2021 Draft Tax Bills & Rates Bill: National Treasury & SARS response to submissions

Meeting report

The Chairperson welcomed the members of the Committee. He then welcomed the officials from Treasury, SARS, PBO, the Committee support team, the media and all stakeholders.

The Committee Secretariat read the apologies into the record.

The Chairperson said that the Committee did not have much time as many members would be flying to Cape Town. The programme would have to move a bit faster as the next day, the Finance Minister would be tabling the MTBPS and some of the members needed to be in the chamber physically. He requested that everyone stick to the time allocated.

The Chairperson moved onto the second item of the agenda which was the response by National Treasury and SARS to the submissions received for TLAB, TALAB and the Rates and Monetary Amounts and Amendment of Revenue Laws Bills.

The Chairperson handed over to Mr Momoniat.

Mr Ismail Momoniat, Deputy Director General: Tax and Financial Sector Policy, National Treasury, reminded members that they were dealing with three bills. The Committee was looking at the Rates Bill, the TLAB Bill and the TALAB Bill. These bills would give effect to the February budget. It was a coincidence that this was close to MTBPS. What Treasury was saying today was not a new announcement. The bills were published around the end of July. Today, Treasury would be dealing with Chapter Four and Annexure C of the budget review and the proposals in there. The idea was that after today, taking the comments into account, the Minister would be tabling the bills the next day. Because of the time constraint it would be difficult to make some changes now but the Department would do it through the Money Bills process after they were introduced. That was important to bear in mind given that Parliament was busy during the local government elections. That gave the Ministry very little time to table bills. Treasury had circulated a draft document of response and the timeline of the presentations already made to Parliament which was around the end of August. There had been workshops with stakeholders, those who submitted comments. Today, Treasury was ready to present.

Response by National Treasury and SARS to the submissions received for the Taxation Laws Amendment, Tax Administration Laws Amendment and the Rates and Monetary Amounts and Amendment of Revenue Laws Bills

Ms Yanga Mputa, Chief Director: Tax Policy Unit, National Treasury, and a delegation from National Treasury and SARS presented the responses by National Treasury and SARS to the submissions received on the Taxation Laws Amendment, Tax Administration Laws Amendment and the Rates and Monetary Amounts and Amendment of Revenue Laws Bills. The presentation provided a summary of the consultation process, a summary of the key issues raised during the consultation process, the responses to the 2021 Draft Rates Bill, the responses to the 2021 Draft TLAB and 2021 Draft TALAB.

Key issues raised during consultation process

2021 Draft Rates Bill

Comments: The proposal to increase the excise rate by 8 per cent with the current status of a struggling economy and high unemployment rate of 32.6 per cent is inconceivable. The excise increase is unsustainable and detrimental to the continued survival of the already distressed legal cigarette industry in South Africa.

Response: Noted. Excise taxes on tobacco products are intended to reduce consumption and improve public health whilst generating revenue for Government. As stated in the 2021 Budget review, the World Health Organisation recommend an excise incidence of at least 70 per cent to effectively reduce consumption. An 8 per cent increase will shift the excise duty incidence to around 45 per cent.

Comments: The excise hike has placed the excise incidence on the cigarette’s Most Popular Price Category (MPPC) at 45 per cent compared to a targeted incidence of 40 per cent as per the National Treasury’s excise policy. The total tax incidence on the MPPC now sits at a significant 58 per cent against the background of falling consumer affordability. The excise increase is non-compliant to the extent to which it exceeds Government’s own excise policy on tobacco products, being the higher of 40 per cent excise incidence on the MPPC or projected consumer price inflation.

Response: Noted. Though the proposed increases keep the tax incidence above the 40 per cent policy guideline, the industry has continued to absorb a portion of the excise increases as opposed to passing them through to consumers, which leads to an overestimated tax incidence. The adjustments correct for any price movements that tend to undermine Government’s policy intention to reduce consumption and improve public health. The excise increases also seeks to ensure that tobacco products do not become affordable over time as this will increase consumption of tobacco products, which goes against public health policy objectives. The targeted incidence of 40 per cent is a policy guideline and need not be followed by Government every year. Given that the incidence has remained above the guideline in recent years, the 2021 Budget Review announced a review on the excise policy framework for tobacco.

Comments: The current excise duty on heated tobacco products (HTPs), being 25 per cent less than that of cigarettes, is significantly below the excise tax differential in most of the other countries where these products are now available and where switching from cigarettes, as the most harmful way of consuming nicotine, is being partly driven through excise tax policy. The excise tax for HTPs in the European Union (EU) is on average 72 per cent less than the excise tax on cigarettes. A low excise tax differential, as is the case in South Africa, could be viewed as de facto support for cigarettes and other combusted tobacco products.

