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FINANCE PORTFOLIO COMMITTEE
6 June 2006
SMALL BUSINESS TAX AMNESTY AND AMENDMENT OF TAXATION LAWS BILL
Chairperson: Mr N Nene (ANC)
Documents handed out
Draft Small Business Tax Amnesty and Amendment of Taxation Laws Bill
Draft Small Business Tax Amnesty and Amendment of Taxation Laws Bill: Explanatory Memorandum
Submission by Business Unity South Africa
Submission by Deneys Reitz
Submission by Association for Advancement of Black Accountants of Southern Africa
The Committee heard submissions on the Draft Small Business Tax Amnesty and Amendment of Taxation Laws Bill. The proposed amnesty presented an opportunity for small businesses currently outside the tax net to regularise their tax affairs.
Both Business Unity South Africa and Deneys Reitz Attorneys noted that to make this a real incentive there should be no down-sides such as the 10% surcharge. Tax compliance and tax administration was a major concern for small businesses. The so-called troublesome regulations for small businesses with less than five employees, were identified as Value Added Tax (VAT), tax administration, Unemployment Insurance Fund (UIF), Pay As You Earn (PAYE) and then labour laws. The list of concerns of 28% of businesses with up to ten employees ranged as follows: VAT, tax administration, labour laws and UIF and then PAYE.
People would be discouraged to come forward should SARS use the information presented to it to conduct audits that would be retrospective. The amnesty should include estate duty, donations tax and customs and excise. There were no particular reasons why these should be excluded. In cases where there was no trading or loss in 2005, the levy should be based on the last year in which taxable income was earned.
The definition of "2006 year of assessment" appeared to be superfluous, as there was no further reference to it in the Bill. The term "reasonable" estimate was fairly elastic. There was a need for indications of what would be considered reasonable for the purposes of clause 7(3). The meaning of "other enforcement action" as referred to in clause 8(2) should also be clarified.
Members of the Committee raised a number of questions which included the following:
- Why would there be more burdens than benefits on small businesses should they regularise their tax affairs?
- What was the concern around the tax amnesty levy. Was it about the affordability of the levy or record-keeping problems for previous years or both?
- Would small businesses prefer to stay informal because of the compliance burden instead of formalising their affairs.
- Other than costs, what would be the disincentive for business to come forward and regularise their affairs?
The Chairperson said that this would be a brief session because some stakeholders had withdrawn from the hearings either because they had felt that their concerns had been resolved or that it would not help to raise them because they might not be resolved.
Business Unity South Africa (BUSA) submission
Adv. A Meiring made the submission (see document attached). He said that the proposed amnesty presented an opportunity for small businesses currently outside the tax net to regularise their tax affairs. To make this a real incentive there should be no down sides such as the 10% surcharge. BUSA had in the past submitted that the amnesty should be extended beyond the taxi recapitalisation process to all small businesses that were outside the tax net. It was very encouraging to see that Treasury had accepted the proposal. BUSA still had some reservations about the 10% levy. BUSA’s constituencies that would be affected by this were those that were outside the tax net or in the informal sector. It was not easy to understand this sector of the economy.
He said that research had indicated that tax compliance and tax administration was a major concern for small businesses. Of the so-called troublesome regulations for small businesses with less than five employees, Value Added Tax (VAT), tax administration, Unemployment Insurance Fund (UIF), Pay As You Earn (PAYE) and then labour laws were the main concerns. The list of concerns for 28% of businesses with up to ten employees ranged as follows: VAT, tax administration, labour laws and UIF and then PAYE. There were clear indications that small businesses were concerned with the tax administration. It was in this context that BUSA had felt that an incentive in the form of tax amnesty had to be robust. It should say to the small businesses that there would be significant up sides should they become part of the formalised business environment. It was also in this context that BUSA had some concerns around the 10% surcharge or levy. It would be appropriate to reconsider whether the 10% surcharge would have the desired effect.
The efficacy of the amnesty programme would depend to a large extent on publicity campaigns to persuade businesses to regularise their tax affairs. He commended the government’s efforts to inform small businesses about the amnesty. Sustainability of the campaigns was important. One would not want to see a situation wherein small businesses would come into the net only to find that tax administration was a cumbersome process which would then force them to go underground. Small business had remained in the informal sector due to the culture of poor record keeping. This would not just disappear without appropriate training and assistance. He noted the submission made by the Banking Association for South Africa for simplified application forms to register for tax. It was important not only to encourage people to come into the tax net but also to stay in there. Tax amnesty was a positive measure to enhance tax compliance.
Mr B Mnguni (ANC) asked why would there be more burdens than benefits on small businesses should they regularise their tax affairs. The decision to take advantage of the tax amnesty carried with it compliance obligations and penalties. He asked if BUSA thought that small businesses would rather stay informal because of the compliance burden instead of formalising their affairs.
