Taxation Laws Amendment Draft Bill [B13-2008] & Minerals and Petroleum Resource Royalty Draft Bill [B59-2008]: briefing

This premium content has been made freely available

Finance Standing Committee

03 March 2008
Chairperson: Mr N Nene (ANC)
Share this page:

Meeting Summary

National Treasury briefed the Committee on the Draft Mineral and Petroleum Resources Royalties Bill. This was driven by the approach in the Mineral and Petroleum Resources Development Act (MRPDA), which required conversion of old to new order rights by 2009, and the Bill was largely dependent on policy of the Department of Minerals and Energy. It concerned the fact that minerals were to be owned by the State. However, the State was entitled to impose mineral royalties in respect of extraction. The MPRDA Act reserved the right to communities to receive a consideration of royalties. There had been several drafts of the Bill, and this was now the third version. The protection of communities to receive a royalty in respect of mines on their land was not unique to South Africa. Quotations were tabled, elaborating further on the principles of royalties, how they should be imposed, and what they should relate to. There were a number of possible bases, and some countries had a fixed rate, while others had a progressive rate. The tax should be designed as easy to administer. Many jurisdictions recognised that processing would take place before the commodity was sold, and would allow for deductions, often referred to as net smelting return. National Treasury set out what had been used as the basis of calculation in each of the drafts, and the final option chosen. Graphs were presented as to how the rates would vary according to the calculations. National Treasury then gave an explanation of each clause of the Bill. Questions related to the small business relief, the options that communities could take, the reasons for treating cross border transactions differently in this Bill, why the fixed number formula was being used, who would benefit from the royalties, how land claims would be dealt with, and calculation of the deemed sales. National Treasury and South African Revenue Services then briefed the Committee on the Taxation Laws Amendment Bill of 2008 (the Bill). The main purpose of the Bill was to adjust the rates and thresholds. Pension streamlining had been on the cards for some time and there were anti avoidance measures. There were holdovers from 2007 now being brought in, and there were some other isolated amendments. There was an important change to corporate income tax, with adjustments of fuel and excise levies, and exemptions to home associations. Depreciation was allowed on water pipelines and small companies would in future be able to elect to write off immediately under a small equipment rate. The rules on depreciation were generally streamlined. The position in respect of living annuities had been difficult in the past, and this Bill aimed to recognise them fully so that they did not undermine the status of pension funds. Recognition was also given to preservation funds and deeming provisions. Lump sum payments were being removed from the provisional tax system. The more urgent issues addressed by the Bill related to corporate and cross border rules. They were very technical, but this was an area in which there had been substantial loss to the fiscus. The group definition was being amended to allow foreign companies with SA tax residence to remain in a group and retroactive issues on deemed de grouping had been closed. Several examples of group structures were given. The potential exemption for cash outs was being eliminated. Attempts were made to address the fact that intra-group relief was being used to promote leverage buys, and discussions had been held with industry to try to identify the genuine or bad transactions. The issue of re-domicile was dealt with, as also foreign investors. The Bill sought to promote investment while stopping the avoidance, and it was suggested that taxpayers could demonstrate legitimacy of their structurings to Treasury and obtain approvals. SARS described the amendments in relation to the tax free accommodation, where the period was to be raised to two years and the amount capped. Research and development deductions would apply to the person carrying out the research. The wording in relation to ongoing services was to be tightened. Tax free relief was provided for 18 months for liquidations. Clarification was given on share-for-share relief. Buybacks were to be treated similar to dividends. There were attempts to close the loops in cross redemptions and cancellations. Other issues arising from the Diamond Levy Bill were identified, and special measures applied in respect of services rendered for the 2010 World Cup, the details of which would be agreed between the Commissioner and FIFA. Other changes were described in respect of dividends for foreign companies listed on the Johannesburg Stock Exchange, intra-Controlled Foreign Company transactions, public benefit organisation donations and liquidations, changes to the SITE system, interest payable, obligations to provide reconciliations and other administrative matters. Members queried how South African tax systems and laws compared to other countries, and whether the changes in the JSE tax regime would affect performance.

