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FINANCE PORTFOLIO COMMITTEE Dr R H Davies (ANC)
1 June 2005
DRAFT TAXATION LAWS AMENDMENT BILL: DELIBERATIONS
Documents handed out:
FINANCE PORTFOLIO COMMITTEE
Dr R H Davies (ANC)
Draft Taxation Laws Amendment Bill
SARS Draft responses to submissions on draft Taxation Laws Amendment Bill
Banking Association of South Africa submission
Business Unity South Africa (BUSA) submission
Chambers of Commerce and Industry South Africa, (CHAMSA) submission
Institute of Certified Public Accountants (ICPA) submission
The Committee was provided with the South African Revenue Service (SARS) response to specific issues raised by the Banking Association of South Africa (BASA), Business Unity South Africa, (BUSA) the Chambers of Commerce and Industry South Africa, (CHAMSA) the Institute of Certified Public Accountants, (ICPA) and KPMG concerning the Draft Taxation Laws Amendment Bill.
Point 3.5 Incurral of interest – section 24J of the Income Tax Act
Mr K Louw (SARS General Manager: Law Administration) explained that section 24J had been brought into the Act to regulate the incurral and accrual of interest-bearing arrangements for both the borrower and the lender. The calculated rate was to work on a compounding basis over the term of the arrangement. SARS had detected schemes based on a circular flow of funds where a tax benefit would be made by the borrower artificially inflating the amount borrowed.
He explained that the amendments would act to reduce the amount of interest the borrower claims, because the more aggressive the scheme is, the less the borrower could claim, which would represent penalty provisions. These provisions would act as an interim measure to deal with damaging transactions because they are difficult to detect in audits. It was not enough just to place the borrower in the position they would have been in had they not implemented the scheme, because this was not much of a deterrent.
The Chair asked if the solution was not to have one strong anti-avoidance measure in place to deal with all eventualities.
Mr Louw responded that that was a good idea, but it was the job of some financial institutions such as investment houses to look for loop-holes in the system, which compelled SARS to react to each individual contravention of the Act.
Mr Davidson (DA) asked what other country’s experiences were with anti-avoidance provisions.
Mr Louw replied that the results were mixed. In the United States and England, the courts had passed judicial doctrines to try and fix their problems, but Canada had encountered serious problems with their model.
Point 3.6: Taxation on the fringe benefit value of employer provided vehicles
Mr J Louw stated that the industry was heavily subsidised by motor vehicle schemes at a huge cost to the fiscus. In the period of 1995 to 2003, imports of vehicles had replaced local sales and domestic production. In 2003, the average price for locally made cars was R138 033, and 80% sold for less than R200 000. In contrast, the price for imported cars was R290 390, but 30% sold for more than R 350 000. He said that an econometric study by government confirmed that the motor vehicle allowance scheme burdens the tax system unduly because of the massive subsidies.
The results of the new tax intervention which would reduce the deemed business cost against a motor vehicle allowance from 30% to 20% over the next three years, with a fixed cost capped for cars with a value above R300 000, would be negligible. The demand for new and used cars would decline by 0.3% (560 locally made new cars and 260 used cars). The prices of new cars would decline by a miniscule 0.05%, with a resultant loss of only 0.001%.
He said that employment opportunities in this industry had stagnated since 1995 to 37 000. However, more opportunities were available in secondary industries such as the servicing of vehicles above four years old.
BUSA had asked what substitute revenue measures would fill the revenue void for lower sphere governments. In response, Mr Louw stated that the National Treasury was looking at possible local government financing options that may include the extension of a revenue-sharing arrangement of centrally collected tax revenues.
In response to CHAMSA’s concerns, Mr J J Louw said that it was necessary to rewrite the Income Tax Act to give efficiency to the tax system by removing poor and archaic language and fixing the illogical numbering system. He said that their concerns were noted, but not all of them were relevant for the purposes of this Bill.
The Chair noted that the amendments to the draft Bill would probably be the removal of clauses 6, 7, and 8 from the Bill.
The meeting was adjourned.