Adv. Meiring replied that this was a classic case where regulatory impact assessment would have provided an answer. The answer to the question whether there would more burdens than benefits was anybody’s guess. However, research had indicated that tax administration was seen as significant burden by small businesses. Whether the benefits of being part of a regularised system would outweigh any down side that might exist in terms of bookkeeping would depend on the nature of the business. BUSA was of the view that there would be benefits to some business but not all. The issue whether small businesses would rather stay informal due to compliance burdens was a very big question.
Ms J Fubbs (ANC) found it difficult to appreciate the point that any incentive to induce small businesses to regularise their affairs should surely be an incentive pure and simple to which no penalty was attached. It was submitted that the proposed levy imposition should be reconsidered. She wondered how BUSA would regard this as a penalty. She asked Treasury as to what percentage of tax small businesses would have paid had they been registered. She said that she had an idea as to what percentage they would have paid and she did not regard the percentage as a penalty but a further reward or incentive. What kind of incentive should be offered to people who had not complied with their obligations? The argument was that small businesses should comply with their obligations and that SARS would only take one year into account. It would also not apply the maximum taxation but apply a token. She said she would have been very quick to regularise her affairs had she been given an opportunity of not paying tax for ten years and told that she would only pay ten percent. She could not understand how the presenter viewed this as a penalty.
Adv. Meiring replied that there were informal businesses that had never been registered and never regarded themselves as tax defaulters. Those were the business that should be in the tax system. BUSA was not very much concerned with small businesses that knew fully well that they were supposed to pay tax but simply did not bother to do so. Perhaps a distinction should be made between those informal businesses that had passed some kind of threshold at some point and should now become part of the formal economy and businesses that were already registered for tax but did not pay any. The second category of businesses should be required to pay the levy. There was a distinct element of moral blameworthiness between the two categories.
Mr T Vezi (IFP) wondered if he should wait for SARS to respond to the submissions before asking his question. He said that he had raised the issue of a simplified bookkeeping method. The banking sector had given a very good response on the matter and had indicated that it would go out of its way to try and accommodate small businesses. There had been no response from SARS.
The Chairperson said that it would be better to wait for SARS to respond to submissions and then raise it again if not addressed.
Mr K Moloto (ANC) asked what were BUSA's concerns around the tax amnesty levy. Was it concerned about the affordability of the levy or record keeping problems of going just a year back or both?
Adv. Mering replied that BUSA was concerned about getting informal businesses to come into the tax net. There were good reasons for coming into the system. People would be able to access various services and engage in various initiatives like black economic empowerment.
The Chairperson asked if Adv. Meiring was representing both BUSA and the South African Chamber of Business (SACOB). The Committee was originally informed that it would receive a written submission from BUSA and SACOB.
Adv. Meiring replied that this was a joint submission by BUSA and SACOB. The two organisations had a single tax committee. BUSA included the Chamber of Commerce and Industry of South Africa (CHAMSA) as one of its constituencies. The submission represented views of organised business.
Ms Fubbs said that the presenter had not thrown any light to one of her questions. The presenter's answers would seem to justify a situation where those who had chosen not to comply with tax requirements would be given a kind of preferential treatment way beyond those who sought to comply. It was important to inject a sense of fairness. She still could not understand why the presenter would regard it as a penalty when somebody was encouraged to join the system at lower taxation over a period of maybe one-tenth of their operation. This was every encouragement.
Adv. Surtees replied that the 10% levy was inappropriate. It was a down side. One could not have a compelling inducement for informal businesses that had not thought about tax compliance and at the same time have a down side. It was not easy to argue around amnesty. At a certain level an amnesty was an admission of failure of the system or the rule of law. The introduction of amnesty for small businesses should not be understood in the context of the failure of the system. There had been small business amnesty in the past. Although he was against the 10% levy, he said that an argument could be made for the levy. It could be argued that because there had been amnesty in the past, it would be good that any further amnesty should be slightly less attractive than the initial one. One could understand the thinking behind this otherwise it would be to the advantage of some to play for time instead of using the amnesty when it was given for the first time. The question was to what extent were the intended businesses aware that there had been an amnesty in the past.
Deneys Reitz submission
Professor Peter Surtees made the submission (see document attached). He said that it was unclear if the legislation would apply to all businesses from day one or whether it would be phased in especially after reading what the Minister said in his Budget Speech. There was a need for clarity in the final version of the Bill. The definition of "2006 year of assessment" appeared to be superfluous, as there was no further reference to it in the Bill. The term "reasonable" estimate was fairly elastic. There was a need for indications of what would be considered reasonable for the purposes of clause 7(3). The meaning of "other enforcement action" as referred to in clause 8(2) should also be clarified.
He said that the Bill provided for a tax amnesty levy of 10% of the taxable income determined for the "2005 year of assessment". What would be the position in cases where the applicant had a taxable loss for the 2005 year of assessment or had not traded in 205? Could amnesty still be applied for, and if so, would the tax amnesty levy be nil, i.e. 10% of nil taxable income? Clause 16(c) referred to any estimate which was “materially” incorrect. It was not clear what would be regarded as “material”. He recommended that a percentage accuracy should be stipulated.
