A summary of this committee meeting is not yet available.
FINANCE PORTFOLIO & SELECT & JOINT BUDGET COMMITTEES
17 October 2006
REVENUE LAWS AMENDMENT DRAFT BILL: BRIEFING
Chairperson: Mr N Nene (ANC)
Document handed out:
South African Revenue Service and National Treasury Presentation on Revenue Laws Amendment Bill 2006
Draft Revenue Laws Amendment Bill as of 29 September 2006
The South African Revenue Service and National Treasury took the Committee through its proposals for changes to the Revenue Laws Amendment Bill 2006. The first was in research and development. South Africa’s spending on in research and development was very low so the incentive in the Bill was meant to encourage spending in line with broader Government objectives. How the incentive would work would be the increase in the deductible expenditure from 100% to 150%. A key challenge South Africa faced was the mismatch between employer needs and employee skills. In this regard, employees could receive tax-free training bursaries under certain conditions.
South Africa had maintained a special fiscal incentive/stability regime for oil and gas exploration and production known as OP26 for over 30 years. Government intended to formalise key aspects of OP26 into explicit law (within the 10th Schedule to the Income Tax Act as opposed to agreements outside the tax code), thereby creating transparency and certainty for oil and gas exploration/production.
With regard to Public Benefit Organisations since 2001 the Government had amended the provisions that related to the Income Tax status of Public Benefit Organisations. One proposal was applying a flat rate of 34% for excess trading activities regardless of the form of the Public Benefit Organisation. Under another proposal, excess funds could be freely invested in any form of passive investment.
Recreational clubs currently received complete exemption from Income Tax with few restrictions. This exemption was questionable in an environment with a high degree of disparity between rich and poor. The proposal here was for the clubs to become subject to a system of partial taxation.
Restructuring of the electricity distribution sector would involve the transfer of assets from Municipalities and Eskom to the Regional Electricity Distributors (REDs). REDs would be exempt from Income Tax up to 2014, at which a review would be undertaken and they were allowed to account for VAT on a payment basis.
All the countries that had placed a bid to host the 2010 World Cup were required to sign a number of guarantees ranging from visa requirements to safety and security. There were also two guarantees required in terms of taxation. Following South Africa’s successful bid, Treasury, FIFA and the South African Revenue Service came up with a Memorandum of Understanding that contained the provisions of the tax-related guarantees.
Under current law, interest and royalty payments within a group of Controlled Foreign Companies were disregarded. This proposal allowed this exemption to be elective because some taxpayers preferred a corresponding matching of deductions and income for foreign tax law purposes. The matching rule was also clarified to ensure matching existed for all intra-group Controlled Foreign Companies Controlled Foreign Companies situations.
The exemption for business travel allowances was currently set by the Minister. The uniform system of rates for all foreign travel was unrealistic because different countries had different travel costs. The Bill accordingly allowed foreign rates to be set on a per country or per region basis.
The Revenue Service could withhold refunds that cost more to issue than the capital payout. This level was initially set at R100 but the Commissioner could increase the level. Held back funds also accumulated interest. The proposal also added a cut-off that prevented SARS from raising additional assessments.
No specific provision existed to regulate the examination of goods by means of non-intrusive equipment such as x-ray scanners. The proposal was to enable an officer to examine goods by non-intrusive means also in the absence of any person who had control of the goods.
Mr Cecil Morden, a Chief Director of Tax Policy at the Treasury, began by going through some of the major amendments. The first was in research and development (R & D). The benefits of R & D expenditure spilled over to other parties and it was difficult to exclude others from using the outcomes of the research as once a patent had expired it became public goods. R & D activities were risky, costly and the outcomes were uncertain. On the other hand, they contributed to productivity, competitiveness, economic growth and skills development.
South Africa’s spending on R & D was very low so the incentive in the Bill was meant to encourage spending in line with broader Government objectives. The national R & D strategy was adopted in 2002 with a target of R & D spending of 1% of GDP and increasing it to 2%.
How the incentive would work would be the increase in the deductible expenditure from 100% to 150%. This would apply only to R & D activities undertaken in South Africa and they must be of scientific or technological nature for the purpose of new discoveries and inventions. The depreciation allowance related to capital expenditure was changed from the current four year write-off period (40: 20: 20: 20) to a three year period (50: 30: 30). A full deduction would be given for expenses incurred in obtaining or renewing a patent and the registration or extension of any design.
