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FINANCE PORTFOLIO COMMITTEE
8 September 2004
GOVERNMENT EMPLOYEES PENSION LAW AMENDMENT BILL: BRIEFING & FORMAL CONSIDERATION OF DOUBLE TAXATION AGREEMENTS WITH ETHIOPIA AND BULGARIA
Chairperson: Dr Rob Davies (ANC)
Documents handed out:
Government Employees Pension Law Amendment Bill [B15-2004]
Presentation on the Government Employees Pension Law Amendment Bill
Cosatu's comments on the Government Employees Pension Law Amendment Bill
Resolution No. 7 of 2003: Pension Agreement
Double Taxation Conventions and Agreements PowerPoint Presentation
The Committee was briefed on the Government Employees Pension Law Amendment Bill and double taxation agreements with Ethiopia and Bulgaria. The purpose of the former is to align the existing Act with the negotiated amendments contained in Public Service Coordinating Bargaining Council Resolutions 12 of 2002 and 7 of 2003 that were concluded in the PSCBC in November 2002 and November 2003 respectively. It also allows the Government Employees Pension Fund to provide guarantees to members in respect of home loans by registered financial institutions or otherwise approved institutions. The Fund would be able to deduct from the benefits payable by the Fund any amount, plus interest, due to the Fund in respect of an amount for which the Fund becomes liable under a guarantee furnished in respect of a member.
A number of the articles of the Double Taxation Agreements have timeframes or percentages attached to them that are usually the subject of negotiation. The Committee recommended the adoption of both Double Taxation Agreements.
National Treasury Presentation
Dr F le Roux (Deputy Director-General: Government Employees Pension Fund), Ms M Vercuil (Legal Advisor: GEPF) and Mr G Barnard (Actuary and Consultant to GEPF) represented the National Treasury. Mr R van der Merwe (Manager: International Treaties) represented the South Africa Revenue Service (SARS).
Dr le Roux said that the Government Employees Pension Fund (GEPF) is currently implementing benefit enhancements emanating from Public Service Coordinating Bargaining Council (PSCBC) discussions and resolutions. Some of the changes agreed to in the PSCBC were effected by rules of the GEPF but others require legislative amendments which was the reason for the Government Employees Pension Law Amendment Bill.
Ms Vercuil briefed the Committee on the Bill. (See PowerPoint presentation).
Ms R Taljaard (DA) asked why the Bill seeks to change the definition of 'mutual interest'. She asked if there was an agreement reached at the PSCBC in relation to guarantees that the GEPF would give to members in respect of home loans by registered financial institutions or otherwise approved institutions. She noted that the amendment of Section 27 of the Act would be effective retrospectively from 1 April 2003. She asked for the rationale for the retrospective effect of the amendment. She also asked whether it was not too risky if not undesirable to make law that would apply retrospectively.
Ms Vercuil replied that the current definition of mutual interest includes all matters dealt with in the Act. It had been negotiated in the PSCBC and the board should be able to make amendments that would not affect benefits payable to members.
With regard to home loans, she said that the issue was also negotiated and agreed upon at the PSCBC. Initially, unions wanted the Fund to grant loans but at the end it was agreed that the Fund should only give guarantees. She could not explain why the amendment of Section 27 would have retrospective effect. However, the employer and employee representatives had agreed to this. There are very few dormant members and these come from previous Funds. The reason for the amendment is that dormant members cause administrative burdens to the Fund. Such members are difficult to locate by the time benefits have to be paid out.
Ms J Fubbs (ANC) asked for the practical implications of clause 8. The clause amends Section 30A and provides for the reduction of benefits payable to a former member of a non-statutory force who has received some benefits in terms of the Special Pensions Act or the Demobilisation Act. The question was whether the amendment would cover anyone whose benefits are outstanding. She also asked what interest rate would be used when the benefit are paid out. Would it be the interest rate applying when the benefit should have been paid out or the current interest rate, she asked.
Dr Davies asked what kind of issues would no longer be covered by the definition of mutual interest. He also asked whether members of non-statutory forces who give up their special pensions would be included in the GEPF.
Responding to both Ms Fubbs and Dr Davies, Mr Barnard said that members of non-statutory forces were not able to contribute towards the Fund and were therefore not eligible for benefits for their period of service. The idea is to include that period so that the benefit paid out when they leave service would include that period. The benefit would be reduced by the amount that the people have already received in terms of other legislation.
Ms Vercuil added that the applicable interest rate would be the repo rate and this was in line with National Treasury rates. On mutual interest, she said that the definition would not include amendments in relation to administrative issues.
Mr Y Bhamjee (ANC) asked the presenter to clarify the meaning of demobilisation benefits. He noted that the presenter said that the Fund aims to pay funeral benefits within two days after the submission of a valid claim. He asked why this is not reflected in the Bill.
Ms Vercuil replied that as a matter of policy funeral benefits are paid within two days.
Mr E Asiya (ANC) asked whether there would be the consequences for referring to the Demobilisation Act in Section 30A of the Act.
Ms Vercuil replied that there would be no great consequences. There would be no need to go back to calculations and payments already made. The intention was all along to take into account both the special pensions and demobilisation benefits. This is also reflected in Resolution 12 of 2003 and Resolution 7 of 2003.
Mr Barnard added that the deduction of demobilisation benefits is permitted in terms of the rules of the Fund. The problem is that the rules and the Act did not match and hence the need for some amendments.
Ms J Joemat (ANC) asked what would happen to benefits of dormant members who could not be located.
