Taxation Laws Amendment Bill [B13-2008]: National Treasury / SARS Response to submissions

Meeting report

Draft Taxation Laws Amendment Bill: National Treasury (NT) and South African Revenue Services (SARS) responses to public submissions
Prof Keith Engel, Chief Director, NT,  and Mr Franz Tomasek, General Manager, SARS, indicated that they would speak to the main issues raised during the public submissions on the draft Taxations Laws Amendment Bill.

Comments had been made about the timing. The National Treasury gave this matter as much time as they could. In addition to publishing the Bill on the website, NT had e-mailed all relevant people interested in tax matters. There had been further consultations on 5 March, and reasonable compromises had been worked out with the sector.

On the matter of intra group reorganisations (Section 45 of the Income Tax Act), Prof Engel said that NT had originally designed intra group relief as a deferral. However, intra group transfers were being used as disguised exemption cash-outs. As a matter of fairness that must be dealt with. Arguments were put up that many legitimate transactions were being attacked by the proposed draft. The problem was that there were many illegitimate schemes being done by companies with large amounts of money at stake. A new formula approach was therefore being taken. The basic adjustment was about the solution. The discussion group recommended that the de grouping charge should be altered. Reducing the base cost in the loan had created problems and would be changed. The de-grouping charge had therefore now been enhanced. Originally, if a buyer and seller in a group did an intra-group transfer, tax would be triggered if the group broke up. Now a group break up would also be considered when buyer and seller separated from their parent organisations. That would prevent the disguised cash outs . There was a bit too much over-breadth, but industry was prepared to accept that, and there might be some refinements over time. Essentially the institution was pleased with that. Fair market value-based cost could be got for intra-group loans.

Prof Engel noted that the solution generally did work, but there was one escape route that was still under consideration. A second avoidance scheme was being used that went beyond Section 45. Black Economic Empowerment (BEE) deals were an important class of commercial deals. However, it had been found that some companies were adding to them. For example, there might be a legitimate BEE deal, but it would go through with external funding. through a second scheme bank would lend additional money (that was not needed) as a "funnel" and there would be a circle played around this, in which the financier ended up with a double deduction. The bank who had received the double deduction would then lower the interest rates for the group The securitisation deal was legitimate but was being used as a pretext to pile avoidance on top. The fiscus was suffering huge losses. Those deals could not be hit under Section 45, and NT was planning to address that quickly. It believed that a number of those were susceptible to the General Anti Avoidance Rules (GAAR) and NT would be coming back on that, and would be dealing with this more aggressively. The legitimate deals must be allowed to go through.

Prof Engel noted that a second set of deals was used when foreigners were using treaty exemption through Section 23K of the Income Tax Act to multiply exemptions through the group. Foreigners selling South African (SA) shares were exempt from Capital Gains Tax (CGT). However, the foreign investor owning a SA parent company would try to multiply that throughout the group. There were many criticisms that the NT proposals were hitting the innocent transactions. Therefore NT had decided to narrow the proposals, to state that the foreign exemption would apply fully unless it was being used in the way he had just described.

The next issue was that of re-domicile through shifting foreign company tax residence onshore (8th Schedule of Income Tax Act, paragraphs 12(2) and (4) and 64B). There had been many incentives to encourage people to bring assets on shore to South Africa to enrich and support the Headquarter SA company. Multinationals were an important part of the franchise and were to be supported. However, this incentive had been misused. The exemptions were used not just to use the money back home but to strip the headquarter company. The criticism had been that the solution was punishing the repatriation of funds, and that the tax should be calculated on exit. NT wanted to ensure that incentives were not used to undermine the headquarter company. Therefore it had accepted the suggestions made, and it would incentive the bringing in of assets, but no exemptions would apply at the exit point. 

The effective dates of 21 February 2008 were raised as another contentious issue. In the past, when seeing high level avoidance, NT had tried to ensure that  the changes to address the avoidance became effective on the date of media release or date of release of the draft legislation. In doing so, it was trying to protect large amounts that were being hidden from the fiscus. Commentators had said that, in the case of section 34, the effective date proposed would have the effect of disrupting a number of deals. NT was still debating within itself and SARS a proper effective date. It wanted to give the market certainty, but did not want to disadvantage the fiscal stability. It would revert to the Committee when a decision was made, within the next day or two.

