-3.5 of the submission.

The Chair informed Mr Boonzaier that an explanatory note on the objectives of the proposed amendments was contained in the Explanatory Memorandum to the Bill, and would be made available to him.

(i) Reportable transactions
Mr Boonzaaier proposed that a R1m minimum tax benefit threshold be incorporated, as was the case with the United States legislation.

The Chair stated that this point had been accepted.

Mr Kosie Louw, SARS: Legal Services, replied that it was accepted in principle that a minimum threshold should be included, but a final figure was not yet decided upon.

Mr Boonzaier raised the AHI's concerns in Points 3.6.2-3.6.4 of the submission.

The Chair requested Mr Boonzaier to clarify whether the AHI was of the view that the proposed amendments to Section 76E was unconstitutional, or whether it was simply unfair.

Mr Boonzaier raised the concerns contained in Points 3.6.5-3.6.8 and Point 4 of the submission.

Discussion
Dr G Woods (IFP) stated that several concerns have now been raised with the uncertainty or confusion caused by the amendments, and asked SARS to indicate whether it has or planned to circulate any practice notes on the proposed changes.

Mr Frans Tomasek, SARS, responded that SARS had already conceded that it must tighten up on the "reportable transactions" legislation, and this would hopefully obviate the need for significant interpretation notes on the matter. He stated that SARS would be releasing the discussion document on advanced rulings later in the year, to ensure the engagement with SARS that was always requested.

He stated that several comments have been made to the effect that the advanced rulings were intended as a substitute for reportable the significant transactions with tax consequences. Mr Tomasek stated that it was only a partial substitute. It would only be those persons who did not mind disclosing the facts of their transactions who would come forward for a ruling, whereas those persons who preferred to keep their financial matters a less clear would not request an advanced ruling. He stated that reportable transactions would cover both categories of persons.

Dr Woods asked SARS to explain the practice notes it had circulate thus far on Capital Gains Tax (CGT).

Mr Tomasek replied that SARS had a draft guide of approximately 300 pages on its website, which covered the entire scope of the legislation and provided a great deal of guidance. He stated that a specific valuations guide has also been made available, which indicated the methodology used by SARS and the kind of forms that have to be completed in order to support the valuation. A range of practice notes have thus been released, which were now called interpretation notes. Mr Tomasek stated that some of the areas covered by the interpretation notes included "residence", especially the "physical presence test" and the "ordinarily resident test" for individuals, as well as an interpretation note on the "effective management test" used for companies. He stated that SARS has thus given guidance in those areas in which there have been significant changes in the legislative framework.

The Chair requested additional clarity on what exactly was meant by "reportable transactions". She asked whether the information had to be reported when the transaction was completed or when the person was contemplating the transaction.

Mr Tomasek replied that it would have to be reported when the transaction was completed. He stated that there would then be certain triggers which would give rise to the transaction being reported or not. The trigger would be that an assumption was made about the tax implications regarding the benefit the person would receive, and there would also be a repricing arrangement. SARS would be particularly interested in those transactions in which the parties decided to share the risk of a successful challenge, because these persons would not be prepared to live with the consequences but would instead be prepared to shift the repricing arrangement so that they can share the consequences.

He stated that the classic example would be found in the financial service industry, although it was not limited to that industry alone. SARS has noticed agreements which had fairly aggressive tax structuring in place, and was sowed into the municipality's other non-taxable entities in order to reduce the interest rates they were paying on the transactions. Mr Tomasek stated that it would effectively happen that once SARS challenged that agreement the financial institution has not borne the cost, but it was simply passed straight back to the municipal entity.

He stated that SARS released a couple of media releases in 2001 which pointed out that people would have to be very careful of the risks they were accepting when they entered into such transactions, because people were only focusing on whether a better interest rate was being offered, without realising that the risk was a "sword of Damacles" just waiting for a challenge. Mr Tomasek stated that SARS' second media release indicated the particular transactions it was concerned about, and this has led to a greater level of caution regarding the purchasing of these products.

The Chair asked SARS to explain one of the triggers that the transaction must be subject to confidentiality.

Mr Tomasek explained that it related to confidentiality in terms of the tax treatment.

The Chair stated the Committee had learnt during a visit to a municipality that the activities of the banks which appeared to spend most of their time structuring very complicated financial dealings, often employing such aggressive tax vehicles. She asked whether it was these kinds of structures that SARS was referring to.

