Second Revenue Laws Amendment Bill: hearings

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Finance Standing Committee

23 October 2001
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Meeting Summary

A summary of this committee meeting is not yet available.

Meeting report

24 October 2001

Chairperson: Ms Hogan (ANC)

Documents handed out:
SACOB submission - Appendix 1
Afrikaanse Handels Instituut submission - Appendix 2

SACOB's submission considered the amendments according to four criteria: The extent to which the amendments will ease and reduce the cost of administration. The extent to which it will distort a business's investment and fund raising decisions. The extent to which the burden of tax will be related to a company's ability to pay. The extent to which tax liabilities are clear cut. SACOB submitted that the proposed legislation does not accord well with those criteria.

The Afrikaansehandels Instituut submitted that the negative sentiments expressed by it are reflective of the general negative sentiment of foreign investors and illustrated by the value of the Rand. AHI urged government to take cognisance of the negative sentiment and implied that government is not encouraging positive sentiment.

South African Chamber of Business (SACOB) submission
The SACOB delegation consisted of Mr Ken Warren, Mr Ernie Lai King and Mr Carl Muller. Mr Lai King and Mr Muller, SACOB Taxation Committee members, dealt with all the points in the written submission.

SACOB's concern with the secrecy provisions was a contentious point. Mr Lai King said that taxpayers always relied on secrecy when the disclosure was made. It was submitted that SARS has more to lose than to gain by amending the secrecy provisions. For example, if a person has contravened the exchange control regulations and is deriving taxable income from his investment - under the old secrecy provisions, SARS cannot disclose the fact that money has been invested illegally. Under the new provisions the taxpayer will not disclose because SARS could hand over the info to another organ of state. SARS therefore loses income that could have been collected had there been a non disclosure provision.

Ms Hogan questioned the morality of business if this was the submission being made.

Mr Louw (SARS) confirmed that SARS cannot disclose any information - only if it relates to a tax offence. Even in an investigation of a tax offence if information is discovered about another crime, even a murder, SARS cannot disclose this information to another organ of state. The amendment proposes that if a non tax offence is committed then SARS, can pass the info to a another organ of state. The crime must be serious and carry at least a five year jail term.

Mr Lai King indicated that SACOB stands by its proposal that SARS should get a court order
for the release of info only if it concerns matters of public health or state security.

Ms Hogan requested SACOB to review its position because there should be mechanisms to stop criminal activity.

Mr Andrew commented that the secrecy provisions are not new to South Africa. Other countries have probably decided that it is more beneficial to have the secrecy provisions.. He understood that the world is changing and that they need to combat crimes such as money laundering. He suggested that there be a session to discuss the secrecy provisions. He said that it was wrong to imply that SACOB is trying to hide criminal activity.

There was discussion on the administrative burden that is caused by the amendments. SACOB had submitted that the new amendments have wide implications, are difficult to fully appreciate and therefore increases the admin burden on the taxpayer and the tax collector. It was submitted that presently SARS takes a long while to answer queries and causes a long delay. SACOB asked for a six month extension to the consultation process due to the complexities.

Mr Nene (ANC) asked if the problem with the delays has been taken up with SARS in the past.

Mr Muller said that it has been taken up from time to time. He suggested that SARS does not have the capacity to deal with these timeously.

Mr Lai King added that the delays are around complex matters and with the additional complexities of the amendments, there is a concern that taxpayers will wait even longer.

Mr M Grote (SARS) pointed out that before 2000, SA had a huge compliance gap. Up to R30 billion was not collected. During this period the admin burden was far less. Now when SARS is trying to narrow the compliance gap, it is inevitable that complexity and admin burden must follow. He said that the admin burden and complexity must be seen in this light.

Mr Muller replied that persons who are outside the tax net will stay outside. The compliance and admin burden will only affect the regular taxpayer.

Mr King added that the tax gap is not reduced by more legislation but by better implementation of the law.

Ms Hogan said that due to globalisation, it was necessary to introduce Capital Gains Tax and the residence based system of tax. She asked if the transition to making this work is not important.

Mr King replied that all SAOCB is asking for is that the amendments be made with South African circumstances in mind.

