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FINANCE PORTFOLIO AND SELECT COMMITTEES
20 October 2004
NATIONAL PAYMENT SYSTEMS AMENDMENT BILL: ADOPTION; DRAFT REVENUE LAWS AMENDMENT BILL: TREASURY AND SARS RESPONSE TO HEARINGS
Chairperson: Dr R Davies (ANC)
FINANCE PORTFOLIO AND SELECT COMMITTEES
National Payment System Amendment Bill [B14B - 2004]
Draft Revenue Laws Amendment Bill [B - 2004]
Select Committee Report on the National Payment System Amendment Bill
SARS response to the Representations on the Revenue Laws Amendment Bill 2004
PowerPoint slide: Convertible loan example
Department presentation on property shares
The Committee adopted the National Payment System Amendment Bill without debate.
The National Treasury and South African Revenue Services (SARS) then outlined their responses to the public submissions on the Draft Revenue Laws Amendment Bill. Certain provisions in respect of the broad-based employee share initiative had been extended to comply with the Companies Act, and it was again emphasised that this initiative was aimed at empowering rank-and-file employees. Clarity was obtained on hybrid financial instruments provisions, and it had been decided not to extend the three-year period for these provisions. The question of advance rulings received considerable attention, and it was proposed to phase these in, as they would be a new burden on SARS. The current exclusions would apply. In terms of the withholding of capital gains tax in respect of non-resident sellers, it was confirmed that the onus would be on the buyer to withhold the tax. This was a widespread international practice.
National Payment System Amendment Bill
Mr J Pienaar (Reserve Bank) said that it had always been the intention of the legislation to make it an offence to contravene the regulations. The amendments would also assist in the practical implementation of the Bill.
Dr Davies read the report of the Select Committee and the proposed amendments and asked whether there was agreement. The Bill was adopted. He suggested that the report be processed expeditiously.
Treasury and SARS response to submissions
Professor K Engel (Director: Tax Policy) and Mr F Tomasek presented the responses to specific issues raised in representations to the Committees. The response document detailed the issues and responses, and certain concerns were highlighted.
Sections 8B; 8A; and 8E of Act 58 of 1962
Professor Engel said that it was accepted that employee share plans providing for consideration of not more than the minimum required in terms of the Companies Act would be allowed. Since the main objective of the proposal had been to empower rank-and-file employees, and these employees were unlikely to have cash at their disposal to purchase shares, any fringe benefit in respect of an interest free loan used to finance the minimum amount required in terms of the Companies Act, would be exempted. A number of comments were not accepted, and it was emphasised that it had not been the intention to fully align the broad-based employee share plan proposals with the executive equity schemes since they had totally different guiding principles.
A number of concerns had been raised that the limit of R3 000 placed on the value of shares was too low, particularly with the "odd lot" requirement. The proposal had been pitched at 5 per cent of the SITE amount limitation, to be of greatest assistance to rank-and-file employees. Consideration would be given to amending the proposal to allow for a cumulative share issue of R9 000 over a three-year period. The 90 per cent rule would now be applied to all employees other than those who participated in any other share schemes of the employer. In response to concerns that the 90% test might prevent relief where one employment company existed within a group of companies, and the request that the test should then be divided based on the companies being serviced, it was felt that the whole group of companies should be covered, and that permitting exclusions on an ad hoc basis would undermine the intention.
It had been queried whether the intention had been to include labour brokers and personal services companies in the definition of employee for the purposes of the broad-based employee share initiative. It was clarified that the intention was to exclude labour brokers, personal service companies and personal service trusts (defined as employees in the Fourth Schedule) from the benefits of the scheme. Section 8B was an incentive provision, while the Fourth Schedule definition was wide because it was directed at anti-avoidance.
It was felt that the new accounting standard would have no impact on the tax deductible status of the cost of employee incentive schemes as, according to case law, these expenses were not company related but resulted in the dilution of shareholder interests. A specific deduction had therefore been provided for in the context of the broad-based employee share initiatives.
It was accepted that the reporting requirement for the employer be limited to five years, and an early effective date would be considered.
A recommendation that tax only be levied when the shares acquired in terms of executive equity schemes were disposed of was not accepted. Taxation on fringe benefits applied when the employee had unrestricted control over the asset. The shares could be sold in order to pay the tax. It was agreed that the JSE would be consulted to determine whether the restrictions as per the Securities Exchange requirements were imposed in terms of legislation or were contractual.
