2022 Tax Bills: Treasury & SARS response to public submissions

Meeting report

Mr Ismail Momoniat, National Treasury Acting Director-General, accompanied by Treasury/SARS team, presented the draft response to the submissions made by businesses on the proposed amendments to tax legislation (see document). The meeting participants included business leaders across industries and sectors directly affected by the proposed amendments. Businesses protested that the tax amendments are too onerous and would likely bring unintended adverse consequences to the fragile South African economy.

Comments from Stakeholders
Beer Association of South Africa (BASA)
Mr Gregory Marks, BASA Strategic Excise Advisor, noted that in 2021 because of the inflation rate and the excise duty increase there were unintended consequences that impacted consumers. Consumers are price sensitive but are unlikely to be deterred from consumption. Rather, consumers will seek tax-free alternatives in the illicit market which presents significant risks. Consumers have a tendency as demonstrated by independent research to gravitate towards illicit or low-cost alcohol products. This low-cost alcohol presents a significant risk to the legitimate market, the fiscus and the consumer.

The second point he addressed was the excise tax policy over the next three years. Historically, the excise duty rate has surpassed the inflation rate, sometimes doubling the inflation rate in certain years. This has had a cumulative impact over the last six years of around 70%. BASA wished to put forward their position to advocate that stakeholders have excise policy certainty over the next three years. This would encourage investor sentiment and confidence in the industry.

On the different excise duty rates, BASA recognises that South Africa is part of the World Customs Organisation and there is a definite need for product classification. BASA contended that the rates applied should be simplified based on alcohol by volume. The current varying excise rate structure is an inhibitor to product innovation and is based on a historic system which presents a clear bias.

A simplified tax rate methodology is in support of Treasury's position on simplification. This would encourage product innovation towards lower alcohol by volume (ABV) products which would be in support of the World Health Organisation while not being overly punitive towards other products falling within the same ABV range.

British American Tobacco South Africa (BATSA)
Mr Dane Mouyis, BATSA Senior Manager: Fiscal Affairs, said that the implementation date for the flat excise duty rate, 1 June 2023, was an ambitious target because of the highly unfragmented market with more unknowns than knowns. SARS would need to fully understand the market, including its workings and the large do-it-yourself mixing market before agreeing to a specific date. SARS still had to consult on multiple issues with many actors such as bond requirements, payment terms, reporting requirements. Companies would also need to update their ERP systems and put governing and reporting processes and procedures in place. It was important to bear in mind that this was the first time that most industry actors had ever had to deal with an excisable product. He proposed that a more appropriate date would be 1 June 2024.

On the proposed excise rate, he explained that the comparable analysis presented by National Treasury did not consider purchasing power parity, product prices in South Africa and other factors. Considering appropriate market adjustments, the South African excise rate of R2.90 per mil would be one of the highest in the world. It would cause certain products in the market to double in price. He cautioned that legislators needed to be cognisant about comparing an introductory rate to established excise regimes because this may lead to a situation in South Africa where there is immediate noncompliance and fiscal evasion. He used Europe as an example stating that in Europe the legal market was destroyed when high introductory rates were implemented. He advised that it would be best that South Africa err on the side of caution on the introductory rate. He proposed that the introductory rate should be around 70c per millilitre. He based the proposed rate on research by Oxford Economics Africa. The rate would allow SARS to broaden its tax net and test the administrative system. Once the actors in the market are brought into the tax net then the rate could be appropriately increased.

Vapour Products Association of South Africa (VPASA)
Ms Asanda Gcoyi, VPASA CEO, said it was regrettable that Treasury chose to stick to its proposed position. The tax was not warranted and they took issue with Treasury’s one-sided review of science related to vaping. She reiterated their view that vaping was a harm-reduced alternative to smoking and every piece of credible review bears this out. The US Food and Drug Administration (FDA) that Treasury mentioned had indeed approved vaping as a harm-reduced alternative to smoking.

Ms Gcoyi stated that that the issue of the youth needed to be tackled by all stakeholders and that vaping industry were in fact playing their part, but tax would be a blunt instrument in doing so because the youth would merely continue vaping through black market channels and those illicit products would be detrimental to their health. Tax would not solve the problem but rather they needed a stakeholder-inclusive approach to tackle the issue of youth vaping. Adult smokers who are the legitimate targets of the industry would find the products unaffordable and would be unlikely to continue using vaping products in place of tobacco due to the exorbitant price increases that are likely to result from the imposition of this tax.