Prof. Engel (Treasury) said that sometimes complexities favoured enforcement but sometimes it favoured the taxpayer. The Bill has a provision. Then an exception is granted as a relief. Because the exception is granted, it becomes complex.

Mr Louw commenting on some of the issues raised by SACOB said that it was impossible to have a six month extension to the consultation process. On SACOB pro about unbundling and the public benefit organisations he said that there will be an overlap of the two sets of unbundling rules for a period of two months and that the provisions dealing with public benefit organisations is suspended for a while.

There were no further questions or comments.

Afrikaansehandels Instituut (AHI) submission
Mr W Boonzaier, Chairperson of the Tax Policy Committee, reminded the Committee that at previous hearings the AHI had pleaded that the implementation of CGT be delayed to give SARS enough time to draft appropriate legislation. Prof. Krever from Australia also warned that in his county CGT was implemented two years before the actual legislation was finalised. This causes uncertainty and disruption. This warning has not been heeded in SA and now we have CGT but the legislation is not yet finalised. He said that the CGT had been promulgated four months ago The fact that now half of the clauses are being amended was an embarrassment for the Minister and for the country. The rest of the submission was read by Mr Boonzaier (see document).

The only point of discussion was on the AHI point that to tax foreign exchange gains is unfair. It was submitted that if a person buys UK land for 1000 pounds and sells it again for 1000 pounds then no gain has been made. AHI finds it unacceptable that the gain made due to the depreciation of the Rand is taxed in SA. The AHI used a quote from Allan Greenspan who said that to tax inflation is like taxing government's own inefficiency.

A member of the ANC asked SARS to comment on this point raised by AHI.

Prof. Engel said that SA has a regime where foreign exchange gains and losses are ignored. Currency gains are picked up and gains on listed foreign shares are picked up. It is the general rule that currency gains are not picked up except if the gain is in relation to liquid portfolios to prevent the leakage of funds.

Mr Boonzaier replied that in SA there is a limited opportunity to invest off shore because of all the foreign exchange rules and that it was unfair to tax on these gains. The person in SA might not want to bring the gain back to SA so where must the money come from to pay the tax.

Mr Grote said that already there are huge amounts of money off shore. SARS is trying to contribute to the growth of the SA economy not foreign economies.

Mr Boonzaier said that if funds are illegally placed off shore then this must be dealt with. He maintained that it was unfair to tax legal investments.

There were no further questions or comments and the meeting was closed.

Appendix 1
SACOB Commentary - Second Revenue Laws Amendment Bill

1. Introduction
SACOB through its affiliated Chambers, Direct Members and Associate Members represents some 35 000 businesses throughout South Africa The majority of these businesses are small to medium sized enterprises. The Direct Member constituency represents the majority of South Africa's large corporations. As the largest organized business body in South Africa, SACOB represents the entire spectrum of formal business in the country. it is with these credentials that SACOB claims to speak on issues that affect the interests of the business sector.

Released for general comment on 12th October, it has proved problematic to consult widely on the Second Revenue Laws Amendment Bill. Prior to its general release, SACOB was given access (in confidence) to sections of the legislation in a piecemeal fashion. The constraints imposed as a result of this process have caused a study of the legislation to be fragmented and cursory. As a result the constituent members of SACOB have not mandated the commentary offered below. This is unfortunate since the many constituent members will feel the impact of the proposed amendments in different ways. The Fiscus has successfully produced, to the dismay of taxpayers, ever more complex rules and exceptions. Their implications are still to be fully understood but will come to light in due course and will have to be addressed. Regrettably for business a particular impact will be immediate, namely an inevitable increase in administration and compliance costs. In considering the amendments, SACOB has endeavored to judge them according to four broad criteria. These are: -

The extent to which they will ease, and reduce the cost of administration.

The extent to which they will distort a business's investment and fund raising decisions.

The extent to which the burden of tax will be related to a company's ability to pay.

The extent to which tax liabilities are clear-cut.

SACOB does not believe that the proposed legislation accords well to those criteria.

