A summary of this committee meeting is not yet available.
FINANCE PORTFOLIO COMMITTEE AND JOINT BUDGET COMMITTEE: JOINT MEETING Dr R Davies (ANC) [NA]
2 March 2005
BUDGET HEARING ON TAX POLICY
Mr N Nene (ANC) [Joint Budget]
Documents handed out
FINANCE PORTFOLIO COMMITTEE AND JOINT BUDGET COMMITTEE: JOINT MEETING
Dr R Davies (ANC) [NA]
Budget Review 2005
Presentation by National Treasury
Presentation by South African Revenue Services
Presentation by South African Institute of Chartered Accountants
Presentation by Prof Williams of University of Kwazulu-Natal
Presentation by Prof Koch of University of Pretoria
The South African Revenue Service presentation outlined the policy and administration context of the tax policy in the 2005/6 budget, the transformation outcomes, areas of improved customer experience, areas in which SARS improved compliance and risk reduction, heightened border security and trade facilitation and upcoming legislation in 2005.
The National Treasury provided a brief overview of the 2005 Budget, socio-economic challenges, the fiscal framework and tax policy, Gross Domestic Product by sector, progress on implementation of tax reform initiatives, tax relief proposals, Personal Income Tax rate and relief, medical aid reform tax policy objectives, how the tax regime would benefit taxpayers, tax relief measures facing business income, relief measures for small businesses, the tonnage tax regime and tax imposed on goods and services such as alcoholic beverages, tobacco products and fuel.
During the discussion Members raised the following issues:
- whether South Africa compared favourably with countries with similar economies on effective rates of taxation;
- whether Treasury has under-compensated for bracket creep of the personal income taxpayer;
- whether a double taxation agreement was in place to regulate the tonnage tax owed by international freight corporations;
- the impact of the fuel levy on the agricultural sector;
- whether there was a dialogue between SARS, Treasury and the tax practitioners to ensure the efficient collection of taxes owed;
- whether Treasury could indicate its view on an acceptable tax burden; and
- whether business had raised any concerns with Secondary Tax on Companies (STC) rate.
The South African Institute of Chartered Accountants outlined its views on the PIT impositions in the 2005 Budget, a comparison of the effect of amendments on taxable portions of travel allowances, the company tax imposition, retirement funds tax, transfer duty, the exchange control amnesty and technical amendments which included the tax on broad-based employee share initiatives, stamp duty, share for property transfers as well as the amendments to Section 7(8), 25B, 64C(4), 35A(9) and 35A(11) of the Income Tax Act.
The presentation by Prof Williams of University of Kwazulu-Natal outlined South Africa’s current GDP growth trend and tax burden, private and public saving statistics, the South African macro-forecast, the major tax proposals and the expenditure proposals aimed at increasing growth, infrastructure expenditure plans and backlogs and GDP growth and tax burden forecasts.
The presentation by Prof Koch of University of Pretoria indicated that the 2005 Budget Review was silent on Black Economic Empowerment (BEE), the importance of Employee Share Ownership Plans (ESOP) in achieving broad-based BEE, the paradox inherent in BEE ESOPs, the failure by the Budget to address this and proposed solution to the problem.
Budget Review 2005 which included more detail.
Mr K Moloto (ANC) [NA] asked SARS and Treasury to indicate the concerns of business, if any, regarding the Secondary Tax on Companies (STC) rate.
Mr Grote replied that this was a topical issue and much of the statistics have been provided in the presentation. He suggested that this was overstated for the time being. It was a very good tax for an incentive for reinvestment. This was not a straightforward issue because there were tax treaties in place, and any change to the STC regime was also a negotiated position because it was not revenue-neutral. STC remained a very important issue for Treasury and it was being reviewed constantly. It was important for business as well because they now saw a larger benefit, and it was thus a very high priority for business at the moment. .
Mr Tomasek responded that some businesses believed it to be a fairly complex tax, which surprised him given the alternatives.