The industry was struggling to understand the rationale for imposing a nicotine tax on non-nicotine products even though non-nicotine products fell outside the WHO Framework Convention on Tobacco Control (FCTC) and deserved to be treated differently from products containing nicotine. She urged Parliament to give serious consideration to this very important difference made by the FCTC. Lastly, Ms Gcoyi said that the tax would put many vaping traders out of business.

Association for Savings and Investment South Africa (ASISA)
Ms Liezel Coetzee, ASISA representative and Sanlam Head of Long-Term Tax, said ASISA looked forward to the proposed engagement with Treasury and SARS to review the changes to section 29A because they are material and complex. On Treasury retaining the six-year phasing-in period, she commented that, in the absence of the exact quantum of the transitional impact, they were of the view that a long phase-in period would be in the interest of both the fiscus and the industry.

She explained that alignment of the phasing-in period with the average contract length on transition will ensure that insurers have the cash flow to pay the tax because cash flows arise over the lifetime of insurance policies which can span an excess of 20 years on transition and there is also international precedent for this approach. A longer phasing-in period will not only protect the integrity of any unintended cash flow consequences but also protect the fiscus from uneven tax contributions from the industry. A ten-year phasing-in period was determined as an appropriate period by the Actuarial Society of South Africa based on the numbers available from the 2021 PWC transition impact study; it was also their independent recommendation.

If we compare the phasing-in period provided for short-term insurers of three years to the six years provided for long-term insurers it is not equitable. A small number of short-term insurers will be impacted on transition to International Financial Reporting Standards (IFRS) 17 whereas almost all long-term insurers will be impacted. The quantum for IFRS 17 for long-term insurers is also substantially more material compared to short-term insurers The time frame for which the impact for short-term insurers will reverse is much shorter compared to long-term insurers where the transitional impact will only reverse over a longer period based on the average contract length on transition which will be in excess of ten years.

South African Institute of Chartered Accountants (SAICA)
Dr Sharon Smulders, SAICA Tax Advocacy Project Director, stated that with carbon tax, what they were looking for was basically certainty and clarity on a lot of issues. SAICA did appreciate the clarity received on the US dollar rate and the proposed change to bring that back to rands which would assist immensely and prevent any volatility in calculating those rates.

On the tax pre-allowances, she said they welcome further clarity in the paper that will be published in 2023 and they looked forward to participating in that paper as well.

On the Capital Gains Tax (CGT) annual exclusion, they thanked SARS for the indication that its systems will be ready to cater for this change which will not only help the current system plus the new proposed changes, but it will also help fix the current problems we are facing. On the Contribution Tax Capital, she thanked SARS for excluding from that definition the legitimate targeted transactions as they will now not be impacted, and we will not be in the same situation we were in last year where we had to come back to Parliament after the Bill had been changed to try to fix it. On the Tax Administration Act they are happy about the outstanding penalties for the Employment Tax Incentive (ETI) and she thanked them for those changes. On the tax clearance certificate, they were wary that there could be abuse but they accept that it will a senior SARS official that will be given that final decision.

Banking Association of South Africa (BASA)
Ms Jeanne Stegmann, Banking Association representative and Standard Bank Head: Corporate and Investment Banking Tax Advisory, noted that the Treasury response did not address the collateral arrangements legislation. This was understandable because no changes were made in the 2022 Draft Bills on this but given the fact that the only possible mechanism to postpone or amend this legislation further is by means of an amendment to the 2022 Draft Bill and being under the impression that further consultation will take place between industry, National Treasury and SARS she appealed that they reconsider within the proposed Draft Bill to postpone the effective date.

The Banking Association does support Treasury’s need to clarify that compliant reuse will result in taxes. However, the 2021 legislation will come into effect on 1 January 2023 and the Banking Association considers this to be detrimental to market liquidity and for this reason they requested to engage with Treasury further. The 2021 Taxation Amendment Act constrains the amount of eligible collateral they have on the market and it also increases the cost of maintaining market liquidity. She proposed a solution for correcting the 2021 Taxation Amendment Act by including the proposal that Treasury make a proviso as opposed to an exclusion. She requested the postponement of the effective date until there was further engagement with Treasury on the issue.

