Documents handed out:
National Treasury Powerpoint Presentation: SADC Finance and Investment Protocol
Reserve Bank presentation on Committee of Central Bank Governors
National Treasury Briefing on Municipal Fiscal Powers and Functions Bill
SADC Finance and Investment Protocol
Audio Recording of the Meeting
National Treasury briefed the Committee on the brief background and history of the Southern Africa Development Community (SADC), the process of protocols and ratification. It then outlined the details of the SADC Finance and Investment Protocol. SADC was intended to develop regional cooperation as a tool to sustainable and equitable growth and development. The institutional arrangements in SADC were highlighted. It was explained how the process of Memorandums of Understanding operated. The process to develop the Finance and Investment Protocol commenced in 2006 and ten heads of state had now signed it. The first part contained the general declarations and there were Annexes dealing with specific subjects. It would need to be ratified in order to be fully implemented. The cost implications were as yet unknown, but could be quantified at a later stage. The Annexes of the Protocol were tabled and discussed at length for the information of the Committee, and tied in with the aims of the SADC. The areas covered included the objectives, macroeconomic convergence, taxation cooperation, development and capacity building, tax incentives between member states, tax competition, fiscal evasion and double taxation, and building up infrastructure to support trade. There was a dispute mechanism. Development finance institutions were covered. A general framework for cooperation between regulatory authorities and cooperation of stock exchanges was included. The challenges were set out. It was stressed that South Africa was in a position to be a strong champion and urged that it should ratify the Protocol and expand the process to the private sector.
The SA Reserve Bank briefed the Committee on the Committee of Central Bank Governors and its role in relation to the Protocol. Details were given of the role and function of the Committee, emphasising good management of banks and markets, monitoring of investment and foreign exchange. The different cooperation agreements were set out. It was aimed to implement a Central Bank by 2016 in the SADC region and to try to achieve a single currency. It was important that task implementation be allocated according to expertise and capacities within the institutions.
Members raised some questions, but there was no time for discussion. The questions would be answered at the next briefing session to be arranged on the Protocol.
National Treasury gave a briefing on the Municipal Fiscal Powers and Functions Bill, which aimed to regulate the process of initiation of a municipal tax and to define the manner in which National Government, through the Minister of Finance, must exercise its policy oversight role. It aimed to have municipal taxation powers proactively regulated, to set frameworks for introducing new taxes, to ensure they fitted within the national and local government fiscal and taxation framework, and to prescribe norms and standards. It would therefore promote predictability, certainty and transparency.
The Chapters of the Bill were described in depth. Explanations were given on the replacements of the Regional Services Council levies. The basis for the future calculation and transparency on municipal surcharges was explained. The Minister’s powers and duties were set out. National Treasury did not anticipate any adverse financial implications for national or provincial government and only perhaps limited implications for local government. A full consultative process was followed.
Questions by members sought clarity on the various options set out in the presentation, the principles to be applied in setting surcharges, the consultative processes, and the reason why SALGA was sometimes referred to by name and others by description. Clarity was requested on the interim payments that had replaced the Regional Services Council levies, and concern was expressed that the one month consultation time might be too little in times of parliamentary recess. Members commented that the local government legislation was not user-friendly, and sought clarity on the objectives, powers of the Minister, distinction between surcharges and municipal taxes, the possible encroachment on powers of local government, how the Bill should be tagged, and similarities between provincial and local government taxation regulatory frameworks.
SADC Finance and Investment Protocol (FIP): Briefings by National Treasury (NT) and Committee of Central Bank Governors (CCBG) at the SA Reserve Bank
Mr Themba Zulu, Deputy Director, SADC, National Treasury said that Treasury would shortly be seeking ratification of the Southern African Development Community (SADC) Finance and Investment Protocol (FIP) and the briefing aimed to inform the Committee of the reasons behind and details of the protocol. He outlined the history of the Southern African Development Community, noting that the main reason behind its formation lay in developing regional cooperation. It used protocols as legally binding instruments to ensure that member states abided by their obligations. Regional integration was a key instrument in sustainable and equitable growth and development would be encouraged by forging strong links between member states. Institutions were created to be compatible with these aims and to provide mobilisation of resources and the integration of the SADC programmes.
