Taxation Laws Amendment Bill, Taxation Laws Second Amendment Bill, Ghana / Gabon Double Taxation Agreements: adoption

Meeting report

FINANCE SELECT COMMITTEE
22 June 2005
TAXATION LAWS AMENDMENT BILL, TAXATION LAWS SECOND AMENDMENT BILL, GHANA / GABON DOUBLE TAXATION AGREEMENTS: ADOPTION

Acting Chairperson: Mr Z Kolweni (North West)

Documents handed out:
Taxation Laws Amendment Bill [B19-2005]
Taxation Laws Second Amendment Bill [B20 - 2005]
Double Taxation Conventions/Agreements: SA Revenue Services briefing
Comparison between OECD, RSA and Ghana Tax Convention Models
Comparison between OECD, RSA and Turkey Tax Convention Models
Double Taxation Convention between South Africa and Ghana
Double Taxation Convention between South Africa and Gabon
Explanatory Memorandum on the Double Taxation Agreement between South Africa and Turkey
Double Taxation Convention between South Africa and Turkey

SUMMARY
The SA Revenue Service (SARS) briefed the Committee on the changes made to the Draft Taxation Laws Amendment Bill. A major change was the split of the Taxation Laws Amendment Bill into a Money Bill (the Taxation Laws Amendment Bill [B19 - 2005]) and a normal section 75 Bill (the Taxation Laws Second Amendment Bill [B20 - 2005]). The Money Bill dealt with the imposition of tax, and the other with the administrative issues that arose from that. Other than this split, there were no differences from the single Amendment Bill, with three exceptions contained in the Taxation Laws Amendment Bill. Clause 6 was changed as a result of recommendations during the informal briefings regarding the word "acquired". Clause 10 was changed after the Banking Association of South Africa said the provisions in the draft Bill were unclear. Changes were made to Clauses 19 and 20, which introduced a two-year prescription period for Regional Services Council levies.

The Committee asked if these Bills were available in other languages besides English and Afrikaans to help people in rural areas understand. The Committee adopted both Bills.

The Double Taxation Agreements between South Africa and Ghana, Gabon, Turkey and the Democratic Republic of Congo (DRC) agreements were meant to create certainty in tax treatment; remove double taxation; prevented fiscal evasion and promoted assistance in tax collection. The agreements were based largely on the Organisation for Economic Co-operation and Development (OECD) Model Convention but with differences in some areas such as how dividends, interest and royalties were taxed.

MINUTES

Taxation Laws Amendment Bill: SA Revenue Services briefing
Mr F Tomasek (SARS Assistant General Manager: Law and Administration) said that the Taxation Laws Amendment Bill had been split into a Money Bill (the Taxation Laws Amendment Bill [B19 - 2005]) and a normal section 75 Bill (the Taxation Laws Second Amendment Bill [B20 - 2005]). This was because the Joint Tagging Mechanism pointed out that the Constitution no longer allowed Money Bills to deal with subordinate matters that related to taxation in a Taxation Money Bill. The Money Bill dealt with the imposition of tax, and the other with the administrative issues that arose from that. Other than this split, there were no differences from the single Amendment Bill, with three exceptions contained in the Taxation Laws Amendment Bill.

Clause 6 was changed as a result of recommendations during the informal briefings. The word "acquired" did not do what it was supposed to, and in some cases went too far. These provisions permitted the depreciation of an asset owned for tax purposes. Some said the provision did not require a person to actually own the asset, and wanted the asset depreciated after renting the asset. Mr Tomasek said that this was never the intention of the legislation. The word "acquired" was inserted to cure this problem. Another problem was hire-purchase agreements where ownership would pass after the last payment was made. For tax purposes however, SARS regarded the person as having owned the asset. Thus the word "acquired" had gone too far.

Clause 10 was changed after the Banking Association of South Africa said the provisions in the draft Bill were unclear. SARS inserted a proviso where the "reduction" resulted in a negative interest rate, which was impossible. In such a case, the interest rate was zero.

Changes were made to Clauses 19 and 20. These provisions introduced a two-year prescription period for Regional Services Council levies. The State Law Advisor said more technical wording was appropriate and SARS accepted this recommendation. The meaning of the original wording was retained, but in a different way by cross-referencing to the various sub-sections.

The Acting Chairperson asked Mr Tomasek to briefly run through the Taxation Laws Amendment Bill as the Members of the Committee had not attended the informal hearings and did not really know what the Bill entailed as a whole (see Bill).

The Committee adopted the Bill.

