In this virtual meeting, the Committee was briefed by National Treasury (NT) and the South African Revenue Services (SARS) on three draft bills: the Rates and Monetary Amounts and Amendment of Revenue Laws Bill, the Tax Laws Amendment Bill (TLAB), and the Tax Administration Laws Amendment Bill (TALAB). The second batch of the draft tax bills was published on 12 August 2021 for public comments, and it includes the emergency tax measures in response to the COVID-19 pandemic and recent unrest in the country, which are over and above the tax proposals that were announced earlier in the year. These include: the extension of the expanded employment tax incentive age eligibility criteria and the amount claimable; the extension of the deferral of the payment of employee’s tax liabilities for tax compliant small to medium sized businesses; and a deferral of excise duties on alcohol beverages.
The presentation detailed the technical proposed amendments to the Draft bills. The main tax proposals in the draft rates bill are an increase in the general fuel levy and Road Accident Fund (RAF) levy, an 8% increase in excise duties on alcohol and tobacco, and personal income tax (PIT) relief. National Treasury elaborated on the draft TLAB proposals regarding, individuals, employment and savings; general business tax; the taxation of financial institutions and products; tax incentives; international taxation; value added tax (VAT); and the Carbon Tax Act. Some of the tax proposals in the draft TALAB include allowing the provision of third-party data donation to SARS for information required by law in receipts issued for tax-deductible donations; administrative non-compliance penalties based on estimates for non-submission of six-monthly employees’ tax returns; amendments related to changes in the accreditation system; and increasing the caps for refunds and underpayments of duties.
During the discussion, Members asked for details on the strong public comments Treasury received on the bills, and its response. They also asked for clarity on the issues regarding liquidation and distribution (L&D) accounts, ‘interest disguised as interest’ and the Section 23 M rules.
A member said it would be unfair to charge tax on retirement interest when a taxpayer ceases to be a tax resident, as the individual would not have had an opportunity to withdraw the funds beforehand. He added that the retirement annuity withdrawal pay-out threshold is too low. He suggested that Treasury allow people to top-up their Tax Free Savings Account, by the amount they missed out on since its introduction.
The Chairperson welcomed everyone in attendance and noted apologies from the Minister of Finance, who will be joining late, and the Deputy Minister of Finance, who will not be attending due to another commitment.
Briefing by National Treasury and SARS
Mr Ismail Momoniat, Deputy Director General: Tax and Financial Sector Policy, NT, said the proposals announced in the budget are normally merged into the tax bills. However, similar to last year, deferrals and exemptions had to be made, leading to the change of a few lines from what was announced. The emergency tax measures in response to the COVID-19 pandemic and recent unrest in the country are over and above the tax proposals that were announced earlier in the year. These include:
The extension of the expanded employment tax incentive age eligibility criteria and the amount claimable,
The extension of the deferral of the payment of employee’s tax liabilities for tax compliant small to medium sized businesses
A deferral of excise duties on alcohol beverages
Mr Momoniat paid tribute to a former colleague, who contributed significantly in the drafting of the bills and passed on before the budget announcement.
Ms Yanga Mputa, Chief Director: Legal Tax Design, NT, said the second batch of the Draft 2021 TLAB and TALAB were published on 12 August 2021 for public comment. These draft tax bills contain the emergency tax measures that became effective on 01 August 2021. After engaging with stakeholders, NT and SARS will present a response document to the Committee, with a revised draft of the tax bills that take into account public comments.
2021 Draft Rates Bill
Mr Chris Axelson, Chief Director: Economic Tax Analysis, NT, said the main tax proposals in the 2021 Budget and Rates Bill include a personal income tax (PIT) relief, an increase in the general fuel levy of 15 cents per litre and the Road Accident Fund (RAF) levy by 11 cents per litre, and an above-inflation increase in excise duties on alcohol and tobacco by 8%. The PIT brackets were adjusted by an amount greater than expected inflation, and the medical tax credits increased in line with inflation. Lastly, he highlighted a summary of the changes in clauses 1 to 9 of the Rates Bill on slide 19.
