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FINANCE PORTFOLIO COMMITTEE
16 October 2007
REVENUE LAWS AMENDMENT BILL: PUBLIC HEARINGS
Chairperson: Mr N Nene (ANC)
Documents handed out:
South African Breweries (SAB) submission on the Revenue Laws Amendment Bill
Deloitte submission [Part 1][Part 2]
South African Institute of Chartered Accountants submission
Price Waterhouse Coopers submission
Price Waterhouse Coopers presentation
Audio recording of meeting [Part 1]&[Part 2]
Representatives from the South African Breweries, Deloitte, KPMG, the South African Institute of Chartered Accountants and Price Waterhouse Coopers focused on key issues that they felt needed more attention. All submissions stressed the importance of creating certainty within the tax environment and cautioned against retrospectivity. A number of specific clauses were identified which would unnecessarily tax individuals and companies that legitimately conducted their business. The clauses dealing with expatriates were also criticized. They argued that SA required skills and that it was very important not to make changes to the tax legislation, which would have a negative impact on the ability of South Africa to attract and retain imported skills.
Questions from the Committee focused on double taxation of dividends, retrospectivity, existing guarantees contained in legislation to protect the South African tax base from being eroded, the wear and tear regime being introduced, profits generated and distributed within a group and tax avoidance.
Deloitte and Touche submission
Mr Le Roux Roelofse from Deloitte highlighted key issues that deserved more attention. While anti- avoidance rules introduced in 2006, which aimed to frustrate tax schemes without commercial substance were supported, it was felt that taxpayers who legitimately conducted their affairs should not be unnecessarily disadvantaged.
It was proposed that Clause 5(1)(m) be amended such that the test on whether a dividend is distributed on a reduction in share premium, be applied separately in relation to each class of shares. It was suggested that the allocation be done on the basis of the number of shares held to total issued shares of that class, as they would all have the same value.
The amendment in Clause 5(1)(c) and Clause 63 regarding the period for the time of disposal as opposed to the time of acquisition of the shares, would have the effect of affecting innocent transactions.
With regards to group of companies, as defined in Clause 48(1)(c), no valid reason existed for the exclusion of non-resident companies from a group of companies for the purposes of corporate rules. The South African tax base would not be compromised.
It was proposed that relief was required for amendments relating to retrospectivity, given significant tax liabilities, which would be incurred. A degrouping tax would be triggered without companies undertaking transactions. Treasury’s response to Deloitte’s comments on retrospectivity was that clients should restructure prior to July 2008 to prevent the de-grouping charge arising. It seemed unreasonable to expect companies to incur costs and administrative burdens to protect themselves against the impact of retrospective legislation.
Deloitte was supportive of the introduction of a wear and tear regime for commercial buildings. Companies would be able to claim capital allowances for new buildings. No allowance was available for normal commercial buildings or when improvements were made to existing buildings. It was proposed that relief be extended to include improvements to existing buildings, as well as buildings which were acquired, and not only those which were erected.
Mr K Moloto (ANC) wanted Deloitte to provide more information on their concerns about double taxation of dividends.
Mr Roelofse referred to page 2 of Deloitte’s submission where they provided an example of how double taxation could be resolved. The wording of the Revenue Laws Amendment Bill would result in penal taxes, which should not be the purpose of tax legislation.
Mr Moloto wanted further information on why Deloitte felt that some aspects of retrospectivity would be unfair.
Mr Roelofse repleid that one should guard against making arbitrary changes to legislation with retrospective effect, which would undermine the confidence in the SA tax system.
Mr Moloto asked Deloitte to elaborate on the existing guarantees contained in legislation, which would protect the South African tax base from being eroded.
Mr Roelofse said that under the new rules a non-resident company would not be allowed to sell assets to its South African subsidiary, because the non-resident would not be regarded as part of a group of companies. The buyer would become subject to capital gains tax and income tax that the foreign company should have suffered. Certainty was needed to keep a group of companies together but as a result of legislation, changing groups would be broken up.
