Revenue Laws Amendment Bill [B42-2007] & Securities Transfer Tax Bills [B45-2007]: Treasury Response

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Finance Standing Committee

23 October 2007
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Meeting report

FINANCE PORTFOLIO COMMITTEE
24 OCTOBER 2007
REVENUE LAWS AMENDMENT BILL & SECURITIES TRANSFER TAX BILLS: TREASURY RESPONSE


Chairperson: Mr N Nene (ANC)

Documents handed out:
National Treasury Response Document on the Revenue Laws Amendment Bill and the Securities Transfer Tax Bill

 

Audio recording of meeting[Part1] [Part2]

SUMMARY
Treasury focused on proposals received from the public and interested parties on the Revenue Laws Amendment Bill and the Securities Transfer Tax Bill. The comments made during the hearings were set out, and Treasury commented on each. It had accepted some of the comments and rejected others. Distributions out of pre-1993 profits and pre-2001 capital profits would be clarified given the uncertainty that the present wording had created. Other comments focused on retrospectivity of pre-1993 and pre-2001 capital profits, the proposed inclusion of unrealised profits within the dividend definition in Section 1, the retrospectivity of deemed disposal of shares involved in pre-existing capital distribution, STC given the reduction of investment distributions and the dividend definition, anti-dividend stripping which would result in a double tax charge, the exclusion of trading stock shares, depreciation claims for new and unused buildings, oil and gas stability.

Treasury also tabled newly added clauses, which dealt with hyperinflationary currencies, research and development, tax on retirement funds repeal, pension adjustments, taxation of fishing persons and seafarer salaries, withholding relief for pre-retirement withdrawals, and CFC rulings.


Questions from the Committee focused on retrospectivity, the competitiveness of South Africa in the light of its tax laws, fishing harbours, Black Economic Empowerment deals, and potential conflicts between Exchange Controls and tax laws. The Chairperson requested Treasury to obtain public and stakeholder comments on the new clauses before reverting back to the Committee

MINUTES
Prof Keith Engel, Chief Director: Tax Policy, and Mr Franz Tomasek, Assistant General Manager: Legislation, South African Revenue Services responded to input received during the public hearings on the Revenue Laws Amendment Bill.

The Revenue Laws Amendment Bill’s main focus was on broadening the base for the Secondary Tax on Companies (STC). Under current law, distributions out of capital and ordinary profits equally gave rise to dividends subject to STC, unless those distributions were part of a liquidation. Liquidating distributions out of all the pre-1993 profits and pre- 2001 capital profits were exempt. The Revenue Laws Amendment Bill aimed to repeal exemptions. The submissions received indicated that the effective date of the proposed legislation was unclear. Treasury accepted this comment and indicated that the proposed date would be 1 January 2009.


During the public hearings, it was also submitted that the exemption for pre-1993 profits and pre-2001 capital profits was retrospective, regardless of whether the effective date was 1 October or 1 January 2009. It was said that many taxpayers would not be in a practical position to utilise the exemption in either time frame. Treasury did not accept this comment and said that impacts on future liquidations would be repealed and that dual profit systems could not be maintained indefinitely.

PriceWaterhouseCoopers had argued that the proposed inclusion of unrealised profits within the dividend definition in Section 1 would be administratively burdensome, requiring asset valuations for many actual and deemed distributions. Treasury did not accept this comment and indicated that the compliance concern was overstated. Valuations would only be required for extraordinary dividends.

Most of the comments received argued against the retrospectivity of deemed disposal of shares involved in pre-existing capital distribution, as per paragraph 76 of the 8th Schedule. National Treasury partially accepted the comments and moved the deemed disposal date from 1 July 2008 to 1 July 2011. Taxpayers who engaged in share capital distribution with the expectation of never disposing of their shares in the normal course would be faced with an eventual deemed disposal. Tax loopholes were utilised by deals made, and Treasury and the South Africa Revenue Services (SARS) were reluctant to grant permanent shelter to this potential loss of revenue.