However, expenses for exploration or prospecting; management or internal business processes; trademarks; social sciences or humanities; market research or marketing promotion would not be deductible. If the taxpayer outsourced R & D to an independent contractor, only the owner would receive the R & D incentive.
Mr Edward Liptek, a Chief Director of Tax Policy at the Treasury, said that if the taxpayer received a Government grant to partly fund R & D expenditure, the 150% would be allowed
Only to the extent that the total R & D expenditure exceeded an amount equal to twice the amount of that Government grant. If the grant was taxable, expenditure that did not exceed twice the grant was deductible only at 100%. If the grant was tax-free, R & D expenditure equal to the grant was deductible only at 100%.
For monitoring purposes, taxpayers would be required to report additional information to the Department of Science and Technology (DST) (the type of information, form and location of this reporting was to be determined by the DST).
Mr Morden carried on and said that a key challenge South Africa faced was the mismatch between employer needs and employee skills. In this regard, employees could receive tax-free training bursaries under certain conditions. Their proposal was to give tax-free employee bursaries if those bursaries were part of a salary sacrifice. Employers could fully deduct bursaries even if viewed as a salary sacrifice. This proposal eliminated any potential uncertainty. It was also subject to an agreement that the employee would repay the money if they were unsuccessful due to ill health or death.
Mr Liptek said that a special withholding tax regime was introduced in 2000 to discourage employers from artificially providing services through corporate entities (Personal Service Entities [PSE]) in order to reduce their tax liabilities. This special regime penalized these PSEs by accelerated tax payments and increasing effective tax rates. After consultation with various stakeholders, it was established that this regime negatively affected legitimate small businesses.
According to clause 44 and 17(d), companies/trusts were subject to employee monthly withholding if they qualified as a PSE. The PSE status no longer existed merely because the client controlled and supervised the manner of the SME’s work (unless the work must be mainly performed at the client’s premises). Safe harbour from PSE status now existed if that PSE had a minimum of three employees (as opposed to the four-employee minimum). (The employee minimum for the SME business relief was similarly reduced).
Clients of SMEs could be relieved of any withholding tax responsibility by good faith reliance on an affidavit by the SME that the SME was not a PSE. PSEs could also deduct more than the salary. They could deduct items such as business premise expenses, pensions and medical scheme contributions. The standard 34% withholding rate for PSEs could be reduced to a more realistic final tax liability level upon receipt of a South African Revenue Service (SARS) directive.
With regard to co-operatives in clause 17, Mr Liptek said that in 2005 the Department of Trade and Industry enacted the new Co-operatives Act to facilitate the operation of co-operatives. However, the Income Tax Act needed to be updated in line with this Act and there was a need to incentivise co-operatives in line with international practice.
As an initial step, the Income Tax Act (ITA) was being amended so that co-operatives could qualify for the small business relief. As present, SME’s could not hold equity interests in unlisted entities to prevent income-splitting tax schemes but it was proposed (s12E(4)) that they be permitted to hold membership in non-business co-operatives and friendly societies. Due to the diversity of co-operatives, further amendments were contemplated.
Mr Morden then said that South Africa currently obtains its transport energy needs from the following sources: imported crude; coal-to-liquids; gas-to-liquids and local offshore crude. Local offshore oil and gas deposits that were being currently exploited were nearing the end of their lives. South Africa had maintained a special fiscal incentive/stability regime for oil and gas exploration and production known as OP26 for over 30 years.
The purpose of OP26 was to create incentives and certainty for potential investors to encourage exploration given the limited known oil and gas deposits on and offshore. OP26 was meant to expire in June 2007 and this was impending expiry was delaying key exploration activities off South Africa’s South and west and south coasts. Government intended to formalise key aspects of OP26 into explicit law (within the 10th Schedule to the ITA as opposed to agreements outside the tax code), thereby creating transparency and certainty for oil and gas exploration/production.
Mr Liptek said that clause 65 covered the upstream oil and gas incentives. The incentive applied to any company that either holds or leases oil and gas “new order” rights; or engaged in oil and gas exploration/production or gas refining, but the company could not engage in any other trade. The incentive applied to both domestic and foreign companies.