The institutional arrangements in SADC were highlighted. Mr Zulu noted that the technical committees created technical instruments that ultimately evolved into memorandums of understanding (MOU). He set out the roles of Heads of State, Councils of Ministers and Standing Committee officials. Sectors were managed by member states and there were four directorates. There was an Integrated Regional Development Plan (IRDP) that contained the strategic vision and highlighted quantitative targets. This would in time lead to the Customs Union and align with the New Partnership for African Development (NEPAD) and implementation plans. Key challenges included the need to move faster on the regional integration agenda, deal with infrastructure, adopt policies to create employment and deal with poverty, improve fiscal reforms, develop regional industry policies to improve development capacity in terms of trade, have better resource implementation and better coordination and development of relevant skills.
Mr Zulu explained that the SADC Protocol process set out the need for development of protocols. SADC Summit approved the protocols and they were binding on those who acceded to them. They aimed to clarify and build consensus on frameworks developed, to first have a memorandum of understanding and then move to a binding process.
The FIP process had commenced in 2006. It was not contradictory with other agreements and had been reviewed by the SADC secretariat and the legal team, and had been considered by a South African legal team. The first part consisted of general declarations of the intentions of the member states. The annexes were specific on content and subject. The Finance ministers were driving the protocol, and it was approved by them in 2006 and submitted to the Heads of State in Maseru. Six Heads of State had signed and in October 2006 a further four signed. The process of ratification was still needed, and once ratified all member states must implement the protocol. The cost implications at the moment would be difficult to estimate, but could be quantified at a later stage and dealt with through the national budgeting process.
Mr Zulu proceeded to discuss the Annexes of the Protocol. Annex 1 indicated that the Protocol was built on the key objectives of attracting investment, harmonising investment policies and law, ensure fairness, equity and transparency in treatment of investors, and giving support for local and regional entrepreneurs and encourage cooperation amongst agencies.
Annex 2 of the Protocols dealt with Macroeconomic Convergence to ensure that the member states adopted stability orientated policies. The Articles provided the indicators in broad outline, but did not specify what they would be. There was establishment of a surveillance unit to monitor convergence and to develop a database. In 2008 there would be qualitative indicators used.
Annex 3 dealt with taxation cooperation and related matters. Mr Martin Grote, Chief Director, Tax Specialist, NT, sketched the importance of tax in the integration process. African countries had a tremendous hurdle in reforms as many countries relied heavily on trade taxes, which would need to be substituted with tax reform if they were to be reduced. The Memorandum of Understanding, which was subsumed into this Protocol, sought to promote coordination of tax policy and administration, as part of formulating and coordinating sound policies. Substantial effort had already been put into designing good tax policies, improve efficiency, train tax officials, and institute networks. The key document was ambitious. Tax incentives were not to be allowed, and this had given rise to a number of questions as to whether, in principle, the public good should take precedence, and whether a more economically integrated economy in the region was preferable to individual country sovereignty.
Annex 3 was divided into six substantive articles, dealing with development, capacity building, cooperation, common approach development and coordination, harmonisation of indirect taxes, and dispute resolution. A tax database was required to gather the necessary information in order to coordinate policies. This would include details of all direct and indirect taxes and levies, including rates, dates, exemptions and allowances, tax incentives and all tax treaties and statistics on revenue collection. There was a requirement for an annual update. The database was launched on the website in 2005. The annex dealt with capacity building on taxation cooperation. It aimed to develop professionalism and expertise of tax policy officials. Administrators and member states undertook to actively support initiative skills and best practices, and recognised the importance of IT and digital revolution.
Annex 3 covered appropriate use of tax incentives between SADC member states, including avoiding harmful tax competition. The language was very loose, but already the use of "endeavour" and "ensure" caused some problems. SADC aimed for transparency to ensure that no deals were being made between investment centres. Existing tax incentives included investment allowances, depreciation allowances, tax credits, costs of acquisition allowed as deductions, and tax holidays. The Annex also aimed to avoid harmful tax competition, which included the typical tax havens. Individual states were cautious of committing themselves to binding commitments. Guidelines would be drawn on how to achieve the goals and assist competition policy through the fiscal framework. Hopefully all states would realise that tax incentives without a proper cost benefit analysis could lead to economic instability, high taxes on consumption and little on corporate activities.