Mr M Stephen (UDM) [NA] stated that he was not convinced by the argument regarding the net cost of the tax relief. He stated that Treasury indicated that those parts of industry that were awarded direct tax incentives have shown no growth at all, yet Treasury was proposing a general tax cut which was nothing more than a general tax incentive and he failed to see how this would be more effective than the direct incentive. He asked Treasury to indicate whether it considered any other alternatives to tax cuts to grow the economy, especially the employment rate.
The Chair sought clarity on government’s strategic choice in favour of addressing the investment climate to reduce the overall tax rate of companies as opposed to opting for a series of incentives, and asked Treasury to indicate the nature of these kinds of incentive schemes in South Africa..
Mr Grote agreed with both Mr Stephens and the Chair that tax incentives and the tax regime was not the most important thing. There were multiple studies released by the World Bank and the Commonwealth Business Group which indicated that out of a list of 12 issues that drove investment tax would rank at 8 or 9 at most. The most important was macro-economic stability, and it was thus when the demand by the domestic consumer grew that foreign investment was stimulated.
Mt Stephens sought clarity on the proprietor of the software used by SARS to collect the revenue.
Mr Tomasek responded that SARS would like to own the package and the details were still being ironed out.
Mr Durr asked whether Treasury’s policy unit considered the total "imposte" of the tax take from the provincial and local government sphere generally when it evaluated the tax structure.
Mr Grote replied that national government cannot constitutionally prescribe to provinces or local government structures as to their tax instruments. However any other revenue instrument which was being put up in South Africa would have to be regulated in terms of the Provincial Regulations Procedures Bill which was being done by Treasury. Only then would it be able to gauge whether its tax burden was in fact increasing, because it would not be desirable to have an internal factor of reverse trade in South Africa.
Mr Durr asked SARS to indicate the cost of collection of Capital Gains Tax (CGT), and whether it has been a worthwhile exercise.
Mr Tomasek responded that the decision was made to merge CGT into the general Income Tax Act and thus, it was almost impossible to separate out the cost of collecting CGT.
The following questions were not answered by the presenters due primarily to time constraints:
Mr Durr asked whether the SARS help desks for the public would be located.
Mr Zita asked SARS to quantify the potential benefit should it realise all the tax-base broadening initiatives mentioned in the presentation.
Mr Durr asked whether Members of Parliament were now required to maintain log books of their travels when visiting constituencies.
Ms Fubbs sought clarity from Treasury on the reasons for the dip in the slide entitled "Which income groups need assistance?".
Ms Fubbs questioned whether the medical aid fund interventions listed in the Treasury presentation could be implemented.
Mr Johnson sought clarity on government’s incentives for companies employing the unemployed.
The Chair sought clarity on the general anti-avoidance rule (GAAR) in other jurisdictions.
The Chair asked Treasury to explain whether its initiative to provide relief from financial transactions was in fact a progressive tax that was redistributive in nature.
Mr Nene sought clarity on the extent of consultation between local government structures and Treasury with regard to the abolition of regional services council levies.
Mr Nene asked whether SARS and the South African Institute of Chartered Accountants (SAICA) used the same rates when calculating the fuel levy.
Mr Zita suggested that, given the attitude of taxpayers and the challenges of inequalities in South Africa, a campaign should be embarked on to promote an understanding of addressing inequality across society. This would assist in increasing the volumes of taxpayers.
Mr Zita questioned the logic behind the slide in the presentation which indicated that taxpayers earning between R60 000 and R150 000 were taxed at 32,3% yet those who earned between R150 000 to R250 000 were only taxed at 22,4%.
Presentation by South African Institute of Chartered Accountants
Mr M Van Blerck, outlined SAICA’s views on, amongst others, the PIT impositions in the 2005 Budget, a comparison of the effect of amendments on taxable portions of travel allowances, the company tax imposition, retirement funds tax, transfer duty and exchange control amnesty.
Mrs J Arendse outlined SAICA’s comments on the technical amendments addressed by the Budget which included the tax on broad-based employee share initiatives, stamp duty, share for property transfers as well as the amendments to Section 7(8), 25B, 64C(4), 35A(9) and 35A(11) of the Income Tax Act.