In terms of the maximum corporate tax rates (10th Schedule, para 2), rates for domestic gas and oil companies could not exceed 29% and those for foreign companies could not exceed 32.38%. the current tax on secondary companies could not generally exceed 5% and the pre-existing OP26 rights holders generally received the benefit of a 0% limitation. Exploration capital expenditure (capex) received an immediate 200% write-off and production capex received a 150% write-off.
Capex and operating expenditure (opex) could be freely deducted during the start-up phase and any other associated finance charges could be similarly deducted. Capex and opex losses generally could only be used against oil and gas production income or gas refining income. However, 10% of any unused excess above the ‘ring-fencing’ could be freely deducted (against investment income). All unused losses could be carried forward.
Oil and gas companies that transferred “new order” rights at a gain could elect to be taxed under the normal rules, under the rollover election or use the participation election (10th Schedule para 7(1)). In the rollover election, the seller had no gain and the buyer obtained the seller’s tax cost. In the participation election, the seller was taxed on the gain at ordinary rates (29%) and the buyer could claim an immediate 100% write-off.
In terms of forex, oil and gas companies could freely use foreign currency free of tax if that currency was used for financial reporting. The thin capitalisation anti-avoidance rules against excessive foreign debt were restricted.
He then said that mining companies had to make long-term financial provision for environmental rehabilitation on closure in terms of the Mineral and Petroleum Resources Development Act (2002). Methods of financial provision included setting reserves aside in a rehabilitation fund. Contributions to these funds were currently tax deductible and the growth accumulated was tax-free. These incentives for set aside reserves operated as an incentive for environmental rehabilitation.
Clause 29 (and 13(1)(f-g), 14(1)(b)) expanded the list of parties who could make deductible contributions to rehabilitation funds to include holders of mineral rights, parties engaged in mining/prospecting without mineral rights and other subjects subject to the Commissioner’s approval. All contributions to valid funds were deductible and as quid-pro-quo for the above relief, the rules that prevented impermissible withdrawals were tightened.
Mr Morden then dealt with retirement fund issues in clauses 4(1)(o) 42 and 43. Individual funds could not be withdrawn before the age of 55 to ensure retirement savings. However, administrative fees could eliminate any growth (or the funds themselves) if the funds were small. The Minister would be given the power to regulate all de minimis withdrawals with the level set by way of Gazette Notice.
For post-retirement employer benefits, in 2001, Government agreed minimum benefits (out of employer contributions). Among other impacts, this guarantee required the surplus to be apportioned to ex-fund members. Ex-fund members now had a choice when receiving these post-retirement benefits. They could withdraw the benefits and be subject to tax or rollover those benefits into another retirement fund free of tax.
With regard to Public Benefit Organisations (PBOs) since 2001 the Government had amended the provisions that related to the Income Tax status of PBOs. The proposed amendments addressed some of the anomalies by creating financial sustainability for PBOs, encouraging foreign charitable donor support into South Africa and easing any undue administrative burdens on the PBOs.
One proposal was applying a flat rate of 34% for excess trading activities regardless of the form of the PBO. The system would be neutral as to whether the PBO conducted the activity directly or through a separately controlled company or trust. It would be administratively easier to track trading activities in a separate vehicle.
The second proposal was that eligible PBOs could now assist (via loans) households that earned in excess of R3500 with the rate set by the Minister and the housing PBOs could provide guarantees. Contributions by conservation, environment and animal welfare PBOs were now deductible.
The third proposal was that foreign PBOs could receive Income Tax exemption (as well as a possible VAT zero rating) like domestic PBOs. They had to prove their PBO status existed in the foreign home country and only South African located assets had to be transferred to South African PBOs if the foreign one liquidated (not the foreign PBO’s worldwide assets). Donations to foreign PBOs however, would not be deductible.
Mr Liptek said that the fourth proposal concerned permissible investments. If PBOs had excess funds, current law limited the range of permissible passive investments (some of which required Financial Services Bureau approval). Under the proposal, excess funds could be freely invested in any form of passive investment. However (section 30(1)(b)(ii)), excess funds could not be invested in a manner that acted as a disguised distribution of funds to a member of the PBO nor could the funds be invested abroad.