Response: Not Accepted. Excise taxes on all tobacco products are intended to reduce consumption and improve public health. In line with the World Health Organisation’s Framework Convention on Tobacco Control’s guiding principles, specifically, the one contained in Article 4.2(b), we also intend to discourage initiation because Government recognises that all forms of tobacco use are harmful, including the use of HTPs. The concessionary rate given to HTPs should not be interpreted as de facto support for either cigarettes or HTPs, but as an introductory rate that is subject to review. A cautionary approach is necessary because as argued by the World Health Organisation (2020:8): “…there is insufficient evidence to conclude that HTPs are less harmful than conventional cigarettes. In fact, there are concerns that while they may expose users to lower levels of some toxicants than conventional cigarettes, they also expose users to higher levels of other toxicants. It is not clear how this toxicological profile translates into short- and long-term health effects”

2021 Draft TLAB

Comment: The proposed amendments aim to ensure that the anti-avoidance measures apply in respect of any loans, advances or credit that a trust, directly or indirectly provides to a trust in relation to which, its beneficiaries or the founder are connected persons in relation to the founder or beneficiaries of the trust that provided the loan, advance or credit. Section 7C was originally introduced to counter schemes whereby a person transfers his or her growth assets to a trust in return for a fixed loan without interest in order to avoid wealth taxes (donations tax or estate duty) on the growth asset. The proposed amendment should be withdrawn and alternative antiavoidance measures aimed at the specific mischief, namely transactions that result in a tax free disinvestment in a South African company followed by an investment in a company in another jurisdiction, should be considered.

Response: Accepted. Although a risk was identified that through the use of low interest bearing or interest free loans between trusts, taxpayers could achieve tax free disinvestments from South African companies facilitated through loan arrangements. However, it is acknowledged that the aim of section 7C was to specifically curb the use of low interest bearing or interest free loans in order to avoid estate duty and donations tax on the assets subsequent growth in value. As such, the changes proposed in the 2021 Draft TLAB will be withdrawn and a more specific anti-avoidance measure will be considered in the future.

Business Tax (General):

Comment: Companies’ earnings have been severely affected by COVID-19. If this proposal is introduced in the years where the impact of the COVID-19 pandemic is felt, interest deductibility will be further impacted by the significantly lower tax EBITDA in the current and post COVID-19 pandemic years.

Response: Accepted. This measure was first proposed before Covid-19 reached South Africa. The current rules are an important tool to mitigate the use of excessive debt and interest payments that reduce taxable profits in South Africa. Government maintains the view that these rules need to be strengthened to protect the corporate tax base, but understands that many businesses may have had to rely on more debt to withstand the pandemic and its associated lockdowns. This coupled with lower earnings provides the rationale for postponing this proposal to provide space for recovery. The proposal will remain in the 2021 Draft TLAB. However, the proposals will come into operation on the date on which the rate of tax in respect of the taxable income of a company is first reduced after announcement by the Minister of Finance in the Annual National Budget, and will apply in respect of years of assessment commencing on or after that date.

International Tax:

Comment: The concern relating to the mere conclusion of contracts in the country of residence of the CFC is acknowledged. The proposed amendments are too restrictive to CFCs that enter into genuine business transactions with persons outside of the country of residence of the CFC. The proposed amendments should be withdrawn or alternatively the requirement for delivery should relate to the delivery of goods from the country of residence of the CFC to the South African resident rather than the delivery of goods to the CFC in its country of residence.

Response: Not Accepted. Firstly, while Government acknowledges business practices, this loophole in the diversionary rules should be closed. Secondly, the alternative proposal suggested would still allow for the diversion of profits from South Africa, as a CFC, for example, in Country A, that signs a purchase contract with a third-party supplier in Country A, but with goods originating from another country and are delivered directly to SA. That transaction would arguably not result in imputation of net income from that transaction to South African residents.

Comment: The references in the Explanatory Memorandum of "anti-diversionary rules for CFC outbound sale of goods" in the "Reasons for change" as well as in the "Proposal" section is inappropriate.

Response: Accepted. Changes will be made in the 2021 Draft EM to the 201 Draft TLAB to delete the references to “anti-diversionary rules for CFC outbound sale of goods”.

2021 Draft TALAB

Comment: The change in use adjustment is in relation to fixed property that is temporarily let. The word “temporary” is linked to the intention of the vendor and as such, is subjective in nature and this is what creates the uncertainty. As such, a time limit as a proxy for intention will assist in providing certainty.

Response: Accepted. The proposed amendments will be further amended to specify what is envisaged by the words “temporarily applied” by introducing a new definition in section 18D.

Comment: The VAT payable on the change in use adjustment when the fixed immovable property is leased for the first time is still disproportionate to the exempt income earned by the developer and it is suggested that a formula be used for the adjustment which should be similar to the formula used in Australia.

Response: Partially Accepted. The proposed provision is designed to ease the output tax burden faced by property developers when the fixed property is leased for the first time because the proposed provision requires the developer to make an output tax adjustment on the adjusted cost, not the current open market value of the fixed property. However, the proposed amendment will be further amended to provide clarity on the input tax and output tax adjustments.

Comment: Although clarifications were welcomed, stakeholders were concerned that reference to allowing only renewable energy purchases made in terms of a power purchase agreement (PPA) could create uncertainty as different types of PPAs may exist. It was unclear whether a taxpayer that generates electricity from fossil fuels, has a power purchase agreement in place with a third party to purchase renewable energy and that third party supplies the electricity directly to the taxpayer for example, on-site solar PV project, and not through the national grid, would be eligible to claim the RE premium deduction. It was recommended that examples of eligible renewable energy purchases for the different PPAs are provided in the explanatory memorandum (EM).