Presentation by Professor Williams
Prof Williams, University of Kwazulu-Natal, outlined the South African historical and current GDP growth trend and tax burden, private and public saving statistics, the South African macro-forecast, the major tax proposals and expenditure proposals aimed at increasing growth, infrastructure expenditure plans and backlogs and the projected GDP growth and tax burden forecast.
Presentation by Professor Koch
Prof Koch, University of Pretoria, indicated that the 2005 Budget Review was silent on the new Black Economic Empowerment (BEE), the importance of Employee Share Ownership Plans (ESOP) in achieving broad-based BEE, the paradox inherent in BEE ESOPs, the failure by the Budget to address this and the proposed solution to the problem.
A Member (ANC) asked Dr Koch to indicate whether the Income Tax Act would be overhauled.
Mr Van Blerck replied that, given the time and effort that had gone into the very dramatic changes effected over the past few years it would be counter-productive to divert Treasury and SARS with such a process. Surgical changes were needed and SAICA would continue to interact with both SARS and Treasury on those.
Mr Davidson asked Dr Koch to very briefly explain the constituents of GDP inflation.
Prof Koch responded that GDP inflation and CPIX were very similar except that they were calculated on a different base. CPIX was placed on a group of goods that Statistics South Africa decided were relevant goods, whereas GDP inflation was based on the entire basket of consumption goods.
The Chair asked SAICA to explain whether its members saw SAICA’s role to assist members to avoid taxes, or was it a broader role to educate them on the importance of tax compliance.
Mrs Anderson replied that SAICA was concerned with the replacement of Section 103 of the Income Tax Act which was the general anti-avoidance provision. There was no clarity on this at the moment. If for example Section 103 was repealed case law would have to be relied on to determine anti-avoidance, and the issue would then become very uncertain. SAICA believed that there should be some form of general anti-avoidance provision.
The problem was that there appeared to be an overlapping in recent years of avoidance and evasion, which has spawned the term ‘avoision’. Avoidance was very clearly something that was technically within the law, whereas evasion fell outside the law and was therefore illegal. They were two different concepts and there therefore needed to be a divide between the two, and SAICA’s concern was therefore that these two terms were overlapping.
She stated that SAICA’s role was to advise its clients according to the law. Therefore SAICA’s members would advise their clients to pay the amount of tax due according to the law, and there was no compulsion to pay additional tax. It must be understood that SAICA cannot be expected to function as an arm of SARS, but it did comply with the law and promote compliance amongst its members as well as a professional code of conduct that must be complied with.
The Chair asked whether the role of SAICA’s members was to devise complicated avoidance schemes.
Mrs Anderson replied in the negative. Unfortunately SAICA was not able to control everything done by its members. She acknowledged that this did happen in practice but it was certainly not the role SAICA promoted amongst its members.
The Chair stated that a few of Prof Koch’s comments were close to the fallacy which presupposed that a certain event happened as a consequence of another event, especially his assertion that a reduction of tax by 1% would result in a 1% increase in the growth rate..
Prof Koch responded that he stipulated in his presentation that this was not an economic reality. He did however believe that because South Africa’s tax base was so small there was a concern that perhaps the taxes were having a negative impact on growth. There was thus a relationship between taxes and growth but it was not on a one-to-one basis.
Mr T Vezi (IFP) [NA] asked the presenters to comment on the statement that growth per se would not necessarily solve the problem of unemployment, especially Prof Koch’s statement that too much hope should not be pinned on tax reductions as a vehicle to solving the unemployment problem.
Mrs Anderson agreed fully with Mr Vezi. Although fiscal policy cannot solve all the problems it did form an important foundation, and there was thus scope for fiscal policy to be used to provide incentives to create employment but it certainly would not solve the entire problem.
Mr Nene asked whether SARS and SAICA used the same rates when calculating the fuel levy.
Mr Van Blerck responded that there were a number of different variables that determined the additional tax payable, which were the cost of the vehicle and the kilometres traveled. The difference between the two was the kilometres traveled.
