The Committee met with representatives from National Treasury and the South African Revenue Service (SARS) to receive a briefing on the key issues and amendments on the 2020 Tax Bills.
The presenters outlined some of the comments made in the public hearings on the Rates Bill, the Taxation Laws Amendment Bill and the Tax Administration Laws Amendment Bill. They explained governments’ responses and indicated if any changes had been made as a result of comments from the public. On the Rates Bill, the key issues raised were on the increase in excise duty on tobacco. On the Taxation Laws Amendment Bill, the issues that received the most comments were the introduction of export taxes on scrap metals, as well as the issue of addressing anomalies in the tax exemption of employer provided bursaries, among others. On the Tax Administration Laws Amendment Bill, the most comments were on the Tax Administration Act of 2011, underpinning the auto assessment system, which was in full swing this year. A second issue was the grace period to determine if a payment is in excess of an assessment. A difficulty here was that people make payments to SARS and SARS would be unsure where the payments belong.
Members asked questions of clarity regarding the tax breaks available around bursaries - and whether there should be tax breaks for parents sending children to private schools. Issues were raised on the very low prices charged by some outlets for tobacco products, the sale of illicit cigarettes and the excise duties charged on ‘hot tobacco’ products. A question was also raised by about alternative solutions to the problems around scrap steel, if the tax regime on its own is not a panacea.
Presentation by National Treasury and SARS
Ms Yanga Mputa, Chief Director: Tax Policy Unit, National Treasury, said that the purpose of the meeting was to brief the Select Committee on Finance on the key issues raised during the oral public hearings that were held on 7 October in Parliament on the 2020 Tax Bills. The key issues in the 2020 Tax Bills that received the most comments in the public hearings included the Rates Bill, specifically on the increase in excise duty on tobacco, as well as comments on the Taxation Laws Amendment Bill (TLAB) and the Tax Administration Laws Amendment Bill (TALAB). There were written comments during the public workshops, as well as presentations from stakeholders in Parliament during the public hearings and National Treasury responded to those comments on 13 October 2020. On the 2020 TLAB, the key issues that received the most comments were the introduction of export taxes on scrap metals, as well as the issue of addressing anomaly in the tax exemption of employer-provided bursaries, among others. National Treasury said in their response to the comments that some of the issues may be considered in the final TLAB and have since made amendments to the legislation in order to take consideration of the comments.
Mr Franz Tomasek, GM: Legislative Policy, South African Revenue Service (SARS), said that the key issues that were raised on the TALAB, specifically on the Tax Administration Act, 2011 underpinned the auto assessment system, which was launched in full swing this year, dealing with the problem of people not responding to queries and the raising of assessments based on estimates. The second issue was the grace period to determine if a payment is in excess of an assessment. The difficulty here was that people make payments to SARS and SARS would be unsure where the payments belong. The problem is that when SARS would refund them and they still owe outstanding tax somewhere else, they would be charged interest and potential penalties on that other amount. The last issue that was raised had to do with the removal of the requirement to prove intent for certain statutory tax offenses.
Mr Christopher Axelson, Chief Director: Economic Tax Analysis, National Treasury, said that the 2020 Rates Bill, proposed an increase in the excise duty on tobacco from R16.66/20 cigarettes to R17.40/20 cigarettes with effect from 26 February 2020, which would result in an increase of 4.4% in line with the expected inflation rates. The comment National Treasury received on the issue required them to not increase the excise duty and to commit to a freeze in the level of excise duties on tobacco. The response from National Treasury was that they will go ahead with the inflationary increase, as the policy guideline is that they increase excise duties on tobacco by an amount of at least the inflation rate or to get to the targeted excise burden. The guideline is that the tax rate in terms of the full value of the product should be around 40% of the price of the most popular product in each category. National Treasury will still look at the values of excess duty increases in the next budget, but it would be against the guideline to increase by an amount lower than inflation.