The fifth proposal was that PBOs that sought exemption no longer needed approval from the Non-Profit Organisation controlled by the Department of Social Welfare. However, SARS could withdraw exempt PBO status if that PBO committed an offence under the Non-Profit Organisations Act (and the Department requested withdrawal). Partially taxable PBOs (those with significant trading activities) would not be subject to provisional tax withholding.
Recreational clubs currently received complete exemption from Income Tax with few restrictions. This exemption was questionable in an environment with a high degree of disparity between rich and poor. The proposal here was for the clubs to be become subject to a system of partial taxation. They would only qualify for exemption to the extent that their activities merely represented a sharing of expenses by members through membership fees; member payments for club facilities, amenities and services; occasional fundraisers undertaken substantially with voluntary assistance and up to R20 000 from other sources. Operating and investment revenues generated from outside sources would now be generally taxable (at a rate of 34%).
Clubs were granted rollover relief from capital gain taxation on the sale of property used to produce exempt club income to the extent that those sale proceeds were fully reinvested in property assets used to produce further exempt club income (8th Schedule para 65B). to the extent that the clubs engaged in taxable activities, they were not subject to provisional tax withholding until 2010 or a later date set by SARS (4th Schedule para 1).
To apply for the partial exemption, clubs had to receive SARS approval in terms of the initial constitution plus amendments. They could not operate like normal private companies. they had to operate in a non-profit manner; could not distribute surplus funds during the club’s lifetime; on termination they could only distribute funds to other clubs, PBOs and the Government and they could not pay excessive salaries nor make payments based on percentages of club revenues. All members must be entitled to club membership for a minimum of a year. The Commissioner must also be satisfied that the club was not engaged in tax avoidance.
If a club’s constitution violated tax requirements or actions of the club violated tax requirements, SARS could withdraw the partial tax-exempt status. SARS had to first notify the club of the intent to withdraw the status so that the club could take corrective measures. Only once insufficient corrective steps were taken could the withdrawal occur. Clubs with ‘withdrawn’ status had to transfer all of their assets to a valid club, PBO or to the Government. If neither corrective steps nor a transfer occurred, the club would be subject to Income Tax on the market value of all held assets as if received during a single year.
Currently, existing clubs needed SARS approval for the exemption but this approval had been delayed due to weaknesses in the current legislation. If these clubs applied for approval before the 31st of March 2011, they could obtain partial exemption from 2007 going forward like other clubs and retroactive approval of all previous existing exemptions.
Mr Morden then said that the tax regime/status of public and municipal entities had long been subject to a series of ad hoc rules. Initiatives had been undertaken over the past two years to clarify the VAT treatment of grants and other payments to public entities. The focus was now on the ITA. Other public entities would be reviewed in next year’s amendments.
All A, B and C Municipalities would remain tax exempt an other old-style references to old style structures would be deleted with a similar rule existing for Transfer Duty and VAT. All water boards would be exempt regardless of form. Also, all foreign Municipalities, provinces or national Governments would be exempt. However, foreign agencies were not exempt unless they were dedicated to official development assistance. Foreign employees of exempt foreign agencies were exempt, as were foreign employees of foreign Governments.
Restructuring of the electricity distribution sector would involve the transfer of assets from Municipalities and Eskom to the Regional Electricity Distributors (REDs). REDs would be exempt from Income Tax up to 2014, at which a review would be undertaken and they were allowed to account for VAT on a payment basis.
Traditional communities would be explicitly exempt until a date determined by the Minister and the three possible grounds of exemption under current law would be removed. Annual mineral royalty payments to communities were currently deductible as paid over the life of the mine. Advanced mineral royalty payments to communities would be deductible over the life of the mine as if paid over the life of the mine.
Mr Liptek said that a number of domestic grants were exempt from Income Tax under current law. These would remain. At issue was whether taxpayers could use these grants for further Income Tax benefits. Their proposal was that there should be no “double dipping.” That is, funds from exempt grants could not be used to obtain further deductions, depreciation or base cost for capital gains purposes. The Minister could allow for “double dipping” by explicit notice in the Government Gazette (GG) (while adjusting the cash grant accordingly).
