Workshop on Tax, Rates & Revenue Bills

Meeting report

In her opening remarks, the Chairperson welcomed the South African Revenue Service (SARS) and National Treasury, setting a collaborative and respectful tone for the session. She acknowledged the importance of their presence, emphasising the critical role they play in the functioning of South Africa's fiscal and tax systems. After the formal introductions, she invited Members of the Committee to introduce themselves, ensuring that everyone was acquainted.

Mr Edward Kieswetter, SARS Commissioner, proceeded to introduce his SARS colleagues, highlighting their respective roles within the organisation. He also acknowledged the presence of key representatives from National Treasury, underscoring the collaborative efforts between the two institutions in advancing the country’s tax administration and fiscal policies.

SARS Induction Briefing

Mr Kieswetter opened the presentation by providing an outline of SARS's strategic goals and challenges as the organisation moves towards its 2025 vision. He emphasised SARS's role in fostering sustainable economic growth and building public trust through compliance and data-driven modernisation. The core focus areas included broadening the tax base, improving voluntary compliance, and leveraging data and technology to achieve more with fewer resources.

SARS has shown significant performance improvements in the past five years. He highlighted key achievements such as the recovery of R261 billion for the fiscus through initiatives like debt collection and audits. He also noted improved taxpayer experience, with the adoption of AI-driven compliance and service interventions that had resulted in the auto-assessment of millions of taxpayers.

Despite these successes, SARS faced ongoing challenges, such as insufficient capacity and funding to address non-compliance comprehensively. He acknowledged that many taxpayers remained outside the system, and the organisation had to work towards increasing registrations and enhancing compliance enforcement measures.

Ms L Tsolekile took over to discuss SARS' future plans, focusing on the modernisation of tax administration through the implementation of AI and data science. The goal was to create a seamless, data-driven platform that improves voluntary compliance while reducing operational inefficiencies. She highlighted how these technological advancements would make it easier for taxpayers to fulfil their obligations​.

Mr Fhatuwani Malivha, representing the SARS Junior Board, concluded the presentation by discussing leadership development initiatives. He stressed the importance of upskilling employees, particularly through programs aimed at young professionals and general assistants. These initiatives were part of SARS’s broader strategy to build a capable workforce that could drive innovation and performance in the future.

In conclusion, the presentation provided a comprehensive overview of SARS's current status, key achievements, and future strategic objectives, positioning the organisation to meet both immediate and long-term challenges in revenue collection and compliance enforcement.

See attached for full presentation

Discussion

Ms M Siwisa (EFF, Northern Cape) raised several issues concerning revenue collection, corporate compliance, and labour exploitation. She noted that while revenue had increased, it was still insufficient to meet the country’s financial demands, leading to ongoing budget cuts as the Minister of Finance indicated. She highlighted the concern of large corporations that, despite having sufficient funds, avoid paying taxes owed to SARS by engaging in costly legal disputes. She pointed out that some companies may owe SARS R1 million, yet spend double that amount on legal fees to avoid payment, ultimately reducing the funds available for essential public services. She questioned how these actions by large companies impacted SARS's financial position and ability to fulfil its mandate effectively.

She raised the issue of labour exploitation, mentioning employers who deduct retirement contributions from employees’ salaries but fail to remit these funds. She observed that this issue particularly affected larger corporations and deprived employees of their rightful retirement benefits, while the companies also evaded their compliance obligations. Lastly, she noted the practice of companies opting for liquidation to escape tax obligations, thereby creating financial instability within the tax system. She asked how SARS addresses the challenge of companies dissolving to avoid taxes and whether there are sufficient measures in place to hold such companies accountable.

Mr P Swart (DA, Western Cape) appreciated Mr Kieswetter and the SARS team, recognising their strength and dedication to tax collection in challenging times. He commented on the impressive growth in the tax to gross domestic product (GDP) ratio, as presented on slide 5, and sought further insight into how SARS had achieved this sustainable growth, given South Africa’s current economic constraints.

He then turned his attention to slide 10, which highlighted SARS’s efforts to broaden the tax base and improve voluntary compliance. He asked what additional measures or incentives SARS might implement to encourage compliance, specifically targeting the informal sector, which remained largely untaxed. He conveyed the public's curiosity about the potential revenue that could be generated if unregistered businesses, including illegal operations, were brought into the tax system. He asked how SARS and National Treasury planned to ensure compliance within these informal areas.

Mr Swart voiced concern over SARS's accountability and transparency, especially considering the institution’s struggles during the state capture period. He requested assurances on the governance measures now in place to safeguard its integrity.

Closing his remarks, he addressed SARS's ongoing capacity and funding challenges, asking what had been done to overcome them and how Parliament could assist in securing the necessary resources for SARS to function effectively and expand its capacity. He commended the team’s resilience, and asked how the newer “youth team” would support SARS's goals going forward.