Dr Davies said he had understood the policy position on the broad-based employee share initiative was that this would be a tax incentive. He now understood that the scheme actually had to be taken up by 90%, not just be available to them. If the employees now had to pay, and the allocation could be R9 000, he wondered whether there would now be any pressure on companies. Should workers be putting their savings into these schemes? He could understand that employees might want shareholder input. He asked whether full share information would be given to unions and collective bargaining groups, as this was a serious decision.
Professor Engel replied that the 90% test was availability. If an employee did not want the shares, s/he did not have to take them. Shares could be rejected individually and on a bargaining basis.
Ms J Fubbs (ANC) asked how an employee was classified in terms of this scheme if s/he was contracted to work for the employer for a particular period, particularly since companies seemed to favour renewable contracts, even for employees on the lower income scales.
Professor Engel replied that an employment contract was a common law contract, and made the employee eligible as an employee for the purposes of the scheme.
Ms Fubbs said that many employees took home R1 500 per month and asked exactly what their disposable income was, if any, and linked this to the percentage to be spent on shares. Would these employees simply be excluded? This had not been a problem when the shares were to have been issued "free" as empowerment. She queried why British case law from 1893 had an impact on the South African decision.
Dr Davies said he had calculated that the repayments, on an interest-free loan over three years, on 9 000 shares at R1 per share, would amount to R250 per month.
Ms B Hogan (ANC) asked how he arrived at that figure, as her understanding had been that the shares were to be issued for no consideration.
Professor Engel said that the Companies Act provision prohibiting the issue of no consideration shares was a governance issue, ensuring value for value. The Treasury had thought that the provision of services provided value for value. The 1893 British case referred to seemed to have been revived by recent cases and services were deemed not to be consideration. Minimal consideration was provided for. If shares had no par value, the employer was obliged to issue them for free, but shares with par value had to be paid for. The Companies Act was being revisited.
Ms Hogan asked whether the bulk of shares would be issued free. If the shares were to be sold at par value, employees would have to see whether acquiring them was in their best interests.
Dr Davies said it was clear that the Bill allowed deductions on R9 000 worth of shares, but that the shares were to have minimal par value. This would not be an onerous payout.
Mr Tomasek said that par values were typically very low, even as low as 1c per share.
Mr B Mnguni (ANC) asked what the capital gains tax would be if the value of the shares were R10 000 after five years, but the par value was lower.
Professor Engel replied that tax was levied on market value. The employee was not taxed for holding the share, but when it was sold. Tax was not levied on a notional value.
Sections 8E, 8F, 24J; 64B of Act 58 of 1962
Mr Tomasek said that the intention was to limit the deduction of interest to interest on the actual financing requirements of the borrowing company. The circular flow of funds to which members of a group of companies were party was taken into account. It was not accepted that the question of hybrids and derivatives be dealt with under a separate section, as the subject matter was complex and required the commitment of substantial resources. This aspect would receive attention in the medium term.
The question of the three-year period was addressed, and it had been decided not to extend the period. The reason for introducing it was to create a clear no-go zone for convertible instruments where the substance of the instruments clearly deviated from their legal form. The proposed amendments in respect of the forward purchase of shares, and the provision for lease and leaseback had been withdrawn.
A deemed dividend arose when amounts were incurred in respect of instruments falling within Section 8F and interest was incurred on a day-to-day basis. It had been queried whether secondary tax on companies (STC) was triggered on a day-to-day basis or on distribution or at the end of the year of assessment of the payer, and it was decided that the general rules would apply to determine the point when the deemed dividend arose.
Dr Davies asked whether most or many hybrids were structured for tax avoidance purposes.
Mr Tomasek replied that there was no doubt that there was a real requirement for capital, but that the instruments had been structured for maximum tax benefit. Another argument advanced for hybrid financial instruments was that they increased capital for the purposes of bank supervision.
Ms Hogan asked whether the three-year period was irrelevant as had been suggested.
Mr Tomasek replied that it was inevitable that some schemes would change to three years and one day, but said that the legislation was designed to deal with the most unacceptable. The more the period was increased, the more likely it was to touch on more commercial transactions.