Mr Nene sought clarity on the deemed rates for travel allowance that were capped at R340 000.
Mr Van Blerck replied that the ceiling was in fact R1 over R340 000 and not R360 000 as indicated by Treasury’s presentation. The reason was that the relevant bracket was listed in Treasury’s presentation and dealt with a vehicle valued at over R340 000 but did not exceed R360 000, and at that point the fixed cost was frozen at slightly above R99 000. The reality was that the capping occurred at R340 000. SAICA had no problem with capping per se, but the issue was really whether the capping occurred at a realistic level and whether the overall package of the travel allowance was not significantly harsher than was necessary to deal with abuse of the system.
Mr Tomasek agreed with Mr Van Blerck that the figure of R340 001 was correct, but SAICA ignored the fact that in arriving at those costs SARS did not cost a figure that cost R340 001 as the bracket was costed appropriately for the value of R340 000 to R360 000. The cap was thus correctly placed at R360 000.
Mr Nene asked Prof Koch to explain whether his slide on trends in GDP growth and tax burden only extended to 2002 due to lack of information, or whether it painted a different picture that might not necessarily be in line with the presentation.
Prof Koch replied that the data he worked with ranged from 1960-2002, as 2003 data was only recently available and 2004 very recently. He was thus only a year off with the data sample and he then suggested that 2004-7 would look similar.
Mr Nene questioned Prof Williams’ assertion that the Budget Review 2005 was devoid of any commitments to BEE initiatives, as there were such initiatives.
Prof Williams responded that he agreed that the Budget did include such broader initiatives, but he was focusing on very specific BEE initiatives as defined in the BEE Act.
Mr Zita appreciated SAICA’s point that the housing subsidy appeared to be a subsidy from the rural poor to the urban poor.
Mrs Anderson replied that each was different and needed to be treated as such. A set of incentives must therefore target each section separately.
Mr Zita questions Prof Koch’s association between higher taxes and lower rates of growth, as there were cases of high taxes and high rates of growth as was the case in Sweden.
Prof Koch responded that he was not familiar with the Swedish model. For a very long time now Europe has had one of the slowest growth rates in the world and most of it was attributable to incredibly difficult labour legislation which made it very difficult fir it to fire workers, with the result that they did not hire workers. Sweden was probably not that high. Europe has made a social decision to pay for a very large welfare scheme, which on average did cut down on people’s willingness to participate in the labour market.
Mr Zita asked Prof Williams to explain whether he was of the view that BEE should also be cascaded down towards the SMME’s, as it to date appeared to focus on the large corporations.
Prof Williams replied that this was a policy decision that would have to be taken by government and would have to be legislated for, yet this fell outside his sphere of expertise.
Ms Fubbs asked Prof Williams to explain whether BEE should follow a more evolutionary trajectory, as it appeared to be a long-term process whereas short-term results were needed.
Prof Williams replied that the problem was that the charters were imposing extremely short time limits on business to achieve charter targets and there was thus not much time at their disposal to achieve the goals.
Ms Fubbs asked Prof Koch to explain how greater public expenditure on equity to address the problem with the hiring and firing of workers.
Prof Koch replied that on average equity did not improve growth, and most people would be willing to accept a lower growth rate to improve equity. This did not mean that workers should be fired, but equity must be promoted in an efficient manner so that it used as few resources as possible.
Mr Durr asked Prof Williams to explain whether the discretionary trust he proposed would benefit the employees and be converted into a wealth creating vehicle. He asked whether the trust should hold the shares of the specific company alone, or should it have the discretion to convert those shares on the market on behalf of the holder.
Prof Williams replied that it would be highly undesirable to restrict it to one company as the shares would then be exposed to the risks of that company. On the other hand it would not be desirable for the trustees to speculate with shares or any other commodity, but authorised investments like listed unit trusts could be employed as these would spread the risk.