Meeting report

Draft Mineral and Petroleum Resources Royalties Bill: (the Draft Bill): National Treasury (NT) briefing
Mr Ismail Momoniat, Deputy Director General, NT, gave a brief background to the Draft Bill. It was driven by the approach in the Mineral and Petroleum Resources Development Act (MRPDA), which required conversion of old to new order rights by 2009. Although the Department of Minerals and Energy (DME) was responsible for the administration of these matters, only the Minister of Finance was able to table a money bill. This Bill was largely dependent on policy of the DME. It concerned the fact that minerals were to be owned by the State. However, the State was entitled to impose mineral royalties in respect of extraction. The MPRDA Act reserved the right to communities to receive a consideration of royalties.

Mr Momoniat explained that the first draft had been published in 2003. At that stage industry had expressed concerns that the royalty rates were too high, and that the tax base, based on gross revenue, was too broad. There was no relief for marginal mines and small-scale miners, and it was argued that there would be double royalty, as the Bill was silent on community royalties. A second draft of the Bill was released for public comment on 11 October 2006, which took into account many of these concerns. A third version was published on 6 December 2007, and this was the version now before the Committee. NT had also asked for further comment, which was due by end February.

Mr Cecil Morden, Chief Director: Economic Tax Analysis, NT, noted that the protection of communities to receive a consideration or royalty in respect of mines on their land was not unique to South Africa; similar royalties were also imposed in Canada and some other countries. Although the structure and rates of royalties varied internationally, most were collected as payment to the owner of the mineral resource in return for the removal of the mineral for the land. Royalties must relate to a non-renewable resource. He tabled some quotations elaborating further on the principles of royalties, how they should be imposed, and what they should relate to. There were a number of possible bases on which to impose a royalty, and once that had been decided then the rate must be quantified. Many countries had a fixed rate, which might differ from mineral to mineral; others had a progressive rate. The tax should be designed in such a way that it was easy to administer.

Mr Morden noted that royalty tax was unique to the natural resources sector. Sometimes it was based on profitability, but more commonly on the quantity of material produced, or its value. Many jurisdictions recognised that processing would take place before the commodity was sold, and would allow for deductions, often referred to as net smelting return. Often the deductions would be for prime costs – typically transportation costs, and refining and smelting. The international trend was to reduce the rates, with the exception of diamonds and other precious stones, to around 3% to 4%.

Mr Morden noted that the tax base of the second draft had been gross sales value, but had allowed for certain deductions (see attached slides for detail) for allowable expenses. At that point, however, NT had consulted further with industry, to try to get an idea of the types of expenses to be considered. This list had included items such as smelting, refining, processing, primary crusher, Dense Media Separation plant, recovery and sorting. These were all beneficiation activities. In addition there were expenses of transport and insurance, throughput, security, port shipping and insurance.

NT then managed to identify nine key minerals, and the table showed the deductions as a percentage of the gross sales for each. Some minerals were more pure than others. Expenses for manganese, for example, would be largely transport costs, whereas for less pure minerals there would be more refinery costs.

The second draft of the Bill had also still included a flat rate. NT was asked to consider the idea of having a lower rate for beneficiation - there was one rate for refined and another for unrefined products. However, NT then ran into some problems, as iron ore was difficult to define. Therefore consideration was given to a different way of dealing with it. A new tax rate structure was then formulated.

Instead of trying to give certain rates for certain minerals, the third Draft was now using a formula. The royalty rate would be the minimum rate plus gross sales revenue over a fixed number. The typical value for the minimum rate would have to be found. Information was obtained from other mining companies, which indicated the average Earnings before Interest, Taxation, Depreciation and Amortization (EBIDTA) over gross sales percentages. Slide 22 of the presentation set out three scenarios that NT had used for the basis of calculating the possible returns. NT had chosen to run with the second of these options, so that the typical royalty rate would range somewhere between 1% and 4%. 

Graphs were presented on how the rates would vary, depending on EBIDTA over gross sales. The advantages of the new formula included the fact that the derived rates were related to the ability to pay, that there was no discrimination between different minerals, and there was no necessity to adjust the rates when the economy was good or bad. It automatically catered for marginal mines. The profitability would depend partially on management, but variation on commodity prices was critical to this industry. The formula took this also into account. Government share would be found in the upside benefits and the down side risk of commodity prices. There was, however, a need to guard against manipulation of EBIDTA. Allowing for certain deductions would avoid penalising mines that beneficiate. It took account of the location of the mine in relation to the market. Mr Morden explained how the rates had been used in the third draft. Mr Morden noted that NT had received an indication of how the ratio of EBIDTA over gross sales had fluctuated for various minerals over the past 5 years. A comparison was provided in slide 33 of the royalty rates now fixed in the third draft as against the rates that had been contemplated in the second draft Bill.

