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FINANCE SELECT COMMITTEE
20 November 2007
ADJUSTMENTS APPROPRIATION BILL, REVENUE LAWS AMENDMENT BILLS & SECURITIES TRANSFER TAX BILL: DELIBERATIONS
Chairperson: Mr T Ralane (ANC, Free State)
Documents handed out:
2007 Adjustments Appropriation presentation
Double Taxation Conventions/ Agreements presentation
Revenue Laws Amendments 2007 presentation
Convention Between the Republic of South Africa and the Republic of Mozambique
Audio recording of meeting
National Treasury and the South African Revenue Service briefed the Committee on the 2007 Adjustments Appropriation, the Double Taxation Conventions between South Africa and Mozambique, the Revenue Laws Amendment Bills and the Securities Transfer Tax Bill. These items were approved by the Committee.
With regards to adjustment appropriation the Public Finance Management Act (PFMA) stated that the adjustment budget may provide for significant and unforeseeable economic and financial events affecting fiscal targets and the roll-over of unspent funds from the proceeding financial year. The revised budget framework made provision for about R 5.2 billion in under spending at a national level, in addition to R 3 billion contingency reserve set aside in the budget. The total estimated level of spending rose by R 8.5 billion, from a budgeted R 533.9 billion to a revised R 542.4 billion.
The objective of SA and Mozambique tax treaty was to promote economic growth by providing certainty on cross border investments and to prevent double taxation. Tax paid for purposes of a foreign tax credit included exemptions or reductions granted in accordance with laws, which establish schemes for the promotion of economic development in Mozambique or South Africa. The agreement allowed both SA and Mozambique to collect taxes covered in the Convention on behalf of each other.
The proposed amendments in the Revenue Laws Bill proposed a decrease in the STC rate from 12.5 % to 10%. The amendments attempted to broaden the tax base and also to close loopholes within the current legislation.
With regards to adjustment appropriation questions from the Committee focused on underspending by departments, salary adjustments, demarcation issues in the North West province and adjustments due to floods and alien vegetation.
Questions related to the taxation agreement focused on perceptions of SA amongst its neighbours, pensions and annuities, tax exemptions for teachers and African Customs Union (SACU) members taxes.
Revenue Laws Amendment questions focussed on intellectual property changes, top-up occupational death benefits, employment abroad, maize zero rating and depreciation of environmental manufacturing assets.
National Treasury briefing on Adjustment Appropriation Bill
Ms Jo-Ann Ferreira (Chief Director: Public Entities Governance Unit) gave the Committee an overview of the 2007 Adjustment Appropriation. The Public Finance Management Act (PFMA) stated that the adjustment budget may provide for significant and unforeseeable economic and financial events affecting fiscal targets and the roll-over of unspent funds from the proceeding financial year. Of the R 3.8 billion recommended for unforeseeable and unavoidable expenditure, R 754 million was related to natural disasters and animal disease. Unforeseeable and unavoidable expenditure consisted of R 387.8 billion for national disaster funding in respect of Kwa-Zulu Natal and the West Coast District, R 200 million for the National Education Recovery Plan and R 50 million for comprehensive HIV/ AIDS care. Reported unforeseeable expenditure also included R 45.7 million in support of the health sector during the public service strike, uninsurable agricultural losses, emergency housing in the North West province and restitution in the Richtersveld land settlement claim.
Amounts announced in the 2007 Budget included R28 million for Alexkor, mainly for restructuring and R 678.7 million for the Pebble Bed Modular Reactor project. Roll-overs reported totaled R 4 060 million for 2006/07 to 2007/08. The total additional amounts added to the budget equaled R 16.7 billion. The revised budget framework made provision for about R 5.2 billion in under spending at a national level, in addition to the R 3 billion contingency reserve set aside in the budget. The total estimated level of spending rose by R 8.5 billion, from a budgeted R 533.9 billion to a revised R 542.4 billion.
RSA/Mozambique Double Taxation Agreement briefing
Ms Yanga Mputa (Director: International Tax, National Treasury) explained the double taxation agreements and the ratification of a tax treaty with Mozambique. The objective of tax treaties was to promote economic growth by providing certainty on cross border investments and to prevent double taxation. Tax treaties had to be approved by Parliament before they were binding. The aim of the tax treaty with Mozambique was to strengthen existing economic relations and was signed in South Africa on 18 September 2007. South Africa was the largest foreign direct investor in Mozambique. The Industrial Development Corporation (IDC) had approved funding for 10 projects in Mozambique and was considering additional projects in the area of mining and mineral beneficiation, agriculture, tourism, chemicals, forestry, transport infrastructure and energy.