Response: Accepted. PPAs can exist for onsite renewable electricity purchases where there is direct supply of electricity to the buyer, and offsite electricity purchases where the producer supplies electricity to the buyer through the national grid and not directly to the buyer. Renewable electricity purchases by taxpayers in terms of an offsite PPA would be eligible however, onsite PPAs would not be eligible as it resembles self-generation for own use and would be not constitute additional electricity purchases. Changes will be made in the 2021 Draft EM to the 2021 Draft TLAB to include examples of eligible renewable energy purchases under the different types of PPAs 50 Clarifying the definition and scope.

Comment: A consequential amendment is proposed to the Value-Added Tax Act, 1991, to ensure alignment of the minimum values as it relates to VAT levied upon importations as well as VAT amounts paid upon importation on which refunds are claimed.

Response: Partially accepted. The suggestion deserves further consideration but the interaction between VAT and duty raises difficult questions in this context. As a result, this amendment is withdrawn for further consideration of the potential for an integrated approach.

Comment: To qualify for the new PAYE and Employment Tax Incentive (ETI) relief, a taxpayer must be a ‘qualifying taxpayer’ which is defined as a person conducting a trade. Public Benefit Organisations (PBOs) approved in terms of section 30 of the Income Tax Act and many other exempt organisations such as recreational clubs, professional bodies and schools are effectively excluded from this definition as most of them do not conduct a trade. As these organisations, especially PBOs, play a significant role in our society and have been affected dramatically by the COVID-19 lockdown (and will be affected for many months thereafter as they may no longer receive donations that they previously relied upon), we submit that the definition of ‘qualifying taxpayer’ should be amended to include these organisations as mentioned above.

Response: Not accepted. The design of these measures mirrors that of the measures in 2020 in order to enable their speedy implementation without significant systems development on the part of employers, payroll providers and SARS. As noted when a similar comment was made with respect to the Disaster Management Tax Relief Administration Bill, 2020, automatic PAYE relief is targeted at small to medium sized businesses. Gross income, which is a key requirement, is a poor measure of PBOs’ size, since their receipts are often of a capital nature. PBOs may apply for case-by-case relief by SARS, where their actual circumstances can be properly considered. The concept of a qualifying taxpayer is not used in the ETI relief measure.

(See Presentation)

Comments from participants at the meeting of 31 August 2021

Ms P Abraham (ANC) opened the floor for participants and interested stakeholders to make comments on the responses to the proposed Bills.

Mr Shadrack Ntando Sibisi, Chairman, South Africa Tobacco Transformation Alliance (SATTA), said the lockdown, that resulted in five months without any sale of tobacco products, had hit hard. During the 2021-2022 period, the bulk of the emerging farmers, which was numbered at 22, had been kicked out of business. It was his wish all along that people received something to look after themselves. It was unfortunate that 22 emerging farmers were now out of business due to the massive illicit activity that had taken toll in the industry. Of the 22 emerging farmers 18 were women and some of them were widows. If the issue of illicit trade was not taken seriously, as it deserved, how many of these people were now going to queue for grants? People would be moving from a livelihood to grants. It was unfortunate. He said that maybe the SARS Commissioner and Minister of Police would see that the illicit trade was killing people’s livelihoods.

Mr Johnny Moloto, General Manager, British American Tobacco South Africa (BATSA), commented on a number of points Treasury had made in regard to the purpose of excise, why it was being increased as well as the policy issues relating excise. The industry all agreed and understood what the intention behind excise was. It was meant to reduce the consumption of tobacco products. However, the key contention was the projection by Treasury for this financial year. Treasury projected a consumption or tax on about 15 billion sticks of a market of 35 billion sticks which left a huge gap of untaxed, or duty not paid tobacco products. This meant that Government was taxing just slightly over 40% of the market. That meant it was not only not addressing the health problems that they were supposed to address but it meant that there was still a huge gap of about 20 billion that was not being collected. That was then passed on to the legal market. He responded to the comments made in the presentation that the tobacco industry should also take the blame for not passing on the excise to the consumer in order to keep the products cheap.  This was not true. In the current financial year, the excise was 8% but if VAT was added on to that the industry passed over 9% of excise to the consumer. Whereas the illicit players in the market reduced prices by 9%. This meant that the price deferential was getting bigger and bigger between the legal and illicit players. That was a huge concern to the industry. Treasury also said that Government was capable of concurrently implementing excise policy while also enforcing. He disagreed with that. The SARS Commissioner had told Parliament the previous day that they were fighting a losing battle in terms of dealing with illicit activity. It meant that as matters stood the illicit activity was not effectively dealt with and SAPS was merely scratching the surface on this issue. BATSA requested that when doing increases both of these issues should be taken into consideration. The illicit players did not play according to the rules. SARS had issued rules around installing CCTV cameras that were supposed to come online next year. BATSA recommended that they be brought on board urgently as another measure that could actually assist in controlling illicit goods from falling into the market. He noted the R28 policy that it would be done as part of the policy review of next year. When could BATSA expect this policy review to begin?