Mr Morden then proceeded to describe the clauses of the Bill. The definitions provided that the royalty would only apply to geographical areas within the confines of a mineral resource right, and would apply only to extractors. Mineral resources included mineral and petroleum. The transfer of a mineral resource acted as the trigger for the royalty. The charging provisions were contained in Clause 2. The rates were set out in clause 3.

Clause 4 set out the aggregate gross sales, and these were interpreted broadly, including a full range of benefits obtained for mineral resources transferred. Non-quantified amounts did not form part of aggregate gross sales. This clause contained an important change, since the mining company as a whole was being taxed. This covered also the situation where the primary product might be one type of mineral, but others were also being produced. An average of production would be allowed.

Clause 5 set out the limited set of deductions, covering beneficiation or transport related costs (including insurance). The indirect expenditure was not allowed.

Clause 6 set out the deemed amounts and transfers.

Prof Keith Engel, Chief Director: Legal Tax Design, NT, said that the rules were designed to prevent avoidance. In royalty tax, there were only a few people who were subject to the tax. NT was trying to prevent people from manoeuvring activities to get around royalties. The first rule prevented under-collection of the royalty by people who would sell a mineral without adding its normal beneficiation activities. A deeming provision was now inserted so that sellers were deemed to sell at the normal point of processing where they would sell for tax purposes. The second deeming rule prevented under-collection of the royalty by a person exporting the mineral without a sale. Minerals would be deemed to be sold at the export point. The third rule prevented over collection by deeming the royalty to apply before beneficiation activities that were not otherwise conducted by the industry. This that would apply to the steel industry.

Mr Morden noted that there was provision for write off of bad debts in Clause 7, and for currency conversion in Clause 8. These were normal clauses in tax legislation.

Part III of the draft Bill contained relief measures. There was relief for small miners (defined as those with a turnover of less than R5 million), on certain conditions. Illegal small miners did not qualify for this relief. There were anti-avoidance measures to prevent a mine being split into smaller units to qualify for relief. However, there were exceptions to allow mines to export samples for analysis without having to pay a royalty, provided that the sampling did not exceed R20 000 per assessment period.

Clause 11 contained rules relating to arms length value transactions. Prof Engel said that in the income tax arena there was an internationally accepted definition of an arms length price (the fair and reasonable price that two independent persons would arrive at in an open market) and arms length transactions could be imposed between related parties. He noted that to avoid royalties, extractors might try to shift value to non-extractors. Therefore NT held that arms length pricing must apply to all transactions under this Bill. There was a formula for calculation, which would take into account earnings, gross sales or beneficiation and transport expenditure. The issue would be to find good valuators.

There was a general anti-avoidance rule in Clause 12. Not all the methods to avoid royalty payments were yet known. The Commissioner therefore was given the power to target mineral resource transfers that could undermine the application of the State royalty, and re-characterise them.

Mr Morden noted that there had been an argument that fiscal guarantees should be provided for long-term investment. Investors were allowed the option to enter into a fiscal stability agreement with the Minister, which would have the effect that the formula would remain in force for the duration of the royalty right. (see slides 42 to 46 for further details)

Mr Morden then summarised the administrative aspects of the Bill. He then noted that NT had done a brief estimate of the revenue from this Bill. After allowing for certain deductions, the tax base had been calculated.

He noted that the royalty payments would apply in May 2009, when the conversion had been completed.

Discussion
The Chairperson noted that this Portfolio Committee would also be discussing this with the Portfolio Committee on Minerals and Energy, who had been invited to this presentation but had other commitments. There was a need to check that this was in line with the primary legislation and did not undermine any of those principles.

The Chairperson noted that the media statement on the third draft, dated 6 December 2007, spoke of small business relief. It referred to a maximum turnover of R10 million per year. However, slide 39 had referred to turnover of R5 million. He asked if this had referred to a six month period.

Prof Engel confirmed that this was so

Mr K Moloto (ANC) also asked for clarity on the media statement. He asked whether NT believed that communities should convert their arrangements or continue as they were.

Mr Morden noted that NT had had long discussions with stakeholders, and had concluded that it was up to the community and the mines to enter into an agreement. They would be protected, but how they should take their matters forward was entirely up to them. In the case of Mofokeng, the agreement was that Mofokeng would convert their royalties because it was in their interests to do so. There were some changes made to the Income Tax Act to accommodate this but it was not a requirement of the law.

