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FINANCE PORTFOLIO COMMITTEE
14 September 1999
DRAFT REVENUE LAWS AMENDMENT BILL: BRIEFING
Documents Handed Out:
1. Draft Revenue Laws Amendment Bill
2. Explanatory Memorandum on Bill
3. Background to Revenue Laws Amendment Bill
4. Taxation of Long-Term Insurers
As the agency responsible for the drafting of tax legislation and its amendments, the South African Revenue Service (SARS) drafts a yearly Taxation Laws Amendment Bill. On occasion a second bill, the Revenue Laws Amendment Bill, is introduced later in the year. This is the case in 1999 as the elections required deviation from the normal legislative schedule. In this informal briefing with the Portfolio Committee of Finance, the SARS team gave a clause by clause overview of the document. Mr Kosie Louw (General Manager of Law Administration for SARS) briefed the committee on the Bill and Mr Peter Franck (Director of Value Added Tax) gave the presentation on Value Added Tax.
There is a public hearing on this draft Bill on Friday 17 September at 9h00 in V454. Prof Dennis Davies is giving a briefing on the Katz Commission on Tuesday 21 September.
Discussion on Draft Revenue Laws Amendment Bill
Ken Andrew (DP) asked, with regard to the notice of variation of tax rate (Clause 3), what would happen if Parliament does not pass or chooses to amend the new rate?
Mr Louw replied that the revised rate should last for at least six months.
Ken Andrew followed up by asking where in the Bill it said that. The reply was Subclause 2.
Mr Andrew stated that he believed that the Minister of Finance's regulatory notice should be the legal authority until Parliament makes any changes.
Dr Luyt (FA) wanted to know how the losses people would incur would be dealt with if, in fact, Parliament lowers the tax.
Mr Louw responded that refunds were not administratively possible.
Ken Andrew asked why the Minister could change it by notice at all, given that it is such a small tax. He also asked why not wait until Parliament makes it law.
Mr Louw replied that it was for the Minister to do when he is setting the budget.
Chairperson Hogan (ANC) added that it aided continuity.
Prof Turok (ANC) asked with regard to company buybacks, who is and who is not considered a trader.
Mr Louw responded that the distinction was based on the type of profit made. If, when the actor purchased the shares, the intention was to make a profit, then it is of a revenue nature and is taxable.
Mr Schutte (NNP) followed up by asking whether this creates a situation of possible double taxation.
Mr Louw replied that the exemptions are there to avoid any occurrence of double taxation. But with companies the situation is slightly different from that of individuals.
On the issue of pension funds, Ken Andrew pointed out that if a member of a pension scheme is being taxed at a higher marginal rate than the spouse, then the spouse is being prejudiced when the marriage dissolves.
Mr Louw said that the member had the opportunity to deduct at the higher rate.
Mr Andrew clarified his point. Mr Louw responded by saying that everything is aimed at the member.
Dr Luyt (FA) inquired how it would be treated if one were to use a certain type of redeemable share to reduce one's capital.
Mr Louw responded that the same principle would apply as when ordinary share capital is concerned.
Mr Andrew asked about the background of the exemptions in Clause 20 with regard to the South African Housing Trust Limited.
Mr Louw replied that the trust would soon cease and therefore the exemption is no longer necessary.
Mr Andrew went on to ask whether Clause 20 (1)(d) was setting up conditions for unfair competition.
Mr Louw responded that tax exemption status will apply to those activities which were previously conducted by the municipalities themselves.
Mr Andrew asked, with respect to agricultural products, that if a company is a Section 21 (non profit) company, why must the municipal council remain as one of the members.
Mr Louw said that the municipality should still control the entity. It is a control measure.
Chairperson Hogan asked for clarification as to what constitutes control.
Mr Louw specified that this was the existing wording but that it could be a provision that a majority of the members would be needed. Chairperson Hogan said that this would be a better way of wording it.
Speaking on intellectual property (Clause 22) Mr Feinstein (ANC) asked how other countries dealt with the issue surrounding intellectual property. He also asked if SARS had spoken with the Department of Trade and Industry on the issue.
