National Treasury, South African Revenue Service (SARS) and various tax experts were present in order to discuss tax and Exchange Control proposals for the 2008 budget. National Treasury provided a comprehensive presentation that outlined the tax policy objectives for 2008/09, the tax revenue trends, and the various proposals that had been made.
Mallinicks and the South African Institute of Tax Practitioners provided their recommendations.
Discussion topics covered indirect taxation, passive holding companies, biodiversity incentive schemes, double taxation, and withholding tax.
National Treasury Presentation
Mr Ismail Momoniat (DDG: National Treasury), Mr Franz Tomasek (Assistant General Manager: Legislation - SARS) and Mr Cecil Morden (Chief Director: Economic Tax Analysis, National Treasury) outlined the tax policy objectives for 2008/09 and the tax revenue trends (see document). The presentation touched on various issues such as disabilities, where plans had been put in place to expand the list of disabilities that may qualify for the deduction of all medical expenses. The scope of the definition of mental illness that may qualify for the deduction of all medical expenses had been limited.
On the matter of employer-provided bursaries, as a rule, if an employer provided a bursary to a relative of an employee, then a taxable fringe benefit would be triggered. However for employees earning up to R60 000 per year, the fringe benefit, up to R3 000 per year, would be tax-free. On passive holding companies, it was noted that the lower corporate tax rate of 28% created opportunities for arbitrage, where individuals would channel their passive income (dividends, interest income, rent, royalties, etc) via a company.
Other topics included the urban development zone tax incentive, the challenge of affordable low-income housing, biodiversity conservation efforts, and certain ad valorem excise duties that would be abolished.
Mr S Marais (DA) asked what the idea was behind the ad valorem excise duties for vehicles. Slide 48 made reference to the cost and the pricing of electricity; however no reference was made to the sale of electricity to neighbouring countries. Slide 11 made reference to disabilities and clarity should be provided on who had been consulted.
Mr K Moloto (ANC) said that in the OECD countries, there was a shift towards indirect taxes. There was a proposal to increase VAT tax in order to reduce corporate tax. What would be the impact of a move to an indirect tax system given South Africa’s social and economic background? On tax incentives, what were the lessons learnt? SARS should provide clarity on whether they had managed to pick up the existence of passive holding companies.
Mr B Mnguni (ANC) asked about the difference between the normal pension fund and the preservation pension fund. On exchange controls, he had heard that institutions no longer had to apply. Clarity should be provided on whether the legislation would limit over exposure by South African beneficiaries overseas. On the issuing of incentives, how many people outside the SARS radar, were coming into the tax system.
Dr D George (DA) asked for an explanation of what it meant for preservation funds to be stand alone. On the issue of tax arbitrage, were there any other measures that could be taken to prevent tax arbitrage on a large scale? The electricity tax was imposed to compensate for emissions. However, it would be better to incentivise people to cut down on energy emissions.
Mr N Singh (IFP) asked if there was a definition for low and medium income housing and whether there were any brackets. Clarity should be provided on the fuel levy and what informed the decision to provide the Road Accident Fund (RAF) with more funds. On biodiversity, Treasury should comment on the incentive schemes that would be offered. Was the e-filing deadline extended beyond 31 January 2008? SARS should comment on whether duty-free legislation was still work in progress and when the legislation would be implemented.
The Chairperson asked for comment on the successes and failures of the urban development zoning tax incentives introduced in 2004.
Mr Momoniat replied that due to the type of income distribution that South African had, it could not be compared to some of the current OECD countries. It was only through direct tax systems such as income tax that one could really have a progressive income tax system.
Mr Morden added that that 25% of South Africa’s revenue came from VAT alone, which was very impressive and South Africa had a well balanced tax system.
Mr Momoniat said that Treasury did not know to whom Eskom sold electricity, however Treasury tried to get the tax to apply to all those who consumed the electricity.
Mr Morden added that Eskom did publish in their annual report the sales to neighbouring countries. There was a debate on whether the tax should also apply to the sales to neighbouring countries, and there needed to be a balance on how to address the matter. On emission tax, it was possible to have an emission tax, however the difficulty was in the administration, as it was difficult to measure and monitor emissions. There was no doubt that there were engagements with provinces on biodiversity, and once the agreements were in place, then the deductions would come into effect.