Mr Moloto said that currently the Income Tax Act arms length would apply to cross-border transactions between related parties. He asked the reason for the different approach under this Bill.

Prof Engel noted that royalty was based on gross sales. It was important to have a real price. If two companies were engaging in the normal course, the extractor would want the best price. However, these kinds of deals might involve players who had no real concern on the price. A large mining group could have numerous companies. Because they knew only the extractor was subject to royalty, they would try to have the extractor sell to another subsidiary (maybe even a shelf company) at a lower price, and that shelf subsidiary would on-sell at a higher price. That second sale would not attract royalties. In the Income Tax Act, the main concern was cross –border situations. Royalties, on the other hand would not apply to domestic or foreign companies who were not extractors. Therefore there was a need to have arms length considerations apply across the board. Also some finance institutions would suggest that structures could be created to hide tax.

Mr S Marais (DA) asked why the fixed number formula was being used.

Dr D George (DA) also asked a question on the formula. He asked how specifically the "A" and "B" parts of the formula were determined. He asked if the NT had followed from what it wanted to collect.

Mr Morden noted that slides 20 and 22 set out the formula. A was the minimum rate, and B was the fixed number. NT had compared the various figures, and had taken into account that no payment to the State for a resource should be allowed to drop to or go below the zero rate. However, there was a problem with marginal mines, and NT had to decide how far to help them, in view of the importance of the industry and the fact that it was labour-intense and created jobs. Therefore in an extreme case NT had decided it would be prepared to drop to zero. The rates in the first draft had fluctuated between 1 and 8, and in the second draft between 1 and 6. Assuming a maximum EBIDTA of around 50 or 60, the rates would fluctuate between 1 and 5. Internationally they were between 3 and 4. Those were the guiding parameters. If there was a higher B factor (fixed number), the rates would come down and would have been significantly outside the target range.

Mr Momoniat said that the rates had been arrived at after extensive consultations with industry. He reiterated that this final rate had come out lower overall than in the other two drafts. NT had looked at the industry, held discussions, made a judgement call and arrived at what it felt would be fair.

Mr Morden said that the real rates should be between 1 and 5. They might go to zero if the mine was in trouble. If the mine was doing well through increased commodity prices, they might rise for a period above 5.

Mr Marais considered those who would benefit from the royalties. He wondered if this did not allow for avoidance by the extractor. He noted that if there was a write off of bad debt, then no royalties would be paid. He said it might be possible to use a chain of companies to avoid the royalty, and wondered if there should not be a limit.

Prof Engel noted that if something was sold for 10 million, but if this was not be paid and was written off, then the extractor was not being taxed. The bad debt was the money not collected and written off. However, assuming that the selling price was R100 million, and that amount was written off, then certainly the 4% royalty would not be paid, but the extractor would have lost the R100 million. There was no incentive in this case. Where the bad debt was found not real, then there were provisions to stop this.

Mr Marais asked how land claims would be dealt with, to ensure that the rights of local communities were being protected.

Mr Morden responded that MPRDA provided for imposition of a levy, but the Minister of Finance could only table a money bill. Item 11 of Schedule 2 was important as it protected the rights of communities. The DME was administering mineral rights, and they would not doubt have a role to play in ensuring that this was upheld. It was under that Act that the protection would occur. The protection in the current Bill would not impact upon the royalty imposed.

Dr George asked ho the deemed sales would be calculated.

Prof Engel noted that the Bill said that any side deals would attract the real price. He stated that there was some difficulty in deciding what was a real price, and S A Revenue Service (SARS) would have to argue a price, which could be checked back to world commodity prices. Significant expertise would be required to determine the amounts, as the commodity prices on the exchange were not the same as the extracted price.

Draft Taxation Laws Amendment Bill: National Treasury /S A Revenue Services (SARS) Briefing
Mr Franz Tomasek, General Manager: Legislative Policy, NT, noted that the public hearings on the Draft Taxations Law Amendment Bill (the draft Bill) would commence the following day.

Prof Keith Engel noted that there were a number of tax laws, and a short parliamentary calendar. The Bill was released the day after the Minister's budget speech. An e-mail was sent by NT calling for comment from everyone who traditionally commented on the Bill. The closing date for comments was 5 March, responses from NT would be heard the next week, and the Bill would be tabled on 19 March.