Mr Durr asked the presenters to indicate what government was doing that was limiting its growth at 4%, whereas central Europe and Latin America was growing at faster rates. Furthermore he sought clarity on the relatively low savings rate on growing the economy.
Prof Koch responded that he believed that there was incredible potential in South Africa. There were essentially two separate economies and attempts were being made to regulate both with one very standard procedure, with the result that essentially first world solutions have been implanted on a two tier economy. It was therefore necessary for government to re-evaluate the economy and separate completely the way each tier was treated.
The Chair asked Treasury and SARS to comment on tax on HIV/AIDS and the ESOPs as mentioned by Prof Williams.
Mr Grote replied that government might not have specifically pronounced itself on the HIV/AIDS intervention, but the tax reforms on medical aid took this into consideration. The Minister has repeatedly stated that he would not design a tax regime that focused exclusively on one disease as there were many diseases that needed to be treated in a neutral fashion. There was a "horrific" increase in the Health budget on average of 11,6% between 2001-2005, and the Social Development budget grew by 25,5% over that period. This was the commitment of government via the expenditure of the relevant line departments.
Mr Tomasek responded that at the time the idea was to make the employee the owner of the ESOP and the tax law allowed the employer to restrict the sale of the shares for up to 5 years. During those years the employee would see the benefit of share ownership such as dividend income and would, at a technical level, be able to vote at various general meetings. It was very much early days at the moment as this was only promulgated in January 2005. If a trust were allowed it would negate the very intention of BEE as the ESOP would then simply become an investment vehicle, that was not specifically directed at BEE.
The following questions were not answered by the presenters due primarily to time constraints:
A Member (ANC) stated that today’s Business Day referred to R300b that the South African government has lost due to offloading of public enterprises and the subsequent repurchasing of the shares at a much lower price. He requested Dr Koch to indicate the point at which government should intervene for the purposes of allowing competition, as they should be sold off to stimulate competition.
Ms Fubbs sought clarity on the ‘non financial goals’ referred to by Prof Koch.
Mr Nene asked Prof Koch to indicate what exactly government could to do address the problem his presentation indicated with the difficulty to hire and fire workers.
Mr Davidson asked Prof Koch to explain the implications of the negative real growth in GDP, especially as far as joblessness is concerned.
Concluding remarks by Treasury
Mr Grote thanked the Committee and presenters for the enlightening comments. He stated that government already employed a double approach as a broad-based VAT on consumable goods was used to bring the poorer sections of society into the tax net. It was highly regressive for poorer taxpayers to be made subject to high VAT rates. He was concerned with the reliance placed on introducing incentives as it focused too much on the revenue collecting agent, whereas its primary target was to achieve the revenue target and not to steer the economy.
The meeting was adjourned.
During the discussion on these presentations Members raised the following issues:
- whether SAICA believed the Income Tax Act should be overhauled;
- whether SAICA sees as its role to assist members to avoid taxes;
- whether it was correct that growth would not necessarily solve the problem of unemployment;
- the deemed rates for travel allowance that were capped at R340 000;
- whether BEE should follow a more evolutionary trajectory as it appeared to be a long-term process whereas short-term results were needed;
- whether the ESOP trust proposed by Prof Williams should hold the shares of the specific company alone or should it have the discretion to convert those shares on the market on behalf of the holder;
- what government was doing that was limiting its growth at 4% whereas central Europe and Latin America were growing at faster rates; and
Presentation by South African Revenue Services
Mr Kosie Louw, General Manager: Law Administration, stated that the National Treasury presentation would focus on the macro-policy issues whereas the SARS presentation would cover the tax administrative issues, but the SARS presentation would focus on certain issues such as the small business and travel allowance.
Mr Franz Tomasek, Assistant General Manage: Legislation, outlined the policy and administration context of the tax policy in the 2005/6 budget, the transformation outcomes, areas of improved customer experience, areas in which SARS improved compliance and risk reduction, heightened border security and trade facilitation and the Bills SARS would tabling in Parliament during 2005.