Ms R Joemat (ANC) was concerned at the creativity displayed and asked whether there were any loopholes that might allow this with the 90% broad-based employee share initiative. Could companies lease the shares to the employees instead of selling them?
Mr Tomasek replied that this was one of the reasons for the insistence that shares be owned by the employee as this cut out leasing.
Ms Fubbs referred to a suggestion that hybrids could be for raising funds or hedging to a degree. Hedging was not raising funds but protecting them. Hedging itself had not been mentioned and she asked whether it was arguable that hedging was to do with funding. She agreed with the SARS approach to go slowly.
Mr Tomasek said that hedging was not actually touched on by these amendments. Reliance was on common law, and it was a very complex issue.
Dr P Rabie (DA) said he assumed that hybrid schemes were universal but asked whether they were not an attempt to generate growth. He appreciated that they should still be taxed, but asked for comment.
Dr Davies asked whether there would be a huge economic impact in terms of the proposals if they were growth generators.
Mr Tomasek replied that hybrids were encountered elsewhere but did not of themselves give rise to growth. The loan might contribute to growth. Interest on the loan was allowed, but the interest could not be stepped up. It was possible that the transaction could be damaged if the measures were too harsh and SARS had considered an interlocking approach, but great care had to be taken to avoid double taxation.
Professor Engel said that financing was very important, and capital was a critical issue. The no-go areas had no economic justification. The problem with hybrids was that many were paper deals. At this point, Treasury and SARS were proceeding cautiously.
Mr K Louw said that there might be a business rationale, especially those schemes flowing through the banking system, and they were normally used to raise capital. The substance was really a loan. If documentation was examined, it was usually possible to see a computer model based on an interest rate calculation. Ultimately, companies were trying to reduce the cost of borrowing. The Fiscus objection to this was that they were subsidising the loan but had no say over it and this was not normally how the Government spent its money.
Sections 24M; 24N; s 10(1)(h); 11(g); and 10(1)(d) of Act 58 of 1962
Professor Engel said that tax law was generally independent of accounting treatment of a transaction and did not accept that there was in substance no sale if the future purchase price was undeterminable. It was also not accepted to defer the introduction of the proposal as it was based on widely accepted concepts of case law. Section 24M was extended to include allowances claimable in respect of intellectual property, mining operations and farming operations. The connected person's test had also been withdrawn.
In respect of Section 10(1)(h), it was emphasised that South Africa had full taxing rights on interest paid to non-residents, in accordance with international practice. Portfolios held by non-residents not physically present in South Africa for 183 days or less during a tax year were exempt.
Mr Tomasek confirmed that discussions were ongoing with the JSE and Bond Exchange to ensure a smooth transition. The date of the Presidential Proclamation of the Act would be the effective date.
The suggestion that the proposed R100 de minimus stamp duty limit be increased was partially accepted and the R100 duty exemption would be adjusted upwards to R200. It was not accepted that the removal of the limit in respect of rentals was prejudicial in cases of long-term leases. The low rate of stamp duty was unlikely to reach the maximum transfer duty; therefore the capping of the amount was not required. The suggestion that the interest rate be linked to a rate in the Public Finance Management Act was also not accepted as stamp duty and related interest calculations were still a manual process. This reason also applied to interest in terms of the Transfer Duty Act.
Section 67A of Act 58 of 1962
In terms of the registration of tax practitioners, the proposal would be reworded to make it clear that natural persons would be required to register if they or their employers were compensated for the provision of their services. The application of the principle of incidental services would be clarified by way of explanatory notes to the registration form and, if necessary, by the issue of an Interpretation Note on the matter. In respect of advocates and attorneys providing assistance or advice in anticipation of litigation, attorneys and advocates would be treated similarly to other professionals when providing "general tax advice".
It was emphasised that the Bill sought to register tax practitioners. There was therefore no basis for the Commissioner to refuse to register them and it was not clear how the registration of the tax practitioner could be used to assess or risk profile his/her clients' returns. The proposed registration provisions would be subject to the secrecy provisions contained in the Income Tax Act. It was anticipated that legislative authority would be sought to transfer information regarding a tax practitioner's identity, contact details, qualifications and experience to any regulatory authority for tax practitioners to be established by legislation.