Mr Morden said that in terms of the scrapping payments grants, Government payments for assets were generally taxable under current law. The proposal was to have Government payment for assets solely for destruction and scrapping of diseased animals would be exempt by Government notice. The “double dipping” rules would apply here also. The Government payments would have a VAT zero rate.
The long-awaited Taxi Recapitalisation Programme would become reality in the next few months. Amendments to the ITA were proposed to ensure that the R50 000 allowances did not create a tax liability in the hands of the recipient.
Mr Liptek then said that both foreign and domestic contractors could receive tax-free revenues for goods and services in respect of outright foreign assistance (clause 13) if the assistance was part of an umbrella Official Development Assistance between South Africa and a foreign Government/multinational organisation; the project was approved by the Minister of Finance after consultation with the Minister of Foreign Affairs; the umbrella agreement required exemption and the exemption was announced by the Minister of Finance in the GG. The same “double dipping” rules applied, foreign assistance could be zero rated for VAT and foreign employees of multinationals were exempt to the extent that the employees were delivering foreign assistance.
In a minority of situations, the foreign donor could generate revenue from proving the assistance, and the tax system would exempt all spheres of the foreign Government or developmental agencies. Multinationals could be exempt under the same conditions as contractors receiving foreign assistance revenues.
Mr F Tomasek, the Assistant General Manager of Legislative Policy at SARS, then went through some interesting aspects of the new General Anti-avoidance Rule (GAAR). For example, one of the new tests was a “lack of commercial substance” test where five indicators would help the courts to identify this deficiency in certain transactions. SARS also introduced a new ‘notice requirement’ where SARS had to give taxpayers notice of possible application of the GAAR and reasons for believing why it was applicable. The taxpayer then had 30 days to give reasons why it should not be applied to them. SARS could also request additional information or apply the GAAR if the taxpayer did not supply reasons or was not satisfied with those given.
Mr Morden then said that all the countries that had placed a bid to host the 2010 World Cup were required to sign a number of guarantees ranging from visa requirements to safety and security. There were also two guarantees required in terms of taxation. Following South Africa’s successful bid, Treasury, FIFA and SARS came up with a Memorandum of Understanding that contained the provisions of the tax-related guarantees.
FIFA and its subsidiaries; FIFA national associations; FIFA affiliated partners, operators and media associations amongst others were allowed to import World Cup goods free of import taxes. Also free from import taxes (Schedule 1, part VI and Schedule 2) were trading stock for resale or re-exportation; samples of trading stock not for resale, distributed at a site or re-exported; capital goods and promotional material and household effects of a person seconded to the country for the World Cup among others.
Mr Tomasek continued and said that other tax aspects of the guarantees involved the exemption (and partial exemption) from tax of certain persons. FIFA, its subsidiaries and its national associations (except SAFA) were wholly exempt. FIFA’s commercial affiliates; licensees; merchandising partners; providers; concession operators and flagship store operators (among others) were partially exempt.
The wholly exempt entities would be treated in a similar manner to diplomatic missions for VAT refunds in respect of goods directly connected to the Cup. There were some specific exclusions however: embedded taxes such as fuel levies and excise duties, where match tickets, accommodation or off-site hospitality was sold by any of the wholly exempt entities, VAT had to be levied and FIFA was to withhold UIF and the Skills Development Levy from its employees.
The partially exempt entities were essentially FIFA sponsors and the exemption operated in limited areas and periods of time (a “tax-free bubble”). Gods and services sold within designated sites would be free of Income Tax and VAT. However, expenses related to such sales would not be allowed as deductions for Income Tax purposes. The “tax-free bubble” concept was limited to the stadia, one week before the Cup until the closing ceremony for both the Confederations and World Cups; training sites on official FIFA sanctioned training days; official host city public viewing venues, on Championship days only and the FIFA flagship store, six months before the 2009 Confederations Cup until one month after the closing ceremony of the 2010 showpiece.
Income derived from non-residents in connection with staging the championship would not be subject to Income Tax. These included the FIFA delegation; referees; all commercial affiliate staff; all merchandising partner staff and designated service providers’ staff among others. However, team members; directors and personnel of SAFA and directors of the Local Organising Committee would be subject to Income Tax on income derived in connection with the Cup.