The annexes were guided by what was working in Europe and the European Court of Justice. SADC had adopted consultancy studies and done research papers. The treaty was important to create an environment for investors. It intended to address juridical double taxation and fiscal evasion. It was intended to build up an infrastructure that supported trade. The South African Revenue Services (SARS) was already assisting weaker countries in collecting taxes efficiently, and VAT had been introduced in all member states so that there would be a VAT forum also set up in the near future. In terms of indirect tax, members were agreed that many advances could be made in policies. There was a need for sensitivity in facilitation of trade through indirect taxes and import duties. SADC was putting effort into sending experts to audit what was working and where the problems lay.
Annex 7 dealt with disputes but it was unlikely that this would be used, as most disputes were negotiated through. Therefore the implementation of this Annex was deferred but could be activated if needed.
Mr Grote indicated that the South African tax policy was quite mature but could tie in with less developed countries through a policy of “variable geometry and differential speed” along with transparency of costs.
Mr Zulu continued that Annex 9 dealt with cooperation of development finance institutions. It aimed to cooperate in capacity building, pool resources, strengthen governance codes, and to deal with development finance institutions (DFIs) to achieve regional integration through resource mobilisation. It also aimed to strengthen governance codes and ensure that there was adherence to best practices. Risk assessment should be credible and acceptable to potential investors. Research capacity would be developed. DFIs had been created as nationally bound institutions but it was now intended that they extend to cooperation beyond purely national projects. A DFI Network and Development Finance Resource Centre were created. This would encourage investor confidence and SADC was working on establishing a regional insurance guarantee.
Annex 10 created a general framework for cooperation amongst regulatory authorities, seeking to develop the financial services industry, protect consumer rights, explore opportunities for joint financial products and harmonise regulations and laws. It wished also to ensure compliance with international standards.
Annex 11 set out cooperation in SADC Stock Exchanges. It aimed to achieve an integrated real time network of national securities markets in SADC for skills transfer
Committee of Central Bank Governors (CCBG) at South African Reserve Bank: briefing
Mr Mshiyeni Belle, Head: International Relations and CCBG Secretariat, SARB, sketched the background to the Committee of Central Bank Governors, that was established in 1995 to promote closer cooperation amongst central banks. The focus was on well-managed banks and markets, monitoring investments and foreign exchange. It reported to the SADC Ministers responsible for national financial matters. The current Chairman was Tito Mboweni and the Committee met twice a year. Working groups were represented by central banks and there was a committee of central bank officials. There were various subcommittees. In view of the work coming out of the FIP, an MOU was signed to establish a framework for cooperation and coordination of exchange controls, and there was now a SADC Committee involving officials from the Ministry of Finance.
The MOU had established principles that would facilitate the creation of a coherent and convergent status in the legal and operational frameworks and would facilitate operations independent of Central Banks. It was also intended to create best practices. The MOU was signed in September 2005 and the principles were incorporated in the FIP. There was furthermore a signed agreement by CCBG for cooperation in the areas of ICT Technology, which would play a supporting role. Cooperation and coordination in banking regulations was incorporated into an MOU approved in 2006, and this aimed to promote regionally efficient and effective banking regulatory and supervisory systems, based on internationally recognised programmes. The Committee of Stock Exchanges of SADC had signed a cooperation agreement in February 2006. This intended to establish an integrated real time network of national securities markets and to encourage cross border integration. An MOU was developed in March 2007 by the SADC Banking Association to try to promote coordination of banks.
Mr Belle noted that there were still some MOUs outstanding, and these related to anti-money laundering, accounting and auditing standards, project preparation and development funds, and the SADC Banking Association. Challenges in implementation included the SADC Structure. It was aimed to implement a SADC Central Bank by 2016 and a single currency after that. The current structure in SADC allowed only governors to report via the Ministers of Finance, which could be a challenge as the work intensified. Market reports that assessed the progress of countries in terms of inflation, current accounts and so forth were ongoing. There was a need for improved coordination at national level, for regular interdepartmental discussions, and for national buy-in. It was important that task implementation be allocated according to expertise and capacities within the institutions.