Ms Hogan asked whether the parameters for the exclusion of attorneys and advocates were too open-ended.
Mr Tomasek replied that it was essentially understood that specific legislation was contemplated if an attorney or advocate was "in anticipation of litigation".
Ms Hogan raised the issue of confidentiality and asked how the information on registered tax practitioners would interact with the Financial Intelligence Centre Act (FICA)?
Mr Tomasek replied that information was requested on the practitioner, not his/her client. There was a degree of overlap with FICA but SARS had seen instances where tax practitioners were not covered and needed to be. FICA was concentrating on suspicious transactions.
Ms Hogan asked if FICA would be able to requisition information on the registered tax practitioners.
Mr Tomasek agreed to check on this.
Mr K Durr (ACDP) asked whether there was a general and specific exclusion in terms of the Promotion of Access to Information Act.
Mr Tomasek replied in the affirmative. SARS had a specific exclusion that operated in respect of other people's tax records.
Dr Davies referred to incorporated practices and said that if an incorporated practice or trust was a tax practitioner, all natural persons working for that practice or trust would have to register. He felt the practice itself should be obliged to register.
Mr Durr asked whether the definition of a natural person was covered by the Interpretation Act.
Mr Tomasek replied that the intention was not to capture the incorporated practice, but the people doing the work.
Ms Hogan referred to a situation where there was evidence of money laundering. FICA would have an interest in who was providing advice and she asked what cross-references existed. At a later stage, would there be information on the clients served by each tax practitioner?
Mr Tomasek replied that FICA had access to SARS records for investigations, and would get their information in this way.
Dr Davies said that this was one of the reasons it was necessary to know the corporate entity, and whether the entity or a rogue employee committed an offence. He asked SARS to consider this.
Sections 76B to 76S of Act 58 of 1962
Mr Tomasek said that although the advance ruling system had generally been welcomed, the general trend of the comments seemed to suggest that the system was too restrictive and should be widened in many respects, such as a wider range of rulings, less restrictions, non retroactive withdrawals, limitation on publication and specified turnaround times. It was important to put this initiative into perspective. One of the reasons for an advance ruling system was to create certainty for taxpayers on the tax implications of proposed transactions. These rulings would be given on transactions still to be entered into and some risk was thus attached to the proposed measure. Although SARS had some experience on the issue of rulings, a formal rulings regime was something that would take time to develop; thus the reason for a more modest approach at this stage. The rulings regime proposed was a first step in the direction of providing clarity in the case of genuinely anticipated transactions.
A suggestion that transfer pricing be included was not accepted, as transfer pricing was an inherently and intensely factual area, particularly ill-suited to resolution through the advance ruling system. It was accepted that the scope of the advance ruling system be extended to uncertificated securities tax, stamp duty and transfer duty. The exclusion of issues vexatious to taxpayers was retained, as was the exclusion of anti-avoidance applications.
The retrospective revocation of a ruling could only occur within very narrow parameters. The provisions of the section attempted to strike an appropriate balance between competing interests and concerns, including the need to protect a taxpayer's reasonable reliance on binding rulings that had been issued and the need to ensure that the tax laws were enforced in a fair and impartial manner.
Suggestions that advance rulings not be published, or that the publication of the rulings might expose the applicant's intellectual property, were not accepted. It was felt that, without publication of these rulings, edited to protect the identity of the taxpayer, the advance tax ruling system would lead to the development of a private body of law that could give some taxpayers an unfair advantage and exclusive knowledge about the interpretation of certain areas of tax law.
It was not accepted that timeframes be included in the legislation. The rulings system would be an entirely new function within SARS and it was believed that the imposition of rigid statutory deadlines would not only be inconsistent with the practice and approach of the majority of other countries but would also be impractical. India was in fact the only country surveyed in which such a deadline was imposed, and it was six months. SARS would endeavour to process rulings consistent with international norms, taking into account factors such as the complexity of the ruling request, the completeness and quality of the application and the taxpayer's co-operation in the process.
Ms Hogan asked whether retrospective revocation was consistent with the concept of administrative justice.
Mr Tomasek replied that the taxpayer had to be approached before the ruling was revoked, and that he felt that the requirements had been met.
Dr Davies agreed with the "walk before you run" approach and asked whether SARS believed that the provisions gave them sufficient leeway so that this process did not dominate their activity. He would have accepted starting with class and general rulings.