The range of amendments is wide and their implications are difficult to fully appreciate, even for seasoned professionals. The summary below covers selected issues that are of concern to business. They must be regarded as an initial response to the proposed amendments and must be the first step in an ongoing process. It must be noted that clauses I 16 to 141 dealing with amendments to the Customs and Excise Act will be dealt with under a separate submission.

2. Selected Comments
2.1 Administration
The amendments set out in the Bill are extremely comprehensive and wide-ranging. The fact that they have necessitated a Second Revenue Laws Amendment Bill in itself tells a story. The medium to long-term implications are extremely difficult to grasp and appreciate in the time allowed for comment. It is understood that the various amendments have different implementation dates and SACOB urges that a six- month period of grace be given for greater consultation and examination.

South Africa is undergoing a tax revolution with an accompanying quantum leap in compliance complexity. While it is accepted that a residence based system and the introduction of a capital gains tax inevitably produces such a result, careful consideration is required to take into account South Africa's unique circumstances. Taxpayers must adapt, understand and comply with stringent complex new laws. With the increase in the compliance burden, a caution must be sounded for the drafters of the new legislation to consider the difficulties faced in its practical implementation.

The new laws and amendments are a double-edged sword. The South African Revenue Service (SARS), as is its duty, must assess returns submitted by taxpayers and where necessary raise queries to be answered. Members of SACOB have experienced administrative delays whereby replies and objections to queries and assessments raised on complex issues have been 'net by silence and a non-response from SARS. It can happen that twenty to thirty months may pass with no response to the replies timeously submitted by the taxpayer (for example queries raised on sale and leaseback's). In the interim, commercial life continues. Businesses and companies are bought and sold and contingent liability notes are recorded in annual financial statements in respect of outstanding tax queries, often of significant financial impact. SACOB concedes that the delays that we refer to are in regard to complex issues, but we wish to point out that some of the proposed amendments will not contribute to the simplification of our tax system.

It is in the light of this experience that SA COB is apprehensive in regard to the additional complexities about to be introduced into the tax system. Undue delays in handling objections or responding to replies, fosters an atmosphere of uncertainty and raises questions about the constitutional right to fair administration. We do not quarrel that in many instances taxpayers do not timeously reply to queries raised but just as taxpayers are expected to play their part, SARS must be respectfully called upon to play theirs. Many of the proposed amendments deal with areas that both taxpayer and tax collector are just coming to grips with. SACOB therefore wishes, in a constructive manner, to raise a flag that the proposed amendments should be reviewed against the additional administrative and compliance obligations of taxpayer and tax collector alike.

2.2 Secrecy
Clause 20 The alternative of obtaining approval from a panel comprising of retired Judges, Advocates or Attorneys, is not acceptable to SACOB. It has always been of great benefit to the Fiscus that taxpayers were able to rely on the secrecy provisions of the Income Tax Act when disclosing their affairs in their annual returns. whilst the need to combat crime is understood, SACOB submits that the Income Tax Act is not the correct code to pro-actively achieve that objective. That is the
responsibility of the Ministry of Safety and Security. Accordingly SACOB believes that the current position whereby a court order has to be obtained to require SARS to reveal privileged information should continue. Only under the most compelling circumstances, such as any threat to the security of the State, should SARS act in a proactive fashion to pass on taxpayer information. SACOB therefore recommends that application may only be made to a High Court judge, of at least 5 years standing, and only in respect of matters of threat to public safety and State security.

2.3 Double Taxation
Clause 22(b) - Where a person donates or disposes of an asset for less than market value, where the difference between the market value and the proceeds received could be viewed as a donation, donations tax may be leaked in terms of Section 54. The proposed recoupment in terms of the amendment to Section 8(4)(k) would result in double taxation on the same transaction. The amendment should include a proviso that the recoupment is to be reduced to the extent of donations tax payable.

2.4 Foreign Equities
Clause 23(d) Page 20 of the Explanatory Memorandum, second paragraph, records that paragraph 43(4) of the Eighth Schedule provides for the determination of a capital gain from the disposal of a foreign equity instrument, which is held as a capital asset. Paragraph 43(1) and 43(2) deals with the disposal of an asset other than a foreign equity instrument.