PricewaterhouseCoopers (PwC)
Mr Kyle Mandy, PWC Tax Policy Leader, stated that it was concerning that there was still uncertainty on the future trajectory of the various allowances on carbon tax. Treasury announced that a paper would be issued in 2023 before consultation. This would add to policy uncertainty because this was a piecemeal approach to carbon tax policy which was not ideal and was in fact unhelpful. On revenue recycling, the amount of tax revenue Treasury is raising on an annual basis is in the region of R3.5 billion and that was cash sitting in the bank. To then suggest the renewable energy premium and the electricity levy constitute the recycling of revenue was incorrect and misleading. He insisted that these were amounts that Eskom would otherwise be liable for on a carbon tax perspective, and they did not reach Treasury’s bank account. Transparency was lacking in how the revenue was being recycled. The energy efficient saving tax incentive is negligible in the greater scheme of things.

On the socio-economic impact assessment study that accompanied that carbon tax bill in 2019, Treasury had highlighted certain risks which eventually materialised. He pointed to Treasury’s mitigating measure which included reviewing the revenue recycling after Phase 1. Being at the end of Phase 1, the review has not happened yet so it is crucial that review takes place and that revenue recycling measures be revisited.

Business Unity South Africa (BUSA)
Mr Happy Khambule, BUSA Manager: Environment, Climate and Energy, said BUSA supported the fact that the tax legislation is part of climate action. He made a request that the reductions need to be clearly spelt out that South Africa is seeking in mitigation outcomes. Reiterating Mr Mandy’s point, Treasury needed to undertake a review on how effectively the tax has been implemented so that we are able to identify where the unlikely unintended consequences are. BUSA welcomed the fact that Treasury was encouraging the bottom-up analysis and they hoped that Treasury would be standing with them when working through the outcomes of the analysis.

Although BUSA had some objections and critiques around the proposal, this did not mean that they were not in line with the Paris Agreement outcomes and the country’s mitigation commitments. What they were simply trying to do was indicate affordability and other challenges they were faced with. It was important to discuss what happens in a situation where tax is applied that is above the carbon budget and what that means for the realisation that there could be double penalties that could be applied.

South African Breweries (SAB)
Ms Fatsani Banda, SAB Economist and Excise Specialist, in line with the SAB request for a consistent basis on which all alcohol categories are taxed, National Treasury has responded by sharing market share data and rated alcohol content for each alcohol category in the industry. This was contrary to what public health research had stated – that the higher the alcohol content, the higher the alcohol industry player should be taxed. The market share of the spirits category is 3% whilst the beer industry is 75% as quoted by Treasury. The spirit industry is taxed double the excise tax the beer industry is paying because its average alcohol by volume (ABV) is 40%. The wine industry average is 12% ABV but its paying lower taxes amounting to four times less than the beer industry. This is the inconsistency within the excise framework that has not been materially dealt with in Treasury’s response. Fundamentally they believe that there is a scope of best practice on this matter and Treasury needs to note this outside of market share and alcohol volume content relative to each alcohol player.

Also National Treasury only quotes data provided by the wine industry in its empirical evidence. The beer industry had given Treasury multiple submissions to use their own data and models to guide a transparent process on excise policy, but they have not received an opportunity to do this. This was a gap in giving the beer industry a platform to contribute to excise discussions. She pointed to the empirical evidence provided by Treasury for giving the wine industry preferential treatment in the excise policy. Treasury had quoted the fact that in EU wine-producing countries, they give the wine industry preferential treatment. This is different to the response Treasury had given in the February 2022 Budget public hearings which quoted page 57 of the excise policy stating that it is the macro-economic performance of the wine industry that grants it preferential treatment.

She requested Treasury provide clarity on why its initial reason for the wine industry’s preferential treatment had changed and why the EU policy had to be applied to the South African context. On the lack of certainty and predictability on excise guidelines, SAB asked that the medium-term budget policy statement (MTBPS) be a space where businesses are given an opportunity to get certainty on investment and business planning by fixing the excise rate in line with forecast inflation into the medium term.