Mr Zulu highlighted the role of South Africa in the process. When South Africa joined SADC, it was allocated two sectors of finance and investment and health. In 1995 the Finance and Investment Centre Coordinating Unit was set up to coordinate the investment protocol, and this was based at South African National Treasury. On restructuring in SADC, this sector was removed from NT and moved to Gabarone, Botswana. This had led to challenges for coordination, and it suffered from capacity constraints. Much effort had been required to put forward this protocol. South Africa's ratification would be a signalling factor for other SADC member states to expedite the process. He urged that South Africa must continue to operate within the ambit of the strategic documents for the region, to force other member states to come up with implementation plans. South Africa must be positioned as a strong champion, given its level of development. Thus far the process had been driven by the public sector. With the creation of a broad framework on the financial investment sector, there was now a need to undertake a communication dissemination campaign among all stakeholders to achieve wider collaboration and greater private sector buy-in.
The Chairperson indicated that the document was not yet binding. Although the Committee had commenced an exercise on double taxation agreements, the FIP was intensive and detailed and the Committee could not be expected to comment immediately on the call for ratification, and would need further time for consideration.
The Chairperson noted that he had a copy bearing a different date to that mentioned in the presentation and asked for clarity on the dates.
Mr K Moloto (ANC) asked for clarity on the plans to establish a central bank, and asked what would be the case if one country had different interest rates from another. He also enquired what type of sanctions was anticipated to ensure that rates were complied with. He noted that the Stock Exchange confidence was dependent on economic activity, and asked how member states would ensure consistency of accounting standards, as this clearly affected strength of and confidence in the Stock Exchange.
Mr Asiya asked what the implications were of only ten of the fourteen member states having signed, and how this would affect the targets. He felt that some of the targets, including that to reduce money laundering, were quite ambitious, and enquired how a common understanding could be achieved.
Mr S Marais (DA) asked when other member states were likely to sign. He asked how the regional trade would operate, and if there were likely to be guarantees of payments. He asked if the problems of liquidity of countries, in terms of foreign reserves, as opposed to individual liquidity of individuals within a country, would be dealt with in the interbanking systems.
Mr M Johnson (ANC) asked to receive a copy of the SADC Treaty, and also asked for an explanation why countries were not signing.
The Chairman noted that the presenters had to leave the meeting to give another presentation to the Select Committee on Finance, and therefore ruled that it was not necessary that answers be given at this stage. A further briefing date would be arranged, and that briefing should commence with the necessary answers to the questions now raised.
Municipal Fiscal Powers and Functions Bill (MFPFB): briefing by National Treasury
Mr Lungisa Fuzile, Deputy Director General, Intergovernmental Relations, National Treasury (NT), set out the Constitutional framework for the Municipal Fiscal Powers and Functions Bill (the Bill). Municipalities were permitted to impose property rates, surcharges on municipal services and other taxes, and levies and duties over the whole of or a category of local government. No municipality could impose income tax, VAT, general sales tax or customs duty. Section 229(2) of the Constitution stated that the power of a municipality could not be exercised in a way that prejudiced national economic policy. Current local government legislation regulated property valuation and rating through Municipal Property Rates Act. The Bill would deal with outstanding Section 229 legislation by regulating the process of initiation of a municipal tax and by defining the manner in which National Government, through the Minister of Finance, must exercise its policy oversight role.
The aim of the Bill was to ensure that municipal taxation powers were proactively regulated, to set a framework for introducing new taxes, to ensure that they fitted within the national and local government fiscal and taxation framework, and to prescribe norms and standards. It would therefore promote predictability and certainty, as well as oversight, in respect of municipal powers and functions, and effectively oversee the exercise of municipal fiscal powers and functions. The Bill was not intended to impede the municipality's ability to collect own revenue, nor did it introduce new municipal taxes. There would be a test on the taxes before they were imposed, rather than the current situation where taxes could only be challenged after imposition.
Chapter 2 said that the Minister of Finance could authorise a tax on application by a municipality or group of municipalities, after consultation with the Minister responsible for local government, and the Financial and Fiscal Commission. The tax would be authorised through regulations. The application would have to set out the policy rationale, and the extent to which it would be earmarked for particular purposes, specifying also who would be liable to pay, indicate estimated revenue, the economic revenue of such tax and the collection authority, and the consultation processes. Time limits were set out for the Minister's decision.
