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FINANCE PORTFOLIO COMMITTEE & JOINT BUDGET COMMITTEE: JOINT MEETING
08 March 2006
TAX PROPOSALS & PANEL OF TAX EXPERTS TO COMMENT ON TAX PROPOSALS
Co-Chairpersons: Mr N Nene (ANC) and Ms L Mabe (ANC)
DOCUMENTS HANDED OUT:
National Treasury and SARS Tax proposals: Budget 2006
South African Institute of Chartered Accountants submission
Michael Katz submission
The Committee was briefed on the tax policy proposals emerging from this year's budget and it heard comments from tax experts.
Some of the comments made by the tax experts included the following:
- The outstanding performance of SARS had led to the creation in the minds of domestic and foreign investors that the South African tax administration was efficient, certain and predictable.
- Specific tax incentives should in general terms be avoided since they impacted adversely on the more sensible policy objective of general rate reduction. It also made tax administration and tax compliance more costly and distorted resource allocation.
- There was support for the decision not to reduce the basic corporate rate. A further reduction of corporate rates unaccompanied by a reduction in the maximum marginal rate of individual tax would result in tax arbitrage. It was not an appropriate time to reduce maximum marginal rates of individual tax.
- The government was urged to totally abolish the regional services levy and not replace it with another tax. The tax was complex and suffered from a number of legal objections. The decision not to replace it with another tax would provide business with appropriate tax relief.
- The tax on retirement funds should be abolished because it was clearly a form of double tax and affected mostly those who had no choice but to belong to pension, provident and retirement funds. The more affluent section of the population might choose other forms of retirement savings e.g. equity, property, etc and thereby avoid this form of double tax.
- The tax amnesty granted for small business should encourage many small businesses to transition from the informal to the formal economy, with a resultant reduction in the tax gap. The exclusion of businesses that are under investigation by SARS was unnecessary. Perhaps a higher penalty for these businesses would have been more appropriate instead of outright exclusion if the intention was to encourage compliance.
SARS and Treasury proposed reforms on the following issues, amongst others:
- Transfer duty relief
- Regional services levy reform
- Research and development tax incentive
- Learnership tax incentive (skills development)
- Synthetic fuel industry (proposed windfall profit tax) and oil & gas exploration tax incentives.
Issues raised by the Committee included:
- Government subsidisation of research and development
- Tax policy that ensures economic growth
- System of zero rating municipality property
- Role of society in revenue collection.
The National Treasury and the South African Revenue Services were represented by Mr C Moerden (Chief Director: Tax Policy), Mr F Tomasek (General Manager: Legislation), Ms Y Mputa (Deputy Director: Legislative Oversight and Policy Co-ordination), Mr K Louw (General Manager: Law Administration and Mr V Pillay (Policy Researcher). Mr Moerden and Mr Tomasek took turns to make the presentation (see document attached).
Mr B Mnguni (ANC) noted that deduction for current expenditure on research and development (consisting mainly of salaries of researchers) would increase to 150 per cent. He asked if this meant that the government would subsidise research and development. Research had shown that tax incentives were bad because they had the effect of limiting the tax base. It was important to broaden the tax base in order to reduce the tax rate. He wondered if the government was convinced that it would not give too much incentives such that the tax bade would be reduced and people would end up paying exorbitant taxes ten years down the line.
Mr Tomasek replied to the question on research and development on the basis of corporate tax (29%). Currently a company that had spent a R1000 on research and development could claim R1000 as an expense for tax purposes. This would mean that the company would save tax of R290. This was pretty neutral because it was merely a deduction of what had been spent. In terms of the proposal a company that had spent R1000 in research and development would be able to claim R1500. They would get an extra tax saving of R14, 50. This meant that the tax system would recognise an expense where there was none.
Mr Moerden replied that the point about trade off between incentives and tax was very important and the government had tried to deal with it over the past years. As a general rule Treasury would prefer to have a broad base and low tax rates and to minimise expenses and incentives. The reality not easy to deal with and there was always some special cases being put forward and requests for incentives. Looking at trends across the globe, the view was that this particular incentive was appropriate at this stage. It was broad enough to provide relief for businesses and industries across the board. A problem existed in relation to special types of incentives that would undermine tax in future.