Mr Francois van der Merwe, Board Member, Limpopo Tobacco Processors (LTP), said that the LTP was the only tobacco processor in the country which contracted 100% of the Flue Cured Verona (FCV) tobacco farmers in South Africa. It processed that leaf and sold more than 90% of its leaf to British American Tobacco and some other buyers. That was the value chain. The tobacco brought the whole value chain to South Africa with value adding and with high quality products. He noted that the South African cigarette market was a big market. It was well over 33 billion sticks. It was a significant market. What happened during the five-month ban was that the legal industry complied with the ban. The legal brands were behind bars. The illicit players took full advantage and took over the market. During that time, they had an opportunity with very little enforcement to take over the market. That was basically what had happened. The legal industry had hoped that after the ban was lifted that it would bounce back. To its own surprise the legal industry was not bouncing back. The reason for this was simple. The ban gave the illicit players an opportunity to take over the market and to entrench themselves. During that time, they also exploited the consumers with very high prices. After the ban was lifted, because they did not pay taxes, they dropped their prices and no one could compete with that. There was a 33-35 billion stick market of which over 60% was illicit and they have become entrenched. The legal value chain, the farmers, processors, manufacturers and retailers, were competing in less than 40% of the market. The legal industry had to make a living in less than 40% of the market. SARS and Treasury were collecting taxes from less than 40% of the market. This meant that the issue of consumption would not be addressed as was the intention of excise. Government would not address consumption. Government would not reduce consumption as long as more than 60% of the market was flooded with cheap, unregulated, rubbish product. Because of this Government needed to think differently. Government could not think ‘business as usual’ when it came to excise policy. It could also not be ‘business as usual’ when it came to enforcement. As the Commissioner and Chief of Customs told the Committee yesterday, they were fighting a losing battle and only scratching the surface. The legal industry was positive and believed that the situation could be turned around with huge benefits to SARS and Treasury.  Firstly, there would be more income. Secondly, if the playing field was more level then all products were more expensive and tax paid then consumption would decline. Only then Government would reduce consumption which would achieve the health objective and National Treasury and SARS would have much more income to spend in South Africa. The picture was that illicit was entrenched and the legal industry was dying. Farmers had already left the industry. What industry could survive if it had only 40% of the market and it could not compete with an illicit market? In the illicit market, they did not pay taxes and there was unregulated product flooding the market. What would the Committee, SARS or Treasury say to the legal value chain if it came and asked Parliament where would its livelihoods now come from? This year the industry had spared no effort to do market research, market analysis and built proposals for SARS. The industry had tried to point SARS in the right direction. They had mentioned and named the manufactures, the brand and prices of those who were dealing in the illicit market. This was all known. Contrary to popular belief smuggling from outside was a big problem but the biggest problem was local manufacturing. This was told to the Committee yesterday. This made the solution much easier. To make it worse the biggest players were 50 kilometres from SARS. SARS knew who they were and knew the brands. The industry had made proposals on how to tackle them. The Commissioner had said the previous day that track and trace was not the solution and he was correct. It was a longer-term solution. He supported the comments made. Minimum price was key. CCTV cameras were key. A material audit was key. The LTP had made all those proposals to SARS and asked Treasury to hold on excise increases because the only beneficiaries would be the illicit players. They would just make more money. Next year he would tell the Committee again that the legal industry was almost extinct.

Mr Neetesh Ramjee, Director: Corporate Affairs: Philip Morris South Africa, noted the presentation and the comments by National Treasury on the excise for heated tobacco products. Philip Morris looked forward to engaging further with National Treasury on this topic. Philip Morris wanted more information on the timing and process related to the proposed review of excise tax policy for tobacco products. It would continue to build towards a smoke-free future where smokers who were not able to quit would be encouraged to switch to scientifically proven less harmful products. It would continue to provide examples and precedents from other parts of the world where regulatory authorities had gone through the evidence, gone through the science. Most notably, in the US where the Food and Drug Administration (FDA) as well as emerging peer-reviewed science and journal articles had classified Philip Morris’ heated tobacco product as a modified risk tobacco product. It looked forward to engaging more on this topic and to illustrate how tax policy could help smokers switch to better alternatives.

Mr Kurt Moore, CEO, South African Liquor Brand Owners’ Association (SALBA), said that he represented the manufacturers and distributors of alcoholic beverages. He thanked the Chairperson for the opportunity to respond and for the feedback from Treasury on its comments on the Rates Bill. SALBA was disappointed with the feedback. While it noted the reasons what was missing from the feedback was the central point that was raised around policy certainty. The Department was currently, and it had admitted so, operating outside of its policy framework. SALBA assumed that that was the only tool this Committee had to hold the Department to account. The amendments that were defended today de facto amounted to an abandonment of its own policy. While there was a plan to introduce a policy review process these changes that were happening right not amounted to an abandonment of the policy. In 2014, SALBA had participated in a policy review process which was very comprehensive. Treasury tabled a position paper supported by research and industry was afforded an opportunity to respond fully also with some supporting research. During that review process SALBA was able to evaluate the unintended consequences more fully such as illicit trade. SALBA did not believe that the increases in excise taxes will actually achieve the objectives which it seeks to address, like consumption if all the consumption went to the illicit market. As another round of excise adjustments were about to begin, SALBA would like more policy certainty. The previous Minister spoke of policy certainty for avocado farmers. Why were wine farmers excluded from this policy certainty? The notion of having to increase without an understanding of where Government was heading made it very difficult for investment into the sector. SALBA looked forward to the engagement on the excise policy. There needed to be a hold off on the excessive adjustments until there was a full understanding of the implications and start operating within the policy environment which had been set by Government.

Ms Patricia Pillay, CEO, Beer Association of South Africa, said that she was from the Beer Association of South Africa and was joined by a colleague from South African Breweries.