2021 Draft TLAB
Ms Mputa and Mr Axelson elaborated on the proposals in the draft TLAB. Proposals in the Bill relating to individuals, employment and savings include: A review and expansion of the nature of long-service awards for fringe benefit purposes; curbing abuse in the Employment Tax Incentive (ETI) by reviewing the definition of employee and work requirements; clarifying the time disposal rules in respect of an asset acquired from a deceased estate; changing the tax treatment of a cession of a right to receive asset; strengthening anti-avoidance rules in respect of loan transfers between trusts; applying tax on a retirement interest when an individual ceases to be a South African tax resident; allowing members to use retirement interest to acquire annuities on retirement; allowing tax-neutral transfers between retirement funds by members who are 55 years or older; and classifying self-insured risk benefits as a ‘defined contribution’ to clarify the calculation of fringe benefits in relation to employer contributions to a retirement fund.
Proposals relating to general business tax include: strengthening the rules dealing with the limitation of interest deductions in respect to debts owed to certain persons not subject to tax – which includes a review of the rules regarding back to back loans, the meaning of interest, the formula calculation of deductible interest , the definition of “adjusted taxable income’ and the interaction between the level of withholding tax on interest in terms of tax treaties and Section 23 M rules; restricting the set-ff of the balance of assessed losses in determining taxable income; clarifying the definition of contributed tax capital (CTC); limiting the potential for double taxation under the hybrid debt anti-avoidance rules; clarifying the meaning of ‘interest’ under the debt relief rules; refining the interaction between anti-value shifting rules and corporate reorganisation rules; clarifying the rules that trigger additional consideration in asset for share transactions when a debt is assumed by a company; clarifying the early disposal anti-avoidance rules in intra-group transactions; extending the reversal of the nil base cost rules to apply on the sixth anniversary of an intra-group transaction; clarifying the interaction between early disposal anti-avoidance rules and the nil base cost anti avoidance rules; refining the provisions applicable to unbundling transactions; and lastly clarifying the rehypothecation of collateral within collateral arrangement provisions.
Proposals regarding the taxation of financial institutions and products include: clarifying the transfer of liabilities in respect of insurance business between short term insurers; and refining the deduction formula for taxable long term insurer policyholder funds.
Proposals regarding tax incentives include: the extension of the Urban Development Zone (UDC) tax incentive to 31 March 2023; the extension of the learnership tax incentive to 31 March 2024; and refining the time frames of compliance requirements of Industrial Policy Projects (IPP) tax incentive;
Proposals relating to international taxation include: clarifying the controlled foreign company (CFC) anti-diversionary rules; clarifying the interaction between provisions dealing with a foreign company ceasing to be a CFC and the participation exemption; and clarifying the rules dealing with withholding tax exemption declaration.
Proposals regarding value added tax (VAT) include: the zero rating of super fine maize meal; changing the VAT treatment of temporary letting of residential immovable property; and reviewing the section 72 decision with regard to the VAT treatment of telecommunication services.
Proposals concerning the Carbon Tax Act include: clarifying the renewable energy premium beneficiaries; clarifying the definition and scope of carbon sequestration regarding the limitation on biological sequestration to forest plantations, and the sequestration tax liability deduction for fuel combustion emissions; clarifying the carbon budget allowance; and aligning schedule 2 emissions activities and thresholds with the greenhouse gas emission reporting regulations of the Department of Forestry, Fisheries and Environment (DFFE).
2021 Draft TALAB
Mr Franz Tomasek, Head: Legislative Policy, SARS, elaborated on the 2021 Draft TALAB proposals. It is proposed that the information required in the receipts be extended to allow the provision of third-party data donations to SARS. Other proposals include: enabling SARS to impose administrative non-compliance penalties based on estimates for non- submission of six-monthly employees’ tax returns; the removal of double-penalty for the same incidence of non-compliance relating to employees’ tax; expanding the purposes for which air cargo may be removed to degrouping depots; amendments related to changes in the accreditation system; and increasing the caps for refunds and underpayments of duties.