Mr Ismail Momoniat, Head: Tax and Financial Sector Policy, National Treasury, said that National Treasury is quite unapologetic about increasing the excise duty on cigarettes, specifically from a health perspective, as it is the right thing to do, although they do take into account the concerns that enforcement is a challenge. This is a big issue to get right considering the dismantling of capacity at SARS and to also deal with illegal trade of tobacco. The answer is not to increase the weight but finding a solution to strengthening the enforcement capacity against tobacco products, as they come with health issues, including heated tobacco products such as vaping.
One of the big challenges that National Treasury has faced is the issue of scrap steel and its availability for local industry. The departments of Trade and Industry and Economic Development have a Price Preference System (PPS) in place, which has not been working as anticipated and many have suggested to National Treasury that the export tax is the answer. National Treasury has been very skeptical of seeing tax as a panacea to any problem, as no tax is able to work alone. The steel industry has many sub-sectors involved and some of those calling for scrap steel to have an export tax belong those many sectors. In terms of SA’s trade agreements, there are limitations to the number of export taxes that the country can have. The other factor to take into account is that when imposing an export tax, the country might have countervailing action from other countries that are affected by the export tax.
Mr Axelson said that they received a lot of support from some of the industries that make use of the scrap metals from import processes but those who supply scrap material were against the proposal. There were also concerns about the fact that the price of scrap values change quite often in terms of international markets and there were calls to say that there should be quarterly changes to the Rand value of the export tax. This would not seem to be doable from National Treasury’s perspective, as there are problems when trying to change these types of rates on a regular basis, so for that reason, National Treasury moved to a percentage value for the price, which is the way a lot of other import duties are done in terms of percentage tax on the value of the product.
Mr Momoniat said that there were many allegations made which need to be followed up on, such as the large scale of money laundering or illegal activities. National Treasury needs to look at the enforcement capacity at SARS and the anti-money laundering system.
Ms Mputa said that the Income Tax Act contains provisions that provide exemption in respect of a bona fide scholarship or bursary granted by an employer to an employee or relative of qualifying employees, subject to certain monetary limits and requirements. When this exemption was initially introduced in 1992, the applicability for tax exemption was dependent on the fact that the employee’s remuneration was not subject to an element of salary sacrifice. The view of National Treasury was that when one exchanges part of his/her salary for the benefit, that cannot be regarded as a bona fide bursary or scholarship, as the person would be exchanging part of his/her salary pre-tax to pay for school fees, whereas those who do not restructure their salaries pay for school fees after tax. In 2006, changes were made in the Act to remove the requirement that the employee’s remuneration should not be subject to an element of salary sacrifice. Over the past few years, there have been schemes emerging in respect of employer bursaries granted to the relatives of the employees. For example, schemes developed by an institution other than the employer marketed to the employer seeking to reclassify ordinary taxable remuneration received by the employee as a tax exempt bursary granted to the relatives of employees, where the portion of the salary sacrificed by the employee is paid directly by the employer to the respective school and is treated as a tax-exempt bursary granted to the relatives of the employees. National Treasury made proposals to close these schemes in the 2020 Draft TLAB by 1 March 2020 and received comments that they cannot effect the closure of the schemes by 1 March, which they accepted. The date was moved to 1 March 2021 and three requirements were put under this provision to take into account the comments received. First, the requirement that the bursary or scholarship granted by the employer should be an open bursary or scholarship available and provided to members of the general public was removed, and the tax exemption will not depend on whether or not the bursary or scholarship is open to members of the general public. Secondly, the only test that will remain is that the exemption will only apply if the employee’s remuneration package is not subject to an element of salary sacrifice. As a result, if the bursary or scholarship is subject to an element of salary sacrifice, the exemption will be denied. Lastly, if the bursary or scholarship is subject to an element of salary sacrifice, then the employer deduction in relation to the said bursary or scholarship will be allowed.
Mr Axelson said that in the Tax Act there was a provision that if one formally emigrated through the Reserve Bank, the person would be allowed to withdraw his/her retirement annuity in full if the person were to leave the country after the formal emigration through the reserve. In the new system there will not be a formal emigration process through the Reserve Bank. National Treasury proposed a new trigger where if a person was non-tax resident for three consecutive years, they would be able to access those amounts. The comments from the stakeholders were that there should not be a three-year restriction and individuals should be allowed to access these amounts as soon as they become non-tax residents. National Treasury did not agree with this comment, as there is no way an individual who remains in the country can access the retirement annuity funds up until the age of 55. Allowing access within three years to those who leave the country means that they are treated in a more favorable manner.