Presentation by National Treasury
Mr Martin Grote, Chief Director: Tax Policy, provided a brief overview of the 2005 Budget, the major socio-economic challenges, the fiscal framework and tax policy overview, the 2005 Budget Gross Domestic Product (GDP) by sector, the progress on implementation of tax reform initiatives, the major tax relief proposals in the 2005 Budget, the Personal Income Tax (PIT) rate and relief, medical aid reform tax policy objectives, how the tax regime would benefit taxpayers, tax relief measures facing business income, relief measures for small businesses, the tonnage tax regime and tax imposed on goods and services such as alcoholic beverages, tobacco products and fuel.
Mr I Davidson (DA) [NA] requested that Members be provided with a copy of the KPMG study. Secondly, he sought clarity on the effective tax rate of South Africa compared to other emerging markets, especially those in Africa.
Mr L Zita (ANC) [Joint Budget] asked Treasury to explain whether South Africa compared favourably with countries with similar economies with regard to the effective rates of taxation, as well as with other middle income countries.
Mr Grote responded to these two questions by stating that the terminology used in this issue created a problem. KPMG has considered the corporate rate that was taxed in the hands of the company and taxed again in the hands of the individual. He stated that he was not fully aware of all the information in the KPMG study, but he could indicate the tax rates of the following markets: Argentina 35%, Australia 30%, Austria 34%, Bangladesh 30%, Belgium 34% etc. The majority of the countries were at 30% and above. The KPMG study listed South Africa at 37,8% yet this was wrong, because the study did not carry the assumption of 100% profit distribution throughout the study.
As economists the effective tax rate definition was the tax paid as a percentage of the operating surplus, which was the real accounting surplus. Thus all the deductions included in the tax code must be excluded because they were incentives. This figure cannot be gleaned from foreign jurisdictions, as the individual files of taxpayers would have to be evaluated. This kind of exercise was done by the South African Reserve Bank (SARB) which indicated that corporate income has increased from R316,6b in 1999/2000 to R485b in 2003/2004, and the ratio of income tax as a percentage of corporate income increased from 6,6% in 1999/2000 to 12,6% In 2003/4. This was the real effective tax rate because it took all the deductions made by companies into account. This same exercise should be done for all countries, but this kind of data was not available.
Mr Davidson stated that if the fuel levy reflected tax as a percentage of the pump price which was currently close to $50 per barrel, then if the fuel levy returned to the average price of about $25 per barrel the average price would increase quite considerably.
Mr Grote replied that it was quiet clear that the days of $25 per barrel were over, and there was consensus that the area of $40-$50 was now being entered. Thus if the price per barrel reduced then the fuel levy would be higher.
Mr Davidson asked Treasury to explain whether it was considering incentives for companies to "go out and employ people" so as to do away with jobless growth.
Secondly, Mr Davidson indicated that the presentations received yesterday indicated the total impact on the individuals as the total tax burden in respect of individuals was actually increasing, and this must be evaluated
Mr K Durr (ACDP) [NA] asked whether Treasury has under-compensated for bracket creep of the personal income taxpayer.
Mr Grote responded to these three questions by stating that a total of 410 000 jobs were created in South Africa in 2004. Thus with the growth in the economy people would increasingly be moving into the income strata which would in turn attract tax. It was not however true that the tax burden placed on individuals had increased, but Treasury had decreased its reliance on total revenue take from 42% to 33%. This was clearly a concession. During 2005 a total of R3,4b amounted to fiscal drag adjustment, and R3,5b amounted to real concession via tax relief because the brackets that were currently at R40 000 were broadened to R50 000 and the primary threshold was increased. Government had thus adjusted fully for inflation and salary adjustments.
Ms J Fubbs (ANC) [NA] asked Treasury to explain the time lag that was envisaged for the tonnage tax system to have an impact.
Mr Grote responded that considerable work had already been done but Treasury now has to extend into the public domain and evaluate the business plans of the South African shipping firms, which had many ships on order in Asian ship yards and the delivery would begin rolling out in 2008. Treasury preferred to lock them in for a 10 year period because they cannot be allowed to jump between tax regimes.