The main purpose of the Bill was to adjust the rates and thresholds. There were some urgent matters: the Pension streamlining had been on the cards for some time and there were anti avoidance measures. There were holdovers from 2007 and there were some isolated amendments.

The key rates had been adjusted, the corporate income tax rate being the most important. The fuel and excise levies had been adjusted and there were a number of thresh-hold adjustments There were important changes for home associations, who would now be permitted a R50 000 exemption for investment income. Other related issues were under review in relation to home owners associations, such as VAT and income tax on conversions. These would be brought up for comment later in the year.

Depreciation was another issue. Water pipelines for electricity power plants had not been depreciable, but the new Bill allowed for 5% depreciation. The percentage base seemed small but the pipelines were quite large. Small business companies had had a special business regime enacted. For non-manufacturing, a 50/30/20 rate would have formerly applied. However, some could get access to the small equipment rate that would have allowed an immediate write-off. Therefore small business, under the new Bill, could choose the better option. Certain rules prevented artificial inflation of cost for depreciation purposes, in sale/lease situations. The new regime under this Bill aimed to streamline the rule.

In respect of pension tax amendments, NT was trying to streamline a number of issues. There were ongoing confusions in the pension area, with a dual process. The overall pension tax regime concerned ordinary individuals, but the regime had been complex, built on a weak system. Some of the regulations were hidden in the Income Tax Act, and NT was now attempting to bring all hidden regulations to light, and move them over to the Pension Funds Act.

Living annuities contained some anomalies. A person retiring from a pension fund could take a one-third lump sum, and the other two-thirds was intended to span the remaining period of retirement. Some annuities were guaranteed to pay a certain amount, with adjustment for inflation. However, they were not often investor-friendly. Therefore, living annuities, for shorter times, would allow for better retirement planning. Technically pensions using living annuities were invalid, and NT was now trying to ensure by this amendment that they would be recognised so they did not undermine the status of pension funds.

Preservation funds were also addressed. Under the general pension law framework, a number of funds had emerged. A person could take his pension and move it into the vehicle of a preservation fund, through a number of deeming provisions. These were now being recognised officially, and NT was trying to make the definitions simpler. A person retiring could either leave his money in the fund or it would go to a preservation fund. Much of what was being done was creating a foundation for more important reforms coming up later in the year.

Provisional tax was designed to pick up recurring income, and was payable on amounts not subject to withholding tax. Capital gains were excluded, but lump sums were not. Lump sums were now being removed from the provisional tax system.

Prof Engel then described the more urgent matters, which related largely to corporate rules and cross-border rules. These were technical, but involved large amounts of money. The first amendments related to intra-group transactions. Serious amounts were being lost to the fiscus at the moment, and he predicted that there would be serious contention about NT’s attempts to close down the loopholes. Amendments in 2007 had been made, but had failed to reach the core of the problem. The share avoidances and cross border had been stopped, but the main issue was at that stage outside the scope of the budget. NT needed to get the Minister's authority, which it had now done, to address the matter again.

Prof Engel noted that there were controversial discussions about the “group” definition. To have a group of companies was beneficial, because roll-over relief was allowed. Any gain or loss could be deferred. Narrowing the definition would narrow the benefit. A foreign company in South Africa was outside the net. However, some foreign companies were registered in SA and managed in SA, and they were also currently being excluded. The proposed changes would allow foreign companies with SA tax residence to remain in the group. Retroactive issues on deemed de-grouping charges had now been closed.

The group structure was tabled. In a typical group transaction, there would be a parent company and subsidiaries. Subsidiary A would sell all assets. The gains would roll over to the second subsidiary B. However, there was no reduced tax cost in that note. Although gain or loss was not recognised, the full market value was being recorded in the note for tax purposes. In the following transactions, that note or cash would be used to "play games" with the tax system, trying to turn roll-over relief into tax exemption. This went to the core of the capital gains system.

NT was aiming also to eliminate the potential exemption for cash-outs. The tax cost of the note would be limited to the lower of market value or the tax cost of assets transferred. Internal cash transfers would not be allowed. There had been comments that this was too harsh.