Ms Fatsani Banda, South African Breweries (SAB) and Beer Association of South Africa, responded to the comments made by Treasury. The out of policy adjustments in terms of excise continued to be of great concern for the Beer Association. While there had been different iterations of the current excise policy framework in 2002 and 2014. There had been no sentiment that the policy framework was set out to be an implementation mechanism that not only sets out the rules but also provides a guide as to what type of certainty and transparency around the ways the implementation would take place. She highlighted that the Presidency had set out in the National Policy Development Framework at the end of 2021 that the principles of public policy making and practices in South Africa required clarity including the implementation of public policy principles. She highlighted that the predictability principle in the framework highlighted by the Presidency was key. It stated that regulation should be predictable in order to give stability and certainty to the regulated. This reduced the uncertainty and helped to ensure fairness in the implementation of the public policy. This was not seen with excise since its implementation in 2002. The Beer Association highlighted, that National Treasury whilst reviewing the current excise policy, it was concerned that the level in which the policy had been implemented at out of policy since 2002. It was worried that the sentiment was that it would just be a set of guidelines that were improved but there were no implementation mechanisms that would create certainty and transparency around the contents and the direction of the policy. She attended the point Treasury raised on the industry not providing complete pass through of excise into prices. As it had been highlighted by the tobacco industry, consumers remained price sensitive and the industry was cognisant of the fact that households did not have high disposable incomes. That was the macroeconomic environment in which businesses had to work. When Treasury said that there was no complete pass through on price the industry knew that this did not happen. This was only because legal alcohol was essentially competing with illicit alcohol because excise was being implemented outside of the policy framework which was above inflation. The fact that this continued meant that customers who were price sensitive were actually substituting away from legal alcohol to illicit alcohol. She lastly highlighted that there were only three months left in the current budget cycle and the industry had not yet received any transparency around the policy review process. The industry was worried that it was approaching the budget and tomorrow the medium-term would be heard. There was no sentiment around the policy review process and that as key stakeholders it had no say, in good time, as to what the nature and the contents of the policy review would be.

Ms Pillay thanked the Committee for the opportunity to present. The presenter from SALBA spoke about the research that the industry did. The illicit alcohol industry had grown by 43%. She emphasised that the point Ms Banda raised about the increase in excise and the passing through to the consumer was very important. During lockdown people were brewing their own homebrews which the industry did not have a problem with. The problem was when people who did not know how to homebrew properly bought out all the pineapples in the store and all the yeast so that other people could not bake. Some people tried to brew and actually lost their lives. This was where things started getting out of hand because public health was absolutely critical. This needed to be avoided. The industry wanted to avoid people going into an illicit market and doing things that were dangerous. There were young children drinking cough mixture and mixing it with other ingredients. The issue that the industry had was more than just putting a tax on something. It was about changing behaviour and that was something that was focused on as an industry. She did not think that just putting in an increase that was above inflation was going to be the stamp. She asked Treasury to consider the smaller brewers, craft brewers, the younger supply chain, the entrepreneurs and the job creation that the industry was looking at in the industry. They had not recovered and were not recovering. What was worse was that the industry did not receive relief, as the beer industry or the alcohol industry. The alcohol industry was exempted from any relief that Government gave out. It was something that had been raised on other platforms. She reiterated that this would be a relief for the industry. She asked that Parliament and Treasury heard their plea and consider their motivation.

Dr John Purchase, CEO, Agbiz, addressed the one matter Agbiz raised. He appreciated that National Treasury had looked at the matter thoroughly, made certain proposals, accepted certain proposals and partially accepted others. He welcomed that there was at least a delay because of the problems many businesses were facing given the COVID pandemic, the insurrection in KZN and Gauteng and the various other supply chain problems. There was a bit of a delay in implementation. The one issue Agbiz raised was on the cyclical nature of agriculture and agri-business. It was addressed and there was a partial relief with a de minimis threshold of R1 million that had been included to the 80% that could be carried forward. Agbiz was not sure how that R1 million was arrived at. It sounded a bit arbitrary and Agbiz wanted to engage on that matter. Agbiz wanted that threshold to be higher, R10 million if possible. With the threshold at R1 million there would be very few businesses who would find relief from that. That was the one issue but Agbiz acknowledged the partial acceptance of its proposal to review that. He noted that the other presenters had raised substantive issues which needed to be considered. Notably, around the illicit trade in alcohol and tobacco.   

Ms Jeanette Maree, Banking Association of South Africa (BASA), addressed the re-usage of collateral. She thanked National Treasury for setting up a follow-up workshop where it had a constructive discussion on Treasury’s concerns and its concerns. She thanked Treasury for removing the retrospectivity and the contractual requirements. That went some way to providing some form of certainty for the industry at large. National Treasury’s confirmation that what was intended with the draft legislation was merely to clarify the existing legislation. BASA was concerned with the earlier comments that Treasury still proposed limiting the collateral reuse and merely carving out some very limited bank and Regulation 28 situations. It needed to be remembered that there was a very large industry use of collateral arrangements dispensation which would be outside of these carved out situations. If the industry ended up with limitations on that it there could be far-reaching consequences on market liquidity and impacts on various industry areas who were doing business locally and globally. As with all thing’s legislation, the devil was in the detail. Until the industry saw how the revised final bill actually panned out and what the wording looked like it would not know what the impact was. She cautioned that a limitation on legitimate collateral reuse would have very far-reaching consequences. 

