Revenue Laws Amendment Draft Bills [B81-2008]: public hearings

Meeting report

South African Institute of Chartered Accountants Submission
Mr Muneer Hassan, Project Director (Tax): SAICA, highlighted their concern regarding the many changes proposed, with some sections being continually amended. In order to deliver better quality comments and less tweaking of the legislation, they requested additional time to consider the draft changes. On retirement issues, specifically the transfer from pension to provident fund, they recommended that taxing be deferred to the subsequent withdrawal from the provident fund. The recommendation on Employers and Employees was that these proposals should be extended to service providers and independent contractors. The list of qualified disability expenses should be prescribed by the Department of Health, in respect of deductions. They welcomed the increase in the tax-free ceiling but recommended that this be increased to R100 000.

Mr Wessel Smit (National Tax Committee): SAICA, stated that the new dividend definition would give rise to the necessity of two dividend definitions and a bigger administration burden. Referring to equity shares, he commented there was very little arbitrage possible once the combined tax effect was considered. It was not outside the tax scope. The definition of “dividend” needed to be updated as it was going to be difficult for companies to obtain the required information. They noted the problems that the legislation was silent on what would happen to profits previously capitalised to share capital and the share premium and a lack of clarity as to what the Treasury would accept as “paid”. SAICA commended the National Treasury for the proposal.

On Secondary Tax on Companies (STC) credits, SAICA noted share buy-backs which took place through the JSE, be exempt from the proposed withholding tax to avoid practical difficulties outlined in submission. They recommended that there should be a longer period for use as this would make more economic sense.
On the passive holding companies (PHC), SAICA agreed that arbitrage existed but not to the extent of the full 12%. They further contended that this was not specifically the result of the dividend tax and had always been there. There was not a huge drive in the market for companies to create PHCs to hold dividends and asked if this measure was really necessary to combat arbitrage and avoidance. The wording of the PHC was also queried as to the possible confusion with parent companies. The proposal on presumptive turnover tax was not particularly clear on the inclusions and exclusions and was still relatively complex in nature. They recommended that the business must complete a year of assessment as to the compulsory de-registration issue.

On returns and payments, SAICA would be more comfortable with keeping option one. The amendment to the value-added tax (VAT) on the Industrial Development Zones (IDZ) was welcomed. They recommended the extension of the 30 day period under specific circumstances. They recommended that relief be provided in instances of tax cascading. SAICA responded to proposals on estate duty, referring to the general anti -avoidance rule (GAAR). They commented that the unintended result would that all estate planning activities would be caught by the GAAR. The proposal regarding the second provisional tax payment was noted by SAICA for its removal of the safe harbour of the basic amount. In closing, Mr Hassan encouraged the Portfolio Committee to consider all the comments that would be made that day.

Business Parliamentary Office (BPO) Submission
Mr Abdul Waheed Patel, Parliamentary Liaison Officer: BPO, stated that generally the Business Parliamentary Office (BPO) was supportive of the changes to the tax regime. Their particulars areas of concern were of a technical nature, they requested the Portfolio Committee to give sufficient detail to the technical issues, so as to produce an Amendment Bill of good quality. The BPO would also appreciate an opportunity to make further submissions on the 29th when National Treasury and the South African Revenue Service presented their responses to the original submissions.

Mr Des Kruger, Director (Corporate Tax): Webber Wentzel, presented the BPO’s submission. His opening comment was that the major policy issue with the draft Revenue Laws Amendment Bill (dRLAB) was with the amount of legislation presented every year and he was not convinced that all of it was necessary. The retrospectivity that had crept into the legislation which would apply to the coming tax year of 2009 was extremely difficult for business people to cope with. He expressed the view that it was a nightmare to follow all the effective dates in the legislation. The retrospectivity may change the basis on which deductions have been granted in the past, leaving business in the position of actually owing the Receiver, meaning that there was now the possibility of unexpected costs for businesses.

On the dividend tax regime, the exemptions were administratively burdensome as to the STC credits - if these were not allowed this would amount to double taxation. There was no reason to limit this to three years as there were already very effective rules in place to govern this. There was the possibility that this could be seen as male fides or grossly negligent. He pointed out that the presumptive tax excluded service providers. While he acknowledged that it was meant to encourage manufacturing, he pointed out that much more employment was created in the personal service industry which led him to ask why service providers should be excluded. The repayable employee benefits was welcomed by the BPO as was the personal use of cell phones and computers. On the broad based employee shares schemes they felt that consideration should be given to the incorporation of the use of equity instruments. Referring to the STC reforms and the new definition of contributed tax capital (CTC), they pointed to the lack of detail provided. Would the new rules apply only to the issue of new shares or would companies be required to review their history to establish CTC forthwith. It was also unclear how payments made by a company to its shareholders, would be ranked.