Ms Vercuil replied that if a person cannot be located the benefits would be paid into an unclaimed account. The person would still be entitled to the benefits. In terms of Section 26 of the Act proscription does not apply.
Mr T Vezi (IFP) asked if proscription did not apply at all.
Ms Vercuil replied that the proscription period commences once the Fund has received duly completed statements.
Ms Taljaard asked how the change of the definition of mutual interest would affect future Public Investment Corporation-related disputes between labour and government once the GEPF board is formally constituted.
Ms Vercuil could not see how the change would affect the investment of funds by the Public Investment Corporation (PIC). The investment of funds is dealt with in accordance with instructions given by the board of trustees. The current definition is quite wider than what is commonly understood by 'mutual interest'.
Dr le Roux added the change in the definition was agreed to in 2002 and the formation of the PIC originated during 2003. The changes in the PIC would transform the PIC into an asset manager. He could find no link between the two.
Ms B Hogan (ANC) said that the Committee had hearings on benefits payable to former members of Non-Statutory Forces (NSF). It transpired that the benefits that were being given to former member of NSF were inadequate. The problem was that an agreement had been reached in the PSCBC on this. The unions realised, in retrospect, that the benefits were not enough. Parliament has the powers to override agreements reached in the PSCBC. The question becomes whether Parliament wants to override agreements reached in the Council. She felt It would be undesirable for Parliament to override such agreements. It would be preferable to get the relevant resolution reflecting the agreement on benefits payable to former member of the NSF.
The Chairperson said that it would be important to compare the Bill with the agreements. He asked if the presenter could confirm that the proposed changes to the definition of 'mutual interest' were agreed to at the PSCBC.
Ms Vercuil replied that the changes were agreed to in Resolution 12 of 2002.
Double Taxation Agreements with Bulgaria and Ethiopia
Mr R van der Merwe briefed the Committee on the agreements. The agreements closely follow the OECD model convention, which forms the foundation for the vast majority of Double Taxation Agreements. A number of articles have timeframes or percentages attached to them that are usually subject to negotiation. The purposes of the agreements include the avoidance of double taxation and the reduction of withholding tax rates. The presenter went on to highlight some of the important articles of the agreements.
Article 5: Permanent establishment
This article determines the basis for being able to tax a company. Tax is levied only on permanent establishments.
Article 8: International Transport
Internationally this article normally relates to air and sea transport. In both agreements this article extends to profits derived from the rental on a "bare boat" basis of ships or aircraft used in international traffic, if such profits are incidental.
Article 10: Dividends
In practice, withholding taxes vary widely internationally. The agreement with Bulgaria provides for a withholding tax of 5% if the shareholding is 25% or more whereas the agreement with Ethiopia provides for withholding of 10%.
The DTA with Bulgaria provides for withholding of 5 % and the DTA with Ethiopia provides for 8%. The withholding will not apply where interest is paid to government, political subdivision or local authority of the other Contracting State, the central bank or any wholly-owned institution of the government of the Contracting State.
Article 12: Royalties
The DTA with Bulgaria provides for withholding of 10% on royalties and 5% in relation to copyright for artistic work and equipment rentals. The DTA with Ethiopia provides for withholding of 20% on royalties and excludes equipment.
Article 20: Teacher and Researchers
Both DTAs provide that teachers and researchers who give lectures or carry out research at the invitation of the government, University, college, school, museum, cultural institution or as a result of a cultural exchange for a period not exceeding two years would not be taxed in the host country provided that their remuneration is derived from outside the host country.
Article 25: Exchange of information
Both DTAs allow for exchange of information in respect of every kind of taxes.
Both DTAs have no provision on assistance in collection of taxes. The legal basis for such assistance needs to be present in both countries and such arrangements would never operate unilaterally.
Ms Fubbs asked for clarification on the application of the extension to Article 8. She asked how Article 20 would affect a person who holds a scholarship or bursary from the host country.
Mr van der Merwe replied that scholarship and bursaries are normally not taxed.
Ms Taljaard asked if the Committee could be furnished with the specifics of the taxes withheld in respect of all agreements signed. This would enable the Committee to establish the average rate of withholding taxes. With regard to Article 20, she asked how rigidly the Article would be applied. Exchange programmes often go beyond a two-year period and some include salary agreements.
Mr van der Merwe said that the two-year period usually covers most of the secondments. Hence the principle that the period is never extended to more than two years. Before South Africa gives up its right to levy tax it has to be satisfied that the remuneration would come from outside the country. The Committee would be supplied with information on withholding rates in all DTAs.
Mr Bhamjee asked what the oversight role of the Committee would be. He wanted to know if the Committee would have the power to change anything if it wanted to do so.
Mr van der Merwe replied that there was nothing stopping South Africa from re-negotiating any Articles of the treaty. Hence the agreements are normally referred to Committees before they are signed.
The Chairperson said it would be preferable to ask SARS to brief the Committee on the impact of the DTAs. The question was whether they enhanced revenue collection and whether they are for the benefit of individuals.
Mr Bhamjee asked the presenter to provide the Committee with a comparison between agreements and explaining the reasons for shifts from the norm wherever there were such shifts.
Ms Taljaard said that it would be preferable to have a briefing on the tax approach to the African Union and bilateral agreements that exist across the AU.
Mr van der Merwe replied that the AU has no policy on tax treaties. In any case the agreements are bilateral and not multilateral.
The Committee recommended the approval of the agreements.
The meeting was adjourned.