Mr Leon Coetzee, Banking Association of South Africa, said that in the response document BASA valued the relaxation on the date and the contractual requirements. However, it was quite concerned about the slide 34 where National Treasury mentioned the clarification but it looked like further restrictions on the securities lending industry. While it was grateful for the specific carve out for banks it needed to caution on the major impact that this could have on the entire securities lending industry. BASA would like to engage National Treasury once the legislation was out just to make sure that there were no unintended consequences.

Ms Beatrice Gouws, H/O Stakeholder Management & Strategic Development, South African Institute of Taxation (SAIT), thanked SARS and Treasury for the continued engagement on all of the matters raised. SAIT would go through the presentation and draft legislation as soon as it was released tomorrow and then engage further with the Annexure C process. She wanted to know, from an Annexure C point of view, when the process would start? When should comment go through this year? This was not a normal year so it would be understood if it was a truncated process. If there was any further engagement that needed to happen it would go through the legislation, contact its colleagues and then have further engagement on that front.

Ms Sharon Smulders, Project Director: Tax Advocacy, South African Institute of Chartered Accountants (SAICA), said that there were a few interesting changes. She thanked National Treasury and SARS for their comprehensive feedback. SAICA looked forward to reading the details to see exactly where the policy was heading. Based on the presentation most of SAICA’s issues that rested in Parliament specifically had been addressed. A little more clarity would have been appreciated on the extension of the reduction in the corporate tax rate to 27%. She highlighted the assessed loss amendments and the interest limitation amendments. Why was that going to take place because SAICA had a few issues on that? It would wait for further legislation on that. It wanted clarity from Treasury as when it could expect that to come through. She raised three important points. Firstly, it was noted that a lot of the changes had been amended to no longer be retrospective. SAICA appreciated that. It was just concerning that that kept happening. There were these retrospective dates and then it had to be changed. It noted some of the concerns where there was abuse but in a lot of these cases the abuse that was spoken of SAICA was not sure what it was. She requested SARS and National Treasury to provide more clarity on what the abuse was. Secondly, she raised the specific changes to the abuse. There were a lot of provisions coming through that related to abuse but was not related to the particular change as it was. SAICA’s request was that the focus rather be on the abuse and leaving the general provisions as it was. She noted that there were issues that were not included in the bill. It also wanted clarity on when the Annexure C process would take place. There were a few things that were not included in the bill. It appreciated National Treasury, during their workshops, taking those into consideration and including them in the discussions there and changing some of those things. The things not included in the bill were things like the home-office relief, which was requested. It was discussed at the workshop. A lot of the changes that might be coming through would be too late for a lot of the individuals who had to work from home and incur a whole lot of additional costs that were not reimbursed by a lot of their employers. She raised the issue of relief benefits for those employers who were trying to help their employees during the unrest. There were no exemptions included for that. She noted the relief for essential workers which the SAICA raised previously in the Disaster Management Relief Bills but nothing seemed to have come through. Lastly, she discussed the timing of this particular engagement. It had been a very different year. She questioned why this discussion was being held just before the bills were being released. What if there were major implications? Looking at some of the issues discussed at the workshop there were really important issues. It was not sure the way National Treasury was going to go. For example, if the retirement reform was not withdrawn at this stage then what would have been the process? It was concerning. Luckily, National Treasury had agreed to most of the concerns but she hoped it would not happen again. What would the process have been if substantive changes had to be made by Parliament? She thanked National Treasury and SARS for their workshops. It was engaging and they thrashed a lot of the issues out. It would be nice to have a lot of those discussions before the legislation came into place so that it did not have to sit with this particular problem. It appreciated the ability to provide examples so that it could clarify some of its comments. It helped them understand where National Treasury was going with the legislation and what its practical viewpoints were. The SAICA looked forward to reading the details.

