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FINANCE SELECT COMMITTEE
26 November 2003
ADJUSTMENTS APPROPRIATION BILL; REVENUE LAWS AMENDMENT BILL; PREFERENTIAL PROCUREMENT FRAMEWORK & ANNUAL COMMITTEE REPORT: ADOPTION
Revenue Laws Amendment Bill [B71-2003]
Adjustments Appropriation Bill [B69-2003]
Errata to Revenue Laws Amendment Bill
Committee Annual Report 2003
Committee Report on Preferential Policy Procurement Framework (document awaited)
Before adopting the Revenue Laws Amendment Bill the Committee was briefed by the South African Revenue Service (SARS) on the technical and clarificatory amendments effected to the Bill. The briefing focused on the following clauses: Clause 26 allowed for the creation of a mining trust to generate funds to be used for the rehabilitation of the property being mined, and Members sought clarity as to who would co-ordinate this matter. SARS informed Members that Clause 33 allowed a generous concession for the construction of new buildings and the refurbishment of old buildings in the Urban Development Zones, Clause 36 prevented persons from disguising their private expenses as business expenses in order to gain a tax benefit and Clause 69 dealt with the reportable arrangements and focused on whether such arrangements contained a tax benefit which had to be declared.
Before adopting the Adjustments Appropriation Bill the Committee was briefed by Treasury on the adjustments made to the budget allocations to various government departments for unavoidable and unforeseeable expenses. They focused on the two largest adjustments made: firstly the R750m allocation to the Department of Communications for the recapitalisation of the Post Office, and the R500m awarded to the Department of Defence for its peace support initiatives in the region. During the discussion Members raised concerns with the fact that there were not any objective criteria used to decide whether expenditure was in fact unavoidable or unforeseeable and the Financial and Fiscal Commission recommendations could be used to assist here.
The Committee also adopted its 2003 Annual Report as well as its Report on Preferential Procurement Policy Framework.
Revenue Laws Amendment Bill - briefing by South African Revenue Service
Mr Frans Tomasek, (SARS Assistant General Manager: Law Administration), referred to Mineral Resources and Petroleum Act. any changes in terms of this Act would not trigger a tax event.
The definition of "documents and information" has changed because of the repeal of the Computer Evidence Act by the Electronic Communications and Transactions Act.
Recovery of tax on the Appointment of an Agent deals with the alignment of smaller taxes with income tax and value-added tax.
Similar provisions are to be found in dealing with evasion. In the final version of the Act, the public officer or responsible person bears liability, and directors and shareholders who are involved in the overall management of financial affairs are also personally liable if funds are not paid over.
This is to be read with clause 106 and 107. This allows for a tax payer who disposes of an asset in a business context to have the recruitment to be spread over the life of the new or replacement asset. This is to ensure that there are funds available for the purchase of the new asset. Over the life of the new asset, the tax payer can claim a new depreciation to encourage reinvestment and growth.
Sections 9(e) and (f) have been repealed and 9(e) has been significantly amended.
Sub-clause (b) provides that mining companies have significant environmental impacts. There is opportunity for the mining company to create a rehabilitation trust so that money is available to rehabilitate the property. There is now tighter regulation over such trusts so that money is not reinvested in the business. Sub-clause (h) introduces the Participation Exemption. Once there is a significant interest in a foreign country (more than a 25% stake), any dividends that flow from it are tax-free.
The Chairperson mentioned multi-national companies that use various methods to avoid paying tax in different countries.
Mr Tomasek said that certain anti-avoidance provisions had been introduced along with the concept of Participation Exemption.
Sub-clause (n) introduces a new Z(i) which deals with public-private partnerships. Where an amount in received by a tax-payer in terms of a public-private partnership, ownership will be vested in the Government by the end of the public-private partnership. The amount received will not be taxed.
This relates to the Mining Rehabilitation Trust and provides that there not be too great a deduction in any particular year.
This deals with research and development and creates a friendlier tax dispensation for new intellectual property, copyrights, designs and patents. There a much more generous extension of the concession for buildings. Controls are in place to avoid abuse. Research must be done in South Africa so that it is not spun off into a tax haven.
