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FINANCE PORTFOLIO COMMITTEE
16 October 2001
SECOND REVENUE LAWS AMENDMENT BILL: BRIEFING CONTINUED
Chairperson: Ms Hogan (ANC)
Documents handed out:
Second Revenue Laws Amendment Bill
Second Revenue Laws Amendment Bill: Explanatory Memorandum
Proposed changes in the Foreign Tax Policy Arena – PowerPoint presentation
Corporate Restructurings – PowerPoint presentation
The clause-by-clause briefing on the Second Revenue Laws Amendment Bill continued from Clause 84. This was followed by a briefing on the VAT amendments and the proposed changes in the foreign tax policy arena. There was not enough time for the briefing. The briefing on the new corporate rules will take place at the 17 October meeting.
Mr K Louw (SARS) continued outlining the amendments to the Income Tax Act.
Clause 80 amends Item 30 of Schedule 8 and deals with the time apportionment base cost. The only main change is a proviso in sub (d) that states if an asset is held for part of a year then that part is treated as a full year.
Clause 85 amends Item 31 of Schedule 8 and sub (a) introduces the concept of ruling price on the last trading day before disposal in determining the value of the financial instrument listed on the exchange. In sub (b) a disposal of a fiduciary or usufructuary interest must go across at market value. The amendment clarifies whose life expectancy must be used to determine the value of the interest and states that the donee’s must be used.
Clause 86 amends Item 32 of Schedule 8 that deals with identical assets. There are three categories of identical assets:
- Listed shares
- units in unit trusts
- gold and platinum coins.
If over time a person has purchased these assets and then they start selling there are three specific methods that can be used to determine the base cost. The method most used is the weighted average method and this method has the most amendments. If persons use this method, it must be applied to all assets that form part of that class until all the assets are sold.
Clause 87 amends Item 34 of Schedule 8 and deals with debt substitution. If a debt is reduced or discharged by the use of an asset, then the asset must go across at market value. The market value will be the base cost for the creditor.
Clause 88 amends Item 35 of Schedule 8. Proceeds from the disposal of a asset are dealt with. Sub (a) is a consequential amendment. Sub (b) ensures that there is no double taxation and a double deduction for income tax and CGT purposes. Sub (c) targets buy-backs and attempts to address fictitious losses.
Clause 89 amends Item 38 of Schedule 8. The assets must go across at market value if there are donations and transactions between connected parties. Sub (a) is a textual amendment. Sub (b) states that if an asset is acquired it is an expense to the acquirer. The clause also avoids double taxation.
The reference to spouse in Item 39 of Schedule 8 is deleted by the Clause 90 amendment.
Clause 91 amends Item 40 of Schedule 8. It is a further relief measure. Assets that move to and from deceased estates are excluded. For example, if a person has an interest in a pension or provident fund and the proceeds go into the estate, then it is excluded. Another relief measure is when a person acquires an asset from an estate, then it is an expense incurred by the acquirer.
Clause 92 amends Item 42 of Schedule 8 that deals with short term disposals and acquisitions of identical assets. Sub (a) is a technical amendment. Sub (b) contains no new principle just the reference to spouse is deleted.
Clause 93 forms part of a later briefing by another presenter.
Clause 94 amends Item 44 of Schedule 8. This item deals with the first R1 million exclusion in respect of a primary residential properties. The amendment clarifies the position when the primary residence is in a trust. The definition of interest is amended to make it clear that if any kind of interest is held in a trust, then the exemption does not apply. The exclusion does not apply if the interest is a right of lease.
Clause 95, 96 & 97 are textual amendments.
Clause 98 amends Item 51 of Schedule 8 to clarify that members of close corporations also benefit from the exclusion.
Clause 99 amends Item 53 of Schedule 8. Currently if an employee receives a car allowance then it could be argued that the car is not for personal use but for business use. The amendment just makes it clear that if a person receives a car allowance the gains or losses is excluded from the CGT regime.
Clause 100 is a technical amendment.
