Pension Funds Second Amendment Bill: deliberations;Provincial Tax Regulation Bill: briefing

Mr Andrew (FSB) said that he understood their concern but felt that the situation was remedied by Clause 15B(2)(a) which specifically provided for inclusion of conditions prescribed by regulation. An additional problem was data availability. Data for some funds would be readily available and the history of these would be easily determinable. However, for funds where information is sketchy or not available at all there is a big problem. This was the area in which a more flexible approach towards the manner in which the history of a fund is taken into account is necessary. A possible solution to the problem would be to provide for strong principles that would ensure the formulation of the kind of regulations they want. All this would have to be done without being too rigid.

Mr Andrew (DP) pointed out that in terms of clause 15B(6)(d) and (e) it did not look like past members had the right to comment and object. Neither did it look as if former members have the right to be informed.

Mr Andrew (FSB) said that this was an issue which had been discussed often amongst the drafters. He said that former members should have a right to comment and object. The problem arises with the right to be informed. Here the problem is that tracking down and establishing the identities of all former members would be an impossible task. What they could do is oblige the Board to advertise in the press giving notice to all past members.

The submission from the Actuarial Society of South Africa called for an extension of the period of fifteen months in clause 15B(1)(b) to eighteen months. The FSB agreed to this change with Mr Andrew (FSB) explaining that the period of fifteen months was not cast in stone and thus they saw no reason that the extension should not be effected.

Ms J Joemat (ANC) said that she felt this extension should not be given. The clause in question provided that the Board of a fund had fifteen months from the effective date in clause 15B(1)(a) to submit a scheme. Even one year is a long time for a pensioner to wait for their money and thus this amendment should not be allowed. Ms Hogan agreed and this change was rejected.

Mr Andrew (DP) pointed out that in clause 15B(6)(b) it provided that the valuator should certify only that the exercise of discretion was done in a manner that was equitable. The question was raised as to whether actuaries were qualified to say what was equitable.

Mr Andrew (FSB) said that the actuary creed was 'Equitas'. In their schooling and training actuaries receive a fair degree of instruction on the subject of equity. Through all their practices and exercises, the actuary is trained to always provide for a delicate balance of equity.

Mr Andrew (DP) said that the situation was nevertheless still complicated as who could objectively say what was equitable in a given set of circumstances. All that one could have was a view or opinion on the subject.

Ms Hogan asked what would happen if the actuary declared that equity had not been adequately provided for.

Mr Andrew (FSB) said that in these circumstances the actuary would report this to the Registrar of the Institute of Retirement Funds. If after looking at the circumstances, the Registrar agrees with the assessment of the actuary, then the power to make such decisions can be removed from the Board and this power given to an independent board.

Ms Hogan said that in light of the serious actions which can be taken in terms of the clause, perhaps the reference to 'equitable' should be removed. This would be safer because the term 'equitable' is highly susceptible to interpretation.

The Actuarial Society of South Africa sought to delete the words "where the Board of the fund has been unable to reach an agreement within the prescribed period, or". The FSB agreed to this change.

Mr Andrew said that this made sense as if they failed to submit a scheme then the matter would go to the tribunal anyway. Ms Hogan agreed that the change made sense. However it was fine to require the submission of a report, but if they failed to reach an agreement and then also failed to approach the registrar, how would the registrar know about this?

Mr Andrew (FSB) said that the due date for all the schemes was known and that their computer system was programmed to question whether a specific report which had become due, had indeed been submitted.

The Life Offices Association had submitted that the words "of a fund" in clause 15B(1) should be deleted. Mr Andrew (FSB) said that while not legally necessary the use of these words distinguishes the Board of a fund from that of the employers.

Mr Andrew (DP) said that in the definition section the word 'board' had been defined as the board of a fund. He said that the rules of statutory interpretation needed to be taken into account. The omission of these words here could result in a consequence that the drafters had not intended. He asked if the Bill had made provision for the situation where the Board was unable to reach an agreement well before the deadline for submission of the scheme, would they be able to approach the Registrar.