Mr J Britz (DA, Eastern Cape) began by reflecting on his long history as a taxpayer, recounting the earlier days when tax returns were complex and daunting. He congratulated SARS on its resilience, especially during the state capture years, and commended the institution for regaining public trust. He remarked that SARS had become a model institution in South Africa, expressing hope that other government entities would follow its example.

Turning to current concerns, he referred to recent reports on illegal mining activities and certain mining companies engaged in tax and value-added tax (VAT) evasion. He highlighted that this example represented a broader issue, where many foreign-owned businesses in townships operated with unclear tax compliance. Citing constituent feedback, he questioned how SARS identifies these businesses and what measures it employs to ensure their inclusion in the tax base.

He acknowledged recent improvements in revenue collection, but pointed out that there was still a backlog to address. He inquired about the specific plans SARS had in place to ensure targets were met, asking what actions the team intended to take to clear this backlog.

Finally, Mr Britz raised a point about the definition of small and medium enterprises (SMEs). He questioned whether the current SME classifications accurately reflect the businesses intended to fall under these categories. He suggested it might be time to re-evaluate these definitions to more effectively capture income and expand the tax base. He clarified that this was a question rather than a statement, inviting SARS’s perspective on the matter.

Mr J Majola (MK, KwaZulu-Natal) expressed his appreciation for the unique quality and professionalism of SARS’s presentation, noting how it stood apart from those of other departments and institutions. He thanked the Commissioner and the SARS team for the significant work they had been doing, particularly referring to their efforts to combat tax evasion.

He raised two points of clarification. First, he referred to the Commissioner’s example of the tobacco sector, where preventive measures had been put in place to address tax evasion, including foreign-owned businesses in South Africa. He expressed concern over the potential negative impact that illegal businesses, particularly those linked to drugs, might have on communities. He then questioned SARS's powers in this regard, asking if it had any specific authority to intervene in such cases and, if so, what steps it could take to tackle these associated illicit activities.

The second question concerned a graph on page 11 of the presentation, which described taxpayer behaviour. Mr Majola noted the Commissioner’s remarks on non-compliance, where some taxpayers may not always willingly comply with their obligations. He referred to the Commissioner’s mention of “throwing the book” at serious offenders. He asked for further clarification on how SARS differentiated between wilful tax evasion and unintentional non-compliance, and whether any specific recommendations were in place to address such cases effectively.

Mr D Ryder (DA, Gauteng) expressed his appreciation for Mr Kieswetter and the SARS team, acknowledging their meticulous work and dedication to making South Africa’s tax system more efficient. He then presented a series of questions centred on the impact of recent legislative changes, the effectiveness of compliance strategies, and the operations of SARS.

His first question focused on slide 6, which mentioned the 36 million taxpayers within a population of 62 million. He pointed out that a significant portion of the population was either too young or too old to pay taxes, with unemployment rates compounding this issue. He inquired about the distribution of active taxpayers, particularly within the small business sector. He raised specific concerns over the impact of compliance costs on small businesses, following amendments that grouped closed corporations (CCs) and private companies (Pty Ltds) under one regulatory category. He had heard complaints from small business owners who felt the increased compliance requirements were burdensome. He questioned whether these requirements deterred small businesses, which may struggle to justify the costs involved in compliance, particularly when they were required to register as a business for even small-scale operations.

He also expressed interest in the role of the SARS Junior Board, asking how the board contributed to SARS’s strategy and whether it was driving innovation. He shared his belief in the value of involving younger talent in leadership, noting the potential for fresh perspectives and new ideas.

Turning to alternative dispute resolution (ADR), he referred to recent feedback indicating that ADR processes might be overly complex. He raised concerns over potential legislative changes allowing SARS to recover legal costs in disputes, suggesting that this might lead to a more aggressive approach from SARS. He requested clarification on whether it remained committed to ADR as an accessible and fair channel for resolving taxpayer disputes.

In his final question, Mr Ryder highlighted the under-resourced areas within SARS mentioned in the presentation, noting that additional resources could be a self-funding solution if strategically invested. He inquired about the ideal level of funding that SARS would need from Treasury, suggesting that an initial boost could allow SARS to significantly increase revenue recovery, thereby yielding returns that justify the funding allocation. He sought specifics on what additional resources would enable SARS to achieve its operational targets more effectively.

Ms T Legwase (ANC, North West) began by acknowledging that many of her questions had already been addressed by previous speakers, particularly Mr Ryder’s points on dispute resolution. She expressed interest in understanding how SARS manages disputes and appeals related to tax assessments, seeking further clarification on SARS's approach to ensuring fair and efficient resolution processes.