2.5 Controlled Foreign Entities (CFE) - Capital Gains
Clause 23(g) Section 9D(9)(a) is amended to exclude from the taxing provisions of Section 9D any capital gains of a controlled foreign entity where those capital gains have been or will be subject to tax at a statutory rate of at least I 3,5%. SACOB believes that the additional complexity and compliance burdens, brought about by this amendment, is out of proportion to the cash flow benefit that will accrue to the Fiscus. In essence, dividends repatriated to South Africa out of profits subjected to the taxing provisions of section 9D, are exempt from section 9E. Offshore companies in jurisdictions where income of a revenue nature is taxed at 27%, but do not tax capital gains, will therefore have an additional burden of tracking capital gains included in distributable reserves to identify which dividends are subject to section 9E and which are exempt. Furthermore as the inclusion rate for capital gains is 50% it appears that the Fiscus would be better off overall if it simply taxed dividends repatriated to SA at I 00%.

2.6 Residents holding 5% control of a CFE
Clause 23(;j) - Dividends, interest, royalties, rental, annuities, insurance premiums or income of a similar nature, or any proceeds derived from the disposal of any asset, fall within the taxing provisions of Section 9D, notwithstanding the fact that the controlled foreign entity trades as a bank, financial service, insurance or rental business, if such income is received from a resident connected person. It is proposed to further include receipts and accruals from any resident who holds at least 5% of the participation rights or who is entitled to exercise at least 50/0 of the votes or control of that controlled foreign entity. A threshold of 5% is, in our view, too low. A 5% holding appears insufficient to allow any form of mischief anticipated by the Fiscus. SACOB submits that the connected person link is sufficient

2.7 CFE Income Exemption Proviso - non connected persons
Clause 23(k) - Section 9D(9)(b) excludes from the taxing provisions of Section 9D the net income of any corporate controlled foreign entity, attributable to any 'business establishment". This is in line with international practice of excluding "active" income earned by controlled foreign corporations. The exemption does not extend to certain receipts being dividends, interest, royalties, rental, annuities, insurance premiums or income of a similar nature, or any Eighth Schedule proceeds unless, inter alia, they arise from the principal trading activities of a banking, financial service insurance or rental business. This concession further reinforces the logic that provided the controlled foreign entity receives the income in the course of its normal "active" trading activities such income will not fall under the taxing provisions of Section 9D Clause 23(k) proposes that the exemption will in future only apply where the receipts and accruals of such banking, financial service, insurance or rental business are derived mainly from persons who are not connected persons. Section 9D(9)(fA) however exempts from the net income of a controlled foreign entity any interest, royalties or rental paid to such controlled foreign entity by any other controlled foreign entity in relation to the South African resident. Section 9D(9)(f) exempts any foreign dividend contemplated in section 9E declared to a controlled foreign entity which is a company, by any other company which is a controlled foreign entity. Accordingly only intercompany annuities, insurance premiums or Eighth Schedule proceeds will fall to be taxed under Section 9D if the receipts and accruals of the controlled foreign entity are derived mainly from connected persons. The logic of the amendment must be questioned for the following reasons:

2.7.1 The additional complexity introduced is tin desirable,

2.7.2 An offshore treasury company ("Offco"), which falls into the definition of a "business establishment", is de facto an "active business" albeit that the majority of its dealings may be with fellow subsidiaries.

2.7.3 Such fellow subsidiaries could raise funding from Offco or from independent third parties. Raising funding from Offco means that the margins earned by Offco stand to be repatriated to SA as a taxable 9E dividend, whereas raising funding outside the group means that the margins are lost to SA. The proposed amendment encourages the offshore companies to borrow from outside the group.

2.7.4 The proposed amendment is not uncommon in other jurisdictions but it must be borne in mind that such countries generally do not have restrictive exchange controls.

2.7.5 Bearing in mind tile nature of a banking or financial service business it would be more equitable to examine the net margins of the business rather than "receipts and accrual s".

2.7.6 The proposal appears to discriminate against banking, financial services, insurance and rental businesses.

2.8 Connected Person Deductions
Clause 28 The amendment is unnecessarily harsh and will apply irrespective of the fact that the transaction may be conducted on an arm's-length market-related basis. Clause 22 will impose a tax effect on a disposal on a market-related basis to the extent that there is an amount to be recouped. Clause 28 does not apply this market-related principle where a loss is incurred. Consistency of treatment is required.