Any person abusing any of the exemptions or concessions could have that exemption withdrawn in whole or in part by SARS in consultation with FIFA, from the date the exemption or concession was first granted (Schedule 1 part VIII). The proposed legislation was to come into effect retrospectively from the 1st of April 2006.
Tickets and hospitality services (including hotel accommodation) would be subject to VAT at the standard rate (14%). Some of the VAT revenue collected from the sale of tickets would be made available via the budget of the Department of Sports to subsidise the ticket prices for some of the local supporters.
Mr B Mnguni (ANC) asked if the Government was subsidising gas and oil exploration companies.
Mr Liptek replied that South Africa did not have extensive oil and gas reserves so incentives were needed to get companies to explore here, for example for capital outlays.
Mr Y Bhamjee (ANC) asked if there had been any agreement with FIFA on the Bill. What would happen if the Committee wanted to change some of its provisions?
Mr Morden replied that SARS had been very hard in the negotiations with FIFA. The concessions on the table were very tight in terms of duration and content. The Memorandum of Understanding had been agreed to in principal by FIFA but it still needed to be “signed off,” but it would look very bad for the country if SARS reneged on the agreement. SARS and the Treasury would do everything they could to ensure that it did benefit South Africa.
Dr Van Dyk (DA) asked why market research was not included in the list of deductible expenses. He said that there was a need to make exploration for new sources of energy attractive. Why not reduce tax to 29% for instance?
Mr Tomasek replied that market research was excluded because R & D was aimed at developing something that benefited the whole society, whereas market research would only benefit the company undertaking the research.
Mr I Davidson (DA) asked to what extent the R & D incentives helped SASOL as they only seemed to deal with exploration and not production. Why was there this distinction? Why could the rates for foreign companies not exceed 32.5%. How did they arrive at the figure of 34% for PBOs and clubs? Would it not be better for them to incorporate themselves and become companies?
Mr Liptek replied that SASOL did not do any producing and there were not any incentives for refining as they were not necessary, and this is what SASOL was involved with. The distinction was made because of the Secondary Tax on Companies (STC). That is, South Africa had no jurisdiction to impose STC on foreign companies, so imposed a rate of 32.5% in lieu of the STC.
Mr Tomasek continued and said that PBOs could do business in their own hands or they could establish a subsidiary. If they used a subsidiary they would pay a 29% rate of tax and they would also have to pay STC as well on any disbursements. If they incorporated themselves, they would lose a number of exemptions they applied for now.
Mr B Mkhaliphi (ANC) asked how many categories of Municipalities entities were included in the exempt group.
Mr Morden replied that only the water and electricity entities were exempt from Income Tax. The rest had to pay.
Ms E Sogoni (ANC) asked why REDs were receiving exemptions until 2014.
Mr Morden replied that in principal, REDs were outside of the Government and should be taxable just as Eskom was. However, they decided that the REDs would be exempt as the provided a similar service to Eskom’s, but they did it in a different way.
Mr Liptek then dealt with some issues regarding Controlled Foreign Companies (CFCs) (clause 12(c) and (f)). Under current law, CFC operations did not trigger tax to the extent that those operations qualified as a foreign business establishment. The foreign business establishment rule was being liberalised so more businesses could qualify.
CFC “diversionary” transactions triggered tax even if it was part of a foreign business establishment. They were cross-border transfers with nominal business activity in the country of residence. The proposals here were to clarify “delivery.” It meant the physical delivery to the client’s premises, and not to the in-transit drop-off point.
Services would be diversionary if those services were mainly rendered for the benefit of clients having local premises (9D(9)(b)(ii)(cc)(C)). Services to a South African participating shareholder would not be considered diversionary if the South African shareholder did not receive a corresponding deduction for those services. Also, the “country of residence” definition was clarified to mean “effective place of management.”
With regards to rulings relief, at present CFC foreign business establishments would be subject to tax if they ran afoul of the objective criteria of tax avoidance risk via the “diversionary rules.” The proposal was for SARS to have the discretionary power to override the diversionary rules if the CFC activity was subject to foreign tax at a level that equalled at least 2/3rds of the hypothetical South African tax or the CFC was operating as a central location for at least two contiguous foreign countries. SARS could only provide this override if it was satisfied that the exemption would not lead to an unacceptable erosion of the tax base.