Mr S Marais (DP) asked Deloitte to elaborate on the wear and tear regime being introduced. He wanted to know if buildings of related businesses of a manufacturing group would be excluded. He asked for Deloitte’s opinion on empty commercial buildings, given that the stimulation of new businesses was more important.
Mr Roelofse said that taxation should be fair to the taxpayer and to the fiscus. There was recognition that assets over time lose their value. Tax should flow out of commercial transactions and an allowance should be given to the taxpayer given that value of buildings would decrease over time. Allowances should be given for both new buildings and buildings acquired.
Ms J Fubbs (ANC) said that if one looked at urban areas, the tax was referring to depreciation and not to incentives. She asked for Deloitte’s input as to if one considered tax as an incentive as opposed to viewing it as depreciation.
Mr Roelofse said that Deloitte was supportive of the efforts made to broaden the South African tax base and the provision of tax relief.
Price Waterhouse Coopers (PWC) submission
Mr David Lerner and Professor Osman Mollagee presented. They raised concerns about the impact of certain provisions, and also made suggestions to clarify potentially ambiguous provisions. Anti avoidance provisions were drafted too widely and legislation should not be drafted which appeared to be retrospective given the importance of certainty for tax laws.
Clause 71, which dealt with part-disposals, attributed to capital distributions, were considered to be tantamount to retrospective legislation, which was unfair. Even though the proposed implementation date was 1 July 2008, the amendment attacked transactions, which were completed in the past. Potential hardships would also be created where cash flows from the original transactions were re-invested or otherwise applied, because the prospect of short-term taxation did not exist at that time. It was requested that the proposed paragraph 76A (1)(a) should be withdrawn in its entirety, and only capital distributions made from 1 July 2008 should trigger part-disposals. An exemption needed to be made for situations where the shareholder and declaring company would qualify for s47 relief.
In terms of Clause 48 two concerns were raised regarding the definition of a group. The exclusion of certain target companies would result in the de-grouping and/or prevention of the grouping of group companies that were not directly targeted. The general targeting of exempt income in sub paragraph (d) was unduly broad. It was requested that the new definition in Section 41(1) should expressly clarify that group companies that would have formed part of the “group” under the Section 1 definition, remain group companies for the purposes of Section 41(1) notwithstanding that its “controlling company” might be excluded by the first provisio to the “group” definition in Section 41(1).
With regards to expatriate employees in Clause 60 the Draft Bill proposed to limit the circumstances in which a zero amount was ascribed to residential accommodation provided in SA by an employer to an employee when the employee’s usual place of residence was outside of SA. SA required skills and it was very important not to make changes to the tax legislation which would have a negative impact on the ability of SA to attract and retain imported skills. Amendments would result in an unacceptable increase in the cost for the expatriate population.
While Clause 55(1)(k) targeted certain abusive avoidance schemes, it also appeared to have ended up targeting legitimate commercial transactions that were the intended beneficiaries of this group relief. The objective was to enable normal profits generated inside a group to be distributed within a group without any Secondary Tax on Companies (STC). It was proposed that the “included in the profits” test should be reworded to ensure that bona fide group profits were not unfairly disqualified from the exemption.
In Clause 63 the aim was to add previous extraordinary dividends to the disposal of certain shares, when they are sold. Proposed amendments aimed to prevent some mischief but also cast the net too widely which would have unintended consequences for the distribution of post-acquisition profits, liquidations and sudden devaluations. It was proposed that dividends sourced out of post-acquisition profits should not rank to be included as proceeds for the purposes of the dividend-stripping rules.
Mr Maloto required more information from Price Waterhouse Coopers about profits generated and distributed within a group.
Prof Mollagee replied that when companies were restructured but still remained within a certain group, that they should not be unfairly disqualified from the exemption.
Mr Maloto referred to the provision of accommodation to expatriates, which could be extended to a period of four years. He indicated that expatriates could be enjoying tax benefits if they leave SA for short periods every three years and come back. He asked Price Waterhouse Coopers to comment on aforementioned situation.
