Taxation Laws A/B: hearings

FINANCE PORTFOLIO COMMITTEE
2 JUNE 2006
TAXATION LAWS A/B: HEARINGS

Chairperson: Mr N Nene (ANC)

Document handed out:
Price Waterhouse Coopers (PWC) presentation
Banking Association of South Africa (BASA) Presentation
The South African Institute of Charted Accountants
Deneys Reltz Inc.
Association for the Advancement of Black Accountants in Southern Africa

SUMMARY
Price Waterhouse Coopers said that the zero-rating of property rates in municipalities was supported as they were an effective replacement for the Regional Services Council Levies and they were effective from an administrative point of view. After the 1st of July 2006, all supplies would be subject to VAT (though supplies such as bus transport and housing were exempt). The effect of this was that the use of many assets would change from non-taxable to taxable. This meant that in effect, the Bill denied municipalities the right to make change of use adjustments. All fines and penalties charged by municipalities were subject to 14% VAT but the SARS explanatory memorandum said that traffic fines were not subject to VAT. SARS had to clarify other issues relating to other fines and penalties, such as parking and library fines, urgently. The implementation of VAT on current non-taxable portions of municipalities' businesses would create difficulties for the economy. There would be transitional problems, double-taxation issues and unfair discrimination in some cases.

The Banking Association of South Africa said that there were multiple barriers to entry and compliance with the formalities of doing business in South Africa. The formalities for registering a trading entity were complex and there were on-going compliance costs for employers, VAT vendors and taxpayers. For businesses with a turnover of R5 million or less, taxable income would be small. Therefore the levy was unlikely to be significant. BASA recommended dispensing with the levy altogether. National and international accounting standards remained complex and were unlikely to be simplified soon. Standardised accounting packages were available from software vendors and SARS could play a role in evaluating and endorsing acceptable packages. BASA suggested that the amnesty process also be accompanied by a significant publicity campaign by SARS.

MINUTES
PricewaterhouseCoopers Presentation
Mr C De Wet, a Director of Tax Services, began by saying that the zero-rating of property rates in municipalities was supported as they were an effective replacement for the Regional Services Council Levies (RSCLs) and they were effective from an administrative point of view. The basic principles of public finance such as neutrality, equity and economic efficiency, which were taken into account when Value Added Tax (VAT) was introduced, should be adhered to whenever changes were made to fiscal policy. 

He said that VAT was trapped in the cost of municipal assets. Since 1991, property rates were effectively exempt and large amounts of VAT could not be claimed as input tax. To prevent double-taxation in the change of use adjustments, trapped VAT had to be removed from the cost of assets used for taxable supplies and VAT neutrality for VAT vendors had to be ensured. After the 1st of July 2006, all supplies would be subject to VAT (though supplies such as bus transport and housing were exempt). The effect of this was that the use of many assets would change from non-taxable to taxable. This meant that in effect, the Bill denied municipalities the right to make change of use adjustments.

This applied across the board to VAT and non-VAT vendors, leading to double-taxation. Neutrality would be affected as there would be discrimination between municipalities as it depended on the asset profile of the municipality. This increased costs by imposing an added VAT burden, leading to problems in service delivery and its costs. To prevent double-taxation, municipalities had to be allowed to make change in use adjustments. If the change in use adjustments were too costly, the right to make the adjustment could be gradually phased in.  

Since 1991, most vendors operated on an 'invoice' basis. Local authorities could use a 'payment' basis for operation which had a cash flow benefit. After the 1st of July 2006 only municipalities qualified for the 'payment' basis. All local authorities such as water boards and the Regional Electricity Distributors (REDs) would not qualify as municipalities, which meant that they had to pay VAT on current outstanding debts. This affected the cash flow for the REDs and had implications for their financing requirements for longstanding and subsequent bad debts. This inevitably led to increases in the financing costs of the REDs. There would also need to be costly system changes where the RED used the municipality's infrastructure.

Since 1991, transfer payments paid to local authorities incurred 0% VAT. However, many other payments were incorrectly treated and incurred 0% VAT also. The South African Revenue Service (SARS) only assessed amounts at 14% or denied applying the input tax. The proposed Section 40B gave relief for local authorities that had not yet paid the assessments. It was unfair if only some of the municipalities enjoyed relief and PWC was unsure about whether the relief included output as well as input tax. Section 40B(4) said that no refund was possible if VAT was incorrectly paid at 14% instead of 0%. Mr De Wet said that this amounted to unfair discrimination and a refund should be allowed in this case.