In terms of the current provisions of section 10(1)(o)(ii) of the Income Tax Act, individuals who spent more than 183 days working outside South Africa would have qualified for exemption in respect of their remuneration. However, due to travel bans during the COVID-19 pandemic, these individuals could not travel in order to work outside South Africa, and therefore could not qualify for the section 10(1)(o)(ii) exemption. Changes were made in the 2020 TLAB so that the 66 days that commence on 27 March 2020 and end on 31 May 2020, when the country operated under Covid-19 alert level 5 and 4, should be subtracted from the 183 day threshold rule used to determine the eligibility for exemption of foreign remuneration. In order to qualify for exemption, the number of days that a person spent working outside South Africa will be reduced to more than 117 days in any 12 month period, for years of assessment starting from 29 February 2020 to 28 February 2021. The current requirement in section 10(1)(o)(ii) is that 60 of the days abroad should be a continuous period. In view of the fact that these individuals would have qualified for section 10(1)(o)(ii) exemption if there was no lockdown due to COVID 19 pandemic, the proposed relief to reduce the number of days from 183 to 117 in order to take into account the lockdown period during the COVID-19 pandemic is likely to be revenue neutral and will have minimal impact on the fiscal framework.
Ms Mputa said that the Act contains corporate reorganisation rules that allow for the tax-neutral transfer of assets between companies that are part of the same group of companies. The corporate reorganisation rules contain a provision in section 46 that provides for rollover relief, where the shares of a resident company (unbundled company) that are held by another resident company (unbundling company) are distributed to the shareholders of that unbundling company in accordance with the effective interest of those shareholders. These unbundling transactions are also subject to an anti-avoidance measure aimed at limiting or discouraging tax avoidance by taxpayers from distributing shares on a tax-neutral basis. This anti-avoidance measure makes provision for roll-over relief to not be granted if immediately after the distribution of shares in terms of an unbundling transaction, 20% or more of the shares in the unbundled company are held by disqualified persons (such as non-residents and tax exempt entities) either alone or together with any connected persons (who is also a disqualified person) in relation to that disqualified person. To address these concerns, the 2020 Daft TLAB proposed that to close this loophole, changes would be made to remove the reference to “connected person”. The intent was to disallow deferral in terms of an unbundling transaction if immediately after any distribution of shares in terms of an unbundling transaction, an aggregate of 20% or more of the shares in the unbundled company are held by disqualified persons. It was intended that these changes should apply in respect of unbundling transactions entered into on or after the date on which the draft TLAB was published for public comment (31 July 2020). After the public consultation process, changes were made in the 2020 TLAB that was tabled by the Minister, in order to take into account comments received. The deferral in terms of unbundling transactions will not apply in respect of any equity share that is distributed by an unbundling company to any shareholder that is a disqualified person. Disqualified persons in this regard include most of the exempt entities or persons not subject to tax in South Africa and hold at least 5 per cent of the equity shares in the unbundling company immediately before that unbundling transaction. These changes are deemed to apply in respect of unbundling transactions entered into on or after the date on which the TLAB was introduced by the Minister in the National Assembly (28 October 2020).
Mr Tomasek said that the Tax Administration Act provides that SARS may currently issue an estimated assessment: if a taxpayer does not file a return; no return is required but if a taxpayer fails to pay the tax required or; if a return or information supplied is inadequate.