Mr Andrew (FSB) said that no such provision was presently in the Bill and that Mr Andrew had made a valid point. However the problem lay in the fact that it was hard to establish when the Board was in a so-called 'deadlock'.

Mr Andrew (DP) asked what if this step was taken at the discretion of the Board.

Mr Andrew (FSB) recognised that the member had indeed made a good point and resolved to add such a section to the Bill and suggested that such a provision could be inserted at the beginning of Clause 7.

The Association of Retired Persons and Pensioners made a submission which called for the amendment of Clause 15B(3). The amendment suggested that the consideration of the history of an account in the manner prescribed in the regulations should include a requirement that actuarial surplus is used first to compensate existing pensioners for past increases that were below the level set out in the section 15K(4). The FSB did not give effect to the suggestion as the provision would then give pensioners priority over other stakeholders in having their minimum benefits introduced. Ms Hogan agreed with this and the suggestion was rejected.

The Association also called for a need of 100% of the board to approve a scheme instead of the 75% presently provided for. This suggestion was rejected for the obvious reason that this would not be practical as one rogue member of the board would be able to prevent the adoption of a reasonable scheme.

Business South Africa and the Engen Pension Fund had made submissions all calling for the removal of references to formers members. These bodies wanted the Bill to exclude former members and provide only for present members. Ms Hogan said that former members were in the Bill to stay and all the submissions from these institutions relating to the exclusion of former members were rejected.

The Actuarial Society of South Africa called for the replacement of the word 'may' in clause 15C(1) with the word 'shall' and the deletion of clause 15C(2). The change to clause 15C(1) will make it obligatory for the rules of a fund to determine any apportionment of actuarial surplus, while clause 15C(2) which provides for when the rules are silent on such a matter is to be deleted. Mr Andrew (FSB) said that this change would not be logical as legislation would have to cover the situation where the rules are not changed to provide for the apportionment. If circumstances were to arise then there would be an actuarial surplus that could not be apportioned.

Business South Africa and the Engen Pension Fund suggested changes to clause 15E which deals with the utilisation of surplus for benefit of employer. They submitted that 15E(1)(f) be replaced with a subclause that reads "payment in cash to the employer". They also called for the deletion of clause 15E(1)(g) which provides that a surplus can be used to make a payment in cash to an employer in terms of clause 15J, but only to avoid the retrenchment of a significant proportion of the workforce. Mr Andrew (FSB) said that this was a major issue of principle and that the provision as it stood was included to preserve the savings ratio and to prevent shocks to the economy resulting from substantial disinvestments. Ms Hogan agreed that the clause was necessary as it stood and rejected the submission.

Provincial Tax Regulation Bill: briefing
Mr Momoniat (National Treasury) said as background to the Bill, that the South African Constitution assumes that a unitary system is applied. This unitary system was decentralised, but still however distinct from a federal system. National Government has a strong leadership role and is responsible for macroeconomic policy. There are three spheres which are independent but still distinct from each other. These spheres then have concurrent and exclusive functions, provided for in Schedule 4 and 5 of the Constitution. The National sphere is specifically responsible for policy and norms and standards while the provinces are responsible for implementation. Mr Momoniat described this as co-operative governance.

The economic background was that South Africa was a developing country with two relatively rich provinces and seven poor ones. Redistribution between these provinces and within the provinces was an important issue. Mr Momoniat pointed out that experience has shown that 'one bad apple infects the others'. He was alluding to the need to make sure that the short comings of one province to enforce or implement a tax do not affect other provinces. He said that this could be avoided through simplicity, harmony and uniformity in the tax and regulatory systems.

Mr Momoniat shifted to a discussion of fiscal decentralization in South Africa. He said that there were tensions in the inter-governmental system. To curb this tension there had to be centralised bargaining as well as one public service. National Government would also have to determine social grants, another area that would affect the provinces. He said that conventional wisdom on decentralised fiscal arrangements would possibly not work in the developing country context.