Taxation Laws Second Amendment Bill: SA Revenue Services briefing
Mr Tomasek said that previously, goods could only be kept in bonded warehouses if they were subject to customs duty. A change was made to help companies that wanted to use South Africa as a transit point to send goods into the rest of Africa. Goods could be brought into South Africa and put in bonded warehouses for six months or longer without paying Value Added Tax (VAT). Problems arose when the goods were not re-exported. Clause one was restructured to solve the problem.

Clause 2 dealt with a set of contextual amendments.

The World Customs Organisation introduced a convention that prescribed how some goods must be described for customs purposes. Clause 3 dealt with the omission of two sub-clauses during the amendment of Section 47 in December 2001. These clauses were used as a reference to gauge compliance with the international guideline.

Clauses 4 -7 dealt with debit entry duty.
Clause 8 also dealt with the inclusion of provisions omitted in the editing process.
Clause 9 said that public authorities and government institutions did not have to register for VAT purposes if they had not registered by 1 April 2005.
Clause 10 was a consequential amendment because of the introduction of category "F" in clause 11. Category 11 created a category where business with a turnover of less than R1 million could place its VAT returns in every four months instead of every two months.
Clause 12 was a numbering correction.
Clause 13 was a consequence of SARS exchange control amnesty.
Clause 14 allowed SARS to collect government mining royalties.

Ms N Ntwanambi (Western Cape) asked if these amendment Bills were available in other languages besides English and Afrikaans to help people in rural areas understand why they must pay tax.

Mr Tomasek replied that the difficulty was that the original Bills were in English and Afrikaans, so the amendments had to follow this. SARS had translated its brochures into other indigenous languages to help people understand why they must pay tax.

The Committee adopted the Bill.

Double Taxation Agreements: SA Revenue Services briefings
Mr Tomasek said that the South African Double Taxation Model was based on the OECD Model Convention. It was unlikely that an agreement with other countries would be exactly like the South African model as the other countries would try to get an agreement closer to their model. These agreements were meant to create certainty for investors as to their tax liability in other countries if they wanted to invest there and remove double taxation. They helped to remove fiscal evasion and promoted assistance in tax collection between various countries.

South Africa – Ghana Double Taxation Convention
The agreement followed the OECD Model Convention, but there were some differences. Reference was made to Capital Gains in Article two for clarity for Ghana’s sake. Article five contained the ‘permanent establishment’ provisions. Countries only taxed companies with a ‘permanent establishment’ there. This period was 12 months in the OECD model, and six months in the United Nations (UN) model and the South Africa – Ghana agreement.

The OECD model proposed a withholding tax of 5% or 15% on dividends. South Africa and Ghana agreed on a 5% tax for a shareholding of at least 10% and 15% on all others. The OECD model proposed a withholding tax of 5% or 15% on interest. South Africa and Ghana agreed on a 5% tax for banks and 10% on all others, along with a 10% tax on royalties. Article 14 dealt with the taxing of independent services by doctors and lawyers for example. Tax was imposed if the 183-day threshold was exceeded. Pensions were taxed in the state that paid the pension. Teachers were exempt from tax if their remuneration came from a foreign country.

South Africa – Turkey Double Taxation Convention
Mr Tomasek said that the main difference between this agreement and the South African model was the issue of ‘residence.’ Where the place of effective management and legal head office of a company were in two states, the competent authorities must resolve the dispute my mutual agreement.

The ‘permanent establishment’ period was 12 months in this agreement. South Africa and Turkey agreed on a 5% tax for a shareholding of at least 10% and 10% on all others on dividends, 10% tax on interest and 10% on royalties. The source state retained the right to tax capital gains if the asset was sold within a year of acquisition. Pensions were taxed in the state that paid the pensions and teachers were exempt from tax if their remuneration came from a foreign country.

South Africa – Gabon Double Taxation Convention
The period of ‘permanent establishment’ was six months. Article 6 dealt with income from immovable property. The value of the enjoyment may be taxed where the property was situated where share ownership entitled the owner to the enjoyment of immovable property.

South Africa and Gabon agreed on a 5% tax for a shareholding of at least 10% and 15% on all others on dividends, 10% tax on interest and 10% on royalties.

South Africa – DRC Double Taxation Convention
Mr Tomasek said that the period of ‘permanent establishment’ here was six months. In this agreement, international traffic included rail and road transport, not only air and sea transport as was normally the case. There was 5% tax for a shareholding of at least 10% and 15% on all others on dividends, 10% tax on interest and 10% on royalties. Pensions were taxed in the state that paid the pensions.

The Committee adopted the agreements between South Africa, Ghana, Turkey, Gabon and the DRC.

The meeting was adjourned.