Regarding passive holding companies (PHC), Mr Kruger asked where the evidence was that this issue was so widespread and commented that this unnecessarily complicated the legislation. The proposals for venture capital companies (VCC) posed the question as to why listed companies would be excluded. Their miscellaneous issues included depreciation allowances for residential units, allowances and respective expenditure. On the Industrial Policy Projects, they noticed that it was once again limited to manufacturing. The BPO queried the exclusion of construction, service and agriculture. These were other sectors that provided employment and also needed assistance. They raised the proposal on professional tax payments. Specifically noting that the second payment had to be 90% correct, otherwise penalties would apply. This was of particular concern. Mr Kruger pointed out that it is very difficult to determine what actual taxable income was at that stage. Mr Kruger suggested that, should the amendment be adopted, the 90% should be reduced to 75%.

Deloitte & Touche Submission
Mr Le Roux Roelofse, Director (Tax Services): Deloitte & Touche, commented that retrospectivity undermined the canon of certainty fundamental to the system. Under the heading of retirement issues he noted the proposal on taxation of withdrawals. This change was inequitable for taxpayers who withdrew benefits from retirement funds. The proposal was to tax lump sums at rates that were significantly in excess of the benefits received by the taxpayer while contributing. On broad based employee share schemes, he remarked that they doubted the increase was meaningful enough to lead to a much greater take up of the employee share scheme. To achieve an effective incentive they recommend that the tax-free ceiling be increased to R100 000 over five years.

The STC credit to dividend tax proposal created a problem with foreign investors. This definition was unfair to foreign investors who contributed to South African companies in exchange for shares and assets, that have never been within the scope of the South Africa tax system. On the CTC, they proposed that this system be simplified. In the new definition of the dividends tax, the meaning of “paid” was queried. It was important to clarify what Treasury would accept as paid. The refund period was also a concern regarding the waiting period until the next dividend declaration for a refund. It was suggested that there was no reason why the recipient should not be able to present the declaration to SARS immediately. It was not acceptable that there be a waiting period involved. It was interesting to note that the dividend withholding tax regime did not cater for deemed dividends and liability to tax. They noted the use of the phrase “regularly involved”. It was their opinion that this was arbitrary, created complications and was unnecessarily harsh – this provision was not necessary. On PHCs they stated that by and large arbitrage did not happen and this was just not necessary. Their experience was that people did not set these companies up for arbitrage. If anything they urged Treasury to consider a widening of the scope of the unbundling provisions to allow individuals to simplify their investments, so as to allow them to unwind these companies and put the assets in their own name.

Mr Roelofse reiterated that this legislation was not necessary. Intellectual property arbitrage’s new proviso seemed overbroad. If the IP in question was never owned or developed in South Africa but happened to be licensed to South African residents, who have an interest in the IP owning company - why should this be considered abusive as long as the Controlled Foreign Company owning the IP has appropriate business substance? He reviewed he explanatory instances detailed in the submission. It was their recommendation, to cure this problem, that 231(2)(b)(ii)(bb) be deleted from section 231.

On the abolition of the basic amount and a second provisional tax payment proposal, he explained that there were many fluctuations possible in this amount and that the provision would work against keeping the system simple. The penalty was not worth the trade-off. This would result in undue hardship for many taxpayers and it was their recommendation that taxpayers be allowed, instead, to top up the payment.

Discussion
Mr K Moloto (ANC) noted that SAICA argued that it was difficult for buyers to identify sellers in a share buyback. He assumed that the clearing and settling process would enable the buyer to identify the seller. If that did not happen, then there would be no credibility about the stock exchange.

Mr Smit responded that their comment referred to exceptional transactions regarding the share buyback.

Mr Moloto referred to the suggestion that STC credits should continue indefinitely. He asked how the new regime without STC credits would continue if they were retained.

Mr Kruger responded that the STC credits were already present. If there was no credit, the system would have double taxed the dividend. The BPO was of the opinion that it should continue indefinitely. He added that this was a question of degree and there should not be a limit as it would work its way out of the system.

Mr Roelofse commented that they were not asking for an indefinite avoidance scheme. The chances were that the dividend would work through the system and pointed to a situation where not declaring the dividend would be penalised.

Mr Moloto referred to suggestions that there be specific anti-avoidance clauseson estate duty. He pointed out that people would work around specifics and they would keep chasing the same problem. He suggested that they should leave it at general measures.