Mr Kyle Mandy, Tax Policy Leader, PwC, touched on a few issues in response to Treasury’s response document and the presentation. He commented on the response to the proposed exit tax for retirement funds which Treasury had decided to withdraw from this year’s legislation. PwC welcomed that and believed that it was the prudent approach. PwC applauded Treasury for doing so. He highlighted that Treasury indicated that they would revisit this insofar as legislation was concerned in the next legislative cycle. He implored that it was unlikely Treasury would be able to deal with this through domestic legislation. The concern that Treasury had was valid. In PwC’s view, the only way to address this would be through renegotiation of the treaties. The PwC strongly suggested that the sooner Treasury initiated the process of renegotiating the treaties in question the sooner they would be able to address the issue. That was a long and drawn-out process to do so but that would be the only correct way to successfully remedy the situation in the long run. The second issue that he discussed was the limitation of interest deductions. The postponement of that was welcomed in the circumstances. There were a number of issues in the draft legislation that would still be in this year’s bills that Treasury did not provide any responses to. It remained to be seen what those looked like but the PwC would address that as was necessary in the Annexure C process. Similarly, with the assessed loss limitations and the postponement thereof. PwC welcomed that in the current environment. There were also significant issues that were raised as part of the discussions that would be part of this year’s legislation which were not addressed by Treasury as part of their responses. That was something that potentially needed to be addressed once the details of the bill was seen. One issue of the assessed loss that he wanted to touch on, which Treasury did respond to, was the question around the de minimis. Treasury proposed a R1 million de minimis insofar as the use of assess losses were concerned. Agbiz touched on it a bit earlier as well. PwC agreed that that de minimis rule was too low in the circumstances. Looking at the limitation rule in isolation it was relatively generous and that may be true but the danger was when that rule was looked at in isolation and not take into account assessed loss regimes as a whole. The other countries which Treasury alluded to had two significant differences insofar as their assessed loss regimes were concerned. They allowed a carry back of losses. This meant that not only did those countries allow taxpayers to carry forward assess losses to subsequent years but also allowed them to carry back and use that against prior years’ taxable profits. That was a significantly more generous regime than South Africa had. Those countries also allowed group tax or had group tax systems which allowed assess losses generated in one company to be offset against profits in another company within the same group. This resulted in a far more generous regime. He believed that the R1 million de minimis needed to be relooked at. It was only going to provide relief to the smallest companies in question. He then discussed Treasury’s response to proposals around contributed tax capital. PwC noted the proposal and would look at the detail in the legislation. The suggestion that general repurchases insofar as listed shares were concerned would be excluded from the rule was just completely nonsensical, from a purely technical perspective. Such repurchases do not constitute dividends in terms of the definition. It just made no sense to the PwC as to how that would provide any relief while the real issue at hand has not been addressed. He noted that the devil would be in the detail with regards to the bill. He commented on the whole engagement process. Today the stakeholders were getting a response document and the bills were to be tabled tomorrow. The process of getting any further changes made to those bills that may be required was going to be extremely difficult in the circumstances. The situation was not ideal. He emphasised what SAICA asked for. He did not want to see a report of this situation in the future.

Mr Jean du Toit, Head of Tax Technical, Tax Consulting South Africa, said that their primary issue was the tax on requirement interest which had been withdrawn. He echoed what PwC said in that when the proposal was revisited its view was that it would have to be dealt with on an international tax or treaty level. Other than that it welcomed and appreciated the withdrawal.

Ms Abraham said that the Committee appreciated that the various organisations were part of the meeting to present and ensure public participation. She allowed members to ask clarity-seeking questions to National Treasury and SARS.

Discussion

Ms D Mabilesta (ANC) said that as the stakeholders were presenting she could hear and feel that 2020 was a difficult year for the whole economy. The illicit trade in cigarettes was continuing. She pleaded with SARS that they had to do something with the illicit trade. It was bringing more and more of a burden to the taxpayers. She was grateful that there were plans because listening she could hear that everybody needed something to ease the burden they were experiencing. The illicit players were also selling so why could they not pay tax as well?

Dr D George (DA) welcomed the withdrawal of the proposed punitive pension tax. It was most likely unconstitutional anyway and it would have been challenged. It was a good thing that that was off the table. He discussed the taxpayer extensions. The Commissioner had said regularly, and said the same yesterday, that SARS assumed that taxpayers did want to comply. If a taxpayer had a reasonable request for an extension, then he thought that there should be some sort of accommodation. He noted that SARS rejected the inputs from participants on that but there needed to be a reasonable balance because SARS had a lot more power than the average taxpayer. He raised the issue of tax deductions for public benefit organisations (PBO). Had the source of the donations to these PBOs been considered? For example, there was a PBO and it received donations. It then took those donations and funded political parties and independent candidates to run for office. In that way it bypasses the Political Party Funding Act because it was not a political party but its donors then may well claim tax deductions for their donations to the PBO. Had SARS thought about that? How would SARS prevent that from happening because that would clearly be something that nobody would want to happen?

Mr Momoniat responded to the questions asked. Government always had issue with both the tobacco and alcohol industry coming to lobby. Some of the arguments that they put up Government would seriously challenge. Firstly, it was the right of the State to impose higher excise duties whatever guidebook it had the Minister did have that power. The industry needed to do far more to look at the impact of their products on the health of the nation. The lockdown has revealed toward what extent the alcohol industry had an immediate effect on trauma units. It was a bit disingenuous to suggest that the impact of these taxes was not working. Yes, they were not working as well as they should. He discussed the vaping industry. Treasury had announced its intention to publish a paper on the matter as it had been finalised. Moving people from tobacco to vaping products was not the way to go. It was a step down for those who were hooked on tobacco but it was also a step for the younger generation to move from vaping and e-cigarettes into smoking. It did not matter if it was FDA approved. Certain behaviours that were taking place needed to be looked at. He just wanted to make those points. The tax system played a critical role and yes, it might not be working as effectively as Government would like. He acknowledged that more needed to be done with regard to the illicit industry. More needed to be done and those were the engagements Treasury had with the authorities in imposing higher taxes. He allowed his team to comment on the specifics. He wanted to deal with the very organised lobbying from the two industries. There had been many discussions even at NEDLAC. He really thought that the industry needed to do more and that they were not doing enough. It was having a serious impact on the health of the nation with respect to hospitals. Treasury was pretty strong when it announced these measures. He acknowledged that there were negative effects like illicit trade but that was not a reason to not proceed with the measures put in place.