In the first case the assessment may not be disputed until the required return is filed and SARS has failed to revise the assessment in the light thereof. This approach ensures that all the facts are available when the assessment is revisited and that the dispute resolution timelines that would otherwise apply may be relaxed. In order to underpin SARS’ move to auto assessment and reduce the number of cases where failures to answer SARS queries result in assessments that enter dispute resolution prematurely, some changes were proposed in the 2020 Draft TALAB that was published for public comment on 31 July 2020. Estimated assessments will also be permitted where no tax is due or a refund is due, to assist taxpayers and personal income tax administration reform. In cases where specific relevant material was requested from a taxpayer on more than one occasion, without an adequate response, they will also be subject to the limitation on disputes for the reasons set out above. The time-period within which a taxpayer may request SARS to revise the assessment by providing outstanding return or relevant material will be extended from 30 to 40 business days. The maximum extension of time-period by senior SARS officials will be aligned with the prescription period for the assessment from three to five years from the date of original assessment. After the public consultation process, changes were made in the 2020 TALAB that was tabled by the Minister, in order to take into account comments received. Limitation on disputes will no longer apply if no adequate response is received. The response may set out valid grounds as to why the relevant material is not available or need not be supplied to SARS. It is implicit that the response must be something more than a frivolous response. Although it is difficult to see on what basis an estimated assessment would be raised on a taxpayer in respect of a failure to provide a response in respect of third party data requested, it has been clarified that the request for relevant material must be in respect of the affairs of the taxpayer to whom the request was directed.
In terms of the grace period to determine if a payment in excess of an assessment was erroneous, the Tax Administration Act understands that payments that are not properly allocated to a specific tax type by a taxpayer are administratively difficult to allocate correctly. If the payment had to be allocated to a specific tax type but is refunded as an erroneous payment, the taxpayer will be charged interest on an unpaid debt. SARS requires a period to determine if the payment was erroneous. An amendment to provide SARS a period of up to 60 business days to determine the erroneous nature of the payment prior such payment being refunded to the taxpayer was proposed in the 2020 Draft TALAB that was published for public comment on 31 July 2020. After the public consultation process, the period was shortened to 30 calendar days in the 2020 TALAB that was tabled by the Minister, in order to take into account comments received. SARS also faced a difficulty in terms of the removal of requirements to prove intent from certain statutory tax offences. An amendment to provide SARS a period of up to 60 business days to determine the erroneous nature of the payment prior such payment being refunded to the taxpayer was proposed in the 2020 Draft TALAB that was published for public comment on 31 July 2020. After the public consultation process, the period was shortened to 30 calendar days in the 2020 TALAB that was tabled by the Minister, in order to take into account comments received. The “wilfully” requirement is purely subjective and there can be no reference to what a reasonable person would have done in the circumstances. The requirement of intent is generally applicable to common law offences and serious statutory offences in South Africa, while the requirement of negligence, whether explicitly stated or not, is more typical of lesser statutory offences. The requirement of “wilfully and without just cause” was not a general requirement for lesser tax offences before the promulgation of the Tax Administration Act, it does not appear in any other South African legislation and, as the NPA has pointed out to SARS, its proposal and adoption through the Tax Administration Act appears to have been an error. In order to address these concerns, the deletion of the words “wilfully” and from the opening words of “wilfully and without just cause” was proposed in the 2020 Draft TALAB that was published for public comment on 31 July 2020. After the public consultation process, changes were made in the 2020 TALAB that was tabled by the Minister, in order to take into account comments received. As it is not the intention to introduce strict liability, explicit references to negligence were inserted to remove any doubt in this regard. A differentiated approach was adopted where, rather than do away with intent entirely, offences are categorised into those for which intent or negligence is required and those for which intent is required. The first category includes aspects of non-compliance that strike at key duties that the tax system’s broad application depends on, such as failing to register, submit returns, pay over tax that has been collected from a third party and so on. The second category includes aspects of non-compliance where the nature of the non-compliance is such that the requirement of intent is implied, such as issuing a false document, obstructing or hindering a SARS official, assisting another person to dissipate their assets to impede tax collection and so on.
Ms Mputa read the technical changes to the 2020 Tax Bills after introduction by the Minister in the National Assembly.
Mr D Ryder (DA, Gauteng) said that many South Africans are releasing pressure on the government by enrolling their children in private school. There is some merit to suggesting that a tax break should be allowed in that case, whether there would be a threshold for that to happen or not. He asked for the issue to be clarified further by the representatives from National Treasury and SARS. He also asked for clarity on the issue of the auto assessments disputes.