Mr Momoniat replied that the environmental tax issue had come up before. Working out a system of how such taxes were best collected would have to be looked at. Treasury had consulted all key organisations that dealt with people with disabilities in order to determine what the best approach was. On the housing issue, it was very difficult to see what the numbers were. The best thing to do was to go to the municipalities and see which were in the process of putting up new houses. The supply of housing was a problem in the low cost sector, and Treasury needed to look at rentals in the sector, and there was a series of consultation processes in place.
Prof Keith Engel, Chief Director: Tax Policy, National Treasury, replied to the question on the pension funds and said that under current law there were a lot of informal practices around pension laws. What Treasury was trying to do was bring all the informal practices into the pension laws, and then take all the provisions and shift them over into the pension laws.
Mr Morden replied that the process of adjudication and trying to scrutinize applications was not an easy process. The process was a trial and error process and it was hoped that a better product would be designed the next time around. On the ad valorum tax matter, the tax applied to both locally produced and imported goods. It was a percentage of the price and was measured at a progressive rate.
Mr Momoniat added that other revenues referred to dividends from companies such as Eskom and Transnet. On exchange controls, oversight would be done by the new Financial Surveillance unit.
Mr Olano Makhubela, Director: Financial Stability, National Treasury, added that prudential regulations were needed to prevent financial institutions from freely exposing their assets in foreign territory.
Mr Momoniat responded that the fuel levy matter needed to be raised with the relevant people in the provinces.
Mr Tomasek replied to the question on passive and holding companies, saying that experience had shown that passive and holding companies did exist. On the matter of e-filing, the tax deadline had passed for individuals. With the duty free laws, there was a need to ensure that anything an individual did with duty free goods, was within the confines of the law. On the off-the-radar screen question, there was a very successful amnesty system which had encouraged people to come into the system.
Mr Hendrik Bester (Tax Director, Mallinicks) made several proposals on the corporate income tax rate, company taxation and Value Added Tax (see document).
South African Institute of Tax Practitioners submission
Prof Jackie Arendse, Chairperson: South African Institute of Tax Practitioners, made several proposals which included the corporate income tax rate, a simplified tax regime for very small businesses, an increase in the VAT compulsory registration threshold, interest and taxable dividend exemption, legislative reform, administrative penalties, bursary exemptions, donations and the incidental use of laptops and cell phones for personal use (see document).
Mr Moloto asked what had been the general use of a passive company and what were the benefits. Clarity should be provided on what would be an alternative to the proposed tax cut.
Mr Marais asked how passive companies would deal with issues such as double taxation. On Secondary Tax on Companies (STC) being replaced by the dividend withholding tax in 2009, clarity was asked on a potential alternative to this.
Dr George asked if there were any other solutions that would improve the handling of the tax abrogate.
Dr Arendse responded that there were a variety of reasons why people would house their investments in a company other than in their personal names. Two of the reasons would be for estate planning and safeguarding from predators. On double taxation, the simplest way in getting around it when dealing with passive companies and the obvious solution would be to provide exemption for dividends that went out of the company. On an alternative to the tax cut, South Africa was generating more company taxes due to a variety of different taxes. As long as there was tax compliance, then there would be scope to reduce the tax rate. As far as withholding tax was concerned, it would be better to bring the tax into the individual’s hand, as it would be dividend income taxable in their hands. On an alternative system, there were a number of issues that should be looked at. There had been tax avoidance measures used to circumvent corporate companies who had tried to avoid tax. Legislation had been introduced which was too harsh, and had to be amended. One needed to be careful in introducing harsh legislation.
Prof Engel said that a number of issues arose as a result of the passive companies. Treasury did not want to have an overreaction in legislation and in order to prevent an overreaction, there needed to be some examples of likely scenarios in order to make sure those issues could be identified and worked on. On double taxation, there was no plan for having double taxation; Treasury was merely trying to even the playing fields.
Mr Morden added that people would use the opportunity to channel their income through a corporate institution. The rule that would apply there would normally be for that of an individual.
Dr Arendse replied that one would have to consider the “look through” rule as opposed to the 40% rate. One need to look at the ultimate shareholder in the company and at what tax rate they would be looking, as opposed to introducing 40% across the board.
Prof Engel said that Treasury was not trying to create an incentive regime. The submissions should have provided real world examples. Further Treasury was concerned about fraud, as it was important not to have fraud in the VAT system.
The meeting was adjourned.
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