There were over 100 SA companies operating in Mozambique, which included Steers, Vodacom, PEP, SAB Miller, Ackermans and Standard Bank. Investment by Mozambique in SA was minimal. Mozambique was SA’s second largest export market in Southern Africa, with the trade balance in favour of SA. Exports to Mozambique in 2006 amounted to R 6.2 billion and imports amounted to R 318 million. Cross border movement included Mozambique migrant workers in SA mines, the exchange of tourists, Mozambiquan students in SA and people from Mozambique shopping in SA.
Mr Franz Tomazek (Assistant General Manager: Legislation, SARS) briefed the Committee on the South Africa-Mozambique Double Taxation Convention. This closely followed the Organisation for Economic Co-operation and Development (OECD) Model Convention, which formed the foundation for the majority of Double Taxation Agreements (DTAs) worldwide. The Double Tax Convention between SA and Mozambique focussed on construction, furnishing of services, including consultancy services as well as the performance of professional services.
The DTA agreed on 8% of interest from the source state 8% of the gross amount on royalties between SA and Mozambique. With regard to pensions and annuities, it was agreed that payments under a social security system were taxable only in the state which paid the pension. The agreement provided for an exemption from tax in the host state for a period not exceeding two years in respect of visiting professors. The remuneration however should be derived from outside the host state.
Tax paid for purposes of a foreign tax credit included exemptions or reductions granted in accordance with laws, which establish schemes for the promotion of economic development in Mozambique or South Africa. The agreement allowed both SA and Mozambique to collect taxes covered in the Convention on behalf of each other.
SARS briefing on Revenue Laws Amendment Bill & Securities Transfer Tax Bill
Prof Keith Engel (Chief Director: Tax Policy) briefed the Committee on the Revenue Laws Amendments Bill. The proposed amendments in the Bill proposed a decrease in the STC rate from 12.5 % to 10%. The amendments attempted to broaden the tax base and also to close loopholes within the current legislation. With regards to capital distributions, it was proposed that each capital distribution would be treated as a part-disposal of the share and a ceiling was also added on the amount of share capital that can be allocated to a particular class. Case law regarding capital versus ordinary shares was uncertain and informal practices gave industries a hidden presumption in favour of capital. It was proposed that system be changes to that a wider range of shares be included and the period was shortened for holding on to the shares.
With regards to intellectual property arbitrage it was proposed that the payor could not take any deductions when paying for the use of intellectual property if that property was previously owned by a resident or was developed by a payor or any closely related person. Rolling stock would receive a tax write-off over 5 years at a straight-line rate. Port infrastructure (new and unused) would be eligible for a 5% per annum write off. Commercial building as well as improvements would be eligible for a 5 % per annum write off. Environmental treatment and recycling manufacturing fixed assets would also be eligible for a 5 % per annum rate.
Co-operative Banks would be eligible for small business relief and it was also proposed that professional and amateur spots arms could be recombined tax-free. Top-up occupational death benefits were also exempted and financial instruments limits were repealed for company reorganisations.
It was proposed that the Uncertified Securities Tax and the Stamp Duty Act be merged insofar as marketable securities were concerned into a new tax called the Securities Transfer Tax. Changes to the Customs and Excise Duties definitions were proposed as well as legal certainty relating to conflicting provisions in the Counterfeit Goods and Customs and Excise Acts.
Mr E Sogoni (ANC, Gauteng) asked what arrangements were made to cater for under spending by departments.
Mr Sogoni wanted to know when the public enterprises would turn around their fortunes and not come back to request money.
Mr Sogoni asked if the Eastern Cape Housing Department would benefit from the roll-overs. He wanted to know if the would get R 500 million back when their capacity improved.
Mr Sogoni wanted to know where it was catered for salary adjustments within the figures for adjustment.
Ms Ferreira said the discussions were held with the national and provincial education departments who indicated that they would be able to spend money allocated for this financial year. Additional budget allocations would be reconsidered for the 2008/ 09 financial year.
Mr M Robertson (ANC, Eastern Cape) referred to the Land Bank, SAA, Alexkor where the Chief Executive Officers got a lot of money but were running public enterprises at a loss.
Mr Robertson referred to the situation regarding agriculture within the Eastern Cape. Some of the money was paid out, but the Eastern Cape did not supply Treasury with the required documentation, which resulted in them not getting all the money.
Mr Z Kolweni (ANC, North-West) said that there were always roll-overs reported by departments like Housing and referred to the reasons for roll-overs as reported by Treasury. He also referred to demarcation problems identified during meetings with the Education departments and wanted to know what the link was between demarcation issues reported during Education briefings, and the unforeseeable expenditure reported following boundary changes in the North West .