This deals with urban development zones and permits a generous concession in respect of either new buildings or refurbishment of old buildings. The aim is to target areas where infrastructure is already place but not being used to its full capacity. Tests look at whether the rates and property values are dropping. The municipality must come forward to propose an area where this incentive will take effect. It must show that there is a partnership between itself, national Government and the private sector to revitalise the area. The concern is affordability constraints and there is a restriction on the area the municipality may demarcate. If a municipality has a population of 500 000 or less, it is allocated 150 hectares. Municipalities with more than 500 000 are allocated 150 hectares with an additional 20 hectares for each additional 100 000 people in the municipality. Strong reporting is required from the municipality to SARS and the Minister, from the tax payer to SARS and then from SARS to the Minister and ultimately to Parliament.
The Chairperson asked what the situation would be where an area had declined so that it is no longer an economic hub. She referred specifically to Germiston that no longer derives a great deal of revenue.
Mr Tomasek said that some municipalities have multiple areas that have been pulled together. The municipality would then choose the area with the best chance of success as a turn-around candidate. If a municipality has a population of 2 million or more, it has the option of taking the area it is allowed in terms of the hectare rule and splitting it in two.
This deals with public benefit organisations (PBO's). A donation to a Government or provincial administration for one of the section 18A activities will qualify for a deduction. Sub-clause (k) sees the insertion of a new subsection (2) which permits that both activities under one PBO but there needs to be an audit certificate to show that the donation is used only for section 18A activities. Part 2 of the 9th Schedule has been extended substantially so that more and more activities qualify for deductable status. There has been concern about abuse of tax donations.
The concern is that some fairly well-off people are in a position to effectively disguise some of their private expenses as business expenses and claim for tax purposes. There are a set of tests that allows a person to be included into the rule and another set for having oneself excluded from the rule. The marginal tax bracket kicks in at R255 000 and the rule applies if income exceeds this amount. Certain activities have been listed as those where people disguise hobby expenses. If it can be shown that a suspect activity has a reasonable prospect for profit, one can be removed from the list. This prevents people off-setting hobby or secondary trades against primary sources of income. Activities are ring-fenced because there may be cases where people with real businesses are targeted.
The amendments to this section relate to corporate restructuring to make rules more flexible.
This deals with the secondary tax on companies. People can now clearly see where and when dividend cycles begin and end.
With regard to reportable arrangements, the focus is on deals where there is a tax benefit and the person shares a tax benefit. If SARS challenges the structure, the person can get back some of the advantage passed on. SARS must evaluate this kind of structure to determine whether it is legitimate or not. The 60 day period within which the transaction must be reported can be extended in extenuating circumstances. If the transaction is not reported, a stricter anti-avoidance rule is applied and the transaction is deemed as abnormal. The tests in place would have to be satisfied to overturn the transaction. If the person willfully or recklessly fails to report the transaction, an amount of additional tax equal to the tax benefit is imposed, which effectively wipes out the tax benefit. There is still an opportunity to reduce the additional charge in extenuating circumstances. The whole process is subject to an objection and appeal.
Part IIIA - Settlement of Disputes
This is based on existing regulations.
There is now a large number of activities that a PBO can carry out that would qualify it for section 18A status.
This is aimed at combating smuggling and provides for a particular type of packaging and distinguishing marks that need to be put on cigarettes.
The concept of a de-grouping operator is introduced here. Importers and exporters sometimes have consignments that are too small to be transported on their own. A set of rules has been introduced to trace the liability for any duties. A number of propose amendments have not been included and de-grouping provisions have been included for the air side and the marine side will follow later.
Chapter VA - Environmental Levies
This includes the rules required to impose the plastic-bag levy, including enabling legislation to license manufacturers and rules to administer this piece of legislation.
The International Trade and Administration Commission (ITAC) replaces the Board of Tariff Trade and so the relevant changes were affected throughout the customs and excise legislation.