The definition of a living annuity (section 1 of the Income Tax Act) was also raised. In the Pension Tax area there had been a number of informal practices and coordination issues. Much of the tax legislation in this area did not take into account commercial realities. Therefore SARS had come up with practice notes to make the regime more flexible. These amendments in the Bill were intended to codify the rules. Most were procedural and would effect better linkage with the Pension Act.

The issue of who could offer living annuities was important. Many retirement vehicles required, in order to get incentive treatment, that a two thirds and one third formula be applied on closure. Upon retirement, a one-third lump sum was taken in cash, but two thirds must come out in the form of a guaranteed annuity or a living annuity. Living annuities had an amount of flexibility as to when the withdrawal was made. In order to have this vehicle work, there must be an annuity. Under current law, an annuity had to be offered by a long term insurance provider. However, a Supreme Court of Appeal case had thrown that into doubt. NT had agreed therefore to take this proposed amendment out at this stage, as it was premature. This was a procedural issue and a financial sector policy matter, rather than a tax matter, and needed further discussion.

There was also an issue around divorce and pensions (section 1 of the Income Tax Act). Under the previous law, pensions would remain linked despite divorce. There was a continuing problem in unravelling this. By the end of the year, the clean-break principle should be in place both in the pension fund and tax legislation. This amendment was geared towards this.

Prof Engel did not deal with matters on pages 7 to 9, as they were technical. They did not require specific focus.

Prof Engel then moved to the question of expatriate housing, (contained in 7th Schedule, income Tax Act, paragraph 9(7A)). Tax benefits were provided for foreign workers, by tax-free accommodation being allowed. However, it had been found that a number of tax payers were hoping to stay for years with free accommodation as part of their working benefit fringe. The period of one year was firstly extended to a two year period, and there had been requests to extend this further to four years. NT remained committed to the two year period. This was based on the idea that most skilled expatriates would be maintaining a dual home, and two years was a likely period that they would be likely to do so. This also linked up to some short term Department of Home Affairs (DHA) permits. The purpose was not an incentive, but to remove the double cost.

A second issue had been raised, suggesting that the R25 000 cap per month was too low, and should be raised to R50 000. During discussions, the point was made that a short-term expatriate worker was likely to stay in a hotel and the costs of this could rise quite quickly to R25 000 for a month. NT had agreed that longer term stays should be subject to the R25 000 per month cap, whilst stays for 90 days or less would not have this cap. There was also another issue. The ceiling as originally stated had referred to the lower of R25 000, or 25% of the salary. That percentage cap had now been eliminated, also for procedural reasons.

There had been further submissions around the time periods. Prof Engel noted that there was now a two-year rule and a 90-day rule. A request had been made to raise the 90 days to 183 days in line with tax treaties. However, NT pointed out that it was not really effective to put a person in a hotel for 6 months and it was most likely that longer term stays would be done in furnished rented accommodation. The treaty exemption only applied with a foreign payor, not a South African. it was felt that the concessions had been generous.

Mr Franz Tomasek then dealt with the administrative issues. He noted that SARS would pay and charge interest over seven months on provisional tax (Section 89quat and para 23A of Fourth Schedule, Income Tax Act). . SARS felt that this was a generous period. The filing season would typically end within those seven months so a person would have completed the tax return and would know how much he owed SARS, and so would be able to top up on provisional payments in order to avoid having to pay interest.

In respect of medical schemes (paragraph 2(4) of Fourth Schedule), there was currently a problem because employers were treating medical aid contributions differently There was a technical problem because the wording as proposed had forced employers to take all contributions into account, whether or not the employer was dealing with them. It was now decided that it should be worded so that where the employer ran the medical aid through the payroll system, it must be taken into account. Where it was not run through the payroll scheme, the employer may, at his discretion, take this into account.

Mr Tomasek pointed out that the introduction of a penalty on late submission of annual reconciliation (Paragraph 14(5) of Fourth Schedule) had been criticised. SARS noted that the 10% penalty was consistent, and the 60 day deadline had been in the law for many years, although it had often been ignored. It led to spin off problems for employees when they were to be assessed, as SARS could not verify the reconciliation from the employer with the employee's assessment. SARS needed to enforce this penalty. Some countries required reconciliations monthly. The requirement to submit a reconciliation two months after year end was not too burdensome. Having said that, SARS appreciated that some employers had let their system slide, and in the first year that the penalty came into operation it would be applied with some leniency to allow employers to catch up.