Mr Chris Axelson, Chief Director: Economic Tax Analysis, National Treasury, responded to the comments made on the excise duties. Treasury was working on the review and would be following a similar process as last time. Treasury would publish their thoughts and then would engage with industry to look at all the research and the impact on how it would take the review. There was a compliant about the policy being outside of the guidelines and complaints about uncertainty. The current structure of the system was that if there was not a path through then suddenly those percentages went up. In effect the industry could then influence where Government was in that policy guideline which was not optimal. Treasury was looking at it and would try to provide more details on that. There were many points that Treasury would note. For example, on de minimis, on the exit tax and other issues raised. He noted the comments of Dr Muller on the employment tax incentive. There was no section on that in the response document. This was because it did not reply directly to any of the amendments in the legislation. It was a more general comment. Dr Muller was saying that Treasury misled the public and Parliament with regard to the employment tax incentive. Treasury strongly disagreed with that. All the research was available and it was out. The pilot project was slightly different to the national one that was rolled out but it would have to be. It was difficult to do a national pilot. A lot of the research after that had been mixed. There was some research showing that there has not been a good impact on employment and some research showing that there had been a good impact on employment. Treasury kept on looking at that. It was unique as a tax incentive as there were so many papers being written on the employment tax incentive. There were six or seven so far. Treasury also was not trying to hide anything with the previous extension to ten years. It went to NEDLAC. Treasury proposed five years. NEDLAC had independent research which had nothing to do with Treasury. It was NEDLAC that proposed to the Committee that it should be extended for ten years rather than five years. Treasury did not force NEDLAC to do that. It was their view. Treasury could discuss that more but it was not trying to hide anything. There were also points raised on the home office and fringe benefits relief. Those were policy measures that Treasury looked at but were not included in the disaster management reliefs. The review on the home office would continue and Treasury said in the budget that it would look at how it could adjust that policy going forward as part of the general reviews.

Mr Franz Tomasek, Head: Legislative Policy Tax, Customs and Excise, SARS, responded to the questions around the extensions. These were the extensions when a taxpayer wished to request SARS to change an estimated assessment. SARS partially accepted the taxpayer’s comment. It suggested that it would make it clear that the taxpayer needed to advance reasonable grounds. There were two standards found in the Tax Administration Act. The one was that of reasonable grounds which was the lowest standard. There was then the second standard of exceptional circumstances. SARS was making it clear that it was in fact the lower standard that applied in this context. He then commented on PBOs. The use of PBO funds to support a political party was specifically prohibited by Section 30, subsection 2, subsection H of the Income Tax Act. A PBO that did that was in contravention of the Income Tax Act, so Government had thought of it.

Ms Mputa responded to the comments on the process issues of 2021, 2022 and the issues of collateral. When Treasury held their workshops on 7, 8 and 9 September there was an agreement that the financial industry had evolved, deviated and developed. Hence, they understood what Government was doing. The financial industry admitted that themselves during the workshops. During the workshops she had also quoted the minutes from the meeting that was held during 2014 and 2015 when these provisions were first introduced in the legislation. Treasury was of the view that it had interacted and had made changes based on the interactions. Yes, in some cases Treasury had said partially accepted based on the comments. The full response document will be available to the stakeholders where everything was detailed more than they were on the slides. She discussed the 2021 process. She wanted taxpayers to bear with Treasury. This had been a very difficult year. There had been a set date for the response document. It was around 17 October. The dates were postponed because of the local government elections. This year it was different from other years. She wanted taxpayers to understand that it was not like every year Treasury operated like this. This year was different compared to other years. The response document was postponed because Parliament was closed due to the local government elections. This was the time that Treasury could come to Parliament to do the response document. She then discussed the 2022 process. Treasury normally would start the Annexure C 2022 after the Minister had tabled the 2021 Tax Bills because once tabled that process would be finalised. The bills would be tabled tomorrow. Treasury would send a request for Annexure C proposals in the days after the bills had been tabled tomorrow. She pointed out that Treasury normally gave taxpayers 30 days to provide comments. If Treasury issued a media statement on 15 November and say that taxpayers had 30 days to comment. That would then be up until 15 December. The problem was then when would the workshops for Annexure C be held because by that time it would be heading to Christmas? There were two things that Treasury could do. A media statement could be issued for Annexure C and give taxpayers less than 30 days to provide comment for Annexure C. Some of the taxpayers would complain. Usually, the Annexure C workshops were held before the close of December. This implies that the Annexure C workshops on the second week of December, at least before 15 December. Treasury could then do everything before the close of December so that it was ready for Annexure C for January. That was what Treasury wanted to ask because there was going to be a short time to provide comments for Annexure C because of the timing of this year.

Ms Abraham thanked National Treasury and SARS for the responses. She also thanked all the presenters who made their presentations to the Committee. She agreed that the devil would be in the detail. All would have to wait until the Minister had presented the bill in Parliament. Then they would know for sure what was contained in the bill and what could be challenged from the bill. A lot of work had happened before this particular meeting between National Treasury and the stakeholders in terms of the workshops and the interactions that had happened. The Department needed to play a balancing act. Listening to the presentations some agreed with one another, and some differed vastly. She thanked the presenters for making known their concerns. The Committee would meet with the stakeholders after the presentation had been made by the Minister in Parliament to find out how they were affected and how they could survive under the circumstances. She thanked everyone who had been part of this meeting and who participated to enrich the discussions.

The meeting was adjourned.