Deloitte and Touche, KPMG, PKF, the South African Institute of Chartered Accountants (SAICA) and Werksmans indicated during the public hearings that the proposed anti-dividend stripping rule created a double tax charge. Taxpayers would be subjected to both the STC as a result of that distribution while also being subjected to additional capital gains tax due to the extraordinary nature of the distribution. Treasury accepted this argument and amended the rules to only allow for capital losses.

In terms of the reduction of investment distributions and the dividend definition, Ernst and Young, KPMG, The Banking Association of South Africa, SAICA, and South Africa Venture Capital and Private Equity Association (SAVCA) indicated that the reflection of a reduction in investment should not give rise to immediate STC. Treasury accepted this proposal and would accordingly treat reductions in investment as a capital distribution that would generally give rise to immediate capital gain.

Ernst and Young, KPMG, The Banking Association of SA and Werksmans commented that the proposed anti-dividend stripping rule created a double tax charge. Treasury accepted this comment and would amend the rule to disallow capital losses.

With regards to the dividend definition in the proposed Section 64B (5)(f) it was indicated during the public hearings that the reflection of a distribution such as investment in investment should not give rise to immediate STC. Treasury accepted this comment and would amend the proposed legislation to treat reductions in investment as a capital distribution that would generally give rise to immediate capital gain, but this gain would be minimal or nil for newly acquired shares. The proposed legislative change would solve the concerns of avoidance without prejudicing taxpayers.

Comments received from companies also indicated that the required profits for the recipient group company was unclear. Profits added could be offset by the recipient group company losses. Treasury accepted this comment and said that the proposed legislation should merely require that the distribution give rise to additional gross profits in the hands of the group shareholder recipient.

In terms of the amendments in the Revenue Laws Amendment Bills some companies had said that the exclusion of trading stock shares was too wide. Treasury did not accept this comment and said that the exclusion of trading stock was designed to target investments. Subsidiaries of this nature were not part of long-term group structures but more akin to separate assets for potential sale.

With regards to the de-grouping charge in the proposed Section 45(5) some proposals by companies were accepted by Treasury while others were rejected. Treasury did not accept the argument that Section 21 public benefit organisations would be prevented from benefiting from receiving dividends free from STC stemming from controlled subsidiaries. Treasury did accept the comment that proposed changes would prevent group relief if a SA holding company solely received dividends. Treasury would modify the proposed legislation to remedy this concern.

Companies had also asked for clarification as to the ordinary or capital status of shares sold before close of the 3-year period in Section 9 C, which dealt with the capital treatment of 3-year shares. Treasury accepted this comment and would clarify this issue in the Explanatory Memorandum. Some companies also argued that no reason should exist to exclude holdings in unlisted foreign shares from this deemed capital treatment. This comment was not accepted because several tax differences existed between domestic and foreign shareholdings.

In terms of the proposed Section 23 it was argued by some companies that the proposed legislation was unnecessary because Exchange Control prevented the offshore transfer of intellectual property. Treasury did not accept this comment and indicated that the application of Exchange Control to cross-border intellectual property transfers lacked a consistent track record. The sole reliance on Exchange Control to prevent this form of offshore transfers was not sustainable.

Submissions were also received to the effect that the proposed denial of deductions if any South African owned intellectual property at any time, under Section 23, would be extremely difficult to comply with, especially in respect of intellectual property owned by South African residents many years ago. Treasury did not accept this proposal and indicated that available records associated with intellectual property allowed for a comprehensive tracing of historical ownership. Treasury said that the concerns relating to intellectual property were overstated.

During the public hearings companies indicated that the depreciation claims were limited to new and unused buildings. Pre-existing buildings did not receive the benefit of this regime. Companies said that no reason existed for not treating all buildings in the same way. Treasury did not accept this proposal and said that the proposed 5% rate was intended to encourage the creation of new structures. It was also indicated by companies that the legislation should also cover new improvements on pre-existing buildings and not only new and unused buildings. Treasury accepted this proposal and said that their intention was that new improvements on pre-existing buildings would fall within the ambit of the new 5 % depreciation regime.

With regards to oil and gas stability, in paragraph 8 of the 10th Schedule, PetroSA argued that the time limit should be open-ended because the complexities of the arrangements pertaining to the underlying rights often entailed a protracted negotiation process outside of the new taxpayer’s full control. Treasury partially accepted this proposal and said that the period in which an oil and gas right must be received would be extended to one year in order to cater for unexpected difficulties.