Another proposal that attracted comment was that refunds could not be paid without proof of payment (paragraph 28A, Fourth Schedule). However, it could give rise to difficulties, because there was often a procedural problem on the employee side. SARS would be potentially assessing them again. There were a couple of other possible approaches suggested. One was that the IRP5 may not be issued until the reconciliation had been submitted to SARS; alternatively that SARS would not process a taxpayers return until the reconciliation had been submitted. Both options would have less impact than the original proposal

The ability to make refunds of VAT into third party bank accounts (Section 44(3)(d), Value Added Tax Act) introduced some risk to taxpayers. there were practical reasons why  the facility was needed. SARS would withdraw the proposal to amend and study it further in consultation with those affected.

There had been some confusion about the change from the VAT registration threshold (Section 23(1)(a), VAT Act).  It would not be possible to separate it from the proposals around the simplified tax system. Both must be introduced concurrently. The decrease would not be introduced until the small business system came into operation.

Discussion
Mr K Moloto (ANC) asked how the Commissioner would be notified in advance about the organisations, as there was reference to "may empower pre-approval".

Prof Engel said that there was an issue about reporting and pre-approvals. In the discussions last week,  industry felt that there must a heightened sense of reporting. Often, as a matter of practice, reorganisation would be done but only a year or two later would the assessors be able to see the true details of the deal. If there was no spotlight on the issue, people were likely to hide matters. The concept was to get full disclosure so that would dissuade more aggressive deals from being done. The information reporting was generally left to the Commission's discretion. At one time there had been dates set out in the legislation. However, the law was not a good instrument for reporting information. The Commissioner was empowered to closely monitoring reorganisation transactions and to set requirements for reporting.  Some organisations may wish to have advance approval before setting up the deals. There was an idea that perhaps this power must be restored to the Minister, by regulation. The Minister could then say that in certain circumstances the Commissioner may require pre-approval. The details were still to follow. He suggested that the regulations could be shown to the Committee. NT did not want pre-approval for every transaction. It had in effect reverted to the old rules. The question of the timing was important.

Mr N Singh (IFP) thanked the team for their intensive discussions and negotiations. He asked about the interest for provisional taxpayers. He noted that e-filing had been allowed up to 31 January, which was over the 7 month period. He asked if this would change for the 2008 tax year.

Mr Tomasek thought that this year there would be shorter periods for filing. Even if a person was e-filing, and there was an extended period, there was still seven months to do the rough calculation of what was owed. For most people this would not be a real issue, as it was likely that the amounts deducted would be approximately the same as those payable, with small adjustments, typically on travelling. In that situation SARS would pay or charge interest. He noted that in fact the taxpayer could make a top up payment, but SARS was not in a position to give a preliminary refund, so SARS would be paying interest.

Mr Singh asked about the first year leniency on reconciliations and whether it would be enshrined in the law, or used only as a discretionary matter. He asked whether there should not be a provision that the enforcement be effective from the next tax year.

Mr Tomasek did not think the leniency should be enshrined. A number of different factors would be at play, and it would not make sense to try to work them out for one year. He believed that if the introduction of this was delayed it would merely lead to a call for leniency in the following year. South Africans tended to wait for deadlines.

Ms J Fubbs (ANC) asked for clarification of the comment on retirement saving vehicles, that NT was "taking into account the realities". She asked if this had not always been done.

Prof Engel said that the real question was a procedural one; it was felt that this was premature and not entirely appropriate in this Bill. He conceded that there was a misnomer n the wording.

Ms Fubbs noted that,  in relation to expatriate housing, the comment was made that employees who had been in South Africa for more than 31 days in the prior tax year would not qualify. She had assumed that each tax year would be taken separately. She asked for clarity.

Prof Engel said that this comment related to the way the two time periods worked. If an expatriate had been in the country for a brief period, he would fall under the 90 day, rather than the two year rule.

Mr Tomasek gave an example of a person coming in for a year, and leaving for a year, and then returning for another year. There were many who would be in the country for less than 90 days (typically short term technical consultants). Those staying were more likely to be renting a furnished apartment. To stop the in-and-out situation SARS then decided to look also at the year before, and consider whether the person was in the country for more than 90 days. If they were, then the combined periods would count to the two-year rule. In essence the two systems ran in parallel.

Ms Fubbs appreciated the balancing act in relation to expatriate housing, but noted that the dilemma involved public and private sectors, as there was a tendency also in the public sector to bring in specialists for short periods of time to address specific matters - NT itself had done this. She did not believe this was abuse. The person was only needed on secondment. She would have thought that it should not be the intention to have negative spin-off.