Prof Engel then said that the intra-group relief had come up with different results to what had originally been intended. It was typically being used now to promote leverage buys. The interest deduction was being preserved. The structures were being set up to ensure that interest deduction was still allowed, which could not be done on share transactions. Loans were therefore not being tied to shares, but to underlying transactions. A bank would therefore lend to a new co-buyer, but this buyer would be buying the target assets that produced income, via section 45. There had been some suggestions that this had been accepted for a while, and therefore NT should be continuing to accommodate such transactions. It was hoping to meet with industry to go through the transactions and possibilities, and separate the good from the bad. That would be the large discussion for tomorrow

The issue of redomicile was also raised in the Bill. World wide taxation issues were discussed in 2001. At that time, NT wanted fuller taxation of those multi-nationals. The argument was raised that taxing them too heavily this would reduce their competitive edge. Therefore there was a compromise that they would only be taxed to the extent that they were high-avoidance concerns. This was to allow SA-Headquarter companies to be competitive, to encourage repatriation of dividends, to allow greater markets, and to allow for growth in SA company brands. The difficulty was that there were efforts being made to remove the Headquarter companies to abroad. This was an international problem. There were a number of ways to try to re-domicile the Headquarter.

Prof Engel noted that rules were created to promote tax free repatriations. He gave the example that bringing back dividends to SA would be tax free. Because of this, there was an argument that the sale of the foreign subsidiary for cash should also be tax free. That was allowed. The issue was one of participation exemption. The exemptions were however now being used to undermine the value of the Headquarters, as a sword against NT. Under current law, if the SA Headquarter parent company wanted to leave SA there was an exit charge, based on paying the fiscus back for the benefits received over the years. However, there had to be a second set of rules to deal with the stripping out of the foreign subsidiaries, which would result in making the  SA Headquarter now a regional player only. There were arguments for and against indirect re-domicile. NT felt that the main issue was the Headquarter company.

NT also was looking at foreign investors into South Africa. If a foreign company owned SA assets, and sold them, they would usually be exempt from capital gains tax. That was an international rule, enshrined in most treaties as well established Organisation for Economic Cooperation and Development (OECD) practice. However, that exemption was being used for a foreigner’s sale to be spread throughout all the controlled subsidiaries.

Prof Engel expanded on this. An SA parent would own subsidiaries, but would itself be owned by a foreign parent. If the SA parent sold the subsidiaries there would be a capital gains charge. What was now happening was that the foreign parent would set up a new company, and the SA parent company would be sold at market value to the new company. If the new company sold on the SA parent the following day there would be no tax. It would then unbundle and move the subsidiaries up one level, to enjoy the exemption. The exemption was being passed down multiple levels. NT was trying to stop the avoidance, but did not want to stop investment. If there were legitimate uses, it would ask the taxpayer to show the detail and try to strike the proper balance. It did not wish to revisit the issues over and over, lest credibility start to suffer. The issues would be addressed.

Prof Engel said that the miscellaneous amendments to the Bill fell into two categories. There were carry overs from 2007 and isolated new matters. Although NT had received comments on the 2007 amendments, they had lived with them. The goal was now to get the outstanding issues finalised.

Mr Franz Tomasek said that one of the amendments related to the former practice by SARS of allowing tax-free accommodation for a period of one year to a foreign expatriate worker. There had been a court case on the issue, and it had now been decided to bring the period in line with work permits, to allow tax free accommodation for two years. This was to take into account the added expense to the worker of running two homes. The case for this relief became less compelling over time. There was to be a cap on the benefit, which was the lower of 25% of the monthly salary, or R25 000 a month.

In respect of research and development, there had been a deduction allowed for the person funding this research and development. The problem was if the funder was an offshore resident the deduction would not assist. It was now decided that the person carrying out the research and development would get the deduction.

Prof Engel then moved on to reorganisation issues. NT had set out last year to see that collective investment schemes were to be allowed to participate in formations and mergers, and the wording was now being tightened to remove the confusion that had become apparent.

In respect of ongoing services, one set of formations had been missed by the legislation. Where services were now provided to the controlled company subsidiaries there would now be extension to that.

There would now be tax free relief in respect of liquidations over an 18 month period, extending the previous six-month period in recognition that complex liquidations were unlikely to be resolved within this shorter period. 

Share for share relief was merged in 2007 to asset-for-share relief. There had been some problems, and the amendments in the Bill were seeking to clarify the point.

Domestic distributions were also dealt with. A share issue would allow a company to issue more shares, to make the shares more liquid. In effect the company was merely breaking up its interest. The amendment would clarify that this would not attract capital gains tax.

There was also to be clarification that buybacks were to be treated as dividends, like redemptions.