Newly added legislation which dealt with hyperinflationary currencies, research and development, tax on retirement funds repeal, pension adjustments, taxation of fishing person and seafarer salaries, withholding relief for pre-retirement withdrawals and CFC rulings was introduced.

Discussion
Mr S Marais (DP) and Mr B Mguni (ANC) asked for clarification on retrospectivity. They said that retrospectivity should not be extended to allow businesses who acted within the law in the past to be penalised.

Prof Engel said that retrospectivity referred to events that would trigger taxation. There were different forms of retrospectivity and if a company had a liquidation going forward, they would not get the relief of a pre-2001 profit build up. The amendments would only cover impact for future liquidations.

Mr Marais asked what the reason was for choosing the date of 1 July 2011 with regards to the impact of capital contributions.

Mr Tomasek indicated that businesses needed time and that 6 months would be too little time for some businesses to get their cash flow planning right. It was agreed that a period of 3 years would give businesses adequate time to get their house in order.

Mr Marais asked Treasury if it had ensured that SA still stayed competitive and would be able to attract investments against the background of the Revenue Laws Amendment Bill. He wanted to know if SA was not becoming too complex and restrictive in its tax laws compared to other countries.

Prof Engel said that tax systems in different countries were unique and it was difficult to compare them. Comparative research and analysis were done by Treasury but they did not consider comparative analysis to be the panacea for policymaking. Much was done to improve SA’s competitiveness, like the STC rate being reduced.

Mr Marais also wanted to know if those companies who were supportive of environmental protection would be excluded from the Revenue Tax Laws Amendment Bill.

Prof Engel said that legislation would cover companies that were supportive of the environment. Treasury would be prepared to help companies that were experiencing problems in this regard.

Mr Marais said that fishing harbours were a critical issue within SA and that subsistence fishermen were struggling. He said that Treasury had to set a target date in order to deal with issues relevant to fishermen.

Prof Engel said that Treasury would have to consult with the Minister in order to get a target date and deal with issues affecting fishermen.

Ms J Fubbs (ANC) asked for clarification on the 187 days in a year clause and asked if other opportunities would still prevail given this clause.


Mr Tomasek said that the 183 days referred to was a reasonable requirement that applied to expatriates, which were not within SA’s tax jurisdiction.

Ms Fubbs referred to Black Economic Empowerment (BEE) deals and asked how expenditures which moved within a company would be taxed, if a holding company gave capital to a subsidiary and then the subsidiary moved outside the holding company.

Prof Engel said that BEE deals were very complex and that companies did not give things away for free. New structures should add value to companies and to the future growth of companies.

Mr J Bici (UDM) asked for clarity on Treasury’s non-acceptance of those proposals that had indicated that the proposed legislation was unnecessary because Exchange Controls prevented the offshore transfer of intellectual property. He wanted to know if there would be conflict between the laws that governed exchange controls, and those within the Revenue Laws Amendment Bill. Mr Bici also wanted clarification on Treasury’s argument that the sole reliance on Exchange Controls to prevent offshore transfers was not sustainable.

Mr Tomasek said that there would be not be conflict between the rules. In some cases the tax laws would be more strict, but in other cases the exchange controls would be stricter. Laws were changing, with tax issues being dealt with in the tax laws.

Mr N Singh (IFP) asked for clarification from Treasury on its proposals that pre-existing buildings would not be entitled to claim for depreciation allowances. Treasury indicated in one comment that claims applied to pre-existing buildings yet in another comment had indicated that claims did not apply.

Mr Tomasek said if a building was bought and no alterations were done then no claims would be possible. If a building was acquired and improvements were then made, then claims for depreciation could be made.

Mr S Asiya (ANC) and Mr Singh conveyed their appreciation to the Treasury officials for the good work that they had been doing.

The Chairperson cautioned Treasury against adding new clauses without allowing for comments from the public and stakeholders. He said that comments on the clauses just presented should be called for before Treasury tabled the new legislation to the Portfolio Committee again.

The meeting was adjourned.

 

 

 

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