Mr W Aucamp (DA, Northern Cape) wanted to know how it could be possible for retailers to sell cigarettes for R20 and above for a packet if the excise tax is at R17.40. He wanted to know whether it is safe to assume that the manufacturers and distributors of the cheap packets of cigarettes are not paying the required amount of tax and that the cigarettes are available illegally on the market. He asked for clarity according to the text of the current Draft Rates Bill on whether the excise duty on heated tobacco products should be paid on the full weight of the pack or the full weight of a single stick or on just the weight of the tobacco, as is the case in most other countries. He then wanted an explanation on how the decision on either was arrived at.
Mr M Moletsane (EFF, Free State) asked how far National Treasury is in terms of dealing with the illegal trade of tobacco and whether the matter is getting the serious attention it deserves from government.
Mr Z Mkiva (ANC, Eastern Cape) wanted to know what could be the other alternative if the tax regime on its own is not the panacea to the problem of scrap steel.
The Chairperson wanted more clarity on the proposed solutions to illicit cigarettes and a more detailed explanation on the salary sacrifices and how they work.
Response by National Treasury and SARS
Mr Momoniat said that tax is generally a very blunt instrument and a lot of people tend to think it can achieve a particular objective when in actual fact, none of these mechanisms can work by themselves. For example, with tobacco, there is also a need for education campaigns about the adverse health effects of tobacco addiction and so on. All of those steps, including the banning of smoking from buildings, the messages in the packaging, etc. are important in the enforcement of rules against the use of tobacco and illicit tobacco. So, if enforcement of these rules is weak, whether on tobacco or scrap steel, the problem not only persists, but it becomes even harder to solve, hence taxation cannot be the only solution to these issues. Industry stakeholders tend to do undue lobbying in many instances, but they do not have a right to right to say how taxation should be measured or compare how other countries do their taxation to deal with illegal trade. The state has a right to impose a tax but in doing so, it should be implemented in a proper way in terms of the law and follow due processes. National Treasury does look at these issues and will engage with these industries. The laws in place are not a mistake, which the industries try to make it out to be. In every sector there are many people who comply with the law, so in the private sector many companies pay their liable amount. But in any part of society there are always people who are indulging in illicit activities or trying to bend rules, and no single company can control other companies. It does not help to categorize an entire sector as non-compliant, but it is important to identify those within a sector who are non-compliant.
The Chairperson said that he did not mean the entire private sector is non-compliant and reiterated that he stands by his views that there is no major moral difference between tax evasion and tax avoidance. He said that so much of what Treasury and SARS does in Parliament is to cover loopholes where people are avoiding paying their taxes. Those within the private sector who avoid paying their taxes need to be asked to answer why they are doing so, especially if they claim to be in support of them.
Mr Axelson said that on the issue of excise taxes, the problem is that it is not illegal for retailers to sell packets of cigarettes at the [low] prices that they do. The shop owners may not care that they are not making profits [on cigarettes]. They are rather interested in getting people into their doors so that they can sell other products to them. National Treasury has looked at the minimum price issue and some other countries have done it, but the problem is that all other product prices go up to whatever that minimum price is, which makes it even harder to determine which is an illicit product and which one is not. This then just increases the profits for those who are selling the product illicitly. In terms of the heated tobacco product, it is the weight of the stick that is charged and the way it works is that for example, if the price of a pack of 20 of heated tobacco is around R13, which is in line what is stated in the budget, that it would be 75% of the 40% guide, which is 40% of the price of the most popular product category. So, it is exactly 75% for the product of the tax that would normally be paid on a pack of cigarettes. It was not a mistake as the companies have come forward and said it was, as this change is in line with the policy. The problem is that there are some other products that have a lower weight per stick, so for those products, for example, the price might only be R8 instead of R13. It is stated in the response document that National Treasury is looking to review this to see if adjustments can be made in the budget.