Cross redemptions and cancellations were being dealt with in the Bill.  People had been using the STC on companies to eliminate profits. NT was trying, by the new amendments, to ensure that the subsidiary owned shares in the parent. NT had picked up a number of transactions and was attempting to close the loops.

It was noted that in the past, in a group, it was possible to move dividends tax free. There were also rules to deem a dividend, or to give cash. However, there had been an exception, which said if the profits in a subsidiary were reduced, then there must be a positive benefit shown to the parent. This reduction versus positive had been extended to showing a positive to any other company in the group.

Prof Engel noted that the Diamond Levy Bill had been enacted. NT was now working on the implementation. There were a number of issues raised. The main one identified by SARS was a worry about short term diamond permit holders. The Commissioner was now to be given the power to collect immediately on export from a non-regular dealer. Transitional rules had emerged, and they would be cleaned up.

Mr Franz Tomasek described the special measures for the 2010 World Cup. The changes were being effected to reflect all guarantees made to FIFA and the practical issues. It had been envisaged that the host broadcaster would be tax exempt in respect of the set up broadcast fees. However, it was then realised that the host would have to be in the country for longer than the tax-free “bubble” would exist. A class of service providers, known as FIFA Service Providers, were to be tax-exempt, and the host broadcaster was to be added to this class. It was noted, however, that it would enjoy this tax free status only as far as it was dealing with the 2010 World Cup broadcasts. There were technical changes around affiliated entities, which had been broadened.

It was noted that since the expatriates working for FIFA would be tax-exempt, it made no sense to impose the UIF and Skills Development Levies, and therefore exemptions had also been created for these.

Mr Tomasek noted that the 2010 events did not always fit comfortably into the concept of the tax free bubble. The Commissioner and FIFA would have to agree which events did fall within the tax free bubble, and the power to do so was being conferred by the Bill.

Mr Tomasek noted that there was a general exemption for withholding taxes to commercial entities who were part of the FIFA event. It made no sense to say that the employer had to deduct something for which the employee was not liable, and therefore there had been a need to address the wording so that the positions of employer and employee were aligned. 

Mr Tomasek noted that at the moment a person could get an exemption for a dividend received from a foreign company if it was listed on the Johannesburg Stock Exchange (JSE). The 10% threshold that applied was now being dropped. There were further amendments to ensure that dividends paid back to South Africa for foreign cooperatives were exempt, just as dividends from foreign companies.

The Bill also contained provisions that intra CFC transactions, in relation to creditor loss and debtor gain, would not be taxed. If shareholding in CFCs changed, NT wanted to ensure that only one level of tax would apply.

The Bill also dealt with public benefit organisations (PBOs). There was currently a deduction for donations to public benefit organisations, and that was being allowed at the time of assessment. However, if the employer offered employees the option of having a deduction against the salary for donations, then these donations could be taken into account on the PAYE system by the employer, so that the employee would not have to wait until the end of the year to get a refund. Previously a PBO that was liquidated would have to transfer its proceeds of liquidation to a similar PBO, but this had been difficult. The Bill now provided that the liquidation proceeds could go to any other PBO.
 
Mr Tomasek noted that the Bill also made administrative changes. These included changes to the SITE system, which currently was based on the assumption that a person would be earning for the full year, and would "annualise" the salary. In future, an employee would be able to lodge the return and get the tax back if he ceased to work. No employees' tax would in future be allowed to be set off against taxpayers' liability unless the employer had submitted a reconciliation to SARS.

The administrative penalties were to be revamped. NT was hoping, incrementally, to introduce a more consistent set of penalties and to clarify the regulations around how these would be imposed, to create greater certainty for taxpayers.

In the past year, the method of filing had moved to e-filing, which did not require attachment of documents. However, in some cases provisions of legislation still referred to attachment of documents. These would be deleted.

In the past there had been an obligation on employers to provide reconciliations, but there had been no corresponding penalties. This had posed a serious problem for SARS, as it could not check what had been put in the returns. Therefore a penalty was now to be introduced against employers, and those who had not put in the reconciliations were allowed 60 days to do so.

At the moment a person who was not a provisional taxpayer and who was owed by SARS would not receive interest. Equally no interest would be charged on short-payments. SARS therefore was fixing a date from which interest would be paid or charged. Individuals could make voluntary payments to ensure that they did not have to pay interest, by 30 September.