Chapter XA - Internal Administrative Appeal, Alternative Dispute Resolution, Dispute Settlement
This new chapter proposes the equivalent of an objection known as the Internal Administrative Appeal. A set of procedures has also been created for Alternative Dispute Resolution, as well as the provision for a possibility of a settlement. This is substantially based on provisions in other legislation.
The rules outlined in this clause attempt to make the VAT Act more consistent in terms of Government grants and other transfers with respect to VAT.
This includes an expanded definition of "lending arrangement" to increase liquidity on the exchange. The rules now only apply to listed and the borrower is not permitted to claim an STC credit because this would lead to easy tax avoidance.
This relates to custom control areas inside an industrial development zone. Instead of each enterprise being licensed and controlled, an area with all the enterprises inside would be licensed and controlled. The whole administration of the area becomes easier. The benefits of this provision are that there is a deferral on customs duties and import, a deferral of VAT on import and provision of goods and services into the industrial development zone are zero-rated. Tax avoidance concerns are dealt with in that, when goods that come into South Africa, customs duty and VAT will become payable at that point.
If a person seeking amnesty comes before the Commission within 60 days of an application to regularise affairs, it would not be deemed an unlawful activity. The rest of the application can go forward in terms of the normal amnesty regulation.
This clause expands the ambit of the amnesty provisions. There is now a possibility of beneficiaries coming forward and volunteering as the owner of the asset for amnesty purposes.
There are arguments from people who want to claim amnesty for the year 2003. Legislation does not support this point of view and specific cut-off dates have been inserted.
Mr Z Kolweni (ANC) [North West] referred to the mining company trusts and asked who would co-ordinate it.
Mr K Durr (ACDP) [Western Cape] asked where secondary trades would be accommodated in the Memorandum. He asked what wold become of a person showing losses. He asked whether the costs of the money generated by that activity still be written off against the actual costs of that particular activity.
Mr Tomasek answered that the Department of Minerals and Energy would control the mining trust and enforce the provisions that require the creation of such rehabilitation trusts. Income tax legislation supports this by permitting the deduction of the contribution to those trusts to be tax deductible, and for the build-up of funds in those trusts to be tax exempt. With regard to Mr Durr's query regarding ring-fencing, Mr Tomasek said that the enterprise showing losses would have to start from scratch. Losses would ring-fenced from other income.
Mr Durr followed up and asked if, in the event of a sale of an asset, this could be written off for tax purposes. He referred to the facts-and-circumstances test and asked for detail on the concept.
Mr Tomasek said that if there is a recruitment of previous allowances on the sale of an asset, the seller would be able to off-set assessed loss against the recruitment. As far as capital gains are concerned, a person would not be in a position to off-set that loss.
Mr Durr stated that if no money is made from a sale and therefore does not qualify to write off current expenditure against current income. He asked whether the capital outlay could be written off against capital gain.
Mr Tomasek explained that the capital outlay would be claimed as part of the base cost of the asset for capital gains tax purposes. On the facts-and-circumstances test, the legislation itself (clause 36) specifies the factors to consider to determine whether there is a reasonable prospect of deriving taxable income within a reasonable period. He referred to Item A and explained that this deals with the profile of the proportion referred to in the Item. If expenses exceed income, this would suggest that there is not a reasonable prospect of profit. A substantial operation would see income exceeding expenses. Levels cannot be specified because businesses are very diverse. It is difficult to prove whether the activity is a personal expense, a hobby or a profit-generating.
Mr Durr pointed out that some activities or enterprises like farming and wine production take time before they show profits.
Mr Tomasek said that whilst farming is a listed activity, it is explicitly excluded from the 6-out-of-10 cutoff where a farmer has to wait for crops to come into play.
The Chairperson advised Members to go through the legislation. She recommended that the horseracing issue be discussed with provincial treasuries because they derive most of their revenues from this industry.
The Committee agreed to the Bill.
Mr Tomasek said that the detailed explanation regarding urban development zones is to be found between pages 54 to 58 of the Explanation Memorandum.
Mr Durr praised SARS for manner in which the Bill has been dealt with.