Mr Louw replied that the United Kingdom, Australia, and Canada do not provide deductions for trademarks. SARS had not spoken with the Department of Trade and Industry. Mr Feinstein added that he believes that they should.
Mr Andrew asked if there were any objections voiced over this measure (clause 22) and if so, by whom were they raised. Mr Louw replied that Chartered Accountants did not like it.
Mr Andrew pointed out that the trademarks of many companies are enormously valuable and to legislate as if they were not would be problematic.
Prof Turok, in response, made it clear that it is only when Revenue Services feels that there is tax avoidance that there is a problem.
Mr Andrew wanted to know why Clause 23 is even needed at all.
Mr Louw replied that it was because it is linked to the capital asset you are acquiring.
With regard to Clause 50, Mr Andrew asked if the implementation of the new regulations could not be made much more simple.
Mr Louw said that most of the work of implementation would be passed down to the manufacturing sector. SARS does however have the right to make spot inspections.
A debate began when Mr Andrew asserted that seizing a ship found to be carrying illegal goods was a violation of the owner's right to the assumption of innocence. Mr Louw and Chairperson Hogan disagreed. However, Chairperson Hogan stopped the discussion saying that a debate on general forfeiture of assets could wait until some other time.
Discussion on Long Term Insurance Industry
Prof Turok asked why SARS allowed the tremendous fall in taxes from insurance companies.
Mr Louw replied that much of the delay in noticing the trend came from the nearly year long delay between the end of the tax year and receiving the tax returns of the insurance companies.
An opposition MP asked what SARS thought would be the likely net increase in taxation in the insurance sector.
Mr Louw emphasized the difficulty in providing any figures but did say that substantially more revenue would be generated.
Mr Andrew asked if it could be assumed that SARS and insurance industry have reached an agreement. He also asked about what other countries have done.
Mr Louw cited a report by the insurance industry saying that they were indeed comfortable with the SARS tax changes. In response to the second question Mr Louw said that South Africa was unique in applying a four-fund approach to taxation of the long-term insurance industry.
Chairperson Hogan asked what the impact of all of this would be on the policyholders.
Quoting the same report, Mr Louw replied that they would be minimal.
An ANC MP asked about the losses that would have to be endured by companies.
Mr Louw said that there will be large initial losses.
The meeting was concluded.
The Minister of Finance is responsible for tax policy issues, while the Commissioner for the South African Revenue Service administers the various tax laws. There is, however, a close link between the formulation of tax policy and the administration of tax legislation. SARS, therefore, works very closely with the Department of Finance on the development of tax policy to ensure that the tax laws can be administered effectively. SARS is, at this stage, also responsible for the drafting of tax legislation and its amendments. Customs duties are to a large extent dictated by the trade policy of the Government and are formulated by the Department of Trade and Industry. There is also a close working relationship between the Department of Trade and Industry and SARS in this regard.
Normally every year the Taxation Laws Amendment Bill, which is a money
Bill, is introduced during the first quarter of the legislative programme. This
Bill amends the various tax laws, including, inter alia, the following:
· Income Tax Act, 1962;
· Value-Added Tax Act, 1991;
· Marketable Securities Tax Act, 1948;
· Uncertificated Securities Tax Act, 1998;
· Customs and Excise Act, 1964;
· Transfer Duty Act, 1949;
· Stamp Duties Act, 1965;
· Estate Duty Act, 1955; and
· Tax on Retirement Funds Act, 1996.
The amendments to these tax laws generally arise from the tax proposals tabled by the Minister of Finance annually. The Bill is introduced within a few months after the Budget Speech has been delivered (normally in March every year), as many of the proposals, such as the tax rates come into effect retroactively with effect from 1 March of the relevant year, or in other cases on the date of the Speech. The Taxation Laws Amendment Bill is normally passed before the Winter recess to ensure certainty amongst taxpayers who have to apply the new provisions.