Mr Durr asked whether a double taxation agreement was in place to regulate the tonnage tax owed by international freight corporations.
Mr Grote replied that the ship was registered in South Africa and therefore it did not matter where the cargo was loaded, as the total tonnage of the ship multiplied by the days in operation was the primary concern. Jurisdictions were now introducing the tonnage tax because a ship was the most mobile capital good. Treasury envisaged the processing of legislation this year so that the legislation could be introduced in 2006.
Ms Fubbs asked whether small businesses would be able to access the Skills Development Levy (SDL) even if they were now exempt from paying the SDL.
Mr Tomasek replied that small businesses would not be able to claim if they were not contributing. It must be remembered that they would be claiming back what they had already paid, and this was therefore a self-cancelling provision for such small businesses.
Ms Fubbs questioned whether the ‘more than 3 employees’ requirement for tax relief for small business corporations could not be open to abuse, as semi-consultants could be brought in simply to ensure that threshold was met.
Mr Grote responded that Treasury was constantly thinking about this. There were however huge issues international with these tax incentives because employees would fire an employee when the incentive came in and would then hire new people, especially those with lower skills, and they would then ‘double dip’ on the incentive. This did not in fact create any jobs.
Mr Tomasek replied that possible fraud was considered by SARS and it was thus targeting full-time employees.
Ms Fubbs sought clarity on the progress made by both SARS and Treasury in broadening the tax base for the motor vehicle allowance.
Mr Tomasek responded that both Treasury and SARS agreed that 30% was appropriate, but it was merely making the point that 40% would be sustainable.
Ms Fubbs sought clarity on Treasury’s improved compliance and risk reduction in the motor industry.
Mr Tomasek replied that a common occurrence was the incorrect declaration of foreign currency usage, the falsification of export values, incorrect tariff classifications and these were being addressed.
Mr M Johnsons (ANC) [NA] stated that the constituencies, especially the emerging farmers, must be educated as to the agriculture incentives.
Secondly, Mr Johnson asked Treasury to indicate who would benefit and who would suffer with regard to the transfer duty, as there were huge lump sums paid.
Mr Grote replied to these two questions by stating that it was important to remember that tax had only a limited impact on incentivising growth, as the overall environment of doing business and the macro-economic stability of the government really created certainty for investors. There were major expenditure benefits for emerging farmers, approximately R6b over three years over the Medium Term Expenditure Framework (MTEF) period as part of the land redistribution drive. It not only involved the major transfer of land but was also accompanied by a major skills transfer plan that was funded by the Department of Agriculture. A micro-finance scheme of approximately R1b that was aimed at stimulating an uptake of credit so that those emerging farmers could gain entry into the mainstream agricultural sector.
The fuel levy was important here because, as the fuel price was very valuable and the commodity price of agriculture was also a highly fluctuating price, the argument was that the primary input energy was diesel which was not being used on roads and there was no reason for introducing the fuel levy for agriculture because "the farmer with the plough probably never goes on the road". These things were thus commonly introduced internationally for primary production sectors, and no tax charge was placed on diesel. Yet farmers were allowed to use it both on the roads and off-roads and they were granted a 40% rebate on the fuel levy. This was a sufficient intervention that cost government R820m, but this was a small amount compared to the direct intervention on the expenditure side to stimulate the agricultural sector.
Mr Tomasek responded that most small business incentives were also available in the agricultural sector, but it did benefit with capital expenditure as it was fully deductible in the year in which it was incurred. It was thus at a par with manufacturing small business.
Mr Johnson sought an explanation on the inflation rates of fuel prices and government’s targets in this regard.
Mr Grote responded that a 10c fuel levy increase, which was the 5c fuel levy plus the 5c Road Accident Fund (RAF) levy in terms of Treasury’s macro-economic model, added no more than 0.18% to the inflation impression. It was thus a very contained cost shock.
Mr Y Bhamjee (ANC) [NA] stated that tax practitioners ensure that their clients benefit from any tax proposals introduced by government and to ensure that their clients pay less within the rules. He asked whether the finding of loopholes amounted to tax avoidance, and whether there was a dialogue between SARS, Treasury and the tax practitioners to ensure the efficient collection of taxes owed.