Mr I Davidson (DA) said that one thing that was missing was a tax policy that promoted investment which would create more jobs. The issue of amnesty was interesting and very encouraging. He asked what were the mechanisms and incentives for people outside the tax net to come into the net. With regard to the proposed synthetic fuel windfall profit tax, there had been a commodity prices boom and oil was one of the beneficiaries. He wondered what were the reasons for not extending the ambit of the investigation to other commodities which had been the subject of subsidies in the past. He made an example of the gold mines. There was a need for a consistent approach. Tax incentives for learnerships were welcome. The question was to what extent the number of registered learners and apprenticeships pictured in the Sector Education and Training Authority (SETA) system as opposed to outside the system.
Mr Moerden replied that the budget review talked about enhancing growth and innovation. The whole issue of investment and job creation was included. It was hoped that relief to businesses, reducing the compliance costs for businesses and enhancing small business development would contribute to more investment and job creation.
Mr Tomasek replied that there were a number of factors that should encourage people to come into the system. Small business required a tax clearance certificate before they could do business with the government. A number of big businesses were using the certificate as evidence that they were dealing with a reputable business. A small business could have an opportunity to grow its market. SARS was making it easy for businesses to comply once in they were in the system. Last year SARS had announced the introduction of community tax helpers. There were a number of other initiatives to assist people. People who were not in the system would have an unpleasant experience once they had been found. The amnesty was aimed at sparring them the experience.
Mr Moerden replied that the issue of taxes in relation to gold mines was to some extent captured in current gold formula. There was already a built in mechanism and the fiscus had managed to get a big take as gold price and the profitability of gold mines increased. The formula provided some protection in case dropping gold prices. There was a debate on whether this was appropriate. The synthetic fuel industry was slightly different from many other sectors for two reasons: the historical background of the establishment of sector and the substantial increase in the oil prices. He agreed that there should be consistency in terms of the treatment of different sectors. The government should be careful and provide certainty. To try and broaden the scope might send out the incorrect message. There was a reason for focusing on this sector. There was also the question relating to the way prices were being calculated for fuel products in this country. A combination of factors had led to a focus on this sector.
He did not have numbers on the learnerships but the 170 000 did not necessarily refer to SETAs. The learnerships incentives were not linked to the SETA system. Learnerships numbers applied across the board and were not necessarily tied to SETAs. Companies were also participating in learnerships probably going beyond the SETA refund system.
Ms J Fubbs (ANC) said that there had been a number of concerns around the tax brackets. People slipped into the next tax bracket as soon as they go an increase in their salaries. Some people had refused the increase because they feared that they would end up getting less money than before the increase. She asked if there was any way of addressing this. With regard to medical expenses, one could argue that people who were disabled in terms of their eye or footwear were not covered by the medical aids. There was nothing in the proposal to address this. She asked if such people were covered. With respect to the small business tax amnesty, she asked if the requirement was that businesses should have been registered. Many of the small businesses were not registered. Some of them did not want to be registered due to the tax implications for so doing. She asked how the people in Cape Town would benefit from the gas incentives. Would they get tax rebates as businesses or individuals who had lost income as a result of the electricity failures or would there only be indirect benefits? She suggested that there should be tax incentives or deductions on generators for households. On provisional tax, the Committee had heard how actors and singers had often found themselves out of pocket. They had tried to evade tax because of this. They would have good year followed by a bad year but the tax would remain the same. She asked how the government would deal with this.
Mr Tomasek replied that getting an increase and not taking it due to fears of paying more tax was a fallacy if it was indeed happening. Getting a promotion did not mean that one would pay more tax on what one was already earning. He gave an example of a person who was earning R100 000 and would then earn 150 000 following a promotion. The person was required to pay 18% (R18 000) of the amount in tax before the promotion. The person would still be required to pay 18% out of the first R100 000 but pay another 25% on the R50 000. In essence the person would pay tax at a higher rate on the increase. They would still get to pocket 75% of the increase and it made sense to accept the increase. The fears expressed would apply if the government were to say that everybody who earned between R100 000 and R150 000 would have to pay 25% in tax. With respect to the disabled, Mr Tomasek replied that people who were classified as disabled in terms of the income tax system were entitled to unlimited deduction for medical expenses.
He said that small businesses did not have been registered to get the amnesty. People who were registered as personal taxpayers could also come forward and disclose their businesses on the side. Such people would be eligible for the amnesty subject to other criteria.
Mr Moerden replied that the gas incentives were aimed at providing tax relief for power plants that would diesel. The policy of the Department of Minerals and Energy was to have diesel powered plants as peak electricity generation plants to supplement the existing power supply. There would be four plants and tenders had been made public. The intention was to restrict the incentive to big plants because to include even small plants would create an administrative nightmare.
Mr Tomasek added that a generator that was used by a hair salon during power outages was a capital asset that depreciated for tax purposes. The fuel used to run the generator could be claimed for tax purposes.
With respect to actors and entertainers, he agreed that they sometimes had a good year followed by a bad one. There was a mechanism in the Act that allowed such people to approach SARS and indicate changes in their circumstances and ask for a reduction of the provisional tax payments. A slightly different mechanism applied to people who were on the pay as your earn system.
Mr A Moloto (ANC) focussed on the VAT zero rating of municipality property. The question was how this would system work. Would they not be expected to pay VAT on property rates or that the council or municipalities would collect the VAT but not pass it over to SARS? He also asked what were the risks of reducing the corporate income tax whilst at the same keeping the top marginal tax rate of individuals constant.
Mr Moerden replied that legislation was drafted in a way that exempted property rates for VAT purposes. There was a big difference between a zero rate and an exemption. People would still be expected to pay their property rates but there would be no VAT on the rates. Municipalities would not deduct input Vat they had paid when using the money to goods and services. Municipalities could claim input VAT in other expenses because they had VAT.
Mr Tomasek gave an example of a person who way paying rates of R114 and the Council had use the money to repair a road outside the payer's house. He assumed that the Council had spent R100 on materials and paid R14 in VAT. Now that the rates were zero rated, the Council would be able to claim the VAT back.
Mr Moerden continued to say that it was estimated that municipalities would have some extra money. Their lives would be a lot easier in terms of book keeping.
On the issue of corporate income tax (CIT) and the top marginal rate, he said that there was a risk of arbitrage and people would be incentivised to declare their income as business income rather than wages and salaries. Various countries had dealt with the risk in different ways. Some of the Scandinavian countries had a dual income system and when a person had a business, they would assume that a certain percentage was wages or salaries and the other businesses and taxed them differently. South Africa did not have such a system.
Mr Tomasek added that the tax system had to respond because there was an incentive to do business through a company. The maximum tax that one would pay on distributions from a company was the 29% corporate rate and the secondary tax on companies (STC). This would add up to a combined rate of 36.9%, which was lower than the 40% one would pay at the maximum marginal rate as an individual. There might be some incentive to put some of the income into a company. At the moment the different was three percentage points.
Mr L Johnson (ANC) said that the revenue had always passed expectations. Whilst this was good for the country, the question was what were implications of this especially in relation to planning. A lot of money still had to be collected from people who were outside the tax system. Mr Tomasek had used a very good example about a hairdresser having to use a generator when there was a power outage. There were benefits that could accrue to the hairdresser if he/she was in the tax system. What was the role of society in relation to revenue collection? There was a scenario wherein only SARS was involved in revenue collection in order for government to spend for the nation.
Mr Moerden replied that it was good to have some revenue overrun but from planning perspective it would be better to have better estimates. The government was engaging on a number of exercises aimed at beefing up the revenue estimation processes. The difficulty was that some components of the revenue were much more volatile than others and this made it difficult to be exact.
Mr Tomasek said that the member had raised a very valuable point in relation to the society's role in revenue collection. The Committee would remember last year’s campaign and demonstrations on how the money collected was being used. The Commissioner might want to talk more about this with the Committee.
Ms Fubbs said that restaurants seldom taxed what they called casual waiters and waitresses. It seemed that they had now decided to comply with the law. The compliance was in part because they did not tax tips but the basic salary. It seemed that tips were now being taxed. She asked at what rate tips were being taxed.
Mr Tomasek replied that deducting the tax up front reduced the problem of having to pay tax later on. A person who had waitressed enough to earn above the tax threshold might end up having an unanticipated tax bill at the end of the year. Most of the people who waitressed part time did not have sufficient spare cash lying around. Part time employees were not on the SITE system and were in a position to file a return and claim back over payments.
Mr Louw added that there were two sources of income: tips and a basic salary. Tips did not involve an employer-employee relationship and were paid by the visitor to the restaurant. There would be no withholding tax on the tips.
Presentation by Mr M Katz
Mr Michael Katz (Tax Expert) commented on the tax policy arising from the Budget 2006/07 (see document attached). He said that, on a proper evaluation and taking into account the revenue and expenditure provisions and the interaction between them, the budget’s overwhelming thrust was redistribution and sought to achieve this objective in a sensible and appropriate manner. The performance of SARS had been outstanding and had lead to the creation in the minds of domestic and foreign investors that the South African Tax Administration was efficient, certain and predictable. He said that specific tax incentives should in general terms be avoided since they impacted adversely on the more sensible policy objective of general rate reduction; made tax administration and tax compliance more costly and distorted resource allocation. He supported the decision not to reduce the basic corporate rate. A further reduction of corporate rates unaccompanied by a reduction in the maximum marginal rate of individual tax would result in tax arbitrage. It was not an appropriate time to reduce maximum marginal rates of individual tax. He also supported the decision to abolish regional services council tax and the decision not to replace it with another tax. The tax was complex and suffered from a number of legal objections. The decision not to replace it with another tax would provide business with appropriate tax relief.
Mr Katz supported the decision to retain the secondary tax on companies (STC). Any decision to abolish STC would almost certainly give rise to a tax on dividends. STC was in many respects equivalent to a final withholding tax on dividends. He was strongly against deductions on research and development expenditure because they led to wasteful expenditure.
Mr Davidson focussed on STC and corporate tax. The Committee had just heard technical analysis of the situation as Mr Katz perceived it. The issue was how to encourage economic growth in the country. What was the role of tax in economic growth? Some economists had argued that there was a need for a debate on tax policy and seemed that the Minister was somewhat dogmatic and wanted to exclude the debate. The Committee's purpose was to encourage that debate and see what role was played by tax. The budget review had three indicators. One was foreign direct investment (FDI). FDI had almost been static for the past years. The Minister had commented on the low level of public-private partnerships that were taking place. The levels of gross capital formation particularly in the private sector had dropped from 9,7% in 2004 to 6,7% now. This indicated a lack of excitement on behalf of the private sector to really get involved. The question was how to provide incentives for the private sector to be part of the growth. Did tax play a role, if so, what role? KPMG and Merrill Lynch conducted surveys that reflected on South Africa's international competitiveness in respect of tax. SA was not actually not being competitive. It was in this context that he was raising the question on the role of tax in incentivising the corporate sector to be part of the growth initiative. He took the point about arbitrage but felt that this would not happen as the margin was not that great. There were lots of costs associated with the formation of a company to be taken into account.
With respect to the regional services levy (RSC), he said that a company that a low turnover and low employment would not benefit because the RSC was based on this combination. A company that had a high turnover and high employment would benefit even though it was not profitable. There was a kind of an inequity that was not touched in the presentation. Tax policy had a role to play towards economic growth. KPMG had made the point that throughout the world corporate tax rates were on the slide because capital was mobile and was looking for a place where it get the highest return. The question was whether was competitive.
Mr Mnguni said that there was another school of thought, contrary to what said by Mr Davidson, that held that it was political, macro economic stability and efficient tax administration that attracted FDI as compared to too much tax incentives. He asked for Mr Katz's views on this.
Professor Katz replied that comparing tax system or rates was only half of the story. One also had to look at the base, how the taxable income was calculated, what was allowed as deductions and what went into the net. A rate was only a quarter of the input into informing how heavy the tax was. Some countries might have a lot of other user charges. A mere look at the tax rates did not necessarily reflect the degree to which a society was being exposed. He agreed that there was a need for a debate on how tax impacted on FDI. Tax was just one of the features relevant to FDI. The other factors included risks and the conviction that one could make money. The Katz Commission had found that tax featured in two respects: not for the incentives or holidays. There issue was whether there was there an efficient tax administration that was predictable, certain and reliable. The second issue was that the rates generally and the total tax burden generally and taking cognisance of double tax relief. The idea of a holiday was not a major issue. There was whole lot of non-tax issues. Tax should not be an impediment. One of the important issues was that tax should in itself not inform business decisions. Business should be informed by commercial consideration. Structural coherence was important in a tax system. There should be a proper balance between various taxes. He was not saying that there was a magical level of the relationships.
Ms Fubbs agreed that the use of incentives for growth would be unhealthy and lead to distortions. She asked if the presenters were aware of abuses that had arisen in other countries as a result of incentives for research and development. There were zero rated goods. Was not possible for SARS to consider other zero rated goods that were particularly purchased by the poor.
Mr Katz replied that he was favour of research and development but the issue was how it was conducted. One should be careful when making foreign comparisons because a tax system was as much a reflection of good tax policy as it was of the strength of lobbyist. When looking at foreign system the presupposition was that if it was good for them it should be good for us. This was not necessarily the case because there might have been some strong lobbyists in particular places. He indicated that his colleagues across the world had indicated that South Africa had a good thing going in its system. One should be careful of foreign comparisons. There might be a dozen of cases in the systems on problems around the system. To have a deduction in excess of money incurred was to look for problems.
With regard to extending the zero rating, he said that the problem was that one wanted to be cognisant of alleviating the hardship of poor but to also have non-complex system. There were costs of compliance and administration every time a zero rate was given. One should also look if the benefit was going to the intended beneficiaries. Social security, if possible, was better dealt with on the expenditure side of the budget so that it could be targeted to the right beneficiaries.
Dr van Dyk (DA)) noted that tax incentives should be avoided due to administrative costs. He noted that the presenter had said that a healthy tax policy should promotes broaden the tax base, lower general rates and create an efficient tax administration. The question how to bring these together. It was said that to lower corporate taxes might lead to abuse. The question how to distinguish benefits to those companies that would plough back the benefits into new productions against those that would just abuse the system.
Presentation by SAICA
Ms J Arendse (Project Director: Tax) and Mr N Nalliah (Chairman: National Tax Committee). They took turns to make the presentation (see document attached).
Mr Nene asked Treasury to respond to views that there were things that could undermine tax relief given to individuals. SAICA had referred to the new tax regime for medical scheme contributions; the increase (from 50% to 60%) in the portion of travel allowances that are subject to PAYE and the increase in deemed private mileage from 16 000 to 18 000 kilometers. He asked Treasury and SARS to comment on this. SAICA had also urged for the total abolition of the RSC levy. The fear that the RSC levy could be replaced by another tax was raised in a number of submissions. The question was whether there was a basis for the fears.
Mr Moerden replied that the statements that medical reform and company car reform would undermine tax relief were incorrect. The reforms were announced in 2005 and people were aware that they would come into effect this year. This year's budget had cushioned against the impact of the burden. The government would not want to replace the RSC levy with another tax that would place a burden on business. It would be much better if one could come up with a mechanism that would require no replacement at all. There was a need for consultation because the RCS was a source of revenue for local authorities. It was important for local authorities to have a revenue stream that would secure their financial position.
Mr S Dithebe (ANC) referred to the reduction of transfer duties. He asked if there was a possibility of estate agents undermining the benefits that were supposed to accrue to potential homebuyers. A person who had bought a house that was under R500 000 would not pay any transfer duties. There was a complaint from the Institute of Estate Agents that most potential home buyers had decided to withdraw their applications soon after the Minister had tabled the budget.
Mr Moerden replied that it was not so much the estate duties that would undermine the relief but people who would push up the house prices fees. There was little that one could do about this. It was a question of the relationship between the buyer and the seller. There was a concern about high fees charged by Estate Agents. There was some hope that they would review their fees to help lower the cost of transactions.
Mr Louw added that there were people who had tried cancelling their transactions or withholding the lodging of transfer duty documentation until the benefit had kicked in. SARS had issued a notice that it would not recognise cancellations that were made solely for the purpose of getting the benefit.
Mr B Mkhaliphi (ANC) [Mpumalanga] that government had emphasised that there should also be a focus on the capacity of the State to deliver in light of the boom in the housing market and backlog at the Deeds office.
Mr Louw replied that the Deeds office did not fall under SARS. The fact that more transaction would be exempted might streamline the whole process. There was nothing new because the housing market had been experiencing the boom for the past two or three years. The Office had also automated a lot of their process.
The meeting was adjourned.