Fiscal decentralisation was an important part of any decentralisation policy. He identified five elements to provincial fiscal relations. The first two are, institutional arrangements incorporating the constitutional and legal framework and expenditure assignment as a responsibility of each sphere of government. The other three, all dealing with financing, are taxation powers, intergovernmental transfers and grants and borrowing. He said that looking back it is easy to see that the move to fiscal decentralisation is a natural progression.

Decentralisation would be an evolutionary process where they would attempt to reap the benefits while also trying to minimize the risks. The policy approach would be to phase in fiscal powers, with the initial emphasis on the first two phases. Provinces would first get an expenditure management right before further revenue powers are given. Mr Momoniat raised the issue that there were different possible evolutionary paths which South Africa could embark on, in that SA's position could be either highly centralised or highly decentralised. He felt that South Africa had chosen the middle route as emphasis has been placed on the long-term goal of promoting transparency, accountability, efficiency, sound macro management, economic growth and development. As a result parts of the implementation process have been tailored to promote certain of the above-mentioned objectives. It would also be important to ensure that the solutions to short term problems do not foreclose options for moving in either direction. To prevent this, the initial focus would be placed on strengthening the foundations before any measure of rapid decentralisation takes place.

Mr Momoniat told the Committee that steps had already been taken towards medium-term objectives. He mentioned institutional steps, such as the Intergovernmental Fiscal Relations Act and the Budget Reforms, such as the Budget Council. Expenditure management had also been improved through the clarification of expenditure responsibilities, establishing who does what in relation to a concurrent responsibility, the promotion of accountability through the Public Finance Management Act, improving the efficiency of spending and through intergovernmental review. Other steps were taken in the area of intergovernmental grants and transfers, where the equitable share formula governs the distribution of funds and the creation of a conditional grant framework.

There were also other medium-term steps that had been initiated but were still in their infancy. These included the area of taxation, where collection from existing resources was being improved. Also new provincial taxes were in the process of being introduced. The other area where steps where in a fledgling stage was that of borrowing, where the Borrowing Powers of Provincial Governments Act had recently been enacted. Also the Treasury was currently involved in the process of assessing the current approach to borrowing. Here Mr Momoniat mentioned the Constitution of the Republic of South Africa Second Amendment Bill, which was currently being considered by Parliament. This Amendment Bill envisages a substantial change to the current position on municipal borrowing.

Mr Momoniat then gave the Committee some background information on provincial taxes. He said that the National Tax Reform Strategy sought to instill an approach towards tax which was fair, neutral, efficient, equitable, internationally competitive and would promote economic growth and development. Also the tax to Gross Domestic Product (GDP) ratio needed to be carefully established. This would be necessary if South Africa was to attract big investors.

An important issue would be the protection of the integrity of the tax system. What would have to be avoided is the irrational proliferation of taxes. Next, the base of each tax would have to be protected from excessive tax incentives. There would also have to be a measure of flexibility to enable adaptation to the changing economic environment. Lastly it would be important to ensure that redistribution is effected through expenditure while the tax policy strives to be equitable.

It would also be important to remember that the risks associated with decentralisation are great. The risk is that decentralisation might weaken the national government's ability to set and manage macroeconomic objectives, the fact that fiscal decentralisation sometimes introduced economic distortions and that there could be an accentuation of horizontal disparities. When there was a position such as in South Africa where there are poor provinces and rich ones, much care needed to be exercised.

Mr Momoniat said that in 1995 and 1996 the Financial and Fiscal Committee (FFC) produced reports which recommended that there be a surcharge on Personal Income Tax (PIT) which would be phased in over a number of years, that more tax room be given to the provinces with a 7% reduction in the national portion. The FFC reports also recommended that the provinces be allowed to choose rates within a 5% increase. The Katz Commission rejected the FFC's recommendations and spoke out against the adoption of a surcharge on PIT as the administrative cost of collecting such tax would be too great. If there was to be a surcharge in the medium-term the Katz Commission recommended that it be on fuel. It also recommended that excise taxes not be devolved. They had a positive attitude towards land and property taxes, excise on services, gambling and betting and user charges. Finally the Katz Commission was highly opposed to giving the tax room and espoused an attitude of gradualism towards decentralisation.