The regulations authorising and regulating the imposition must name the municipalities, and must determine the relevant date (which must coincide with the commencement of the financial year), the tax base and any exclusions and rates. It may limit the period of imposition, and the purpose for which it was used. The collection would be either by the authorised municipality or another institution authorised by the Minister.
Regional Services Council (RSC) levies were abolished in July 2006. Replacement allocations were made available in the interim, as part of the equitable share for local government. There was around 5% deviation between the projected amounts that would have been collected under RSC levies and the interim allocations. Mr Fuzile set out some of the guiding principles taken into account when assessing the replacement to the RSC levies. These had included maintaining local government fiscal autonomy, meeting the criteria of a good tax, approximating to the same incidence and protecting municipalities from fiscal shocks. Possible options were included in a discussion document from National Treasury and were tabled.
Chapter 3 dealt with the Municipal Surcharges. There was currently a distinction between the municipal base tariff, which covered the costs, and a municipal surcharge, which was imposed over and above those costs. Currently the surcharge was largely hidden. The future process would also take into account costs of providing the service, refurbishment and maintenance, but would then set a reasonable rate of return, and require the base tariff to be regulated by the regulator or Minister, with a maximum set surcharge rate at a tariff approved by the municipal council. This was intended to demystify the pricing and achieve transparency. The Minister would be able to prescribe compulsory national norms and standards, and would also be able to set maximum surcharges and make differentiation between municipalities, types of services, levels of services, categories of users, consumption levels and geographic areas. The obligations of the municipality included the need to disclose surcharges and to have an annual review of them.
Chapter 4 prescribed for regulations to be issued by the Minister. The Minister must review those regulations every five years. He would have to engage in a consultation process with the Minister for Local Government, relevant Cabinet Members of the MEC, The Financial and Fiscal Commission (FFC) and the organised local government. The draft regulations must also be publicised. This Chapter also dealt with transitional provisions, amendment of legislation and savings.
Mr Fuzile said that National Treasury did not anticipate that there would be financial implications for National Government or Provinces arising from the Bill. There should not be many additional financial implications for municipalities, as procedures and systems were in place. However, there could be cases where the current hidden surcharges were too high and unreasonable, and these might, after due process, have to be reduced to a reasonable amount. There was also the possibility that Municipalities might have to undertake some technical work involving start up costs, but this should not be unduly harsh, as it would promote good and sustainable practices.
National Treasury had followed a full consultative process and most comments from the Department of Provincial and Local Government (DPLG), South African Local Government Association (SALGA) and FFC were incorporated into the Bill submitted to Cabinet. There had also been a public consultative process. Prior to the introduction of any municipal tax a detailed evaluation process would have to be undertaken to ensure an appropriate balance between enhancing local government fiscal authority and accountability and implications of such new tax for taxpayers.
Mr Moloto referred to the various options that had been set out as replacements for the RSC levies. He asked what considerations would be taken into account in setting surcharges on, for instance, businesses operating in a particular area.
Mr Fuzile said that perhaps the options included in the document had been distracting, because these were not in fact included in the Bill, but were set out here for information. In setting any tax municipalities would be required to exercise a judgment call and seek a reasonable balance. If certain localities had incurred costs in the course of making it possible to do business within their jurisdiction - such as infrastructure, or other benefits offered, or costs incurred in making it possible for businesses to operate effectively and efficiently, then these could possibly be recovered. The motivation for a local business tax might be, for instance, that the municipality had gone the extra mile to make it easier for business to operate in that jurisdiction.
Mr Marais asked for clarity on the consultative process to be followed by the Minister, and asked why in some cases SALGA was referred to specifically, whereas it surely fell within “organised local government” as referred to in other clauses.
Mr Fuzile responded that at present it was true that SALGA was the only organised local government institution at present, but that in future other organisations might be set up and could fall within the broader definitions. Where it was intended to target SALGA specifically it was named as such.
Mr Marais asked for clarity on the interim payments to replace RSCs. He asked if they were based on expected RSC levy income, and whether that correlated with expected percentages.
Mr Fuzile replied that the replacement grants had been estimates. National Treasury knew what municipalities were collecting and the information on the grants was used as a basis to determine the quantum to allocate to municipalities. NT had then applied the average growth for 2002 to 2005, to reach some sort of base line figure. The rate of growth had turned out to be slightly below what would have been collected under the RSC levies However, in making the comparisons it must be remembered that the VAT zero rating also affected the calculations and this had in fact lessened the gap.