Prof. Surtees accepted the principle of encouraging delinquent taxpayers to come into the system. There should be no discouragement to persons coming forward. People would be discouraged to come forward should SARS use the information presented to it to conduct audits that would go backwards. People would pay a lot less tax than would have been the case as a result of the amnesty. This was an incentive to come into the system but people would be reluctant should they feel that they would be a subject of investigations that could have turbulent results. He suggested that the information presented to SARS should be accepted at face value, as was largely the case with exchange control amnesty.
He said that it seemed like monthly amounts such as UIF and employees' tax and periodic amounts such as secondary tax on companies were not covered from the first day of 2005 year of assessment. This could be a very powerful incentive where businesses paid the 10% levy but would not be given amnesty in respect of the monthly and periodic payments from the beginning of the 2005 year of assessment. This could amount to a large amount of money and people could see themselves at risk from a cash flow point of view if they were to cough up such monthly and periodic fees going back for a number of years. This could be worse in the case of tax year of a company ended on the 30th of April because the 2005 year of assessment would begin on 1 May 2003. There could be a considerable exposure to taxes and penalties. Any uncertainty as to the future implication of applying amnesty would be a disincentive. He urged that the finality and the purity of the amnesty should be spelt out as was the case with the exchange control amnesty.
Prof. Surtees recommended that the limit should be raised from the current R5 million to R14 million. This would be in line with the limit for small business. There should be a pro-rating of the R14 million should a business have a financial year of less or more than 12 months. The Bill did not provide for indirect interests in unlisted companies. There were many variations of business structures and more often interests were held through trusts and companies. He could not understand why amnesty was not available to individuals whose holdings were indirectly through some entities given that trust would be amnestied. The amnesty should include estate duty, donations tax and customs and excise duties. There were no particular reasons why these should be excluded. In cases where there was no trading or loss in 2005, the levy should be based on the last year in which taxable income was earned.
Ms Fubbs said that Treasury would have to respond to the submissions. Some of the points raised seemed very reasonable. It was submitted that the limit should be raised from R5 million to R14 million and that this would constitute elegant equality. She said that it sounded like elite equality. She wondered if there should be elegant equality. The question was what was the target market. Was the legislation for the small or medium businesses? She was of the view that it was for small businesses. She did not relate R14 million to small businesses. She had a problem with the suggestion to raise the limit to R14. She appreciated the fact that the suggestion was not the most serious concern for the law firm. One could have a business that employed three to five but still did not pay UIF. This was unconstitutional and went against the very grain of what the government was trying to do. Anyone who did not pay UIF should go to jail despite the amnesty clause. The presenter had asked if amnesty could be applied for in cases were a business had made a loss. It seemed that the presenter wanted to have his cake and eat it.
Prof. Surtees replied that there was a definition of small business corporation in the Income Tax Act and part of the definition was "gross income not exceedingR14 million per year". This was why one tended to think small business equalled R14 million. He agreed that people who did not pay UIF was committing a very serious offence. It was also a serious offence not to pay income tax but one could understand the emotional attachment to UIF. There was no attempt to maximise what the extent to which applicant would get away with what they had done in the past. He recognised that they would get away with something and that it was up to the Bill to decide how much. The prime reason for the Bill was to bring as many taxpayers as possible into the net. The submission had tried to identify some of the perceived disincentives to taxpayers. There were provisions that could make people to say that they had been able to avoid paying taxes for the past twenty years and that they could not afford to dig into their pockets and that they would take their chances. Every amnesty carried with it an inequity. It would be in the interest of achieving the objectives on the Bill not to introduce too many disincentives.
He said that the Bill provide that the levy would be based on a taxable income for 2005. The question was how would the levy be calculated if there was not taxable income for 2005. The suggestion was that SARS should go back to the last time that the applicant had a taxable income. There should be some basis on which the 10% would be calculated. The concern was that smart taxpayers could take up said that they had not taxable income and therefore their levy was zero.
Mr Mnguni asked why the presenter wanted a deadline to be set for the payment of the levy. He was of the view that the period of twelve months was flexible and people could pay the levy within that period. Other than costs, what would be the disincentive for business to come forward and regularise their affairs?
Prof. Surtees replied that the payment date should be crystallised and made clear. A person who had received an approval on the 31st of August hypothetically had until the 30th of November to pay. The person could still ask for an extension of time but interest would run for the extension period. The suggestion was that there should be a more focussed payment system based on the way income tax was assessed at the moment. The submission had sought to eliminate as many disincentives as possible and to encourage taxpayers to come forward.
Mr Moloto asked the presenter to give his understanding of face value. He had argued that SARS should accept application at face value. Was he saying that clause 16 of the Bill should be deleted?
Prof. Surtees replied that it was again a question of encouragement and no disincentives. Taxpayers, in the exchange control amnesty process, were confident because it was written into the Act that once they had made a submission and received an approval, the information could not be used in the future to trigger a subsequent audit or investigation by SARS. Such kind of certainty should be included in this Bill.
The Chairperson said that SARS and Treasury would respond to the submissions tomorrow.
The meeting was adjourned.
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