World Wide Fund for Nature (WWF)
Mr James Reeler, WWF Senior Climate Specialist, said that WWF and their social partners were very happy to see Treasury holding its ground on carbon tax rates. WWF maintained that the rates have been much lower than global and local model recommendations. Tax rates in developing nations are very much the low ground for the just transition. He agreed that they were an effective tool for incentivising a just transition. This is why they strongly support the strengthening and consideration of science-aligned increases in the carbon tax going forward given the critical nature of the tool.

On the extension of tax deductions based on sawmilling activities, he reiterated the caution WWF had initially provided that the continued failure to include the agriculture, forestry and other land use (AFOLU) sector within the tax net has a significant risk of expanding potential emissions nationally with this process since we do not include the long-term changes in standing biomass relating to the sequestration. For this reason, they proposed that sequestration activities be considered under the offsets allowance and limited in that regard. We also look forward to participating in the debate around the tax-free allowance going forward. We strongly recommend a more rapid phase out of the allowance.

South African Securities Lending Association (SASLA)
Mr Michael Wright, SASLA Chairperson, said that they were disappointed that the collateral arrangement definition was not included in the Treasury feedback. He restated the concern that the amendment to the definition of ''collateral arrangement'' is drafted in such a way that the limitation of reuse of collateral forms part of the exceptions to collateral arrangement. This has an unintended consequence of excluding all proceeding compliant collateral arrangements in a collateral chain instead of only subjecting any non-compliant collateral arrangements.

SASLA submitted that if the reuse of collateral prohibition is included as a proviso instead of as part of the exceptions to the definition, it would have the required effect of clarifying that any arrangements that fails to meet the arrangement definition would not benefit from the securities transfer tax (STT) or capital gains tax (CGT) dispensation. However, it ensures that any prior compliant collateral arrangement on the same securities will benefit from the dispensation. The industry is concerned that if not amended as suggested, one would see market participants in the South African financial market use either cash collateral or revert to the pledge mechanism. In both instances this would cause a liquidity crisis in the market that could destabilise the financial markets. This would also deter international entities from participating in our securities financing transactions (SFTs) market.

Sasol
Mr Handre Rossouw, SASOL Executive Director and Chief Financial Officer, commented that there was no clarity in the proposal on allowances which makes it impossible to understand the potential impact of the proposed changes to the carbon tax. So despite the commitment of further engagement in 2023, it would be irresponsible to enact changes to the legislation before nailing down the allowances. He requested that Treasury provide transparency and honesty on the national benchmarking of South Africa’s carbon tax. When one looks at the international comparison in Treasury's response document, most of the carbon taxes referenced are either on specific portions of the economy or are proposing or exploring portions of the economy. Treasury is referencing the US, India, Brazil, and China when all these countries did not have carbon tax that was a problem. It was especially an issue when considering South Africa’s competitive impact relative to other global industries if these significant increases are enacted. He noted that Treasury keeps referencing the EU. Although the EU does have high taxes, they also have border adjustments which South Africa does not. These increases could be detrimental to South Africa’s competitive edge in industry. Sasol is committed to the just transition and does not oppose carbon tax to the extent that it forms part of well-considered regulations. He said that Sasol is also doing important work for transition.

Minerals Council South Africa (MCSA)
Ms Stephinah Mudau, MCSA Head: Environment Department, emphasized their commitment to climate action and a just energy transition. The fact that they had raised some concerns about the amendments to the tax legislation, specifically on carbon tax did not mean that they were withdrawing their concern and support about climate change and the long-term goals and actions that South Africa has acceded to in the Paris Agreement. They were happy to participate in South Africa’s climate response through policy initiatives aimed at achieving a net zero on carbon emissions. She acknowledged the carbon market mechanism in the form of carbon tax but they were concerned about the dire economic implications of the proposed higher tax rate. The MCSA submissions had not been taken into consideration by Treasury in its response. She reiterated that the onerous tax rate would have serious implications on mining operations.

On the basic tax-free allowance, MCSA needed further clarification and surety on the function of the allowance in the long term. On alignment between the carbon tax and the carbon budget, more information was needed on the nature of the alignment between the two instruments especially on the accession to the tax above the budget and below the budget.