In terms of the tax regime not being the panacea, there are a lot of other problems which reduce the competitiveness of the local manufacturing industry. For example, not having a stable electricity supply, as the prices of electricity have gotten quite dramatically high over the last decade. Those are things that really do hamper the competitiveness of the manufacturing industry, as well as the unavailability of the appropriate skills in the labor force, low levels of productivity and potentially higher levels of import tariffs on the products in other countries. Export taxes very often were seen as a zero-sum game, hurting one industry for the benefit of another industry. If there are wider overall benefits, which is hoped in this case, then hopefully there will be a wider benefit.
Ms Mputa said that in terms of the bursaries, when there is an element of salary sacrifice, the employer is not awarding a bursary because the bursary is paid by the employee. The amount that is paid for the school fees is taken from the employee’s remuneration before tax. For example, if the employee’s package is R100, the private sector will take R10 from the R100 per month to pay for the school fees of the children of the employee. The employee pays tax on R90 instead of the full R100, meaning that when there is an element of salary sacrifice, the amount of the employee’s tax is reduced because the employee paid the school fees before tax. In a different case, an employee who receives a salary package of R100 would pay tax from his/her full salary package and then pay the school fees from the remaining amount after tax. That is where the benefit is. One cannot pass the test of a bona fide bursary if it has got an element of a salary sacrifice because it is not a bona fide bursary provided by the employer, as the employee is paying the school fees on his/her own. The employee would then be subject to a fringe benefits tax and the amount would be taxable as such.
Mr Axelson said that the concern is that if an employer would have paid the employee R100 and then restructure that R100 so that the employee could have lower tax, in effect this would lead to tax free payments of education for employees, but only for formal sector employees. There is a big inequity here that if an employee is outside of the formal sector, he or she cannot have tax free payments for private schooling or any other type of schooling. There is a big inequity between formal sector employees and others and on top of that, it throws the fundamental principle of whether private expenditure is deductible or not into question. If salary sacrifices are explicitly allowed, it means that government will provide a full tax deduction for private expenditure for schooling. If this should be applied to everybody it is a complete change in the tax policy and could also quite easily be extended to other types of private expenditure whether security or other things. It is important to be very careful to not explicitly allow something which is not a bona fide bursary to get an exemption in this regard.
Mr Tomasek said that with auto assessment, SARS looks at its population of taxpayers and the third-party data they have for them. It then selects a subset of the taxpayers where they think they have enough information to do a tax calculation for back tax fairly, and they are then included in the auto assessment population. The population is sent a message indicating the estimate of what SARS thinks the population will owe to them or SARS owes to the population and a window is then opened for the to accept or reject the estimate. If the population accepts it, then they are essentially saying SARS has got the estimate right and confirm that SARS can proceed to issue the assessment immediately. If the population rejects the estimate, then it means SARS’ information is incomplete, perhaps they owe more or less than the estimate and want to fill in a tax return. The third set of the population are those who do not respond, and the question becomes what SARS does in response. SARS will estimate once the filing season has closed and it is at that point that they will receive an estimated assessment which closes the year and they will then have the 40 business days to respond if they disagree with the estimated assessment. They can put a return in to either reject or accept the estimate. This is not that SARS is shortening the filing season, but it is so that there is a mechanism to deal with people who simply do not respond.
The Chairperson asked if SARS has ever had a case where a person responded to them by saying he or she should pay more tax than SARS charged.
Mr Tomasek said that there have been some cases and added that there are a lot of people who want to do the right thing, and this has been happening for a long time. SARS has started prepopulating returns by putting information in the return for the people and expect them to add to the return, and people do add to the return. There have also been cases where people may have some small deductions that they could claim, but they accept the assessment anyway because it is really not worth the time and trouble of filling in the return.
Concluding remarks: Chairperson
The Chairperson said that when it comes to the sale of illicit cigarettes and tobacco products, the lines become blurred about which companies are involved in selling legally or illegally, and it seems that some of these companies do both. One of the major challenges of this problem, including the sale of sugar products and other industries that have health implications is that these businesses employ people. He said that there needs to be a solution beyond taxation to these problems. All the committees need to come together on this issue and create a strategy or five-year program, even if it means Parliament would have to meet regularly and focus on these issues. The Chairperson thanked the representatives from the National Treasury and SARS, as well as the members of the Select Committee for availing themselves to attend the meeting.
The meeting was adjourned.
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