Prof Mollagee replied that Treasury and SARS have sufficient provisions in place to ensure tax avoidance by expatriates did not take place.
Mr Marais asked Price Waterhouse Coopers if they were you saying that the legislation would create a playing field which was not level and which would discourage foreign investment in SA.
Prof Mollagee replied that SARS and Treasury were not bringing new changes but were consolidating anti avoidance provisions. Tax legislation in SA had improved significantly, which brought stability and a levelling of the playing fields. Retrospectivity could however spoil gains made.
Ms Fubbs asked for clarity about the shuffling of profits within horizontal and vertical groups and why this behaviour did not qualify as tax avoidance. She also wanted to know what the difference was between a normal profit and a profit as identified by Price Waterhouse Coopers.
Prof Mollagee replied that under the current rule, vertical structures would be considered to be a group and if they converted into a horizontal structure, they would continue to be qualify for exemption except for the profits that they brought with them. Companies did not always restructure for tax purposes and should not be prevented from restructuring.
South African Breweries Ltd submission
Mr Craig Wessels presented. He said that the consumer brand business made use of intellectual property and there were concerns about using intellectual property coming outside of SA from other group companies. Concerns regarding retrospectivity with external brands was raised. For instance when a taxpayer would have already paid tax and after paying royalties, the royalties would not be deductible.
Clarity and certainty was needed regarding intellectual property. The Section 231 approach would give rise to significant double taxation in relation to wholly legitimate and commercially robust transactions.
The definition of affected intellectual property appeared retrospective, which placed and unreasonable onus on taxpayers and it would make enforcement difficult. An exemption was required to ensure that the licensed use of intellectual property did not create affected intellectual property. Section 231 would act as a deterrent to multinationals using SA as a location for establishing and/or undertaking research and development operations.
[PMG note: Ms Fubb’ comment here is inaudible]
Mr Michele Benetello, Director: International Tax, noted that Clause 5(1)(c) proposed that the definition of dividend be amended by withdrawing the exclusion of capital profits earned pre-1 October 2001, which was granted to companies who made distributions in the course or in anticipation of the winding up, liquidation, deregistration or final termination of that company. The proposed deletion of exemptions with effect from 1 October 2007 would effectively negate the delayed amendment of the dividend definition in relation to pre-2001 capital profits. A rectification should be made to ensure that the effective date of the repeal of sections 64B(5)(i) and (ii) is 1 January 2009 and not 1 October 2007.
Clause 5(1) (m) proposed that the amount of share capital and share premium that may be distributed to a shareholder be allocated to any share based on the pro rata value of that share in relation to the total value of the company. The draft legislation however did not made it clear whether the relative values of the shares at the date of acquisition or the date of distribution should apply. Companies were also concerned that share premium might be lost, where share premium was distributed to certain shareholders.
The definition of profits in Clause 5 (1)(o) might lead to uncertainty, since different taxpayers might interpret profits differently. It was suggested that the term be given a defined meaning for the purposes of the Act.
The definition of equity instrument in Clause 10(1)(f) might be too broad and would apply to options or rights granted to employees in terms of a “phantom share scheme” where the employees had not yet received any compensation in terms of the scheme.
It was proposed that Section 231 should apply only to intellectual property transferred after the enactment of the Draft Revenue Laws Amendment Bill and that a mechanism be prescribed, whereby it would be possible to identify any royalties and licence fees attributable to intellectual property originally transferred and distinguished from royalties and licence fees attributable to subsequent developments of the intellectual property outside of South Africa.
The wording of Section 31(2) (a) needed to clarify the position, where the supply was between two permanent establishments of foreign companies, where both permanent establishments were in South Africa.
Ms Fubbs asked KPMG to provide more clarification on their input on Clause 56.
Mr Benetello said that STC would be payable with the deemed dividend provisions. A number of KPMG clients indicated that they were able to obtain loans at a lower rate than normal. These clients would be penalised when they get a loan from a connected person.
The meeting was adjourned.