Mr G Hill-Lewis (DA) remarked that he is not sure NT can legitimately charge tax on a retirement interest, when an individual ceases to be a tax resident. It would be unfair since the individual would not have had an opportunity to withdraw the funds before. He asked for clarity on the retirement annuity withdrawal pay-outs. A R15 000 withdrawal threshold is far too low and this should be increased to at least R50 000.
Lastly, given South Africa’s need for a savings injection, he suggested that Treasury allow people to top-up their Tax Free Savings Account (TFSA), by the amount they missed out on since its introduction.
Mr Momoniat agreed that household savings in South Africa need to increase and Treasury endorses use of the TFSA. Treasury has been reviewing the thresholds and its emphasis is not on withdrawals, but rather on getting South Africans to save more and preserve their savings. Thresholds are put in place to ensure that money that is saved, for instance, for retirement is actually used when retiring instead of being entirely withdrawn and consumed before when changing jobs. Treasury recognises the need for withdrawals at times, but on a limited scope. A higher threshold runs the risk of creating liquidity problems for many funds. A system to enable withdrawals whilst harmonizing the above objectives is being discussed and developed.
Mr Axelson replied that the rationale of the tax on retirement interest is the time-value of money. The amount should have been paid when the individual ceased to be a tax resident. If interest is not added, then the nominal value will be smaller. Treasury will further look into the comments on this proposal to see if there is a case against it.
Ms P Abrahams (ANC), asked for an elaboration on the strong comments received from public stakeholders on the retrospectivity of tax legislation. She also asked what Treasury’s responses to the comments were. She asked for clarity on the issue of the liquidation and distribution (L&D) account, and on the issue of ‘interest disguised as interest’. Lastly, she asked for Section 23 M to be further explained.
Ms Mputa said Treasury received an informal comment on the collateral arrangements regarding the retrospective effective dates. NT will give a clearer response to the comment in the upcoming response document. The rationale behind the retrospective effective date is the observation that the current use of collateral is outside of the provision of the policy proposal.
Regarding the L&D account, Ms Mputa explained that when a person dies their assets go to the estate and fall under the management of the Master of the High Court. The issue is that there was no rule regarding when the L&D account is considered final. The proposal is that the L&D should be regarded as finalized, once the Master of the High Court has announced the closure of the L&D after the 21-day inspection.
Ms Lerato Ralekwa, Director: Business Tax, NT, explained that Section 23 M was introduced with the Base Erosion and Profit Shifting (BEPS) Project, and mainly focuses on limiting interest deductions in Corporates. One of the provisions is that a taxpayer who is in a controlling relationship with another person (i.e., owes the person 50% or more of their debt), will be limited under the rules if the person whom the debt is owed to, is not subject to South African Tax. The rules have been reviewed, which lead to findings of gaps in anti-avoidance. For instance, legislation allowed for the back-to-back loans and avoidance of the limitation of interest deductions, which the proposals aim to fix.
Ms Hayley Reynolds, Director: Corporate Income Taxes, NT, explained that the motivation behind the proposals is to limit the reduction of the corporate tax base due to excessive interest deductions. When companies are choosing between debt and equity finance, the tax system can incentivise the companies to choose tax. This is because of a general debt bias, which can be exacerbated by the tax border context. South Africa’s corporate income tax (CIT) rate is relatively high, compared to other investment and trade partner countries. If a South African entity is in a controlling relationship with a foreign entity that is in a relatively lower tax rate jurisdiction, then the company group can choose to push its debt into the South African entity and ultimately reduce its taxable income in South Africa, lowering its overall global tax burden.
Regarding the issue of disguised interest, there is a definition of interest in the Income Tax Act. However, taxpayers can use other forms of payment that are equivalent to interest but labelled as something else to curb the application of rules.
The Chairperson, in closing, thanked everyone in attendance.
The meeting was adjourned.
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