Mr Tomasek answered in the affirmative, but stated that they were not always banks. There were actually people who specialised in this kind of arrangement, known as bank boutiques, and would approach banks with a sufficient tax base and taxable income to absorb the scheme and sell it for a fee. He stated that because these people would specialised in designing more elaborate structures to avoid tax, they would not want that structure to escape into the market without them getting a fee. It was for this reason that a very strong confidentiality clause would thus often accompany that structure, which would state that the tax treatment of the arrangement was confidential.

The Chair stated that it would thus be like a patent, or a form of intellectual property. This would then prevent the person to whom it was sold form divulging the structure to another person.

Mr Tomasek agreed.

The Chair asked SARS to lay out the consequences once it is informed of such a transaction.

Mr Tomasek responded that the consequences would be no different than if it had been disclosed in a tax return. The only difference between the two was that, instead of picking up on it 12 to 24 months after the transaction had been finalised, it would now be picked up very soon afterwards. He stated that there would thus be no further impact.

Ms R Joemat (ANC) asked whether there was any obligation on that consultant or "bank boutique" to notify SARS.

Mt Tomasek replied that in this context there was no reporting whatsoever at this time. The only reporting done to SARS would be the reporting done in the income tax return. He stated that his experience with such arrangements has indicated that certain taxpayers would provide SARS with as little information as they were legally required to provide so as to avoid penalties for non-disclosure, but not enough to elicit too many questions. This was the problem SARS was currently faced with.

Mr Boonzaier responded by objecting to the labelling of all taxpayers as dishonest, simply because there were a few bad apples. He stated that his experience has been that, especially in the banking industry, that most of these transactions were accompanied by detailed legal opinions confirming the legality of the transaction. Mr Boonzaier stated that whether SARS disagreed with the interpretation could be resolved in court. He stated that a duty was placed on SARS to find those unethical taxpayers and to bring them before a court of law.

Mr Kosie Louw replied that many of these transactions were grey area transactions. He stated that these were not cases of outright tax evasion, but were rather tax avoidance issues. They could thus be allowed by the existing legislation, or might not be. He stated that there were often a whole range of agreements that were entered into, and it did not involve merely one transaction. Little bits of information about the overall transaction would then be disclosed in these various subordinate agreements, but it was difficult to pick up on these little pieces of information. It would only make sense once the entire scheme was sketched.

Dr Woods stated that he was aware that SARS actually got the ball rolling during 2002 when it revised the Corporate Tax Return for greater disclosure, as to whether banks had participated or advised on such transactions. He asked SARS to explain the initial response given by the banks to providing that type of information, as he was of the opinion that the disclosure would always be limited without the necessary definition.

Mr Louw responded that it has gathered from its interaction with the Banking Council that this disclosure requirement did place an additional administrative burden on them to report in that manner. He stated that it was argued that SARS should simply ask more questions in the tax return but the problem was that the return would only come in a year after the year's end, and the information would then only be reported 18-24 months down the line.

The Chair asked SARS to explain what would happen when the early warning signals for a clearly illegal transaction of this nature were triggered.

Mr Louw replied that SARS would evaluate the transaction or scheme and it would issue a revised assessment, and this assessment would then list the tax consequences as SARS saw them. He stated that depending on how the aggressive the scheme was, SARS could then impose penalties or require interest to be paid. In many cases an assumption would be made on the tax consequences of the transactions and, if those assumptions were not ultimately realised, then costing adjustments would be made to the transaction. He stated that the additional costs would not be borne by the bank, but would instead accrue to the borrower. Thus both the risk and the costs would be passed on to the borrower, which were in most cases a municipality or local authority.

He stated that the additional tax consequences would normally be picked up by the bank, because where the bank would have deducted the lease payments during years one and two, SARS would then require the payments to be spread out over the entire period of the lease which could be 15-20 years. The bank would thus put up the additional tax cost, but the borrower in that case would pick up the negative economic result.

Ms Joemat asked whether the person buying into the package and not the bank would bear the risk, even if that person was recommended by his/her bank to invest in a specific package which involved tax implications.

Mr Tomasek responded that this did very much depend on the specific package. He stated that it tended to be in the big corporate arena where the sums involved were substantially larger, that the custom or tailor-made arrangement was most prominent. In these arrangements the parties aimed to split the profit out of the tax arrangement and, depending on the competitive position of the client and the bank, it would on average be split at 30% for the bank and 70% for the client.

The Chair stated that when this Committee processed the Municipal Finance Management Bill it came across so many municipalities that were showered by these kinds of fancy arrangements, and some of them were "absolutely shocking". She stated that she now better understood the importance of the reporting requirements imposed to curb against these arrangements. She asked SARS to explain why advanced rulings could not be employed here.

Mr Louw replied that it was not so much that SARS did not want to employ the advanced ruling, but rather that it preferred to use both routes. The advanced ruling was different because a person would inform SARS that s/he intends entering into a specific type of transaction, and request to be informed as to how SARS would them treat the tax consequences of that transaction. SARS would then provide that person with a ruling on that proposed transaction. This would thus provide certainty both for business and SARS, and has an added advantage that SARS would then become aware of such transactions at an earlier stage.

He stated that SARS has conducted much research into the advanced ruling system, and it would be releasing its discussion document on this. It would outline SARS' proposal that an advanced ruling system be introduced, the types of advanced rulings SARS would propose and the various strategies of advanced rulings that could be employed. Mr Louw stated that SARS had considered the Australian, New Zealand and Canadian models, and stated that the SARS proposed model was a combination of the Australian and Canadian approach, primarily.

Dr Woods requested SARS to explain whether the solving of this problem would establish greater equity for banks and their tax-paying behaviour, as serious concerns were raised with the inequitable tax take from the banking sector.

Mr Tomasek responded that this was not specific to the banking sector, and could be done in any large corporate environment. He stated that the tax take has improved significantly as SARS has unwound some of those structures, but the success in unwinding these structures was slightly uneven at the moment.

South African Council of Churches
Dr Douglas J Tilton, South African Council of Churches: Associate for Research & Communication, presented the submission (document attached) which raised concern with the complexity of the registration and reporting requirements and their impact on small PBOs in particular, the effects of trading restrictions on organisational sustainability and the lack of a clear strategy for the expansion of Part II of the Ninth Schedule of the ITA and the omission of certain public benefit activities from this list.

Discussion
Ms Joemat suggested that it should not be a problem for the church to register the transaction if the company or arrangement was not related to church itself.

The Chair stated that the Committee shared the concern raised by the South African Council of Churches (SACC) that the quid pro quo should be that the church should not then lose its status as a public benefit organisation (PBO). The church should be allowed to have unrelated trading so that it can plough those funds back into the NGO, but it should not then lose its PBO status if this exceeds 15%.

Dr Tilton responded that this would be an improved, particularly if the 15% bar were to be raised. The SACC was concerned with the very conceptualisation of this aspect, because it appeared that the concern was that Non-Profit Organisations (NPO's) would compete with the private sector. He stated that the SACC was not clear as to where the moral hazard lay here. The SACC would have a problem if it was being proposed that organisations that were engaged in business for the enrichment of their stockholders needed to be put on an equal footing with organisations that were using the income they derived to benefit the community at large.

He stated that the real moral hazard was the notion that a profit-making organisation would disguise itself as a PBO in order to capture the benefits of tax exemption. Dr Tilton stated that if that was the moral hazard, then it would be the view of the SACC that there were several other vehicles in the Income Tax Act that could be used to prevent that from happening. He stated that so many requirements would have to be complied with in order to capture the benefits of the trading allocation and the tax concessions, that it would not really be that practical.

Dr Tilton stated that even if it would be better the proposal that one would be deregistered if it exceeded the limits would be coupled with the raising of the bar above 15%, as these would be two good first steps. The SACC would still argue that there were advantages to PBO's engaged in some degree of trading, not only because they could assist in subsidising public benefit duties but also because they approach trading differently, as was spelt out in the submission.

He stated that there were many cases in which churches have already spun off. The Moravian Church, for example, has already established is Press Office as a separate organisation. Dr Tilton stated that he was sure, but was informed that Psalty Press was in fact a circuit of the Methodist Church. This did raise structural problems for some of the churches. He stated that there was an increasing tendency for these spin off's to become "just another business" because, as the [primary goal would now be the making of money because it would be financing the organisation and as more and more business principles creep into it, it would begin to lose the character it had when it was a part of the integrated activities of a public benefit organisation. This was a concern for SACC.

The Chair stated that she did not believe that the mere fact that it was declared a tax-paying entity would automatically push it into the realm of business principles. She stated that the philosophical assumption should be that PBO's should be able to engage in trading activities in order to become for financially viable and self-sustaining. There were however two moral hazards: the first was that, as stated by Dr Tilton, people could then hide behind the guise of being a PBO and this was a real concern, and would require constant policing by SARS to guard against that kind of abuse.

The second was the problem in distinguishing between the trading activities of PBO's and those of small businesses that were struggling to establish themselves. There were, for example, many churches that have shops that sell second hand clothes, but in many townships the selling of second-hand clothes was a livelihood for many people. The Chair questioned the rationale behind the granting of a tax benefit to PBO's in such cases, when the same exemption was not granted to those small who were struggling to make a living.

The Chair stated that these were thus very murky waters, and a clear-cut approach was preferable: churches should be treated the same as any other business, small or large, if they choose to involve themselves in trading activities, but churches should not then sacrifice its other tax benefit advantages as a PBO. She stated that she would prefer to see this type of spin off, because this model would deal "equitably with everybody on the playing field".

Dr Tilton replied that the point he was trying to make was that if the entity remained integral to the organisation, it would then continue to operate under the ethos of that organisation. However, as soon as it was required to become a completely separate organisation, there would always be the hazard that it would lose the integral nature as to the purpose of the church.

Mr Grote disagreed. He stated that if the directors of the company created were also members of the PBO and they directed the outreach, it could actually be very focused, to his mind. This would allow all the benefits to be streamed back to the PBO, and the employment policy would also be in line with the ultimate outreach of the PBO. It was a very transparent approach, but the PBO would still have full influence over the activities of the organisation.

Banking Council of South Africa
Mr Kevin Daly, Banking Council of South Africa: Consultant, presented the submission (document attached), which focused exclusively on amendments proposed to "reportable transactions" which were uncertain, unreasonable, lacked clarity and consistency and would reduce the efficiency of the current draft of the Bill. He also raised concern with certain specific provisions in the Bill.

Mr M Brits, Banking Council of South Africa General Manager: Financial Markets, added the following comments raised by Rand Merchant Bank:

"lending arrangements"
The "ten working days" requirements must be clarified, because it was quite possible in general terms for such contracts to be concluded on the same day in which it was entered into and lent. Clarity was thus required as to whether this referred to the trade date or settlement date. The proposal was that the phrase "ten business days after the date on which the securities were delivered to that borrower by that lender pursuant to that arrangement" be inserted in sub (a) and (b). The same amendment was also proposed to the "12 month" calculation.

"for any purpose other than for delivery to that lender"
This required clarity because it was quite possible for two unrelated transactions to be entered into involving the same script.

"market the security"
The proposal was that this be limited to securities alone.

"foreign financial instrument holding"
Mr Brits stated that the Banking Council had unearthed an unintended consequence of this definition in the 2002 revision. Part (b) was problematic in that it allowed a South African bank to establish a legitimate off-shore operation in on of those tax areas, but it would not necessarily deal with the residence area, and it would most likely do business with other countries. The proposed amendment was to include a provision which would state:

any financial instrument arising from the principal trading activities of a foreign company other that the company referred to in paragraph (b), that is a subsidiary or fellow subsidiary of a bank holding a South African banking license in terms of the Banks Act 94 of 1990, provide that the foreign company is a member of the banking group as defined in section 1 of the Act, which group is subject to the prescribed regulations relating to banks under the Act, the foreign company draws more than 50% of its income or gains arising from the principal trading activities with respect to persons who are not connected persons in relation to that foreign company.

Tax-related inspections
He proposed that persons appointed by SARS to perform such inspects be prohibited from functioning until they have taken the oath.

Section 88E
Mr Brits stated that the Banking Council was concerned that the breadth of the amendment would be all-encompassing, and would suggest a qualification in a new provision, which would state:

in the event that such a relationship as detailed in (2) above may be perceived to exist, a declaration of such relationship should be recorded in the interest of full disclosure.

Discussion
The Chair asked SARS and Treasury to indicate its reasons for deciding against the use of the advanced ruling.

Mr Louw responded that SARS' ultimate goal, as he stated earlier, was to have both systems in place, and it was thus not a matter of having either the one system or the other. He stated that both the reportable transactions and the advanced ruling systems would have to be used because not all persons would approach SARS for an advanced ruling, especially those who would not want SARS to be aware of their transactions.

The Chair asked what the difference would be if the conditions triggered not a reportable transaction, but rather a request for an advanced ruling.

Mr Tomasek replied that the advanced ruling was the expression given by SARS as to how it would proceed with the case, and there were two issues attached to this. Firstly, the taxpayer could still choose to ignore the views of SARS on the transaction.

The Chair stated that Mr Daly's view appeared to be that the benefit of the advanced ruling to the parties to the transaction was that it allowed certainty as to how SARS was likely to proceed with the matter. It might thus be ideal to make it compulsory to request an advanced ruling, unless this would be unconstitutional.

Mr Tomasek responded that according to international practice, advanced rulings were binding on the revenue authority but not on the taxpayer. He stated that the only certainty afforded by an advanced ruling would thus be the manner in which the revenue authority would treat the transaction. It did not offer any certainty as to how the courts would view it, once it reached that level. Mr Tomasek stated that the removal of the option to approach the courts would clearly be problematic.

Definition of "reportable transaction"
The Chair noted that SARS agreed with Mr Daly's contention here that a tighter definition of this term was needed.

Mr Grote stated that two major economic issues were involved here. Firstly, if the apparent aggressive tax planning was not addressed, government would run the risk of major revenue loss. He stated that this would feed back into the overall fiscus strategy in which government would be unable to collect what was owing to it, rates would not drop etc.

Secondly, this tax arrangement must also be reviewed from the client's viewpoint, and he questioned whether the confidentiality arrangement was correct. He asked whether the reduction of the rates were really beneficial for the other party to the transaction. The Banking Council must be engaged with for assurance that rates for the other party involved in the transaction did indeed drop.

Mr Daly replied that it would clearly have to be to the client's benefit to enter into the transaction, or there would be no incentive for entering into the arrangements. He stated that the banking Council accepted the need to disclose the nature of those transactions, but the backbone of the definition and the point at which one could separate an activity which was done in the normal course of business, in which SARS really should have no interest, and an activity which was based on perhaps a dubious or unconfirmed interpretation of tax law, that backbone was the fact that there was an assumption as to tax treatment.

He proposed that that backbone should override in the definition of a "reportable transaction". Mr Daly stated that the attempts to extend the definition to a category of transactions which contains a confidentiality clause was fine, but this would be too far-reaching if it was done without that pivotal distinction as to whether that assumption was made or not.

The Chair sought clarity on what precisely would trigger a reportable transaction in 76A(1)(b). she asked whether it would solely be a confidentiality agreement, or whether that confidentiality agreement would have to be linked to the assumption as to the tax implications of that transaction.

Mr Louw responded that the use of the word "or" after 76A(1)(b) indicated that any one of 76A(1)(a), (b) or (c) could, by itself, trigger a reportable transaction. He stated that the confidentiality clause did not encompass the intellectual property aspects of the transaction, but only its tax treatment.

The Chair stated that the scenario being referred to here was one in which the tax implications were very clear, but there was also a confidentiality agreement. This would then become a reportable transaction, because the confidentiality agreement would be delinked from the tax assumption. She sought clarity as to why this approach would be followed.

Mr Tomasek replied that the question here was that, if the transaction and its tax implications were that clear, why would it be kept confidential. He stated that SARS would also have to be informed of these creative arrangements.

Mr Daly replied that the innovation could relate to the manner in which the transaction was assembled, and this could very well contain a confidentiality requirements because of the specific manner in which it was structured. He stated that although SARS would eventually want to know about such structures, the Banking Council would have concerns with the impact of such disclosure on competitiveness within the market. He stated that such a proposal would amount to severe inroads being made by placing additional obligations on the taxpayer, and they might not be clear precedent for this, even though SARS might have a justifiable interest in the disclosure. Mr Daly stated that the Banking Council would argue that the definitive aspect of the reportable transaction should remain the tax assumption.

The Chair asked Mr Daly to explain the Banking Council's reasons for linking the confidentiality to the tax assumption issue.

Mr Daly responded that, from the Banking Council's viewpoint, the only justification for that type of requirement was to identify any assumptions made about the tax treatment up front so that it could be dealt with. He stated that the normal reporting and disclosure requirement which would have to be fulfilled when the taxpayer completes his tax return, would now be accelerated. This could be justified in certain cases, but the view of the Banking Council was that the decisive factor here should be whether there has been a tax assumption or not.

He stated that if the definition was extended beyond this, SARS would also require up front disclosure for all confidentiality agreements. Mr Daly stated that the view of the Banking Council was that this would extend the definition too far.

