National Treasury and South African Revenue Services 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.
The Committee was briefed on the Convention on Temporary Admission (The Istanbul Convention). It had aimed to simplify and harmonise procedures for temporary admission of goods to a customs territory, through the adoption of standardized model papers as international customs documents with international security. Goods would be granted temporary admission without payment of customs duties and taxes. This would minimise the costs of border crossing, and provided an important incentive for the development of a country’s economic activity. Carnets would be issued in respect of the goods, which guaranteed also that duties and taxes would be paid in cases of misuse. The carnet also served as a goods declaration at export, transit and import. South Africa acceded, in 2005, to the minimum clauses, to give the carnet system a trial run, and, having decided that it was working well, now wished to accede to the rest of the Convention. Members asked questions on the goods covered by the carnet, whether it would have an effect on drug trafficking and commended SARS for its work in preventing drugs from entering South Africa. Members agreed to recommend ratification of the remaining Annexes B2 to B9, C, D and E of the Convention to the full House.
Taxation Laws Amendment Bill 2008: National Treasury (NT) and South African Revenue Services (SARS) briefings
Prof Keith Engel, Director:Legislative Oversight and Policy Co-ordination, National Treasury, briefed the Committee on the Taxation Laws Amendment Bill of 2008 (the Bill). He noted that 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 now being brought in, and there were some other isolated amendments.
Prof Engel said that the key rates had been adjusted, with the adjustment to corporate income tax rate being the most important. The fuel and excise levies had been adjusted and there were a number of threshhold adjustments There were important changes for home associations, who would now be permitted a R50 000 exemption for investment income. Other related issues were still 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 previously 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 allow 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 lease to sale 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 was aimed at 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 in cash, 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 periods, 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 original 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 had been excluded, but lump sums had not been. Lump sums were now being removed from the provisional tax system.
Prof Keith 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 had been made in 2007, but had failed to reach the core of the problem. The share avoidances and cross border avoidance 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 and managed within South Africa, 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 because this had been accepted for a while, NT should be continuing to accommodate such transactions. NT hoped to meet with industry to go through the transactions and possibilities, and separate the good from the bad.
The issue of re-domicile 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 lay with 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 a 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.
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 in that year, and now the goal was to get the outstanding issues finalised.
Mr Franz Tomasek, General Manager: Legislative Policy, SARS, 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, so as 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, as it was more likely that he would rent out or sell the foreign home. 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. However, 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 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. This extended 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 Standard Tax on Companies (STC) to eliminate profits. NT was trying, through 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 Controlled Foreign Company 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 their 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 reconciliations 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 as the date 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.
Mr E Sogoni (ANC, Gauteng) asked how South Africa’s tax system and laws compared to tax practices in other countries.
Prof Engel responded that South Africa’s taxes were reasonable and that comparisons with other countries should not be drawn, as countries faced different socio-economic conditions. He added that there had been problems in the mid-1990s as the South African tax system had fallen apart and this resulted in poor people paying more as rich people disappeared out of the system.
Mr Sogoni asked how the change in the Johannesburg Stock Exchange (JSE) tax regime would affect its performance.
Mr Engel noted that the amendment would ensure that local companies compared equally with their international counterparts.
Mr Tomasek said that the new tax system would be implemented accordingly and that taxpayers needed to be patient during its implementation. He noted that the SARS would engage with employers and that software would be made available from SARS to assist them with their tax submissions.
He added that diplomats and FIFA officials would be able to claim back tax on certain products, but not on products and services such as petrol, diesel and cigarettes.
Mr Engel stated that fears of a decline in foreign direct investment due to the amendments made in the Act were unfounded, as foreign direct investment was not solely driven by tax policies, but by various other policies or factors as well.
He noted that if SARS stopped giving incentives to business then companies with bigger profit margins would be more likely to leave then those companies with smaller profit margins.
The Chairperson commended SARS for the good tax policies and guidelines they had set in place. He noted that SARS had been instrumental in designing and advising other African countries on tax issues and policies. He believed that the Bill could be passed today.
Ms D Robinson (DA, Gauteng) said she first needed to engage with the DA caucus, while the IFP and ANC Members agreed that in principle they had no problems with the Bill.
Convention on Temporary Admission (the Istanbul Convention): Briefing by SARS
Ms Varsha Singh, Manager, International Customs: SARS, gave a short background to the Convention on Temporary Admission (The Istanbul Convention.) She said that this was a single international instrument combining all the existing Conventions on temporary admissions. It was aimed at simplifying and harmonising temporary admission procedures, through the adoption of standardised model papers as international customs documents with international security, thereby contributing to the development of international trade. It had entered into force on 27 November 1993.
Ms Singh explained that the rationale behind this Convention was to allow for free movement of goods across frontiers. Good would be granted temporary admission to a customs territory (across a border) without payment of customs duties and taxes. This would minimise the costs of border crossing, and provided an important incentive for the development of a country’s economic activity. Carnets would be issued in respect of the goods to be brought through a country that was not the final destination of a product. The goods covered by the ATA Carnets included computers, photographic and film equipment, musical instruments, industrial machinery, vehicles, jewellery and clothing, medical appliances, race horses and aircraft. Contracting parties were also required to accept the ATA carnet, an international customs document that assured, through an international guarantee system, that duties and taxes would be paid in cases of misuse. By using this system the international business community enjoyed considerable simplification of customs formalities as the ATA carnet also served as a goods declaration at export, transit and import. It had become the document most widely used by the business community globally for international operations that involved transit of goods.
The Istanbul Convention was adopted by the World Customs Organisation on 26 June 1990, and it came into force in November 1993. 51 countries had signed. The Convention consisted of 34 Articles and 13 Annexes South Africa had previously acceded to the minimum number of annexes in 2005, to give the system a trial run. This had gone smoothly. SARS was therefore now requesting that South Africa accede to the remaining Annexes to reach full compliance with the Convention.)
Mr E Sogoni (ANC, Gauteng) asked whether the items covered by the ATA Carnets contained in the presentation were just examples, and what was the rationale for them.
Ms Singh replied that the Istanbul Convention was drafted in Istanbul. She added that virtually all goods that were “tools of trade” are covered by ATA Carnets. SARS would file tax claims if these goods came into South Africa but failed to be exported.
Ms A Mchunu (IFP, KZN) asked whether the Istanbul Convention would not facilitate or simply drag trafficking.
Mr R Willemse, Customs Specialist: SARS, said that all carnets were inspected in the countries of export as well as the final destination country.
The Chairperson commended SARS for the good work it had done in preventing drugs from entering the country.
The Committee unanimously resolved to recommend ratification of an accession to the remaining Annexes B2 to B9, C, D and E of the Convention. Ms D Robinson would read the Committee’s statement to the House.
The meeting was adjourned.
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