The Budget Council and Cabinet had decided that the surcharge on PIT would not be implemented as the associated administrative and other costs and the infrastructure that would have to be created would be too great.

The next issue was whether or not a list approach would be allowed. If there were to be a fuel levy, then the list approach would have to be allowed. The list approach was indeed allowed. The Budget Council also decided that each tax would require its own piece of legislation. The priority would be to ensure macro stability and that redistribution becomes a national responsibility.

Provincial taxes would have to improve resource allocation and a system of benefit taxation should also be used where benefits match the tax paid. It would also be necessary, where there is no direct linkage to a particular service, to ensure that the tax be broadly based. Taxes should also be relatively immobile, evenly distributed between regions and relatively stable over economic cycles. It was particularly important that taxes be immobile as if not, people just move to avoid paying that tax. He also said that the move to a destination and residence based tax would be necessary.

Mr Momoniat said that the legal background to this Bill was Section 228 of the Constitution which provided that provinces can impose certain taxes, levies, duties and surcharges on certain tax bases. The Constitution provides that this process must be regulated by an Act of Parliament and that policy oversight must be exercised by the National Government.

In light of this the approach of the Bill is that it places the responsibility on the Provinces to initiate and enact provincial tax proposals. These proposals may not prejudice national economic policies, economic activities across province boundaries, the national mobility of goods, services, capital or labour. In terms of the Bill, the Minister of Finance is to review all proposals to ensure consistency with national economic policy and constitutional requirements. The Bill also provides for the involvement of the Budget Council and the FFC. Once all these institutions have agreed on the proposal it is introduced as legislation into Parliament. This ensures that the national Assembly and the NCOP also get participation. National legislation would then be created to enable the province making the request, and other provinces, to enact the tax. This process will result, over time, in national legislation building up a list of taxes that a province may impose.

Mr Momoniat detailed how the process would work:
- A province will submit its proposal to the Minister of Finance at least ten months before the start of the budget year. These provincial proposals must include reasons and motivations for the proposed tax, the identification of key aspects of the tax, the tax administration arrangements and estimates of revenue and economic impact on the province. Another requirement would be that where relevant, this process should be completed in consultation with interested parties.
- If the proposal meets constitutional requirements, the Minister will table it at the next meeting of the Budget Council and refer it to the FFC.
- Recommendations by the other provinces and the FFC must then be made available to the Minister within 60 days.
- After considering these recommendations, the Minister will report on the status of the proposal to the Budget Council and the provinces.
- Finally if the Minister concludes that the proposal is consistent with the Constitution and National economic policy, then he will introduce it as legislation when the Annual Budget is presented.

Mr Momoniat listed the sections of the Bill and their objectives:
- Clause 1 defines the terms used in the Bill.
- Clause 2 establishes that a provincial tax must not prejudice national economic policies, economic activities across provincial boundaries or national mobility of goods, services, capital or labour.
- Clause 3 regulates the process for provinces in that they are required to submit their proposals at least ten months before the start of the financial year.
- Clause 4 states that the South African Revenue Services (SARS) be the collecting agent for a provincial tax unless another agent is designated in the legislation.
- Clause 5 clarifies the fact that current provincial taxes are exempt from the Bill. This clause also provides that amendments to the Bill may only be introduced in Parliament by or in consultation with the Minister of Finance.
- Clause 6 empowers the Minister of Finance to gazette regulations to implement the Act and to establish procedures to distinguish between user charges and taxes.
- Clause 7 provides for the date on which the Act will take effect.

Discussion
Prof. B Turok (ANC) said that he was always unhappy when people spoke of South Africa have seven poor provinces and two rich ones. This was not true as one only needed to look outside to see that there was an enormous amount of poverty in Cape Town, which was one of the two supposedly 'rich' provinces. His second point was that more data needed to be before them. In all such matters, seldom was there data to show who was actually bearing the burden of these additional taxes. What needed to be looked at was which categories of people pay tax. Without socio-economic data, this process could result in a few people bearing an inordinate burden.