2.9 Public Benefit Organisation
Clause 32 The requirement that the public benefit organisation must solely carry on the approved public benefit activity is overly restrictive. Many public benefit organisations, which carry on a public benefit activity, may also carry on other activities. SACOB recommends that the word "mainly" be substituted in place of "solely".

2.10 Leased Assets
Clause 34(b) - The requirement that the asset must be leased directly from the lessor, does not take into account sub-leases.

2.11 Company Liquidation / Deregistration
Clause 49 - While SACOB welcomes the relaxation of the six month requirement applicable to companies being wound-up or deregistered, it anticipates that the steps (to be prescribed by the Minister) replacing this requirement, will be less onerous.

2.12 Valuations
Clause 77 - The rules relating to base cost are complex and place a huge administrative burden on taxpayers. Asset registers will now have to reflect at least three values, namely accounting cost, tax cost and capital gains tax base cost. Seldom are these
three the same. The inclusion in 9D of a rate of capital gains tax in order to determine whether a foreign entity is an exempt CFE or not exacerbates the problem. The basis used for the determination of a capital gains tax cost in a foreign jurisdiction may well differ from the methodology of determining capital gains tax base cost in South Africa. A company will have to keep a capital gains tax record for a foreign jurisdiction as well as for South Africa. South Africa's rules would have to be applied to determine the South African capital gains tax.

2.13 Asset Base Cost - Resident
Clause 78 SACOB submits that consideration be given to extending the provisions of paragraph 24 to those persons who are only resident because of the physical presence test, but who would not be classified as ordinarily resident. This would exclude inbound expatriates who may be on a second three-year secondment.

2.14 Unbundling / Rationalisations
Clauses I 77 and I 78 The rules are covered in the new Part III and come into effect on 1 October 2001. Applications in respect of unbundling/rationalization in terms of section 60 of the 1994 Income tax Act and section 39 of the 1998 Income Tax Act
must be submitted to the South African Revenue Service before 1 December. This implies that over that intervening period both provisions will apply. Confirmation on this point is sought.

The above is merely a selection of issues that are of concern to SACOB. They are offered in the spirit of constructive criticism with a view to ensuring that whatever amendments are introduced to the tax legislation are sound, workable and administratively practical. Without doubt other problems will be revealed as and when the amending legislation is introduced and applied. SACOB wishes to express its appreciation for being given the opportunity of offering comment on the Bill.

October 2001

Appendix 2:
Afrikaanse Handels Instituut (AHI)
Hearing on the Second Taxation Laws Amendment Bill

Madam Chair, Ladies and Gentlemen

Thank you for affording the Afrikaanse Handels Instituut (AHI) an opportunity to address you on
another taxing issue!

Most economists agree that the economic fundamentals in South Africa are sound thanks largely
to appropriate fiscal, monetary and other policies adopted and implemented by our government.

Yet, the desired economic growth keeps evading us.

It is also common cause that the two factors that will have a major positive impact on our
economy remains job creation and saving. It is our contention that the unemployment problem in
this country cannot be solved by government or big business. We need to encourage small,
medium and micro enterprise development in order to solve the unemployment crisis in this
country (see comments in par 5.1 below). We further contend that the tax system has a major
role to play in solving, or exacerbating, both the unemployment and lack of investment problems
in our country. The current lack of local and foreign investment in South Africa, despite our sound
macro economic fundamentals, can be ascribed to negative sentiment. One of the major causes
of the negative sentiment of South African and foreign investors is the mixed and often confusing
messages sent by government for example:

It appears that certain senior government officials do not regard HIV/Aids as a major threat in South Africa, while a recent report claims HIV/Aids is the biggest cause of death in this country;

The Capital Gains Tax legislation (or part thereof) was promulgated in June this year. Four months later, the implementation date has passed and fundamental changes to the legislation are still in process (taxpayers are expected to implement the CGT legislation, but it is still not complete).