Mr Daly stated that, by creating a offence if such transactions were not disclosed to SARS, clients would now be discouraged from entering into totally legal transactions simply because they would now be weary of the fact that they would now have to report it to SARS, and SARS might then decide the transaction was in fact illegal and the client could face imprisonment.

The Chair stated that this was a difficult issue, and she appreciated the arguments made both by SARS and the Banking Council. She stated that final judgment on this issue would be postponed until the issue was discussed further, and requested Treasury, SARS and the Banking Council to discuss it amongst themselves as well in an attempt to reach agreement.

She stated that she was concerned by 76A(1)(c), because it was a very far-reaching decision.

Mr Louw replied that it was included in the Bill because it could happen that 76A(1)(a) and (b) were simply not adequate to capture all these kinds of transactions. SARS only had the opportunity perhaps once or twice a year to amend the Revenue Laws, and such a provision would allow SARS to act quickly to respond to such transactions which might crop up. He stated that the same route that was followed with the public activities could be followed here, and the provision could require the Minister to publish a list of the kinds of reportable transactions, which would then have to be included in the law within a period of 12 months.

The Chair requested SARS to verify the constitutionality of such a provision, which subjects the Minister'' regulatory powers to a legislative framework. She stated that this Committee had experienced the same problem when processing the Municipal Finance Management Bill.

Section 76B(3)
Mr Louw proposed that final decision on this matter raised by the Banking Council be held over. SARS did not want to be overloaded with information, and it would seek to reach an agreement on this matter. He stated that some of the information listed in that provision was very important, as it allowed SARS to get an overall idea of the transaction and its tax implications.

Mr Daly replied that he understood the concerns raised by Mr Louw, but stated that the reference to "certified copies" in the provision implies manual copies which would have to be certified. This would thus entail additional costs for the taxpayer.

Dr Woods stated that SARS would have to check on a possible conflict of interests here, because Commissioners of Oaths were not allowed to certify their own documentation. Thus it must be ensured that bank managers do not certify the documentation required in 76B(3).

The Chair agreed.

Section 76E
The Chair agreed with the Banking Council that the penalty has to be clarified.

Mr Tomasek agreed.

Mr Louw stated that the three amendments raised by Mr Brits would have to be considered further by SARS, but they did not appear problematic at first glance.

"foreign financial instrument holding"
Prof Engel stated that this matter has been discussed for some time. He stated that Treasury could not act in this area until it had all the facts from the banks on such matters.

Mr Brits responded that he would engage the banks on this matter.

Tax-related inspections
Mr Tomasek stated that that taking of the oath did not absolve the person from observing the secrecy requirements of the legislation. Thus Section 4(3) created an offence here. Furthermore the amendments to Section 4(1) were aimed at clarifying the fact that persons who were engaged by the Commissioner would also be made subject to the secrecy provisions. He stated that they were thus covered by the secrecy provisions.

Section 88E
The Chair suggested that the proposed amendment did offer some protection. She requested SARS to consider the amendment.

Mr Louw replied that the amendment proposed could be effected, if it would clarify matters.

South African Chamber of Business and Deloitte & Touche Submission
Mr Des Kruger, Deloitte & Touche, presented the submission (document attached), which outlined its concerns with the corporate rules, the tax impact on individuals, effects on foreign income, the definition of reportable transactions, Value-Added Tax (VAT) consequences and concerns with administrative provisions.

He stated that SACOB had asked him to raise the following concerns contained in their submission that related to the removal of designated country and business reinvestment provisions.

Discussion
Taxing of directors of private companies
Mr Louw replied that this would not be possible to impose these on the old provisions. It was easily suggested that directors of private companies and income should be taxed as it accrued, but this was in fact were the big problem lay. The old debates as to whether the income actually accrued to the individual would then resurface, when it fact the income only accrued at the end of the financial year when the directors have signed off on the financial statements. He stated that the deeming provision would thus be necessary to take care of basics. He stated that there was room for debate as to the 80% limitation on the bonus paid.

Mr Kruger replied that any number of senior executives who were not directors of private companies or even of public companies, who were in exactly the same position, where it would be dependent on the exercise of discretion by some person. For that reason the amount would then not roll over. He stated that once again a very narrow portion of taxpayers was focused on, whereas a number of taxpayers were doing exactly the same thing. This has unnecessarily complicated matters. Mr Kruger stated that directors of private companies should not be singled out.

The meeting was adjourned.


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