All fines and penalties charged by municipalities were subject to 14% VAT but the SARS explanatory memorandum said that traffic fines were not subject to VAT. What about other fines and penalties such as parking fines where the paid for time period had been exceeded and library fines for not returning books or hired material in time? SARS had to clarify these issues urgently. Since 1991, rates (along with 14% VAT) were charged for sewerage and garbage services while a subsidy was granted for those who were unable to pay. However, after the 1st of July, the 'municipal' rate of 0% VAT would apply.

In conclusion, the implementation of VAT on current non-taxable portions of municipalities' businesses would create difficulties for the economy. There would be transitional problems, double-taxation issues and unfair discrimination in some cases.

Banking Association of South Africa (BASA)
Mr N Lala-Mohan, the BASA General Manager, said that SARS and the Treasury had to be complimented on their proactive approach to the regularisation of the tax affairs of small businesses. However, there were multiple barriers to entry and compliance with the formalities of doing business in South Africa. The formalities for registering a trading entity were complex and the on-going compliance costs for employers, VAT vendors and taxpayers were disproportionately high and few businesses would ever reach the critical mass of sufficient revenue to support the compliance costs.

For businesses with a turnover of R5 million or less, taxable income would be small. Therefore the levy was unlikely to significant. BASA recommended dispensing with the levy altogether. The off-shore amnesty levy was not comparable to this levy as the level of taxpayer sophistication was at opposite ends of the spectrum. If a small business had failed to comply prior to March 2006, it was unlikely that reconstruction records or even estimates would be available. This was a barrier to applicants so BASA suggested that an alternative base fee of R10 000 be accommodated. If the levy was to be imposed, the income could be better served operating as an education or assistance fund for small businesses. Many tax defaulters were unintentionally outside the law due to a lack of expertise, the complexity of requirements and the high costs of compliance. Once outside the law, small businesses found it better to maintain a low profile to escape attention and retribution.

National and international accounting standards remained complex and were unlikely to be simplified soon. Standardised accounting packages were available from software vendors and SARS could play a role in evaluating and endorsing acceptable packages. Successful applicants could receive incentives to acquire packages and deductions in audit or book-keeping fees by registered accountants. SARS could also design simplified and standardised tax schedules and integrate them into the approved accounting packages. Sector Education Training Authorities could also offer courses in tax compliance and education.

In many cases income tax incentives available to small businesses could not be made use of in the early stages of the business. Innovative thinking could assist in encouraging small businesses to register as taxpayers particularly where incentives were available. BASA suggested that the amnesty process also be accompanied by a significant publicity campaign by SARS.

Discussion
Mr B Mnguni (ANC) said that BASA alleged that it would be hard to determine how much the levy was because of poor records but SARS said that they would also look at things like the assets the entity held to make estimates. Why was there such a divergence between them and SARS on this point? Could the compliance costs really be so much that the businesses would choose to operate illegally?

Mr Lala-Mohan replied that there was no need for estimates to be made as they did not see a need for a levy in the first place. By registering, the individuals or companies would become taxpayers, contributing to the fiscus. If penalties were suggested, compliance costs could be more than the 10% levy charge, so in the alternative BASA wanted a rebate to help reduce the costs. 

Ms L Mabe (ANC) asked what informed the BASA proposal for a five-year phasing in period for the amnesty.

Mr Lala-Mohan replied that the phasing period was merely a suggestion to allow the whole process to work smoothly to allow full compliance and to make sure that everyone was aware of the amnesty, the procedures involved and its implications.

Mr Y Bhamjee (ANC) asked PWC to elaborate on their 'parking fine' example.

Mr De Wet said that their example had to do with existing provisions in the VAT Act. The main question to ask was whether the municipalities had provided a service or supplied something. VAT could not be applied to speeding fines as the municipality had not supplied anything but it was different where a penalty was paid for parking longer than the stipulated time. Here the municipality was supplying something, and on interpretation of the current VAT Act, VAT could be applied. However, the new provisions in the new VAT Act seemed to contradict this position. Therefore, PWC was calling for clarity on this issue.

The meeting was adjourned.