Adjustments Appropriation Bill - briefing by National Treasury
Mr Jaz Chaponda, Treasury Chief Director: Expenditure Planning, said that the Bill is an opportunity for the Executive to seek Parliament's approval and adoption of revised spending plans for the year 2003/04. The Adjustment Estimate of National Expenditure is closely linked to the Bill and the two should be read together.
Mr Chiponda explained that National Departments were requested to submit a Treasury Memoranda to Treasury. The Minister then tabled recommendations to the Treasury Committee on 7 October 2003. Requests pertained to expenditure regarded as unavoidable. The other components of the Bill include salary adjustments, self-financing expenditure and projected savings and under-spending. The total amount tabled for consideration is R2.4 billion and excludes statutory amounts. The Bill only deals with additional appropriation for the votes.
Mr Chiponda referred to table 2 in Adjustment Estimate document and said that the first half of the table are those amounts which are being appropriated though the Adjustments Bill. The bottom half denotes the statutory expenditure showing the overall standing level.
He informed Members that the Bill appropriates funds per programme per main division of each vote and is divided into current and capital expenditure. In addition, funds are exclusively and explicitly appropriated for a specific purpose. This Bill provides the legal authority for Departments to spend money on the programmes indicated in the Bill. This is supported with detailed information in the Adjusted Estimates document.
The unavoidable and unforeseeable expenditure figures indicated that the total expenditure for national departments was R2,79b and an additional adjustment was made for provinces at R2,1b, which brought the total unforeseeable and unavoidable expenditure to R4,9b. It was useful to note that out of the 16 government departments that were recommended for this type of expenditure a total of eight accounted for over 90% of the total expenditure, and these were the Departments of Communications, Defense, National Treasury, Water Affairs and Forestry, Public Works, Home Affairs, Foreign Affairs and Social Development.
A rather significant amount of R750m was allocated to the Department of Communications. This figure was not included as an unforeseeable and unavoidable expenditure item because the Minister of Finance announced in the 2003 Budget Speech that this expenditure would take place, and the Public Finance Management Act (PFMA) did allow the Minister to make such an announcement but for the appropriation to be made later in the year. The recapitalisation of the South African Post Office was thus not strictly speaking an unforeseeable expenditure, but was rather considered unavoidable expenditure.
Concerns were raised by the Portfolio Committee regarding the basis on which government was covering a loss incurred by a parastatal. The reason for this concern was that several years ago the South African Post Office used depositors funds to defray its own operational losses. This took place over a period of time during which the Department of Communications, National Treasury and the South African Post Office have put in place certain procedures which ensured that the South African Post Office no longer had access to those depositors funds. This was effected through the corporatisation of the Post Bank. However since government's guarantee was attached to that institution government felt the need to make the adjustment of R750m to the South African Post Office. This amount would be included in the vote of the Department of Communications.
The next largest adjustment was allocated to the Department of Defense and stood at R500m, which were to be used for South Africa's peace support initiatives. This related to the operations of the South African National Defense Force (SANDF) in Burundi, the Democratic Republic of the Congo and Guinea. This was a challenge both fir the Department of Defense and for government as a whole because there were growing responsibilities for South Africa to intervene in the region. The original budget that was approved for these operations was exceeded due to additional requests made on the Department of Defense, and the challenge going forward was thus to put in place sustainable means to support these initiatives in the region.
The Department of Defense itself has argued strongly that even this adjustment was not adequate to meet the pressures is was facing in the region, but the decision taken by the Treasury Committee to limit the Department of Defense's adjustment to that amount reflected. Part of the rationale was that this was a regional initiative and government should thus be seeking donor funding as well, and the United Nations was in fact due to refund the SANDF.
An adjustment of R400m was made to the budget vote of National Treasury for service benefits for Members of Parliament, but was really allocated to Members of the Provincial legislatures as well. The Independent Commission for the Remuneration of Public Office Bearers identified a series of inequalities in the retirement funding of public office bearers requested this once-off benefit to Members of Parliament and the Provincial legislatures. It was decided that it would not be wise to make a complete adjustment for the full complement of Members, because it was not certain whether all Members of the National and Provincial Parliaments would be returning to their office in 2004.