Legislative amendments are also introduced in terms of this Bill to address the deficiencies in provisions of the various Acts that may result in losses to the fisc and, furthermore, to also keep abreast of economic developments and changes in other legislation which affect business practices. It does on occasion also happen that new taxes, levies or duties are imposed which are introduced in terms of a separate new Bill.
Once draft legislation is prepared, SARS consults various business and professional bodies, including the members of SACOB, SAICA, ABASA, NAFCOG, etc. All proposed legislative amendments are normally thereafter discussed informally with the Portfolio Committee on Finance prior to the introduction of the Bill in the National Assembly. The. reason for this arrangement is the fact that once a money Bill is tabled, it may not be amended and the entire Bill must, therefore, either be accepted or rejected. During this informal discussion an overview of the Bill is given on a clause by clause basis to ensure that the Committee is briefed on the entire contents of the Bill. The comments of the Portfolio Committee members are taken into account in finalising the draft Bill. The Bill is then submitted to the State Law Advisers for certification after which the Bill is printed and tabled in the National Assembly. Only thereafter the Bill is referred to the Committee for the formal briefing.
Once the Bill is passed in the National Assembly, the Bill is referred to the National Council of Provinces. A similar briefing is done to the Select Committee on Finance of the NCOP.
In certain instances a second Bill may be introduced later in the year, i.e. the Revenue Laws Amendment Bill, to effect further changes to the different tax laws. In this regard, SARS was this year required to deviate from its normal legislative programme due to the 1999 Elections. The Taxation Laws Amendment Bill, 1999, was introduced a bit earlier than normal and it merely incorporated the tax proposals and fixed the rates of tax. The rest of the proposed legislative amendments will be dealt with in the Revenue Laws Amendment Bill, 19991 and it is anticipated that this Bill will be tabled before the end of the third quarter of Parliament.
Appendix 2: Taxation of Long-Term Insurers:
Taxation of Long-Term Insurers:
1. Section 29 of the Income Tax Act
2. Four-fund method of taxation
2.1 Policyholder funds (untaxed, individual and company)
2.2 Corporate fund (shareholders)
3. Based on trustee principle
4. Assets allocated to different funds - actuarial valuation (prescribed value plus margins)
5.Investment income taxed in funds
6.Special rules for transfers between funds
PROBLEMS IDENTIFIED WITH CURRENT SYSTEM
PROBLEMS IDENTIFIED WITH CURRENT SYSTEM
1. The tax base of the policyholder funds against which selling and overhead expenses are allowable as a deduction is too small
2. Charges on assets, premiums and income of policyholders by insurers are not taxed appropriately
3. System of transfers provides for tax deferral opportunities
Fiscal year Tax collected from 6 largest insurer (R
GROWTH OF INSURANCE INDUSTRY
GROWTH OF INSURANCE INDUSTRY
of all insurers (R million)
Assets of all insurers (R million)
IMPORTANT CONSIDERATIONS PROPOSED APPROACH 1. System of four funds remains as will transfers between funds taking into account actuarial liabilities. 2. Transfers will not be deductible or taxable in policyholder funds 3. Transfers to the corporate fund are taxable in the corporate fund, but transfers from the fund are not deductible 4. Valuation of liabilities in policyholder funds based on a financial soundness valuation 5. Expenditure allowable against policyholder income will be- · expenditure directly relating to taxable investment income · selling and overheads apportioned with a prescribed formula 6. Transitional rules for difference between financial soundness and prescribed valuation of liabilities on commencement of year of assessment on or after 1 January 2000
1. System of four funds remains as will transfers between funds taking into account actuarial liabilities.
2. Transfers will not be deductible or taxable in policyholder funds
3. Transfers to the corporate fund are taxable in the corporate fund, but transfers from the fund are not deductible
4. Valuation of liabilities in policyholder funds based on a financial soundness valuation
5. Expenditure allowable against policyholder income will be-
· expenditure directly relating to taxable investment income
· selling and overheads apportioned with a prescribed formula
6. Transitional rules for difference between financial soundness and prescribed valuation of liabilities on commencement of year of assessment on or after 1 January 2000
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