In banking, CFC treasury operations did not receive the business establishment exemption for CFC investment income unless it was part of an active bank, financier or broker. The proposal was to delete the dealer exemption. Also, under the current law, banks qualified for exemption only if their operations were mainly conducted within the CFC’s country of residence. Other proposals were to eliminate the “mainly” element and to give SARS the power to disregard activities outside the country of residence if those activities qualified as a taxable permanent establishment in the country of activity.
Under current law, interest and royalty payments within a group of CFCs were disregarded. This proposal allowed this exemption to be elective because some taxpayers preferred a corresponding matching of deductions and income for foreign tax law purposes. The matching rule was also clarified to ensure matching existed for all intra-group CFC situations.
Under current law, company redemptions were treated like taxable dividends. Foreign collective investment schemes that operated as a company often had rules that allowed members to leave their schemes only via redemption, thereby triggering a foreign dividend subject to tax at the top marginal rate. The proposal here was for the dividend-redemption rule to not apply to redemptions by collective investment schemes. Hence, the ordinary rate regime did not apply.
Under current law, foreign persons received South African interest tax-free (clause 13(1)(m)). The proposal was to extend this exemption to include “deemed interest.” Companies were currently taxed on their foreign currency gains and losses on an annual market-to-market basis. The proposals were for hedges to be tax exempt if they were used to freeze the foreign currency rate for the purchase of foreign shares in a large scale acquisition and the loss/gain was deferred for Generally Accepted Accounting Practice (GAAP) purposes. All deferred losses/gains would be added to the gain/loss on any subsequent taxable sale of the foreign shares. The rule also applied when one South African member of a group of companies hedged for the purpose of foreign shares by another South African member and the gain/loss was deferred on consolidation.
With regards to company reorganisations, companies with excessive financial instruments could not be part of a tax-free reorganisation because the reorganisation rules were designed to facilitate business restructurings, not investment restructurings. Short-term (less than a year) instruments were ignored for this test.
Mr Tomasek then said that taxpayers could not deduct the same expense more than once (unless a specific incentive existed) (s23(B)(3)). The proposal clarified that taxpayers could not avoid the double deduction rule by claiming the same deduction in different years. With the repo scheme in s24J(5), the proposal clarified that this same denial of a double deduction existed for repo (sale and repurchase) transactions.
In prior years, anti-avoidance rules were created to prevent the swap of tax-free dividend income with taxable interest to artificially reduce tax (with the tax exempt party receiving the taxable interest and the taxable party receiving the tax-free dividends). The rule was amended to prevent indirect swap schemes. It was proposed that the anti-avoidance rule be further widened to prevent the latest round of more attenuated swap schemes.
The exemption for business travel allowances was currently set by the Minister. The uniform system of rates for all foreign travel was unrealistic because different countries had different travel costs. The Bill accordingly allowed foreign rates to be set on a per country or per region basis. The responsibility for setting the travel allowance rate would shift to the discretion of the Commissioner to facilitate administration.
Under current law, an employee’s receipt of unrestricted shares/options of an employer, were fully subject to tax based on the market value of those shares/options (clause 10). Market value was very hard to determine for unlisted shares, so they required simple default rules. The Bill now provided a default rule or definition of market value.
Current law was unclear as to the base cost of assets received in terms of foreign inheritance. The proposal treated these assets as having a market value base cost upon receipt. Inherited assets received by spouses were exempt and those received by other parties were taxable. Sometimes the spouse wanted to swap some inherited assets for others but the swap triggered a capital gain. It was propose that assets received by a spouse in the swap be treated as if received directly from the deceased, that is, being tax-free.
Within SARS’ own administration (clauses 36, 40, 49), it was clarified that one can rely on a timely valuation, with SARS consent, for Capital Gains Tax (CGT) even if that valuation was not submitted with the relevant income tax return. In 2004, Government announced that foreign sellers of South African real estate would have their sale proceeds subject to immediate withholding. The proposed amendment sets this date at 1 September 2007.