Ms Ferreira said that adjustments related to demarcation in the North West created problems. A number of income generating activities was removed to other provinces. Treasury developed a framework for performance management to assist with fiscal discipline in the North West.
Mr B Mkhaliphi (ANC, Mpumalanga) referred to the unforeseeable and unavoidable expenditure reported for flood related problems and alien vegetation invasion by the Department of Water Affairs and Forestry. He said that sharper action and vigilance in conjunction research and development should have enabled the department to address problems under their normal budget, as opposed to request money under the unforeseeable and unavoidable budget item.
Ms Ferreira said that floods resulted in algae in the water, which prevented sunlight to come through and support biodiversity in the dam. If the algae was not immediately sprayed it caused problems.
Mr Robertson referred to an amount of R 134 million/ R 133 million of Housing Department that was taken away from the Eastern Cape. Reports indicated that money would be transferred to the Western Cape and the Northern Cape. The money was turned down by the provinces because they did not have the capacity to spend the money.
Mr Ralane proposed that discussions be held in the 3rd quarter between the Committee and the sector portfolios to discuss problems related to state owned enterprises. Meetings with some national and provincial departments were also envisaged to discuss problems related to budget issues in anticipation of the next budget.
The Committee adopted the proposed 2007 Adjustments Appropriation.
Mr Mkhaliphi referred to South Africa being branded as a big brother within Southern Africa. Given the imbalance of trade between SA and Mozambique he asked what checks and balances were put in place to ensure that this perception of South Africa did not continue.
Ms Mputa said that SACU had different sub committees that dealt with tax, trade and customs
Tax sharing was allowed within SACU. Ms Mputa said that the Department of Trade and Industry might be the more appropriate to deal with the question
Mr Ralane said that their was a new partnership approach with China also investing in Africa which related to the discussion regarding SA and its neighbours.
Mr Kolweni wanted clarity on the pensions and annuities mentioned under the Double Taxation Convention between SA and Mozambique.
Mr Tomasek said that the a South African pension would still be taxable by South Africa if somebody who received pension moved to Mozambique for a few years.
Ms N Ntwanambi (ANC, Western Cape) wanted clarification regarding the tax exemptions for teachers coming from Mozambique given SA’s teacher shortage.
Mr Tomasek said that teachers who were send to Mozambique or South Africa would still be taxed by the country where they received their salaries from.
Ms Ntwanambi asked how to level the playing fields given that people who come from outside in SA were not getting fair pay.
Mr Sogoni asked if the way SA dealt with its South African Customs Union (SACU) members would be different from the way it dealt with other international countries regarding taxation agreements.
Mr Tomasek said that tax systems were unique in different countries, which required different types of agreements.
The Committee considered and adopted the Double Taxation Convention between South Africa and Mozambique.
Mr Mkhaliphi said that the proposed depreciation arrangements of environmental manufacturing assets were commendable. He indicated that this would hopefully be supporting the development of small businesses in South Africa.
Mr Kolweni wanted to know where and how was abandoned mining dumps classified.
Mr Tomazek said that the reprocessing of the dumps would be subject to a wear and tear allowance. The final processing would be putting back the soil but this activity might not qualify for an exemption.
Mr Sogoni wanted clarification on the intellectual property changes proposed in the Revenue Laws Amendment Bill.
Mr Tomazek said that the intellectual property provision aimed to stop people from claiming a deduction when they take intellectual property outside the South African tax system in an way, which was not legitimate. If intellectual property were taken offshore legitimately and licensed, it would be taxed in the normal way.
Mr Sogoni wanted to know how prevalent the top-up occupational death benefits were.
Mr Tomazek said the aim was to encourage the responsible treatment of employees by employers.
Mr Sogoni also asked for clarification on the accommodation of expatriate employees and employment abroad.
Mr Tomazek said that if an employee is in another country for expended periods then the other country has a taxing right.
Ms Ntwanambi referred to maize being zero rated within the Bill but she also indicated that maize was very expensive.
Mr Tomazek said that the provision was made to help the person selling the maize. He said that
maize remained zero rated which is as far as the tax system could go to help prices stay low.
Ms Ntwanambi referred to people staying in houses, which they rented due to working arrangements but that they also pay for their own houses. She asked the Treasury officials to comment on this situation.
Mr Tomazek said that the provisions referred to houses that the employer provide and did not apply to houses bought by employees
Mr Sogoni wanted to know if the provisions for the depreciation of environmental manufacturing assets were in line with other National Environmental legislation.
Prof Engel said that the aim was to help companies, which reduce emissions at their factories.
In future the SA tax system would approach environmental protection from different angles.
The Committee considered and adopted the Revenue Laws Amendment 2007 proposals.
The meeting was adjourned.
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