Ms J Fubbs (ANC) noted that any surcharges would be subject to an annual review. She wondered if the imposition of surcharges might not lead to reliance on them in the budgeting process after a time. She also was concerned might distort the residential patterns, which were supposed to have been transforming. People might now find that that they were gated economically through surcharges. They might be able to afford the property, but not the surcharges distinguishing one suburb from another.
Ms Fubbs was concerned about the one-month period set out before the draft regulations could be approved. She indicated that Parliament was not always available, particularly if regulations were sought in December.
Mr Fuzile took the point that the thirty days might not be sufficient if Parliament was in recess, but he thought that National Treasury could be reasonable and allow further time. Thirty days was the usual standard as set out in the Municipal Finance Management Act (MFMA).
Mr Y Bhamjee (ANC) noted that Treasury was attempting to show an attitude of helpfulness but pointed out that if thirty days was set out then it must be followed. All departments would have to follow what was prescribed so that there was a need to look at this point closely.
The Chairperson indicated that current discussions on the Rules of Parliament were examining the interpretation of “days” and this should be settled in the oversight models being developed.
Mr Y Bhamjee (ANC) noted that the local government legislation was quite complex and was not very user-friendly. He suggested that the pieces of legislation governing the process needed to be reviewed.
Mr Bhamjee asked for clarity on the objectives as the wording set out in the presentation and the Bill seemed to differ. He noted that the Minister was given the power to “prescribe” national norms and standards and asked for clarification on the Minister’s powers. He also asked where the Minister’s powers were derived from, as the Bill should not infringe on the rights of local government. Ms Jo-ann Ferreira, Chief Director, Legislative Services: National Treasury, clarified that there was a distinction between surcharges and municipal taxes. She noted that surcharges and taxes were dealt with differently. The authority was set out under the Constitution. In relation to the use of the word “prescribe” she clarified that National Treasury was only empowered to act in terms of Regulations. Therefore “prescribe” meant “to prescribe by Regulation”, in other words, by subordinate legislation.
This would not encroach upon any other powers of local government. Section 229 of the Constitution made a distinction between provincial and national legislation. Interpretation principles were applied. If national legislation was specified, then this meant either an Act or Regulation that delegated authority. If an Act was referred to, the powers related to the Act itself. Section 229 already permitted regulation, and therefore was not inconsistent with the constitutional interpretations.
Mr Bhamjee indicated that he was not necessarily in agreement. Ms Ferreira said that a copy of the opinion would be available.
The preamble to the Bill said that the intention of the Bill was to regulate the exercise of local government’s ability to set taxes and surcharges. This intention was repeated in some of the clauses. All the regulations in terms of the Bill would follow the intentions, but it must be noted that processes of consultation and publication had to be followed. Anyone affected by the Regulations would therefore be fully aware of them.
Mr Asiya wondered if this should not be classed as a Section 76 Bill, and wondered if the Committee should not take some legal advice on it, notwithstanding the fact that SALGA had been consulted.
Ms Ferreira stated that a Bill would be a Section 76 Bill if it dealt with a Chapter 13 matter, (which Section 229 fell under) but only if it also affected the financial interests of provincial government. This Bill did not meet this requirement. She confirmed that she had discussed the matter already with both the State Law Advisors and the Parliamentary Legal Advisors, who were of the opinion that it was a Section 75 Bill.
Mr Asiya suggested that it was still the prerogative of the Committee to consult with legal advisors, and it would not be bound by the Department’s statement that it had consulted.
Mr Moloto asked whether there were similarities between the local and provincial taxation regulatory frameworks.
Ms Ferreira confirmed that this was similar to the provincial regulation bill, although there were some differences in relation to the surcharge. Section 228 dealt with the right to impose taxes and surcharges. Local Government had the right to impose a surcharge, but not necessarily the right to impose a tax. The drafters had tried to ensure that a consistent approach was followed between Sections 228 and 229 matters to try to achieve better correlation between provincial and local government. Provincial taxes were also subject to national oversight
Mr Bhamjee referred to the consultative process. Consultation of authorities was not necessarily a point that was cast in stone. He thought that there was a need to engage more aggressively in discussions.
The meeting was adjourned.