Mr Tomasek replied that this was a hot debate, and it was being debated whether an anti-avoidance rule was needed at all. Some countries had a very active judiciary that essentially used case law to provide an anti-avoidance others, other countries did not. He stated that, in all honesty, tax practitioners did not point out the loopholes in the system to SARS as that happened very rarely. The reason was clearly because they wished to make money out of the loophole before informing SARS of it. The one place in which they might inform SARS of loopholes and unintended consequences was during the public comment process on legislation, but it was very rare once the legislation was finalised.
Mr Bhamjee sought clarity as to whether SARS was sensitive to the family-owned small business community, as they did not operate like other small businesses. This was important because this sector was "totally terrorised" during the Apartheid system, and this sector must be made aware of the current tax regime.
Mr Tomasek responded that SARS was working on this matter. The presentation indicated the set of commitments SARS will have to deliver on during 2005.
Mr Nene asked Treasury to indicate its view on the acceptable tax burden, and the reason for the return to a tax burden of 32.8% and 32.5% as indicated in the presentation..
Mr Grote replied that the unfortunate aspect from an international standpoint was that the Organisation for Economic Co-operation and Development (OECD) countries were the most well-equipped to release data within a year or two. Thus most of the data currently available related only to the developed economies. The average OECD tax burden was 37,3% and the average for the old 50 European Union countries stood at 41,6% for 2003, which was the total tax received as a percentage of GDP. All the international statistics excluded taxes at provincial or local government level because of the sheer complexity.
Many of the emerging market economies fell in the mid 20% range, very much like South Africa, and a few stood at 19% such as South Korea. Yet this was probably not the real issue. The real issue was that there was a dire lack of updated data especially in the African continent. He stated that, for example, the last figures from Malawi were produced way back in 1996, and it therefore did not make any sense to compare South Africa’s data as at 2004 to other African countries who’s latest data was in 1996.
Sweden did have a tax burden of 51% but it also had a very well developed social security system, with the result that government provided many of the needs. This did however have a consequential as Swedish companies were now relocating elsewhere. This was also the case in Germany where companies were also relocating for labour reasons. The common case in most European states was that the population carried the burden for tax incentives. The issue was that the tax incidence in countries that rolled out tax incentives was carried by the population, with the result that the VAT rate would be well above 19%. This would be a significant regressive issue for South Africa.
Ms B Hogan (ANC) [NA] asked whether SARS and Treasury staff complement compared favourably with tax policy and research units in other jurisdictions. She requested that this information be provided to the Committee when it conducted hearings on the strategic plans of SARS and Treasury.
Mr Grote replied that the review of the strategic investment programme was underway. At the moment Treasury learnt that the R3b of revenue that was pencilled in for four years had been absorbed, and translated into a R10b investment allowance. Slightly over 7000 jobs would be created by this investment and translated into nearly R500 000 per job. This was not a success story when compared to the achievements of other jurisdictions.
Ms Hogan sought clarity on the Treasury’s plans to deal with the trading activities of public benefit organisations.
Mr Tomasek responded that the simple principle employed was that if the public benefit organisation blew its trading limit it would lose its tax exemption in full. The proposed change sought to tax the portion that exceeded the legal limit.
Ms Hogan asked whether SARS and Treasury believed that there were several people who were currently outside the exchange amnesty net and who wished to now enter the net.
Mr Grote responded that Treasury’s unit has re-evaluated the number of people who were requesting inclusion in the net, and very little was forthcoming. The pressure was thus not on Treasury at the moment, but it appeared that the real issue was those people who had missed the boat and were now trying to be included. A repetitive approach to tax amnesty was very dangerous, except for the once in a lifetime amnesty offered by SARS.
Mr Zita requested that SARS provide Members with explanatory text on its presentation, as was done by Treasury.
Mr Tomasek replied that much of the SARS presentation was already included in the
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