The next largest allocation was made to the Department of Water Affairs and Forestry, in the amount of R346m which was recommended for unavoidable and unfreseeable expenditure. This was related mostly to disasters that took place during the 2003/2004 financial years.
Quite a significant adjustment of R180m was made to the budget vote of the Department of Public Works, which consisted the following two components: rates and taxes on State properties and the other on municipal services. It could be asked how these allocations for rates and taxes could be categorised as unforeseeable, but the Department of Public Works motivated that sometimes the invoices either from municipalities or client departments were received late or contained errors. The result was that the Department of Public Works had to pick up the tab at a later date. This pointed to a weakness in the property management register, because an up-to-date register would keep track of the dates on which these bills would become due and payable. The Department of Public Works has recognised this weakness and was trying to clear up its asset register, but this allocation would continue to be a recurring item on its adjustments budget until it resolves the weakness.
The allocation to the Department of Home Affairs was made for the Lindela Detention Centre where there has been an influx of refugees as well as illegal aliens, and the uncertain political climate in the neighbouring countries made it difficult for the Department of Home Affairs to predict that influx. A further item was the Identity Document campaign, which was related to the upcoming election in 2004.
The main item in the adjustment made to the budget vote of the Department of Foreign Affairs related to foreign properties, as that department was either refurbishing or building its own offices in a number of foreign countries including Berlin and Kinshasa. An allocation of R100m was also made for regional food assistance, but this would be made subsequent to an agreement being reached by the Ministers of Foreign Affairs, Finance and Agriculture. Significant savings of approximately R114m were also made on this vote purely because of the strengthening of the Rand, and much of the Department of Foreign Affairs' costs have dropped.
The Department of Social Development received an adjustment of R100m in support of the extension of the Child Support Grant (CSG), which was a welcomed adjustment.
Mr Chaponda stated that these were the major expenditure items.
The Chair stated that the objective criteria have to be used to determine the unavoidable and unforeseeable, and this was recommended by the Financial and Fiscal Commission (FFC). She stated that she did not understand how the rates and taxes under the Department of Public Works' adjustments could be regarded as unforeseeable, because everyone pays rates.
Mr Z Kolweni (ANC) [North West] asked National Treasury to indicate the stage at which it considered the FFC recommendations when it deals with these adjustments. The unfunded mandates that were always presented by departments remained a problem, and could be spotted early by the FFC recommendations.
Mr Chaponda responded to these two questions by stating that when the National Treasury Committee considered these requests it was guided by the Public Finance Management Act (PFMA) as well as the more detailed Treasury Regulations 6.6. The Regulations did lay down some criteria, and Members seem to be suggesting that those criteria need to be tightened. Those regulations essentially stipulate that the following kids of requests were not regarded as unavoidable and unforeseeable: expenditure that, although known when finalising the estimates of expenditure, could not be accommodated within the allocation.
The Chair stated that the department could purposefully not include those items in its budget, thus strategising that a failure to include it would guarantee the allocation of those funds via an adjustment.
Mr Chaponda replied that this was a difficult issue. At the end of the day National Treasury and the budget examiners who were mapped on those individual government departments. Departments must make it their job to familiarise themselves with the budget and to query such matters. For items such as capital expenditure the department would be able to check whether that was accompanied by some sort of capital plan.
The other criteria that were not considered as unavoidable or unforeseeable by the Regulations were tariff adjustments and price increases, and finally extension of new services and creation of new services that were not unforeseeable and unavoidable. This was an area that needed additional work, as was noted in the FFC recommendations.
The Chair stated that it was worth noting that the Department of Labour, particularly the Unemployment Insurance Fund (UIF), was no longer part of the permanent adjustment estimates. This was welcomed.
The Chair presented the Committee Report on the Bill, and noted that Members agreed to it. She noted that the Committee thus agreed to the Bill.
Committee Report on Preferential Procurement Policy Framework
The Chair noted that Members agreed to this Report.
Committee Annual Report
The Chair noted that Members agreed to the Report
The meeting was adjourned.