3.1 Members of this Chamber will recall that during our presentations in March this year on Capital Gains Tax (CGT) we made a passionate plea for the postponement of the introduction of CGT for at least one year. This plea was motivated largely by the time required by the Revenue Authorities to draft appropriate legislation. Business also required sufficient time, so we argued, to implement appropriate electronic and other administrative systems, once the legislation is finalised in order to properly comply with the new tax.

Our plea was not heeded and here we are, with this Bill, attempting to rectify the
consequences of a rushed process to legislate for a very complex new tax while expecting taxpayers to implement an incomplete system.

3.2 You will also recall the warning from Prof Krever from Australia not to do it "the Australian way": (the Australian CGT legislation was finalised only two years after the tax was introduced. This caused major uncertainty and disruption in the Australian economy, according to the professor). This warning was also not heeded. Capital Gains Tax has been introduced, but the legislation has not been finalised.

Having to amend more than half of the provisions promulgated less than 4 months ago is, with respect, an embarrassment, not only for the Minister, but also for the country.

3.3 corporate reorganisations. restructurings. mergers and acquisitions
3.3.1 The Minister earlier indicated that special CGT provisions relating to the above would be promulgated in due course to bring the CGT regime in line with global trends.

Comprehensive proposals have been tabled to deal with these very complex issues. It is stated in the Explanatory Memorandum that "it is appropriate to permit tax-free transfer of assets to the entity where they can be most efficiently used for business purposes". This relief is essential to eliminate the economic double taxation imposed by the cascading inherent in the existing CGT legislation. Not to do so, would place a severe fiscal burden on innovation and adjustment in our economy. Such innovation and adjustment is necessary to accommodate a changing environment which includes adjustments to remain competitive in a global market place, to ensure regional integration (eg SADEC); and to facilitate greater ownership in the economy by previously disadvantaged groups.

3.3.2 We acknowledge that there are certain improvements in the new proposals such as the inclusion of certain unlisted companies and the relaxation of certain administrative and other requirements. However, there is room for further improvement.

3.3.3 We propose that the existing relief provisions for corporate reorganisation and unbundling be expanded to include roll-over relief for CGT purposes. It is worth mentioning that this proposal was contained in an earlier draft CGT Bill. The benefit of this approach is that a comprehensive set of rules dealing with such corporate actions is retained in a single piece of existing legislation, rather than drafting complex new rules.

3.3.4 We also question the appropriateness of requiring SARS approval for these types of transactions. Our experience is that this requirement not only undermines legal certainty, but also tends to cause delays in implementing complex transactions, which are often subject to strict time scales.

3.3.5 It is also our considered view that these roll-over provisions should not discriminate against corporate actions involving non South African companies. If we wish to encourage foreign investment in this country, foreigners should be allowed to compete on an equal footing.

3.3.6 We believe that the anti avoidance measures are far too strict and complex and will be so difficult to police so as to render them ineffective.

3.3.7 The exclusion of financial instruments denies insurance companies, banks and other financial services companies the opportunity to utilise these proposed relief measures.

3.4 Investment holding companies
3.4.1 During our previous presentation, we specifically pleaded that the exemption from CGT afforded to unit trust companies, be extended to include investment holding companies, which meet certain objective criteria. This matter has been further debated with SARS who indicated that it was a regulatory issue (as opposed to a tax issue) and should be taken up with the Financial Services Board (FSB).

The FSB's view (which we endorse), not surprisingly, is that it is in fact a tax issue, which ought to be dealt with by SARS. The consequence of this impasse is that competitive alternative; investment vehicles are unfairly discriminated against. One such vehicle owning assets of approximately R1bn is considering closings its doors, leaving more than 10 000 savers stranded to find an alternative home for their regular savings. This undesirable consequence of CGT is likely to also affect a number of black empowerment investment structures. In a country that urgently needs to encourage savings, this is hardly tolerable.

3.5 Foreign exchange gains
3.5.1 The provisions relating to foreign exchange gains are patently unfair. If a South African resident purchases a foreign asset for £1000,00 and subsequently sells that asset for £1 000,00 he, in fact, has made no gain. Yet, he will be taxed if the value of the Rand has depreciated against the foreign currency in which his asset was denominated.

One of the reasons for the difference in the value of our currency vis a vis those of our trading partners, is the inflation differential between SA and its trading partners. As Allan Greenspan put it: "to tax inflation, is tantamount to taxing government's own inefficiency".

Unfortunately our CGT legislation does exactly that, not only in respect of foreign currency assets, but also in respect of all other taxable capital gains, because no inflation adjustment or currency revaluation is legislated for.

3.5.2 The provisions relating to controlled foreign entities (CFE's) results in similar inequitable consequences. Assume a CFE invests, by way of a loan, in an international group company. If the loan is interest free, the provisions of sec 9D and sec 31 (transfer pricing provisions) impute income in the hands of the SA resident who controls the foreign entity. Even if a market related interest rate is charged by the CFE, the SA resident will again be taxed in terms of sec 241 on the difference in exchange rates even though the CFE has made a dollar loan, and receives dollar interest and capital payments. We contend that the SA resident should not be taxed in these circumstances.

3.5.3 With reference to our accusation in par 2 above regarding the incompleteness of the CGT legislation, we point out that the detailed provisions relating to foreign currency assets are still not included in the draft bill, which was recently tabled.

We would in principle support the disclosure of information by order of a judge, in the circumstances contemplated. One has to weigh up the eradication of crime in this country, against the effective collection of taxes in respect of income which was illegally received or accrued. We support every attempt to reduce the crime rate in SA. One must however expect a reluctance by wrongdoers to declare any ill-gotten gains for tax purposes, if there is a risk that SARS will reveal their identities to prosecuting authorities.

We do not believe it is appropriate that the Commissioner be charged with the duty of issuing an order for the disclosure of information, as contemplated in the alternative proposal. Our view is that an objective third party ie the court should be charged with this duty.

We suggest that the penalty for a contravention of the secrecy provisions be substantially increased, in order to avoid any possible abuse of the relaxation of the existing secrecy provisions as contemplated above.

We endorse the honourable Minister's statement during his Budget Speech earlier this year that small business is "the key engine of job creation". However, the provisions to encourage small business enterprises exclude the majority of small entrepreneurs in this country, because it is restricted to close corporations and companies. Most of these entrepreneurs not only lack the required knowledge, but also prefer to avoid the huge compliance burden imposed by our taxing statutes and therefore find corporate entities inappropriate vehicles to conduct their business.

The second inhibiting factor, as pointed out by Prof Bob Williams, is that these tax concessions are limited to enterprises engaged in manufacturing. Service enterprises are therefore excluded. As Prof Williams put it: "... government seems to have rejected any notion that our economic future lies, not in plant an equipment, but in the creation (and export) of intellectual capital - ideas, knowledge, expertise, know-how ... There is nothing in the recent tax amendments which tries to identify and encourage specific sectors of our economy and virtually no tax incentives to coax us into becoming the continent's powerhouse of skill and expertise".
(Taxing logic of Economic Incentives, Financial Mail 5 October 2001, Pl8)

5.2 While are more than willing to assist SARS in the drafting process of new legislation, most of my colleagues are in full time employment and the exceptionally short time periods afforded to us to comment on draft legislation diminishes the value of the much vaunted transparency and commentary provisions and reduces our input substantially.

5.3 We would encourage stronger and formal co-operation between SARS and other government departments, especially the SAPS and the department of Justice, in order to ensure tax and penalties are extracted from ill-gotten gains. We specifically refer to a recent judgement where the accused who was convicted on charges of laundering approximately R9m of stolen money, received a R1O 000 fine while his share of the loot exceeded R2m. SARS should be very interested to know whether interest earned on these vast sums of money in his bank account was declared in his tax return.

The AHI strives to contribute in a constructive and positive way to achieve what is best for South Africa and all its citizens. The negative tone of some of our above comments is perhaps a reflection of the general negative sentiment, which is apparent in the attitude of local and foreign investors and mirrored in the value of our currency. We would encourage government to take cognisance of these negative sentiments and to do the right things to create a positive sentiment, which we firmly believe is all that is required to achieve the economic objectives all of us are striving for.

Chairman: Tax Policy Committee


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