Mr Bongani Motsa, MCSA Senior Economist, said the tax would have a cost-escalating impact on the mining industry. The fact that they could not transfer cost increases to the final product they sell was a big issue for the industry. The mining industry had lost thousands of jobs. Using the gold industry as an example, it had lost 48 000 jobs over the last ten years even though South Africa was ranked fifth globally as a country with the most gold reserves. The job losses were therefore not because of a lack of commercially exploitable reserves in South Africa. It was because of a slight increase in cost; this resulted in job losses and closure of mining operations.

Cement & Concrete South Africa (CCSA)
Dr Dhiraj Rama, CCSA Industry Development Executive, said that CCSA would need some time to review the Treasury response to better understand the implications. The certainty and clarity on the conversion from USD to ZAR was appreciated. In the case of carbon tax allowances, there was still no clarity on the extent of allowances which would mean that in the interim their members would still be facing uncertainty in terms of effective rates and business sustainability. The cement sector was stressed at present. They looked forward to engaging on allowances proposed for commencement in 2023.

On trade exposure, cement unlike other commodities is trade-exposed based on cheap imports rather than the country exporting cement. So while there was a lot of reference to exports made to EU, they were very concerned they may be faced with cheaper imports from industries and will face challenges to exporting to the EU as a result of the tax border adjustment. The trade exposure needed to consider the cement industry in terms of imports. On the recycling of revenue, their members were concerned about the approach to revenue recycling. Revenue recycling needed more work to better inform the tax regime. On penalties, carbon budgets and carbon tax, there was still uncertainty about carbon tax above budget and the approach to penalties. He hoped that more certainty would be underway.

Industry Task Team on Climate Change (ITTCC)
Dr Andries Gous, ITTCC Co-Vice Chairperson, appreciated the role by all stakeholders to decarbonise South Africa. The request to provide more information about the potential impacts of the carbon tax did not mean that they opposed the tax or the country’s goals to achieve the Paris Agreement targets. However, it has an impact on the operations and livelihood of all companies and the public in general. They welcomed a rand-denominating tax rate as this provided clarity for future carbon taxing and pricing signals. They welcomed further clarity on the allowances and penalties.

ITTCC looked forward to participating in the consultation sessions once the paper was published. They fully supported the work being done on the mitigation analysis, but they suggested that the economic impact and incentives should be reconsidered and expanded on to promote a just transition in the most affordable way. The main reason for this was because the studies cited by Treasury were performed with certain assumptions that have changed. For instance, the economic impact study that looked at the different tax rates and showed South Africa would reach its reduction as well as looking at different methods to recycle the tax was still based on the Integrated Resource Plan for 2013. This plan has been subsequently updated. He reminded Treasury and SARS that without the necessary support, structure and incentives South Africa would not be able to reach the goals it has set out to achieve.

Chemical & Allied Industries’ Association (CAIA)
Dr Glen Malherbe, CAIA Head of Policy Analysis, said they looked forward to further engagements with Treasury about the design of carbon tax and hoped that this would be underway as soon as possible so industry could appropriately consider the potential future financial implications. On the continuation of the base rate of the carbon tax, this was very worrying because the implications would be dire for companies. He found Treasury's statement 'there is no leadership in business' concerning because he was certain that in the chemical industry there were companies operating best in class and from a global perspective there has been voluntary greenhouse gas emissions mitigation for up to a decade and more. He stressed that a single mitigation system was necessary and that there were several policy considerations outstanding that needed to be attended to such as allowances and the carbon budget. He called for absolute flexibility in carbon offsetting and ringfencing of the revenue going forward so that emissions could be reduced wherever possible.

Arcelor Mittal
Mr Siegfried Spänig, Arcelor Mittal Group Manager: Environment, said the consensus in general was that their comments were not taken seriously. Referring to Treasury's international comparison in the presentation, a few countries had been listed as imposing carbon tax. What was left out was that the quoted carbon price is not the price that is necessarily being paid in the end. He mentioned Argentina and Mexico that were dominant industries that had been excluded. He requested that Treasury do more research on the carbon tax rather than simply quoting international countries that impose the tax.

He welcomed the initiative for further work to be done on allowances but added that this was not good enough because the uncertainty about allowances was frustrating for businesses. Treasury could not promulgate carbon tax without have certainty on allowances. Lastly, steel imports had not been dealt with by Treasury whereas imports amounted to 30% of local consumption which warranted closer attention. He emphasised that carbon tax had to be implemented cautiously not to compromise the industry’s competitiveness and that protectionist measures such as carbon border adjustments were an option that deserved to be seriously considered. The iron and steel sector remained a very concerned sector, but they trusted that the carbon tax would not be promulgated in its current form until provisions for the allowances would be included.

Committee Chairperson request
The Chairperson commented that it seemed that stakeholders were not opposed to the carbon tax, but it seemed that the way it was introduced would make it difficult for them to afford. He stressed that affordability was a matter that Treasury and SARS had to consider carefully to ensure that the voices of stakeholders were accounted for going forward.

Treasury response
Ms Sharlin Hemraj, National Treasury Senior Economist, said one of the things Treasury struggled with during this process was the information provided by industry on the financial impact assessments of the carbon tax proposals. The assessments assumed that there would be no allowances in 2030. She emphasised that this was highly unlikely to be the case. They would be engaging further with stakeholders on the future design of the allowances currently in place. They would have to consider the hard-to-obey sectors such as the iron and steel, cement, and chemicals sector in terms of the transition and the availability of technologies. This was an evolving space and the requirements for climate and greenhouse gases commitments would become more stringent going forward but they were prepared to balance this with the impact it would have on industry. Overall, the industry financial impact would be significantly less than the numbers put forward.

On the future of allowances, currently there had not been any proposed changes to the allowances and at this stage the allowances were in place as they do not have an end date. Until there are further engagements, the allowances are still in place in principle. The analysis that was done considered the direct impact of the carbon tax for scope one emissions which is the impacts from electricity generation and process emitters, but it also considered a pass-through of the carbon tax through the electricity levy in 2026. They will be doing further work on the impact on all industries due to the inclusion of the carbon tax in the electricity sector and the impacts. At this stage they have proposed that the commitment to electricity price neutrality is extended for a three-to-five-year period, and this will be subject to consultation. Currently it has been extended to 2025 and if it is extended further, it will provide relief to industry in the transition. This will also consider the electricity sector transition that is underway in shifting to alternative energy. This will make certain technologies more viable over the medium to longer term.

On the revenue recycling measure, usually they do not support earmarking of revenues because this introduces rigidity into the budget process which could result in less revenue being allocated for priority programmes than is required. So the approach taken for carbon tax was to look at soft earmarking of some of the revenues through this commitment around electricity price neutrality as well as the energy-efficient savings tax incentive. Also there is budget that does exist for the environmental Working for Water and Working for Energy programmes. She suggested that industry could submit programmes that they wanted to ensure were supported. There is work through the Presidential Climate Commission (PCC) on the Just Transition framework and further work is planned for other sectors that would be impacted.

On the international comparison, this was just an example of taxes in place as well as the emissions trading schemes, but it does not consider the policies these countries are implementing to reduce emissions and transition their industrial sectors and electricity sector. Once industries look at this more broadly, she believed that they would see that there was a firm commitment around transition in those various countries. In the case of China, it has put in place an emissions trading scheme and also a range of environmental pollution charges and taxes implemented within that system.

Mr Chris Axelson, National Treasury: Chief Director on Economic Tax Analysis, explained that in the 2022 budget they extended the first phase of the carbon tax. A lot of NGOs had commented that Treasury was being too lenient on business because they were not just extending allowances, but also extending electricity price neutrality and extending incentives. It was not too long ago where they were being criticized for being too soft on business but now industries were submitting that they were being far too onerous. He reminded stakeholders that even though the rates are going up they should not forget that allowances were not on paper just yet but that was not a good enough reason not to increase the rate.

A higher rate was necessary because it was too low. Industry had always been cautioned that the tax had been initially set very low to give them time to gradually adjust their operations to the higher rate that would come. Allowances have not been legislated because consultations must take place to ensure that proper allowances are legislated. Considering this, uncertainties will naturally occur during tax legislation going forward. They always try to be transparent and honest, and this is reflected in the response if the presentation is reviewed in full.

Closing Remarks
In response to Dr D George (DA) asking to return to in-person meetings, the Chairperson said that the Chief Whips Forum was attending to the availability of venues so that sit-in meetings could commence.
The Chairperson commented that the Committee will take the Draft Tax Bills process forward by deliberating on the Committee Report and thereafter submitting it to the National Assembly. He thanked National Treasury, SARS, stakeholders and all other meeting guests in attendance.