Clause 101 amends Item 56 of Schedule 8. Paragraph 12(5) deals with the position of the debtor if a debt is reduced or discharged and says the value of the reduction or discharge is a gain. Paragraph 56 deals with the creditors position and says that it is a loss to the creditor. The only change is that the loss will only be to the extent that it was a gain to the debtor.
Clause 102 amends Item 58 of Schedule 8. The amendment clarifies that the options referred to are only options that have an underlying instrument.
Clause 103 is a technical amendment.
Clause 104 must be read with clause 108. For tax purposes unit trusts in fixed property is not a company but unit trusts in equities is a company. Paragraph 61 dealt with them in the same way. Now unit trusts in fixed property must be dealt with in term of the rules dealing with a trust i.e. the gain is only calculated at the time the unit holder disposes of the interest.
Clause 105 amends Item 62 of Schedule 8 and deals with donations or bequests to public benefit organisations. The asset goes across at base cost and there is no capital gain. In the hands of the public organisation the asset is exempt from CGT. The clause ensures that if the organisation loses its exempt status in the future, then there is a base cost for the asset.
Clause 106 amends Item 65 and the end result is if an asset is sold out of an insolvent estate but the asset was in fact the property of the other spouse, when the proceeds of the sale is returned to the other spouse, there is no gain.
Clause 107 amends Item 67 and deals with transfers between spouses. The principle of the tax free roll over of assets between spouses is retained. There is just clarity that the asset goes across to the other spouse with the same base cost. The date at which the transferor spouse had the asset also applies to the transferee spouse. There is an anti avoidance provision in Sub (b) in that a transfer to a spouse who is a non resident does not enjoy the tax free roll over.
Clause 108 amends Item 67A and relates to fixed property unit trusts that has been dealt with.
Item 67B is a new clause and deals with the transfer of assets between the 4 different funds of long term insurers.
Clause 109 is a technical amendment and clause 110 is a consequential amendment to 109.
Clause 111 amends Item 80 of Schedule 8 and deals with trusts and trust beneficiaries. Sub (3) is introduced to align the CGT regime with the income tax provisions. The gain will only be taxed if the beneficiary at the time of the gain had a vested rig. If at the time of the gain the beneficiary had a contingent right then the gain will not be taxed as yet.
Clause 113 and 114 is dealt with in another part of the briefing.
Amendments to Customs and Excise Act
Mr Louw advised that Clause 116 - 141 are amendments to the Customs & Excise Act 91,1964.
Clause 116 amends the definition section and inserts new definitions that are needed because of the new sections. The presenter said that the sections will be dealt with rather than all the amendments.
Clause 117 amends Section 3 that deals with the duties and powers of delegation of the Commissioner. A new sub (3) states that the effective date of any decision communicated to a person is the date when the decision was issued in writing.
Clause 118 deals with the secrecy provisions and has been dealt with under the generic issues.
Clause 119 amends Section 6. The powers of a Commissioner to appoint places of entry is extended. The Commissioner is given the power to appoint places where transit sheds and degrouping depots can be established. A further sub clause provides that a person cannot handle imported goods if not licensed to do so.
Clause 120 amends Section 8 and gives the details of what must be included in the manifests and reports. A procedure is also provided on how to examine goods that seem to have been tampered with.
Clause 121 amends Section11. Before there is due entry of goods, it must have landed on a licenced wharf and it must be clear to whom it must be delivered.
Clause 122 amends Section 18 and states that the removal of goods in bond through the republic can only be removed to licenced premises.
Clause 123 introduces enabling provisions that will apply when the Industrial Development Zones (IDZ) become operative. The provisions says how the goods in these zones have to dealt with for the purposes of VAT and Customs and Excise.
Clause 125 amends Section 38 and deals with the entry of goods into RSA. The current rule is there has to be due entry within 7 days but there were no guidelines as to how the Commissioner can extend this period. There are now such provisions. Provision is also made for the speedy process of goods with a value of less than R500.
Clause 126 amends Section 43 and is an important amendment because it provides procedures for the disposal of unentered goods, goods that were seized and counterfeit goods. In the case of unentered goods, if there is no due entry, the goods go to a state warehouse. A list of the goods are compiled and notice is given that these goods are stored. There is a 60 day period to claim the goods and make due entry. If nobody comes forward, the goods could be sold. In the case of seized goods the Department of Trade and Industry (DTI) or the SAPS is requested to collect the goods. If they fail to take delivery of the goods within 60 days then the goods can be condemned and forfeited and may be sold. These procedures will alleviate the problem of clogged up warehouses that are expensive to rent.
The Commissioner must follow guidelines when disposing of the property. The Commissioner must in the first instance consult with the Directors General of DTI and the Treasury. If the goods are a danger to public health and safety, they can destroyed. This will normally be cigarettes and alcohol. The goods can be sold in the RSA or exported or can be transferred to another organ of state. For example, if vehicles were seized, they could be given to the SAPS to use. Goods could also be used for disaster relief and given to welfare.
In certain circumstances the goods can be given back to the owner. For example, if a motor vehicle was imported without a permit from DTI but it is now in the hands of the innocent purchaser. The vehicle could be returned if all the duty has been paid in full.
Clause 127 amends Section 44 and states when and under what circumstances a container terminal operator, master or pilot are liable for duty and what stage the liability ceases.
Clause 128 amends Section 47. Sub (1) clarifies the position of explanatory notes to the Harmonised System issued by the Customs Cooperation Council, Brussels. Sub (3) deals with tariff determination and the amendment gives certainty as to what the dutiable amount is.
Clause 129 amends Section 65 and deals with the valuation of goods. Again certainty is given to the taxpayer as to what the valuation will be.
Clause 131 amides Section 75. The amendment makes sure that rebates can apply to good that are imported but are then immediately exported. It provides allowances for fuel and alcohol products.
Clause 132 amends Section 84 in which the notice periods are given if a taxpayer wants to litigate against the Commissioner.
Clause 133 is a consequential amendment relating to unentered and seized goods.
Clause 135 deals with the settlement of claims by the Commissioner and has been discussed under the generic issues.
Clause 136 is another generic issue relating to the appeal procedure and Clause 137 lays down the time periods for litigation against the Commissioner.
Clause 138 amends Section 97 and states the circumstances under which a container operator, pilot or master can appoint an agent.
Clause 139 amends Section 99 and deals with the liability of the agent.
Clause 140 amends Section 109 which gave the power to delay a departure of a ship if he has a public health concern. The power is restricted in that the Commissioner may only use this power if he is giving effect to a certain law that safeguards public health.
Clause 141 adds a new sub clause to Section 114. The new provision gives the state a lien over goods stored in a licensed warehouse.
Amendments to Stamp Duty Act
Clauses 142 – 145 deal with the office restructuring in the Stamp Duties Act 77 of 1968.
Clause 146 is the objection and appeal process under the Stamp Duty Act (generic issue).
Clause 147 allows the Commissioner to write off duties (generic issue).
Clause 148 clarifies Item 6 in Schedule 1.
Amendments to the Value-Added Tax Act 89 of 1991
Mr Peter Frank (SARS Drafting Team) took the committee through the VAT amendments.
The definitions in Section 1 are amended by Clause 149:
‘commercial accommodation’ is amended to clarify the status of a residential house that is let because people were trying to claiming their VAT back on the letting of residential property.
‘dwelling’ is amended to include the fixtures and fittings belonging to it.
‘public authority’ is amended to bring the Act in line with the current names of the public authorities.
‘transfer payment’ is amended because the Exchequer Act 66 of 1975 was replaced by the Public Finance Management Act 1 of 1999.
‘welfare organisation’ is brought in line with the approach to these organisations in the Income Tax Act.
Clause 150 amends Section 2. In the banking industry the price relating to the buying and selling of debt securities is dependent on the interest rate. The amendment states that if there is a sale at a higher or lower interest rate, the supply is exempt.
Clause 151 amends Section 6 and deals with one of the generic issues, namely secrecy.
Clause 152 amends Section 8 and is as a result of a court case that said the expropriation of property is not a supply. The amendment deems it to be a supply.
Clause 153 7 154 are textual amendments.
Clause 155 amends Section 12. The amendment maintains the principle that education must be exempt from VAT. The presenter said that the status for education is to be zero rated. Unfortunately the zero rated status will only be favorable to wealthy schools with a good administrative system because they will be able to claim all the VAT back that they are entitled to. The poorer schools with weak administrative capabilities will lose out.
Crèches and after school care are also exempt but only to the extent that they provide welfare.
Clause 156 is a textual amendment.
Clause 157 amends Section 16 and obliges the VAT invoice to be in the legal or trading name of the vendor.
Clause 158 amends Section 20 buy adding clause 20(1A). In terms of this new clause a vendor must provide a simple tax invoice for a supply more than R1000. If the supply is more than R10 000 then a full tax invoice is required which includes the nature of the supply. The clause calls for an accurate description of the goods.
Clause 159 amends Section 28 and gives a vendor five extra days to submit a return electronically. This saves time and prevents fraud.
Clause 160 – 164 deals with the generic issue of court procedures.
Clause 165 & 166 are textual amendments.
Clause 167 amends Section 44(3). As a result of cheques being stolen, VAT refunds can be paid into the bank account of a vendor. The vendor must indemnify the Commissioner for any loss as a result of the refund being paid into the designated bank account.
Clause 168 amends Section 45. SARS pay interest on VAT refunds but if SARS is owed money by that vendor, the vendor’s entitlement to the refund is suspended until all returns are received.
Clause 169 deals with the generic issue of writing off a debt.
Clause 170 amends Section 47. An appointed agent must notify the Commissioner in writing if the agent cannot comply with a requirement of the notice of appointment.
Clause 171 amends Section 52. There are no longer any agricultural boards so all the references to these boards are deleted.
Clause 172 is a textual amendment.
Clause 173 amends Section 58 of the VAT Act that deals with minor offences. Two new offences are added. It is an offence to issue a document as a VAT invoice when it is not one. The other offence relates to the contravention of Clause 170.
Clause 174 amends Section 65 by adding a new sub clause. The new provision states that no vendor can imply that a discount will be given in lieu of VAT. This amendment targets the advertisements that state that VAT value will be given back to the purchaser. The presenter said that these adverts are misleading as it implies that the supplies are zero rated.
Clause 175 amends Section 66 and deals with the rounding-off tables. These tables have fallen into disuse, therefore the rounding-off method is put in the Act instead of having it in the tables.
Clause 176 amends Schedule 1 that deals with exemptions for certain goods imported to SA. If one looks at the new schedule with the notes then there is no need to cross reference to the Customs and Excise Act.
Clause 177 till the end of the Bill – Some clauses deal with appeal procedures and some deal with marketable securities that will be dealt with later.
The presenter noted that these were all the VAT amendments but the legislation dealing with the VAT implications for the Industrial Development Zones was still being fine tuned.
Proposed Changes in the Foreign Tax Policy Arena
Prof Engel (SARS drafting team) briefed the committee on the proposed changes to the foreign tax policy arena.
Balancing Of Interests
He said that tax policy should not accelerate the flow of capital offshore. Tax policy should
rather seek to retain capital wherever possible. Capital outflows come in two forms:
- A South African business can shift various funds offshore.
- A South African business can move its legal personality (that is, its headquarters) offshore.
Tax policy must seek to prevent both the artificial outflow of funds and the artificial outflow of headquarters (HQ). If the tax is too high, the SA business will just move offshore and if it is too low the SA businesses will move their funds offshore. An example of when the tax is too low is if the SA company is a parent company but the subsidiary is foreign and that subsidiary is exempt then the parent will move funds offshore. The tax cannot be too high but it must also be competitive and this needs to be balanced.
The South African Context
The balance required in the South African context is particularly troublesome because South African taxpayers have disproportionately large amounts of liquid capital at their disposal. These liquid funds will be quick to capitalise on tax exemptions within the foreign arena. The SA tax system must be more competitive than countries such as Japan, USA and Europe because South Africa is still an emerging market.
Current Dividing Line
To prevent fund outflow SA has a more liberal regime than competitors because SA does not go
after tax havens. SARS has a larger HQ concern therefore the leniency.
Pro Competitive Amendments
The presenter gave examples of pro competitive amendments.
1. Enactment of a "Participation Exemption":
Its purpose is to exempt dividends and sale proceeds for foreign shareholdings representing a meaningful "participating" stake in an active company. The requirements for these exemptions are the following:
- The shares must be ordinary shares, or participating preference shares, in a company that does not consist mostly of passive financial instruments; and
- The share interest before the transaction must amount to 25 percent of the total (and be held for 18 months for the gain sale exemption).
2) Technical Changes: these relate to Section 9D and 9E of the Income Tax Act
a) The legislation ignores less than 5 per cent South African shareholders when determining the Controlled Foreign Entity (CFE) status of listed foreign companies.
b) The legislation reduces the capital gains tax to 10.5 per cent for individual ownership of tainted CFE income.
c) The legislation reduces the statutory rate to 13.5 percent for determining whether CFE capital gains are exempt under the designated country exemption.
d) The legislation expands the 5-per cent de minimis exception for passive capital gains (i.e., reducing the calculation from gross proceeds to net gain).
e) The legislation extends the designated country exception to all dividends flowing through a designed country CFE even if the underlying profits were generated in a non-designated country CFE.
f)The foreign dividend legislation eliminates deemed dividend treatment for the sale foreign shares. These sales now fall solely under the capital gains tax.
The designated country exemption applies when the foreign subsidiary is in a high tax country. SARS has said that if the rate is at least 27% for income tax and 13.5% for CGT then the exemption will apply.
The proposed amendments are technical corrections. Some are retroactive to ensure that the taxpayer is not unintentionally caught. These amendments are largely favorable to the taxpayer.
Anti Offshore Liquid Portfolio Amendments
1. Currency changes:
The presenter said that pursuant to the Capital Gains Tax introduced last April, most foreign non-currency asset sales will exclude currency gain/loss. However, currency gain/loss will be included if that gain/loss arises from foreign equity instruments (for example, listed foreign shares, listed unit portfolio interests and commodities listed on an index).This tax applies equally to all taxpayers, including CFEs.
The presenter provided an example: if land is bought for $100 and then sold for $100 there is no gain. But if there was a fluctuation in the Rand dollar exchange rate their will be a Rand gain. This Rand gain will be picked up as it arises.
Distinguishing between Section 24I (of Income tax Act) versus capital currency gains/losses, Prof Engel said that each year the gains and losses will be looked at if the taxpayer is a company, trading trust or an individual who trades in currency. There will therefore be an annual deemed sale if the taxpayer holds on to the currency (i.e. these taxpayers will be subject to 24I). For the purposes of CGT the same thing will happen with capital assets but the gain will be picked up only when the asset is disposed. The individual taxpayer will fall under the CGT regime.
As an anti-avoidance measure the list of foreign currency items will be expanded to include commodity forward contracts and commodity option contracts denominated in foreign currency.
Currency losses on loans cannot be deducted if the loan proceeds are used to acquire foreign assets exempt from currency gain. For example, sometimes the pound is borrowed to buy land in the UK. The act of borrowing is an exchange item but is not subject to gain so the loss will not be allowed.
Currency losses with connected CFEs cannot be deducted if no corresponding income is included.
Further, the legislation refines the definition of foreign currency to provide priority for
permanent establishments. Permanent establishments are exempt from currency taxation with respect to their local currency, and currency movements into and out of a permanent establishment trigger tax.
2. CFE Passive income amendments:
The financial institution exception is narrowed as it used to be too broad. The amendment now picks up portfolio incomes but it does not tax an active bank or an active insurance company.
As there was no time for the briefing on the new corporate rules, this will be given at the next meeting.
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