SARS could withhold refunds that cost more to issue than the capital payout. This level was initially set at R100 but the Commissioner could increase the level. Held back funds also accumulated interest. The proposal also added a cut-off that prevented SARS from raising additional assessments.
Mr Liptek then said that the ITA allowed the Commissioner to delegate powers to SARS officials. They proposed that the Minister be given similar powers to delegate to Treasury officials. SARS could not generally disclose information to the Treasury except on an aggregate level. It was proposed that Treasury has access to information from all Government controlled entities.
The ITA currently applied a 12 nautical mile limit for determining South African source activities of the South African coast-line. This limit would be extended to a 200 mile limit, and this would ensure that al oil and gas subject to South African mining regulations were treated as South African source income and loss.
With regards to excess payments, if a vendor received payments in excess of the consideration charged, VAT treatment of the excess payments was not clear. Where the excess payments were of a temporary nature no action was proposed, but where the payments were not going to be offset against the next statement or would not be refunded within a period of three months, the vendor would have to account for VAT on such payments. VAT refunds would be allowed on entertainment expenses incurred in the case of overnight travel by independent agents.
Mr Morden said that the zero rating of movable goods under a rental agreement, charter or agreement for chartering had been clarified. Movable goods used in a customs controlled area (CCA) by a customs controlled area enterprise (CCAE) or an Industrial Development Zone (IDZ) operator could be zero-rated. Clarification that the supply of movable goods (excluding motor vehicles) at the zero-rate would only apply to such goods that were supplied and physically delivered by the supplier or was a VAT registered cartage contractor to a CCAE or an IDZ operator in a CCA.
It was clarified that only services that were physically rendered to a CCAE or an IDZ operator in a CCA could be zero-rated. The proposal allowed a vendor to supply fixed property situated in a CCA, or the right to use or the granting of permission to use such fixed property under any rental agreement at the zero rate to a CCAE or an IDZ operator.
With regards to contractor entertainment (clause 114), Mr Liptek said that vendors could not normally claim input credits for employee entertainment expenses. However, they could be claimed by employers for overnight employee travel. These claims would be extended for overnight travel entertainment payments to independent contractors.
Vendors normally had to provide a VAT invoice to claim a refund for deemed purchases. It was proposed that the invoice requirement be waived for notional purchases such as real estate from non-vendors. The current de minimis threshold for records in terms of second-hand goods would be raised from R20 to %50 (or an amount determined by the Commissioner). SARS would also issue additional VAT statements and the VAT rulings had to be co-ordinated with new advance ruling system.
Mr Tomasek said that under the current law for CCAs, customs laws did not specifically empower the Commissioner to designate areas as CCAs through which the movement of persons and goods could be controlled. The proposal was to grant the power and to specify the limits thereof and, after consultation with the relevant person or authority concerned, secure those areas.
Also, no specific provision existed to regulate the examination of goods by means of non-intrusive equipment such as x-ray scanners. The proposal was to enable an officer to examine goods by non-intrusive means also in the absence of any person who had control of the goods. Offences could be created regarding access to restricted areas where non-intrusive equipment was used and for any actions aimed at preventing x-ray scanners from reflecting a true image of scanned goods.
Customs officers could affix seals to goods or vehicles under the general provisions of the Act. In order to further secure goods under customs control, legislation was proposed to require logistics operators to affix seals to containers and vehicles. The seals had to be affixed in a manner, and comply with the standards, imposed by the Commissioner.
Facilities for the control over imported or export goods were (with some exceptions) not licensed, but were merely appointed. Extensive provisions were made for the licensing of container terminals, combination terminals, road vehicle terminals, bulk terminals and transit sheds. Requirements were also imposed that related to the control over the storage and movement of goods in the licensed facility, the liability of the operator, record keeping and security.
Currently, mandatory electronic communication was not prescribed for any class of persons. As a result of increased automation designed to cater for faster business processes and increased needs for risk profiling, certain classes of carriers, logistics providers and other declarants were required to communicate electronically with SARS.
With regards to Estate Duty, SARS would have the same power as other tax Acts in terms of the appointment of Estate Duty Collecting Agents. Agents were parties who held cash on behalf of the taxpayer (or who were indebted to the taxpayer). SARS could require these agents to withhold taxpayer moneys on SARS' behalf.
The meeting was adjourned.
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