Mr Tomasek said that there were also some changes to the year of assessment. Sometimes companies could decide, for practical reasons, to close their books on "the last Saturday of June" instead of on the actual closing date on 30 June. Technically speaking that could not be done. However, recognising the practical reasons for this, SARS was now prepared to permit a consistent window period of around 10 days close to the year end for closure.

Mr Tomasek finally noted that at the moment, when an objection or appeal was lodged, SARS could be asked not to recover the money pending the outcome. The Bill now provided specifically that any decision of SARS not to receive or recover tax chargeable while an objection or appeal was under consideration did not affect the ultimate obligation of the taxpayer to pay the interest accruing during the waiting period.

Discussion
Mr Marais asked if the applicable interest pending finalisation of a dispute had been set.

Mr Tomasek said it was linked to PFMA, and at present SARS would charge 14% being charged and would pay 10%.

M Marais, asked, in regard to home associations, what would be the situation if a share block were to sell the assets and divide them amongst the shareholders, and if this would be dealt with in the same way as investment income.

Mr Tomasek said the idea was that a home association was acting for its members. If it had a vacant piece of land, and sold it off, it would be taxable as if the members had owned it as a partnership. The reason for the investment income being exempt was primarily for convenience of the home association and SARS. At the moment if a home association earned interest income, it would be required to register as a provisional taxpayer, and this was not really feasible if it earned only a small amount. However, a large investment income would attract individual tax for the members of the association.

Mr Marais asked why the 2010 World Cup provisions were to apply only to the 2010 event, and not to similar events.

Mr Tomasek responded that all bidders had to commit to certain tax concessions. FIFA was in a strong position, and so South Africa had had to agree to concessions.

Mr Moloto asked that the tax free repatriations being used to undermine headquarters should be explained further and asked for clarity on the two levels of tax shown in the examples. 
 
Prof Engel said that two sets of rules were intended. If a company distributed dividends in cash back to the Headquarter company, that was acceptable. If a South African company sold a foreign subsidiary, SARS would normally require that the sale be a cash sale, followed by reinvestment, or alternatively that there should be a restructuring of the subsidiaries. However, avoidance was occurring because the SA parent would not sell or dispose of the foreign subsidiary for cash. Cash was therefore not coming in. If the company unbundled, technically the legislation in prior years applied. It could unbundle, and SA shareholders would directly own the foreign subsidiary that would become the new Headquarter company It was also possible that a South African parent could sell for R1or enter a series of liquidations. There would be problems if it moved interest onshore. The main avoidance had been disposing of the subsidiary with no cash coming back in. Now the Bill was also attempting to cover the longer ways of doing the transaction.  What had been shown as level 2 was merely a the suggestion. The suggestion had been to have a net market value of deemed distribution of assets. That however was still under discussion.

Mr N Singh (IFP) asked for further details on foreign expatriates' accommodation. He asked what had been the outcome of the case that was recently heard.

Mr Tomasek said that SARS had always taken the position that a foreign expatriate could stay for a year without attracting tax on the fringe benefit of accommodation. However, some taxpayers had not agreed that this was a correct interpretation of the law. In this case the employer had withheld the tax, but the employee said that he was not in any event obliged to pay it. The Court understood the rationale of what SARS was trying to achieve, but held that in fact that legislation had not supported the position. Legislative amendment was needed to correct the situation. Originally a six month period had been proposed, in line with treaties, then a year, and now SARS was permitting a two-year exemption, but placing a cap on the maximum payable per month.

Mr Singh asked if a church would be a PBO or if it would have to register.

Mr Tomasek said that churches often were PBOs but donations to churches were only deductible it they were conducting a specific class of activity that was deductible, such as care of HIV orphans. The donation would have to be ring-fenced.

Mr Singh suggested that the new requirement that taxpayers, instead of attaching documents, be required to keep them for five years was onerous to taxpayers. He also asked if there would be a window period for companies who had not formerly sent through reconciliations to adjust their systems.

Mr Tomasek said that the five year period already applied the Income Tax Act. Legitimate loss of documents would be considered on an individual basis. In respect of the window period, he noted that six months was required, to try to get employers moving towards better enforcement.

Dr George asked how widespread were the inter-group transactions.

Prof Engel said that some were designed to facilitate leverage buy outs In mergers and acquisitions, it seemed that recently the use of inter group for mergers was very common. NT wanted to ensure that, if they were to be used in this way, that there would be limitations to roll over relief and not referral. 

The meeting was adjourned.

Share this page: