Taxation Laws Amendment Bill [B13-2008] & Taxation Second Laws Amendment Bill [B14-2008]: deliberations & adoption

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Finance Standing Committee

24 March 2008
Chairperson: Mr N Nene (ANC)
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Meeting Summary

National Treasury and the South African Revenue Service (SARS) summarised the outstanding issues from the report-back given at the last meeting. The revised approach for inter group transfers focused on the de-grouping charge. Intra group sales followed by a sale out of the group would have time limits attached, and although there was originally provision for an advance pre-approval, that had been criticised and National Treasury was not enforcing this aspect at this stage. Certain concessions and adjustments were made in respect of the group definition and controlled foreign companies. A taxpayer who had already made a valid application for a ruling would be excused from the effective date. Certain problems had been identified with black economic empowerment (BEE) financing transactions, and Treasury had issued a media release, and would discuss the matter further in the Revenue Laws Amendment Bill. From SARS’ side, there had been further consideration of how to handle outstanding reconciliations from employers. It had now been decided that The employer would not be permitted to issue the IRP5 until submitting the reconciliation to SARS. Employees who were thus prevented from submitting their returns on time would be exempted from penalties. Members asked for assurance around the Section 45 BEE transactions, noting that these should not be unduly hindered as they were of benefit. The time frames for submission of returns by employers and employees were questioned. Concern was expressed that South Africa should guard against creating undue hindrance to foreign investors, and the Committee was assured that a balanced approach was being sought. The Committee resolved unanimously to adopt the Taxation Laws Amendment Bill and the Taxation Laws Second Amendment Bill. The Report of the Portfolio Committee on Finance was unanimously accepted.

Meeting report

Taxation Laws Amendment Bill and Taxation Second Laws Amendment Bill: National Treasury Report Back and deliberations
The Chairperson noted that there had been an extensive consultation process. He asked National Treasury and SARS to comment on outstanding issues.

Prof Keith Engel, Chief Director, Legal Tax Design, National Treasury (NT) reported briefly on the matter. There had been a response document tabled, in which National Treasury had attempted to address the concerns around a group transfers that the industry had. The industry had been most upset that a transfer of assets for cash or a note was to incur costs. The revised approach by National Treasury had no longer focused on that, but only on the de-grouping charge. This was accepted widely. However, there was also a second approach needed for an intra group sale, followed by a sale out of the group. There was certain relief now provided for, that was limited to a two-year period. The Commissioner would have power to require special reporting and the Minister had the power to require an advance pre-approval process. Taxpayers had objected to that, and NT decided to pull back on that aspect for further consideration.

A further request had been to deal with the group definition, which had excluded controlled foreign Companies (CFCs), which were only partially taxable. Certain concessions and adjustments were made.

On a more simplified level, the issues of effective date had attracted some criticism. It was originally 28 February. As a concession National Treasury had now said if the taxpayer had applied for a ruling, the taxpayer would be exempt from the new rules coming into effect on that date, provided that a valid application had been made.

The third matter was around Black Economic Empowerment (BEE) financing transactions, which had been identified as a problem, but which were outside the scope of this legislation. It had come to light that many BEE deals were being used as a front to deprive Treasury of its revenue, and also to benefit the lenders rather than those requiring empowerment. National Treasury had therefore issued a media release, on Thursday 20 March, and this would be the subject of further discussion in the Revenue Laws Amendment Bill.

Mr Frans Tomasek, Assistant General Manager: Legislative Division, SARS, noted that from the Income Tax point of view he had previously reported that one item remained under consideration - the question of how to handle outstanding reconciliations from employers. The original proposal was that until that reconciliation had been provided, SARS would not allow a credit in the hands of the employee. Taxpayers felt that this unduly penalised the innocent employee. There were two possible options mooted. It had now been decided that the employer would not be permitted to issue the IRP5 until it had submitted the reconciliation to SARS. Employees could therefore be in the position where they could not submit their tax returns. They would be exempt from penalties for late filing, provided that IRP5 and returns were submitted within a reasonable period after receipt of the reconciliation and IRP5.

The Chairperson noted that there had been progress on these issues.

Discussion
Mr B Mnguni (ANC) wanted assurance whether the anti avoidance rules in Section 45 BEE transactions would now be dealt with, and how many deals would be going through.

Prof Engel said that some of the deals might have to go through two hurdles. The legislation as now framed had managed to attack most of the problems, and these deals tended to be more widespread, but involving smaller amounts. He said that there were still some major deals. These were being targeted by the media release and the new approach, and it was hoped that this would be shutting down the larger and more complex deals.

Mr M Johnson (ANC) mentioned that there would be a workshop to discuss the BEE matters more fully. He noted that BEE transactions were obviously in the interests of the majority of South Africans. He said that there needed to be a definition of the people affected.

Prof Engel noted that there was the activist approach versus the written text of the law. The workshop would be in the hands of the Committee. Many of the BEE structurings had a purported intent to assist the poor, but were in fact only raiding the Treasury and those setting up the deals were helping themselves. Treasury did not want to hinder genuine transactions, but did want to avoid the situation where deals were cheating everyone. It had tried to take a balanced approach.

Mr Johnson was interested to know the time frames for the employee returns. He wondered if there should not be more certainty on the times within which the employees would have to file their returns after receiving their IRP5.

Mr Tomasek noted that employers had two months to put their reconciliation in. It was difficult to be specific on the side of the employee. There could be a number of other factors at play. There had to be a degree of flexibility on the revenue side, and that was provided for. There was a range. He explained that a person might be given three minds extension, and that might be reasonable because of his particular circumstances, which could involve a loss of documents, or fire, or ill health. Another person might be given a shorter period if he could not prove that there were acceptable circumstances to justify a longer period.

Mr S Marais (DA) congratulated Treasury on its approach, which had been thoroughly proactive and empathetic. He noted that investors were still concerned that there were so many processes around doing business, and there was a necessity to push foreign fixed capital investment. He asked if Treasury was confident that the Bill now would put South Africa still in the position of preferred investor country, and compare favourably with emerging markets. He said there was a necessity to protect what belonged to the Treasury, while at the same time encouraging investment.

 Prof Engel noted that everything tended to be pushed to international comparisons. The tax system was unique and not necessarily comparable. National Treasury could only really try to continue with a balanced approach. If Treasury was not careful, people would hide behind the "foreign investment" level, but in fact it would amount to raiding the Treasury. Overall it was trying to take a balanced approach; if there was a legitimate business activity, it would be supported. However, he pointed out that raids on the Treasury would cost everyone else, as compensation would take the form of increasing the tax on salaried workers.

The Chairperson read the Report of the Committee in respect of the Taxation Laws Amendment Bill. As it was a money Bill there was no motion of desirability.

Members resolved unanimously to adopt the Bill.

The Committee then deliberated on the Taxation Laws Second Amendment Bill, which was also adopted unanimously.

The Report of the Portfolio Committee on Finance was unanimously accepted.

The Committee Chairperson appreciated the efforts of SARS, NT and all those who had commented.

The meeting was adjourned.

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