Mr Tomasek stressed that the three-month rule would allow for the short-term visit. Anyone coming out for six months would fall into the two year rule. Expatriates could come in for six months in each of two years with that exemption. If they were to keep coming in the following years then there was consideration of whether they were being favoured over local consultants. A person coming in for one or two years was less likely to sell his home overseas, but would be renting it out. If a person in SA rented out the home, he would  not have a dual expense problem, and if he rented out, this would fall in the South African tax system. There were differences to be borne in mind.

Mr S Marais (DA) noted that there were major concerns that had been addressed and that the effective dates were under consideration. He noted that companies would want to plan, and it was only fair to take this into consideration.

Mr Tomasek understood the question of balancing, and noted that it was trying to be fair to the fiscus.

Mr Marais suggested that there was a legal relationship between an employer and SARS. He would think it made sense not to bring the employee into the equation, if he had complied with requirements, and he was pleased that that aspect was under consideration.

Mr Tomasek noted that the employer did have a linkage but the employee would get the benefit.

Mr M Johnson (ANC) said that whilst NT had had some responses to the proposals, there were others who had not been able to comment. Although this was not directly mentioned in the Bill, he wanted to raise the issue of the special pensions. There had been an outcry that they had been heavily taxed and that exemptions needed to be given. There had been no response from NT and he would like to have an opportunity to engage further on those matters at another time.

Mr Tomasek said that there was originally a Retirement Fund Tax, but gradually this had been reduced, and now had been eliminated. Pensions were tax free. Money put in was deductible. Even if a lump sum was taken out, there had been special relief provisions in the last year. The question was whether NT had gone far enough.

Mr Johnson noted that the special pensions fell under the Special Pensions Act. Beneficiaries would receive a lump sum. He noted that the issue was probably being addressed more from a retirement point of view, but whether these were in line with other pensions must be considered.

Mr Tomasek noted that the Special Pensions were dealt with separately because they were a state pension. When they were designed, the fact that they were taxable was taken into account. If there were suggestions to change the tax treatment then it would be necessary to revisit their set-up. This would need to be considered by way of a separate submission, as there were multiple factors to bear in mind. This could not be dealt with properly here.

Mr B Mnguni (ANC) commented that companies were being given a period to deal with their arrangements. He asked if SARS would be able to spot whether there were legitimate or illegitimate unbundlings, and how much might be lost if these schemes were allowed to go through.

Prof Engel said that in tax law there were usually two parts to the anti avoidance, and time periods were generally around 18 months, 2 years or 5 years. The planners would plan, and the deals often had a certain time pressure. The purpose of the time requirement here was to address those deals that had gone a certain way; National Treasury would be able to look at those. The question was the balancing of time. The 18 months and 2 years might be effective for most. However, there might be some companies who were prepared to be patient. The limitation was an attempt not to hinder too many legitimate transactions.

Ms N Mokoto (ANC) asked for comment whether group company taxation was feasible.

Mr Tomasek said that the concept of group taxation had been under general consideration since the Katz Commission. It would be difficult to introduce it; Japan had only introduced this three or four years ago. It was a consideration being revisited from time to time, but it was certainly not in the pipeline this year.

The Chairperson drew attention to a late submission of the Association of Collective Investments that had been circulated to Members. He was not able to allow an oral presentation on this.

The Chairperson also noted that a letter had been received from PricewaterhouseCoopers after the meeting on 5 March. This organisation had raised some concerns on comments made in the meeting. That would be circulated to Members. The Committee would have to deal with the issue of financing, outside of these considerations today.

Mr Singh agreed that the oral presentations should not be allowed. He asked if NT and SARS had had sight of this submissions and wanted to make any comments.

The Chairperson indicated that a copy had been handed out only that morning. NT had indicated it would like to have a chance to look into the matter further.

The Chairperson said that a gap identified by some presenters was that the process did not allow for further submissions on the responses of National Treasury. It was impossible to satisfy everyone. In future the Committee would like to allow for further submissions. On this occasion the time constraints were too tight. The Committee would be formally considering this Bill on Tuesday 25 March.

Committee Report on Appropriation Bill
The first draft of the Committee report was tabled. Members studied the report, page by page, and suggested a number of changes. The recommendations were to be amended.

The debate on the Appropriation Bill would take place on Tuesday.

The report was adopted, with amendments.

The meeting was adjourned.