Ms Fubbs said she had believed that advice could always be obtained from SARS. Advance rulings took this further. She felt that the first bite should perhaps have been just class rulings.
Mr Tomasek agreed that there was a very clear risk. One of the ways of addressing this would be to permit a staggered implementation of general, class and private rulings. He agreed that advice was already available, but pointed out that people were uncertain of its value. The rulings created a very clear framework.
Ms Fubbs asked for clarity on transfer pricing.
Mr Tomasek said that transfer pricing typically related to cross border transactions. One company was based in a jurisdiction with a very low tax base; the other was, for example, in South Africa. The companies would try to trap the profit in the jurisdiction with the lower tax base. If they were two independent parties, there was no collusion. At present, the transfer-pricing unit at SARS consisted of ten people, and they were trying to grow capacity.
Ms Fubbs said she had no concrete objection to excluding timeframes, but believed that saying "as fast as possible" could be dangerous as there were different interpretations.
Mr Tomasek replied that SARS would work towards international benchmarks. These were, however, usually soft targets as the issues could be very complex.
Professor Engel said that this step represented a bold new world. Publication of an advance ruling was not the same as an audit decision, but had a higher standard and was available for examination as well as having a precedent effect. The United States of America had about fifty people dealing with transfer pricing alone. It was a very intensive process and needed solid expertise.
Sections 24B(1), (2) of Act 58 of 1962
Professor Engel noted that the anti-avoidance proposals were targeted at the direct and indirect cross issue of shares and notes. At issue in this section was the scope of indirect cross issues within the ambit of these anti-avoidance provisions. Subjective avoidance intent tests were difficult to enforce, but consideration was being given toward narrowing the scope of indirect cross issues through other means. The request to make the proposal retroactive was rejected.
Consideration would be given to extending the cut-off date for organisations to reapply for tax exemption.
The provisions had been changed to match the tax treatment of sales to controlled companies.
The liability on the purchase to withhold CGT was alleviated by the obligation placed on the estate agent and conveyancer to inform the purchaser that the seller was a non-resident. In view of the comments by the Committee, consideration would be given to increasing the value threshold to R2 million. It was accepted that the Commissioner's discretion in subsection (9) be subject to objection and appeal.
Professor Engel pointed out that CGT withholding was a typically international practice.
Mr Tomasek said that the one page return suggested had been a transitional measure when CGT was introduced. SARS would look at it going forward. He rejected a call for an extension of the timeframe for payment as the buyer was holding the seller's money.
Professor Engel referred to a submission from Mr F Gormley on the Urban Development Zones and said that it was mostly outside the scope of this discussion.
Mr Durr said that he had difficulty understanding the withholding tax. The seller was receiving the benefit from the sale and the responsibility should be his or his agent's. It was immoral to shift the onus to the buyer. He felt that the same applied to the stamp or transfer duty. He suggested that the lawyer or conveyancer could not pay over the purchase price until the tax obligation had been met. It was also better to put it on the professional person in respect of interest, since there were rules for the holding of money in trust. Property transactions could take years.
Professor Engel replied that the withholding obligation only applied when there was an obligation to pay the cash to the seller, not before. He understood that professional parties were more equipped, but there was the problem that they could be held liable for more than their own fees, as this was not their money. The conveyancers and estate agents could be offshore. He did not feel this was workable.
Dr Davies asked whether this only applied to the CGT on the house, not to any other outstanding taxes. Professor Engel confirmed this.
Ms Hogan referred to the monetary limits in fiscal legislation as raised by the South African Institute of Chartered Accountants (SAICA) and said that she understood the pressures on the Treasury, but felt some interim relief was needed on retirement provisions.
Mr M Grote (Chief Director: Tax Policy) said that this formed part of the overall review of the retirement context. A lot of issues were not linked to the tax system. The Treasury had instructions to look at interim relief next year. He assured the Committee that the issue had not been forgotten but emphasised that its affordability had to be assessed.
Ms Fubbs said that many comments included "would be drafted". She asked whether the Chairperson could have sight of the new drafting before it was presented as a money bill.
The Chairperson said that he was not sure of this, but had asked for amendments to be highlighted. This was a problem with timing.
The meeting was adjourned.