She also highlighted the challenges presented by South Africa’s shifting economic landscape, including inflation and high unemployment rates. She questioned how SARS adapts its strategies to manage the impact of these factors on tax revenue collection. She was interested in learning about the specific steps SARS was taking to maintain revenue levels in light of these economic pressures.

Her final question addressed the “two-pot” retirement system, commenting that its introduction had exposed gaps in citizens' understanding of tax-related issues. She asked if SARS had any outreach programs to educate the public on tax obligations and rights, emphasising the need for clear communication to ensure taxpayers fully understand the system and their responsibilities.

Ms S Nxumalo (ANC, Mpumalanga) commended SARS for providing valuable information that highlighted positive outcomes amidst economic challenges. She observed that, unlike other presentations, SARS had managed to lift the Committee’s morale by providing a clear picture of the organisation's impact, which she had found motivating.

She raised a question regarding SARS’s performance targets, asking if specific targets were set for each financial year, and whether it was on track to meet these goals or facing challenges. She also addressed the issue of outreach in rural areas, saying that many individuals in regions like Mpumalanga may not fully understand SARS’s role and requirements. She emphasised the importance of disseminating information and educating rural communities about tax obligations, particularly for business owners, who sometimes faced significant consequences due to misunderstandings about compliance requirements. She suggested that more could be done to reach deep rural areas to prevent such cases and ensure taxpayers were better informed.

Ms Nxumalo also appreciated the SARS Junior Board, noting its significance in carrying forward SARS’s vision and leadership continuity. She praised the Commissioner’s proactive approach to preparing the next generation to ensure a seamless transition in leadership, which she saw as a commendable strategy.

Finally, she acknowledged that she felt well informed on the recent "two-pot" system changes, which had been a frequent topic of inquiry in her community. With this knowledge, she believed she could now better explain the system’s advantages and disadvantages, affirming her belief that "information was power."

The Chairperson acknowledged the points other Members raised, and said she had only one question. She asked if SARS faced network connectivity challenges in rural areas, especially considering their recent digital transformation efforts. Referring to Ms Nxumalo’s earlier comments on rural accessibility, she pointed out that some rural areas, including places she was familiar with, struggled with limited network connectivity. This could hinder individuals in these regions from accessing SARS’s online services, potentially resulting in unintentional non-compliance. The Chairperson inquired about how SARS addresses these connectivity challenges to ensure consistent access to tax services across all regions.

Response by SARS

Mr Kieswetter's response delved into several themes concerning compliance management, particularly in the realm of Corporate Income Tax (CIT) and the issues arising from "ghost employees" in the pay-as-you-earn (PAYE) system. He said that while some segments of the tax system appeared compliant, particularly among larger corporations, this perception could be misleading. He acknowledged the complexities involved in compliance management and highlighted the need to examine various themes.

In discussing compliance rates, he presented a stark contrast between large businesses and small to medium enterprises (SMEs). He provided specific figures -- for large businesses, the PAYE compliance rate was approximately 92%, VAT compliance stood at 93%, and CIT compliance was at 77%. These figures suggested a relatively high level of adherence to tax obligations among larger entities. Conversely, SMEs showed significantly lower compliance rates, with PAYE compliance at 78%, VAT compliance at only 47%, and CIT compliance at a mere 15%. This discrepancy indicated that the challenges surrounding compliance management were considerably more pronounced within the SME sector.

Mr Kieswetter said the issue of "ghost employees" -- individuals listed as employees for PAYE purposes who did not actually exist -- was indicative of broader fraud issues, where taxes were deducted from purported employee salaries but were never remitted to SARS. This problem was compounded by the complexities of the tax landscape, which he described as being rife with aggressive tax planning strategies employed by large corporations. He likened the compliance battle to a David and Goliath scenario, where SARS, with its relatively limited resources, faces off against large businesses equipped with significant financial power and legal expertise. He emphasised that these large corporate entities could afford to employ highly skilled tax advisors and legal teams, which gave them a distinct advantage over SARS in compliance disputes.

Highlighting the resource challenges faced by SARS, Mr Kieswetter pointed out that their budget was dwarfed by the resources available to the tax departments of these large corporations. He said that SARS was in a position where it had to enhance its capabilities to respond to sophisticated tax planning and compliance issues. This included investing in data science and technology to improve the detection of non-compliance and fraud, which were often more prevalent in high-risk areas.

He also addressed the complexity of tax laws, stating that despite his extensive experience in the field, tax legislation had become more intricate only over the past two decades. Even after numerous discussions about simplifying tax laws, they had remained complex. They were expected to become even more so with the rise of digitalisation, the introduction of crypto-assets, and shifts in the global tax framework. This complexity presented significant challenges for tax auditors, who had to raise assessments based on their interpretations of the law, often leading to inconsistencies.

Mr Kieswetter acknowledged that while SARS strived to prevent disputes, it was inevitable that disagreements would arise due to the financial implications these assessments had for taxpayers. He emphasised that for taxpayers, a tax assessment was not merely a regulatory issue but a significant financial liability, potentially leading to criminal sanctions. He elaborated on the concept of "tax certainty," which aimed to provide clarity and predictability in tax obligations. He mentioned ongoing legislative efforts to create mechanisms such as advanced pricing agreements, which would allow taxpayers to receive clarity on tax implications before making corporate decisions, thereby potentially reducing disputes.

He shared some recent litigation successes, noting that out of 119 judgments handed down, SARS had been successful in 102 cases, reflecting an impressive success rate of 86%. He emphasised that avoiding court battles was preferable, but SARS proved effective in its litigation efforts when necessary.

Mr Kieswetter also discussed issuing 25 preservation orders, which had secured approximately R9.3 billion in assets at risk of being moved out of the SARS jurisdiction, with some cases involving mining companies. He also highlighted the ongoing audits related to the Employment Tax Incentive (ETI), which had faced allegations of abuse. Although there had been no court outcomes yet, he stressed the importance of these audits as test cases for the integrity of the tax incentive program designed to promote employment.

Regarding customs and seizures, Mr Kieswetter indicated that SARS operates with a 2% intervention rate for cargo inspections, which was in line with international benchmarks. He explained that the European Union (EU) had an intervention rate of 1.75%, while the United States had a higher rate of 4% due to the unique risks posed at their southern borders. The challenge lay in selecting which shipments to inspect, as choosing poorly could result in either frustrating honest taxpayers or allowing fraudulent activities to slip through. Therefore, he underscored the importance of risk assessment, investment in technology, and data science to enhance their targeting and effectiveness in customs operations.

Despite these challenges, he said that SARS had had significant success in combating illicit trade, having conducted 309 busts related to counterfeit goods valued at R2.1 billion, intervened in 575 cases involving unregulated medication valued at over R700 million, and executed 409 drug busts valued at R1.2 billion. It has also made numerous interventions in other high-risk areas, including clothing and textiles, cigarettes, precious metals, and endangered species products, such as rhino horns. However, Mr Kieswetter cautioned that the fight against smuggling and fraud was ongoing and emphasised the necessity for continuous improvement in risk detection capabilities to better combat these issues.

Dr Johnstone Makhubu, Deputy Commissioner: Taxpayer Engagement & Operation, addressed the informal sector's tax challenges, acknowledging that redefining categories within the informal economy fell under the Department of Small Business Development (DSBD), with whom SARS collaborates on this issue. He noted that while informal businesses often fell outside traditional tax registration, they still contributed to indirect taxes, such as VAT, on purchases of goods and services. SARS leverages third-party data from transactions in informal markets, such as those recorded on swiping machines, to identify entities in its database. The aim was not just enforcement, but also education and support to help informal businesses gradually formalise and comply with tax obligations. However, he stressed that addressing the informal sector’s tax compliance would be a complex, long-term challenge.

Regarding rural areas, Dr Makhubu highlighted SARS’s use of mobile tax units to provide tax services, with 18 units serving various rural regions, including three specifically deployed in Mpumalanga. While SARS considered this approach effective, he acknowledged the need for greater outreach and education in these areas. He added that radio channels, which were widely accessed even in rural areas, could support these efforts as part of a multifaceted approach.

On the issue of payroll tax compliance, he described how SARS monitors employer returns (EMP201) to detect potential “ghost employers” who file returns without making payments. SARS profiles these entities to determine whether they were deliberately evading tax, and had established systems to flag high-risk employers for enforcement action.

He also addressed the question of foreign-owned businesses operating in the informal economy, emphasising that SARS treats all taxpayers equally, regardless of origin. He said that tackling compliance in the informal economy was a cross-agency effort, involving collaboration with other entities like health and law enforcement agencies, as the issue extended beyond tax into public health and regulatory domains.

In his detailed response, Mr Kieswetter addressed various themes regarding revenue generation, compliance challenges, criminal investigations, and the funding requirements of SARS.

He began by referring to a point raised by Mr Britz about strategies for raising revenue. He said that last year, during a period of revenue shortfall, SARS had engaged with the National Treasury, making a compelling business case to secure a budget of R1 billion. He expressed confidence that this investment could yield between R30 billion and R60 billion in additional revenue, highlighting a substantial return on investment.

Despite receiving approval only in December, SARS had used the funds effectively, employing a risk profiling and case selection methodology. Within just 12 weeks, they had resolved 335 000 cases, leveraging 620 project-based resources at a cost of R226 million, which resulted in the recovery of R14.3 billion. He emphasised the impressive return on this focused revenue recovery project, suggesting that the balance of the billion rand was expected to yield further results, with projections indicating a recovery of R30 billion to R60 billion by the end of the fiscal year.

Mr Kieswetter also touched on the challenges posed by organised crime, noting that criminals often had better organisation, resources, and disregard for legal compliance compared to SARS. In the past year, SARS had reported 871 investigations, primarily focused on VAT fraud, with 387 additional cases pending. He explained that many of these fraudsters establish fake companies solely to access VAT refunds, leading to significant financial losses for the state. He advocated measures to combat the proliferation of off-the-shelf VAT companies, as this had become a lucrative business in South Africa.

He reported that 294 of the investigated cases had been referred to the National Prosecuting Authority (NPA), with 85 cases proceeding to court, where SARS had achieved a remarkable 95% success rate. However, he candidly acknowledged that many of these cases were relatively straightforward, and there was a concern about balancing success rates with the complexity of cases pursued.

In discussing the criminal investigation division, he noted the need to address syndicated crimes, which often involved multiple players and complex networks. Last year, SARS completed 310 cases related to these syndicates, raising an assessment value of R14 billion and recovering R20 billion over a five-year period, resulting in a total of R78 billion in assessments and R37 billion in recovered revenue. Despite this progress, he highlighted a significant staffing shortage in this division, currently operating with only 275 personnel.

Regarding illicit trade, he mentioned a specific case involving cigarette smuggling, which required extensive data analysis, amounting to 60 terabytes. This work, performed by a forensic analysis team, had revealed connections between various players, enabling SARS to issue assessments totalling R10 billion, with R4.2 billion recovered.

Mr Kieswetter expressed a commitment to ADR to avoid disputes wherever possible, and invited suggestions on improving the resolution process. He addressed the ongoing funding challenges facing SARS, identifying the "original sin" from 2014/15, when R1 billion had been removed from their budget without correction, and highlighting a continuous shortfall in in-year funding. He called for multi-year funding certainty to enable more effective project management, estimating a shortfall of between R17 billion and R20 billion over the next three years.

Lastly, he discussed the need for a revised funding model for SARS, arguing for greater independence from National Treasury, as the current system did not appropriately reflect SARS's operational needs. He concluded by explaining the rationale behind the two-pot system for retirement fund deductions. He said that while it provided cash flow advantages for the state, it could lead to higher tax rates upon withdrawal. He noted SARS's efforts to facilitate taxpayers' understanding of these implications through digital tools, including a WhatsApp calculator for tax effects.

Follow-up discussion

The Chairperson requested a breakdown of syndicate activity by province to identify regions with higher crime rates, indicating areas that warrant focused attention.

Mr Kieswetter said he would provide an analysis, possibly indicating that certain provinces, such as Gauteng, might exhibit a higher concentration of syndicate-related activities due to urbanisation and economic activity, emphasising the need for targeted resource allocation and strategic planning in those high-risk areas. This would stress the importance of leveraging SARS's resources and capabilities to address the unique challenges posed by organised crime in those regions.

Mr Ryder shifted focus to the issue of multi-year funding, questioning whether the National Council of Provinces (NCOP) was intended to address the budgetary concerns raised by Mr Kieswetter.

In response, Mr Kieswetter explained that while the NCOP was designed to oversee funding matters, the execution and realisation of multi-year funding remained complex. He elaborated on the challenges SARS faced in securing stable funding, noting that even with the NCOP's involvement, the process could be fraught with delays and uncertainties, impacting long-term planning and project execution. There was a need for greater autonomy in budget decisions, with a funding model that would provide SARS with the flexibility to allocate resources effectively over multiple years.

In addressing the topic of crypto-assets, Mr Kieswetter acknowledged the emerging challenges posed by digital currencies, emphasising SARS's ongoing efforts to adapt to these developments. He discussed the importance of regulatory frameworks and partnerships with relevant entities, such as the Border Management Authority (BMA), to enhance monitoring and compliance concerning crypto-assets. He highlighted advancements in technology or methods that SARS was employing to track and assess the movement of crypto-assets, as well as initiatives to educate taxpayers on their declaration obligations related to these assets. The relationship with the BMA may be framed as an evolving partnership aimed at strengthening regulatory oversight, fostering compliance, and navigating the complexities of an increasingly digital financial landscape.

Mr Kieswetter acknowledged that the issue of crime, particularly regarding syndicates, transcended the responsibilities of SARS. He recognised that the complexity of crime in various provinces involved multiple stakeholders, requiring a collaborative approach among different law enforcement and regulatory agencies. He emphasised the need for comprehensive data sharing and coordinated efforts to address criminal activities effectively. By highlighting the broader context of crime beyond SARS's jurisdiction, he underscored the importance of a multi-agency response to tackle the intricacies of organised crime at a provincial level.

On the topic of crypto assets, he clarified that the classification of crypto assets as capital assets versus revenue depended on various factors, including the nature of the transaction and the duration for which the asset was held. He emphasised that the treatment of these assets was akin to that of other disposables, and they had to consider whether an individual was trading with them. To facilitate compliance, SARS adopts a three-pronged approach:

• By communicating taxpayers' obligations through public messaging, webinars, and formal statements, encouraging all participants in the crypto ecosystem -- be it exchanges, investors, or transactors -- to disclose their activities;
• By collaborating at the Organisation for Economic Cooperation and Development (OECD) level, where SARS co-chairs a working group on the Common Reporting Framework; and
• By currently relying on bartering disclosures while gradually enhancing their capability to monitor these transactions.

Mr Kieswetter emphasised the importance of clear communication regarding taxpayers' obligations and the need to simplify compliance processes for crypto assets. He indicated that SARS intended to begin enforcing raised assessments for crypto assets in the coming year, which signified a transition toward a more robust regulatory framework.

He also addressed the collaborative efforts with the BMA, highlighting the challenges posed by overlapping mandates and confusion in roles. He acknowledged that establishing a clear protocol was essential for effective collaboration and capacity building between the two entities. He noted the new Minister's openness to working with SARS, which may facilitate better alignment and understanding of their respective functions, thereby enhancing their capacity to address the complexities surrounding crypto assets and the regulatory environment as a whole.

Briefing By National Treasury: Capacity Building Workshop On Tax Legislation

The presentation highlighted key aspects of South Africa's tax policy and legislative framework. The Treasury officials began by explaining the critical role the entity plays in advising the Minister of Finance on tax policy, with a strong emphasis on the careful balance required when introducing tax amendments. This involved generating sufficient revenue for government, while ensuring the tax system remained fair, efficient and sustainable. The presenters pointed out that some of these decisions could be particularly sensitive, as even minor amendments in tax rates could significantly impact specific taxpayer groups, requiring careful consideration to avoid unintended consequences.

National Treasury's presentation laid out their primary objectives in tax policy, which includes generating adequate revenue to support social and public services, maintaining equity and simplicity in the tax structure, and aligning corporate tax and VAT systems with global trends. This alignment was essential for ensuring that South Africa remained an attractive destination for both local and international investors. The team also highlighted the importance of reducing the administrative burden for taxpayers, particularly for small businesses, by ensuring the tax system was transparent and straightforward.

The presentation also covered corporate income tax in detail. National Treasury explained the controlled foreign entity provisions, which aimed to protect South Africa’s tax base by ensuring that profits made by offshore entities remained taxable in South Africa. This was particularly important, given the increasing number of South Africans investing abroad.

The presenters also discussed personal income tax, explaining how individuals were taxed on both employment and business income, as well as the application of capital gains tax. They described how South Africa operates on a residence-based tax system, which taxes individuals on worldwide income. They detailed the process for calculating taxable income, including deductions, rebates, and tax credits.

An important aspect of the presentation was the discussion of the Customs and Excise Act, which not only generates significant revenue but also serves to protect local industries. National Treasury elaborated on various levies imposed through this Act, including fuel taxes, environmental levies, and excise duties on specific goods such as alcohol and tobacco. These taxes, particularly environmental levies, were also designed to promote desirable outcomes like sustainability and reduced carbon emissions, illustrating how tax policy could influence broader socio-economic behaviour.

In closing, the National Treasury team stressed their commitment to the ongoing process of stakeholder engagement, particularly with Parliament, to ensure that tax policies were designed and implemented in a way that supported economic growth and social development. They emphasised that while tax policy must evolve to meet new challenges, maintaining a balanced approach that ensured fairness and simplicity remained at the core of their strategy.

See attached for full presentation

Discussion

The Chairperson highlighted that many members of the public struggled to understand various taxes, expressing her proficiency with the Skills Development Levy (SDL) and Unemployment Insurance Fund (UIF), but raising concerns about municipalities failing to pay their levies. She mentioned a specific municipality that had been dissolved. She pointed out that many municipalities misused funds meant for the 1% UIF levy, only to pay when pressed by the tax authority. This mismanagement ultimately harmed employees, leading her to seek clarification on how to address these issues. She also reflected on her experiences with estate duty, noting that many people were unaware of their obligations after the death of a parent, and how to assist those facing challenges with their assets.

Mr Ryder began by expressing gratitude for the presentation, commenting that the presenters had conveyed the information in a bureaucratic manner. He aimed to provide Members with a concise overview of the bills mentioned in the last slide, highlighting that three of these bills were presented annually. These were the draft Rates and Monetary Amounts bill, the Taxation Laws Amendment bill, and the Tax Administration Laws Amendment bill. He explained that the draft Rates and Monetary Amounts bill often generated controversy due to its impact on smokers and drinkers. He indicated that this bill served as a focal point for tax-related issues each year.

He discussed the Revenue Laws Amendment Bill, which involves a review of the two-pot system, mentioning that issues had been identified during the last processing cycle. He appreciated the commitment to revisit these matters, acknowledging the promise to bring the review back for further consideration. He pointed out that the last two bills -- the draft Global Minimum Tax Bill and the draft Global Minimum Tax Administration Bill -- were new developments that piqued interest among MPs, suggesting that these additions marked significant changes in tax policy.

In his closing remarks, he emphasised that the recurring bills represented a habitual workload that required MPs to remain vigilant and aware of the implications. He concluded on a positive note, expressing satisfaction that the Health Promotion Levy (HPL) bill was not included in the current presentation, which he viewed as a relief.

Mr Majola addressed the end of the presentation by inquiring about the timeline for reviewing the acts mentioned for potential amendments. He specifically highlighted the Diamond Export Levy Act, questioning the rationale behind the focus on discouraging diamond exports while encouraging the development of the local market. He pointed out that South Africa boasts a wealth of mineral resources, including gold, platinum, and lead, which were similarly subjected to export regulations. Yet, the current emphasis seemed to be disproportionately placed on diamonds.

He expressed concern that this singular focus could negatively impact employment within the diamond industry. He sought clarification on whether there would be a broader review that could include similar measures for other mineral resources, advocating a more comprehensive and equitable taxation strategy that acknowledges the economic importance of all minerals. He stressed the necessity of creating a balanced approach that supports job growth across various sectors, rather than concentrating solely on diamonds.

Ms Siwisa sought clarification on the taxation of donations, specifically referring to slide 13, which indicated that donations tax was imposed at a rate of 20% on the aggregated value of property donated not exceeding R30 million, and 25% on values exceeding R30 million. She questioned whether these were the only two brackets that would be emphasised, expressing concern that individuals making donations of R35 million and those closer to R1 billion would both be subject to the same 25% rate. This raised her concern about the potential for a lack of differentiation in the tax structure for higher-value donations.

She then shifted her focus to company taxation, asking for clarification on the legislation concerning South African companies and foreign companies operating within South Africa. She was particularly interested in understanding the implications for Company A, which was based in South Africa but had operations outside the country, versus Company B, which was based outside South Africa yet conducted business within South Africa. She inquired about the specific provisions in the bill or act that address these different scenarios, and how they impact the overall tax obligations of the respective companies, seeking a deeper understanding of the tax treatment based on the location of the company and its business activities.

Ms Nxumalo expressed her appreciation for the detailed presentation. She focused on the necessity for clearer communication regarding tax responsibilities, particularly in light of the challenges faced by businesses during the COVID-19 pandemic. She pointed out that many companies struggled to pay their employees, particularly the UIF contributions, and emphasised the need for robust follow-up mechanisms to ensure compliance with tax obligations.

She referred to the lessons learned from the pandemic, stressing that companies should be better equipped to meet their tax commitments, even during economic downturns. She also acknowledged the variety of bills under discussion, noting that while some were familiar, others -- including the Diamond Export Levy Bill -- were new to her. She suggested the importance of conducting thorough reviews of these bills to fully grasp their implications. She expressed interest in scheduling additional sessions for further clarification and understanding before they moved forward to Parliament.

Ms Nxumalo reiterated her commitment to engaging with the legislative process and collaborating with fellow Members to ensure effective oversight of tax compliance and related matters.

Responses

Mr Franz Tomasek, Head: Legislative Policy Tax, Customs and Excise, SARS, addressed several key points regarding the lifespan and constitutionality of tax legislation, as well as the complexities of taxing South African companies with foreign operations and foreign companies operating in South Africa. He confirmed that the Katz Commission had indeed evaluated and recommended adjustments to ensure existing legislation aligned with constitutional laws, indicating that ongoing updates were necessary to maintain legal relevance. He contrasted this with Australia, which still relied on its 1936 income tax act, highlighting the challenges posed by outdated legislation.

Mr Tomasek provided two scenarios for international taxation. The first involved a South African company that established a subsidiary offshore. In this case, the foreign country typically taxes the subsidiary, since it operates there. However, the controlled foreign company rule applies if the subsidiary was created primarily to evade South African taxes. This rule allows South Africa to tax the South African shareholder on the income from the foreign company while providing credit for any taxes already paid in the host country, effectively removing the tax benefit of establishing a company abroad for the sole purpose of avoiding local taxation.

The second scenario involved a South African company conducting business overseas. Mr Tomasek explained that South Africa generally taxes its residents on their worldwide income, a policy that was implemented in 2001. In contrast, non-residents were taxed only on income sourced from South Africa. He elaborated that if a non-resident works in South Africa, the income generated from that work is subject to South African taxation. However, international treaties may modify these tax obligations, particularly concerning the duration of presence in the country.

He also discussed the reverse scenario, where a foreign company sets up a subsidiary in South Africa. In this case, South Africa taxes the income of the subsidiary. He noted that issues like transfer pricing could arise when transactions between the parent company and the subsidiary were not priced appropriately, potentially leading to manipulated financial statements to minimise tax liabilities. Transfer pricing rules were designed to address these issues, ensuring fair taxation based on the economic activity occurring within South Africa.

Overall, Mr Tomasek emphasised the complexities involved in cross-border taxation and the importance of maintaining compliance with local tax laws.

Mr Chris Axelson, Acting Head: Tax and Financial Sector Policy, National Treasury, addressed several points raised by the Committee Members. He noted that the issue of municipalities failing to make payments was on SARS's radar, and they were actively checking compliance. He explained that the two-pot system had been beneficial, as it had allowed individuals to see where their money was going, and had highlighted instances where businesses had not contributed to employee retirement funds. The Financial Sector Conduct Authority had also been involved, enforcing penalties and naming companies that failed to comply, but he acknowledged that more needed to be done to address ongoing issues.

He explained that the Diamond Export Levy Act's primary goal was to promote local beneficiation, particularly for raw diamonds exported without processing. However, he noted that there were arrangements allowing smaller diamonds to enter a clearing house in Botswana without being taxed. The intent was to create a more competitive beneficiation sector. However, he pointed out that South African operations struggled to compete with more efficient processes in countries like India, particularly for lower-value diamonds. This raised questions about what further measures could be implemented to enhance beneficiation across various sectors.

Mr Axelson also touched on export levies related to scrap metal, mentioning that several trade agreements limited the number of such levies. South Africa had reached its maximum of eight levies. He clarified that regarding donations tax, the current structure comprised only two brackets: a 20% rate for amounts not exceeding R30 million, and a 25% rate for amounts exceeding that threshold. He highlighted that previously, there had been only one lower rate of 15%, indicating an increase in tax rates aimed at more significant capital amounts donated.

Mr Tomasek explained the relationship between donation taxes and estate duty in South Africa, emphasising that the system was designed to prevent individuals from circumventing estate duty by donating their assets just before death. He described donation tax as a "backstop" for estate duty, highlighting its role in maintaining tax integrity.

He further elaborated on an essential aspect of South Africa's capital gains tax (CGT) that was not universally applied in other tax systems. He noted that a donation made upon death was treated as a realisation event. In simpler terms, this meant that when a person who had made a donation passes away, the transaction was treated as if they had sold the asset for its market value, which triggers a CGT liability on any gains made. This process ensures that, in addition to any donations and estate duty liabilities, the estate also incurs a CGT liability, which was calculated based on the market value at the time of the donor's death. The recipient of the asset receives it at the market value, ensuring that no loopholes were exploited.

Mr Tomasek contrasted this with the U.S. tax system, where there was no realisation upon death, commonly referred to as the "Angel of Death exemption." In the U.S., this exemption allows individuals to avoid capital gains tax on appreciated assets at the time of death, thereby providing a different tax landscape for inherited assets.

The Chairperson inquired about the appeal process and the tax administration structure mentioned earlier, specifically questioning the existence of a tax ombud. She sought clarification on whether such an entity was in place to handle tax-related grievances and to provide oversight in the appeals process. Her inquiry reflected a concern for ensuring taxpayers had accessible and effective avenues for addressing disputes or dissatisfaction with tax administration decisions.

Mr Tomasek confirmed the existence of a tax ombud office established under Chapter 2 of the Tax Administration Act. He said this innovation was designed to address disputes related to tax assessments, including objections, and appeals to tax courts, and high courts. While there were internal and low-cost remedies for disagreements about tax amounts owed, the tax ombud served a different purpose. It specifically addresses service-related issues, such as delays in SARS processing applications, which could leave taxpayers without recourse for extended periods. The tax ombud provided an independent, low-cost mechanism to hold SARS accountable and resolve these service-related grievances.

Closing remarks

In her closing remarks, the Chairperson expressed gratitude for the insights gained during the meeting, and acknowledged the commitment of the participants to return for further discussions and education. She also noted the importance of addressing internal budget issues raised during the session, and indicated that this would be followed up on. She emphasised the value of the collaboration and learning achieved that day.

The meeting was adjourned.