Mr Momoniat said that there was a need for socio-economic data and that such information should indeed play a major role in the formulation of new provincial taxes. However, the consideration of this Bill was a phase in the process well before such information could play any part. Mr Momoniat reminded that in terms of the Constitution provinces are empowered to impose provincial taxes. The function of Parliament is to regulate this process, and the Bill before the Committee was an embodiment of that regulation function. Only once a province brought a proposal to impose a new tax, would such socio-economic data be able to have some bearing on the process.

Mr Andrew commented saying that the process needed to be looked at from a starting point that the Bill flows from a Constitutional provision. He said that the Constitution allows the provinces to tax, but within a framework. The creation of this framework is the duty of Parliament. Mr Andrew said that the Committee was not trying to negotiate amendments to the Constitution, but instead giving effect to it. Mr Andrew also said that he had a problem in that the comment had been made by Mr Momoniat to the effect that the National Government was to exercise oversight. He said that there was no such provision in section 228. He added that if parliament did have a problem with the actions of a province, if they felt that the action of such a province were unconstitutional, then the matter could be raised. Mr Andrew said that in the Bill there was a constant watering down of what the constitution provided for. Mr Andrew was referring to clause 2 which provided that "a provincial tax must not materially or unreasonably prejudice a number of national interests. Mr Andrew pointed out that the Constitution, in section 228, contained similar words but read "materially and unreasonably". He said that the position in the Bill could not be allowed because if Kwa-Zulu Natal lowered its prices to attract more tourists, and it indeed achieved this, it would materially prejudice the other provinces. He added that however material this prejudice might be, it cannot be said to be unreasonable.

Mr Momoniat conceded that Mr Andrew had made a very good point. He also said that the disparity between the Bill and the Constitution was the result of oversight and would be corrected immediately.

Mr Andrew said that looking at clause 3 there are a number of requirements placed on the content of proposals for new taxes. The clause requires quite a lot of information on the proposed tax. Mr Andrew admitted that perhaps these requirements were necessary, but at the same time he felt that what was provided for in the Bill qualified as more than just the regulation of this area in terms of section 228(2)(b). Mr Momoniat said that he agreed with Mr Andrew's observations, saying that he felt the Treasury had not worded the Bill ideally. He however also stated that in his opinion the Bill constituted the legislation that was required in terms of section 228.

Mr Khahla, a drafter from the Treasury Department said that some of the comments on this matter had been taken to heart, specifically those made by the Western Cape Provincial Government. One such concern was that which came from Idasa, which pointed out that although the Bill comes from section 228 of the Constitution, it makes no mention of a provinces specific power to tax.

Mr Khahla also pointed out that in the Bill as it was published for comment, the wording created the impression that the Minister of Finance had a veto power over tax proposals. Since this, the drafters have made it very clear in the Bill that if the proposal complies with section 228 of the Constitution, then it must be tabled at the next meeting of the Budget Council.

Mr Andrew said that he wanted to point out a difference in approach between himself and that of Mr Momoniat. He said that Mr Momoniat had earlier said something that revealed his approach to the Bill. Mr Andrew was referring to a comment by Mr Momoniat that the imposition of a surcharge on PIT would be bad. Mr Andrew said that he did not disagree with Mr Momoniat's view but the fact of the matter was that this was irrelevant. The provinces could if they wanted to impose such a surcharge. The only function of Parliament would then be to regulate this area. He said that this was the starting point from which the Bill needed to be formulated.

Mr Momoniat said that he agreed and that he was not referring to the banning of such surcharge. This matter would be discussed at a later stage of the process. Mr Khahla added that Mr Momoniat was only expressing a view and that the Bill did not preclude the imposition of such a surcharge.

There were no more questions or comments from the members at this point. Ms Hogan then said that the Bill was a section 76 Bill and would go through the NCOP once they were done with it. Ms Hogan noted that the process seemed anomalous in that the Bill went to the NCOP after they had seen it. She said the Committee would profit if Bills such as this one were to go through the NCOP before it came to them. This would be ideal as the Committee would then also have the input of the members of the NCOP when considering the Bill.

The meeting was adjourned.