Mr Hassan responded that if the National Treasury and SARS were aware of the specific avoidance practices that they provide specific anti-avoidance measures. General anti-avoidance measures had far reaching implications.

Mr Moloto referred to the suggestion that they should incentivise non-manufacturing sectors in the IPP, saying that that would happen anyway. He asked what purpose it could serve when the point was to kick-start industrial activity.

Mr Kruger responded that the problem was with the effects of incentives in place as to the extent that it encouraged investment in industrial projects. Other industries were beneficial to the economy as well.

Dr D George (DA) referred to the SAICA submission and the contention that the Act was “unstable”. He asked what they meant by unstable and how they had reached this conclusion about SARS’ capability.

Mr Hassan responded that the reference to “unstable” was aimed at the retrospective nature of the amendments. The comment was not about the administrative capacity of SARS, but rather reflective of the firms and members with which SAICA worke.

Dr George asked if the BPO was saying that the tax laws already passed would not be implemented. He also queried the comments on tax payments being brought forward by two days.

Mr Kruger responded that there was no doubt that taxpayers were not getting it right. He stated that the more complex legislation was definitely not applied as it was meant to be. Keeping track of changes and the complexity was a difficult task.

Mr Roelofse responded that moving the tax payment dates two days forward to meet collection targets did not seem to pose a problem as long as notice was given in advance.

Mr Marais referred to the SAICA submission and asked if the share buyback would not create loopholes where people did not comply with the regulations. How would they approach alignment with the unintended consequences principle?

Mr Marais queried their views on the individual disability expenses. He commented that tax professionals did not usually know what this meant in practice. He asked why these expenses should be prescribed by the Department of Health. It was not necessarily a health issue, rather it was an issue of all the components needed for a disabled person to have a normal lifestyle.

Ms Fubbs queried SAICA’s views on passive holding companies. She pointed out that they did acknowledge that there could be a problem - referring to their use of “suggest”. She highlighted the fact that arbitrage did exist and that they were merely discussing the extent to which it existed. SAICA contended that it was much lower than what SARS regarded it to be. Surely SARS was in a better position to be more accurate about the calculations on PHCs? She queried the actual purpose of passive holding companies and their use for legitimately reducing tax and suggested that other instruments could be used to achieve this.

Mr Hassan responded that SAICA wanted to close the gap between the corporate rate and a marginal rate on individuals and that this was possibly a better reason for the existence of arbitrage.

Mr Smit responded that at most the arbitrage was between 35.2% and 28% (once you accounted for the effects of capital gains tax). This informed their opinion that there was not enough incentive for arbitrage. He reiterated that in practice, they had not seen this actively happening and it did not represent that big of a problem.

The Chairperson asked how this would better serve the country.

Mr Hassan replied that PHCs were not that lucrative. If one added the capital gains tax (CGT) effect, the gap was much narrower.

Mr Kruger added that this was a problem that tax practitioners had seen coming - in that arbitrage was not generally in use. He noted the complexity in the retrospectivity of the legislation and added that they just did not need passive holding companies.

Mr Roelofse commented that the arbitrage possibility existed. He pointed out that the tax system had to be equitable to the taxpayer as well as to the fiscus. It was his experience that PHCs were not set up to play with arbitrage and questioned whether it was worth the effort introducing a new type of company.

The Chairperson reiterated that they agreed that there was arbitrage and suggested that they find a solution.

Mr Smit suggested that the dividend definition not be changed. He suggested a phased to process on which their withholding tax would be based.  He added that there would be no arbitrage for SARS on the old definition.

Ms Fubbs observed that there seemed to be far too much reliance on moratoriums. She stated that these issues were put forward at the Medium Term Budget Policy Statement and other budget engagements where the issues and risks were weighed. She asked if they could use a more proactive approach.

Mr Mnguni referred to the comments on STC credits and asked why it was not viewed as wise and what weaknesses were perceived to motivate this view.

The Chairperson referred to the recommendation on another solution to the PHC proposal and asked how this would help the country better.

Ms Fubbs referred to the submissions on intellectual property arbitrage. She observed that Deloitte was clearly opposed to the broadening and commented that it was meant to ensure that South Africa retained the benefits of its intellectual property.

Mr Roelofse responded that they understood the problem with the back and forth transfer of intellectual property and income flowing offshore and to tax havens. It was clear that this was aimed at stopping that abuse. Deloitte & Touche was not discussing the merits of this case, they were merely exploring the rationale. The issue was the intellectual property developed by a South African citizen, which was then licensed to others in South Africa. This meant that the legislation would now deny the person using the IP in South Africa, a tax deduction. In their opinion this was one step beyond what was necessary.

Pricewaterhouse Coopers Submission
Mr David Lermer, Director (Corporate International Tax): PwC, noted timing and process to be a concern for Pricewaterhouse Coopers. Specifically, he pointed to the very short consultation period which has been the trend. The complexity of all the proposals was mentioned and he commented that seasoned tax practitioners required more time and wondered how average taxpayers would deal with them. The need for rebuttal was previously acknowledged but there was no chance of further debate after this meeting. This was a concern. The key reason for this was that the retrospectivity meant the process was moving in such a fast pace that the risks could not be fully explored and the risk and of being wrong was increasing. He pointed to the fact that if the amendments granted relief they would be good however if they were just creating additional tax burden that was bad legislation, as the taxpayer would not understand the extent of the legislation. They were also concerned with how to properly monitor the legislation.

Prof Osman Mollagee, Tax Director: PwC, referred to the time allowed as well. He noted that there were 200 pages of legislation to review with only eight and a half days to do so and present a submission to the Portfolio Committee on Finance. Furthermore there was no opportunity for rebuttal after today; therefore the SARS and NT response would be final.

Mr Lermer added that the Portfolio Committee should be able to receive an alternative view. He reviewed the recommendations on the intellectual property proposal. On intellectual property, the move to further relief for research and development (R&D) contractors in South African legislation had been enacted and overturned. No reasons were given for this withdrawal. They also pointed to the disincentive for acquisition of existing foreign IP companies.

Prof Mollagee commented on STC credits. He reviewed several explanatory diagrams, as an illustration of how burdensome the proposal would be. He noted that it would arithmetically double the taxation. The adminstrative process was complex. PwC recommended that the STC credit stay in one company. The rationale was that it was easier to manage in one company and there would be no reduction in Treasury’s tax collection.
Mr Lermer noted that the relief was in the wrong company from an accounting perspective and that their recommendation was in line with the appropriate rewarding of credit without having to involve any people up the chain.

Prof Mollagee commented that on PHCs, the issue was not the existence of arbitrage, rather its extent. The question was whether it warranted the complication of a newly defined entity as there were already issues with its implementation implications. He used a diagram to point out that the rationale for establishing a PHC was questionable. Excluded companies were also a matter of concern. The provisional tax second payment was not unexpected in as it was consistent with the international norms. He pointed out that in the year, the chances of the taxpayer being able to accurately determine this payment were not very good. A penalty was considered harsh. PwC suggested that the payments be possibly moved to a third date. A penalty on top up or a higher basic were also possible solutions. The alternative used in the UK was proposed, where certificates of tax deposit were issued. The certificate’s would be Treasury bonds and taxpayers could invest in them to protect themselves from penalties.

Bravura Submission
Mr James Aitchison presented the submission of Bravura. He commented that they too had timing concerns. He commented that the existing de-grouping charge remained as was and they did not see a fixing of this stop gap solution previously put into place. This came with some unintended consequences. As an example he explained how something as simple as a liquidation or internal re-organization would trigger a de-grouping charge. He further noted that the wording as to the operation was unclear and this could give scope up for double taxation. As to the proposal on precluded circumstances, they welcomed the correction of the anomaly regarding the effective date. The concern here was that there was no correction regarding the broad application insofar as it related to preference shares. There was a need to understand their concern surrounding the use of preference shares . The contributed tax capital (CTC) proposal was thought to be unfair to non-residents as they did not come into the South Africa tax act. There was no base cost and this could give rise to treble taxation - subject to withholding tax. The existing dividend legislation’s interaction with the STC credit system lacked clarity as to how a company could elect to transfer to CTC. The PHC proposal raised a number of technical anomalies which needed to be addressed. Of particularly interest was the escape clause that allowed for a PHC to distribute all taxable income. This would allow the upper level 40% of tax to fall way. However a company was not physically capable of distributing 90% of their income as SARS would also want their portion. There were also conflicting views around disposals. This referred specifically to subdivisions/ consolidations and conversions. It was Bravura’s opinion that they should rather leave the legislation in place. It was possible to include this in the legislation, a practice note or an interpretation note. Bravura woud prefer it in the legislation. In generally retrospectivity was a bad thing but there were exceptional instances where it was useful. For instance: to clarify anomalies and this was most often when it was in favor of the taxpayer. This was however subject to the caveat that there be certainty and timeousness. It was important that they closed avoidance mechanisms subject to certainty.

South African Institute of Tax Practitioners (SAIT)
Prof Jackie Arendse, Chairperson: National Technical Committee – SAIT, clarified the focus of SAIT as advising smaller business. The increase in the basic exemption from R50 000 was welcomed but they recommended that it be increased to R100 000 as it would relieve a number of small clubs from the onerous administrative burden posed by the partial tax exemption. However it was the concurrence with this exemption and the proposed withholding tax on dividends which they believed was unintended and should be rectified. These recreational clubs needed to hold reserves in order to build up capital and the SAIT would want that recognized. On the issue of venture capital companies, they would like the legislation to ensure a proper integration with what they already have with small businesses. The new definition of service provider was cause for concern - as one could not bring individuals into the same scope as companies. This could cause untold problems. The questions posed here were whether this included independent contractors, the tax rate, treatment of employment companies, the effective date of 1 March 2008 and the safe harbour of three or more full-time employees. This was not subject to legislation and was quite an onerous provision. She also noted the proposed taking out of the term “labour broker”. On

payroll giving, the deduction was limited. A re-determination provision was required as it was quite possible that an employee may be entitled to a larger deduction than had been taken into account.

The presumptive turnover tax (PTT) proposal for very small businesses was welcomed and supported, however they were concerned about the exclusions. For instance that of professionals. She pointed out that there was a very wide scope of service providers excluded from electing into this tax. This may exclude viable businesses that could develop critical skills. They should allow professionals to elect into this as any small business needed all the help they could get. With the VAT vendors, there was the issue of marginalization and she failed to see the logic. The income tax system and the VAT system were separate and this pointed to double standards. She asked why people who held shares in dormant companies should be excluded. On the exclusion of proceeds from capital asset disposals exceeding R1 million over a 3-year period, she noted that it was difficult to find business property that could sell for less than R1 million. If that happened the company would be excluded from this provision. Also mentioned were the exclusion of trusts and permitted investments from PTT. She proposed a 50% taxation of capital gains and for previous allowances to be added. Prof Arendse pointed out that the point of PTT was to make it easier for small businesses, but they were now requiring detailed records in the legislation. SAIT opposed the proposed deletion of the basic amount as it was unrealistic and unfair to small business. They cautioned against the proposal of bringing the tax payment two days forward. Specific to the calendar year 2009, this would mean a payment on a Friday. This was not advisable as it constituted an effective four-day acceleration and was not fair to the taxpayer. The provision should therefore be updated, bearing in mind advances in technology, particularly, e-banking.

Webber Wentzel
Mr E J Liptak, Partner: Webber Wentzel, opened by stating that the points made by Bravura were critical and that there was no one size fits all answer on retrospectivity. On this topic, he noted that they actually had these laws taking effect prior to any of the effective dates going back 3 or 4 years. This invalidated transactions, previously concluded thereby increasing the tax liability. This could change the direct tax consequences of prior completed transactions or pending transactions with binding agreements. These retrospective measures were aimed at narrow anti avoidance instances, however they were extremely broad and it left the taxpayer looking at additional liability. This created an impossible situation for businesses. He wanted to emphasise that he was not of the opinion this was intentional or malicious, but the practical impact was that it created uncertainty in the business and investment community. This went beyond the economy to the principle of the rule of law. Citizens had the right to certainty, regarding their obligations under the law. He noted international approaches and highlighted that in the majority of countries the trend was against retrospective tax legislation. The USA was mentioned as an exception to this trend but this was only under conditions that the retrospective legislation provided relief and did not violate the rule of law.

Webber Wentzel proposed a “look forward rule”. This was a general rule that amendments would apply to years of assessment beginning on or after 1 January 2008. This would provide protection for completed transactions and binding agreements. The exceptions to this rule were instances of major abusive avoidance schemes, relief from extraordinary or unwarranted tax burdens, technical corrections, rates and rebates. These proposals would foster a culture of compliance where everyone had an obligation to bear their fair share of the tax burden. It would also impose a reciprocal responsibility on government to provide a tax system that was fair and equitable. Retrospective legislation had to be measured against that standard.

Discussion
Dr George asked SAIT if it was small businesses who would have problems with the bringing forward of the tax payment date.

Prof Arendse responded that the key issue for small businesses was cash flow. The calendar consequence of this would be a four-day acceleration of cash flow and this was significant for small businesses.

Mr Marais referred to the SAIT submission and asked about the possibility of a deduction in respect of disability expenses. He pointed out that they had not mentioned anything on that.

Prof Arense replied but the reason there was no comment on this was probably because they were not aware of it. The point about disability expenses was a valid one. The issue was resources and as they were not yet acquainted with the new provisions, SAIT could not expressed a view. She quoted as an example the reference made in the National Treasury/ SARS 19/08 presentation about the new definition of a disability. The conditions “beyond maximum correction” and “ lasting longer than one year” were to go into the new draft and was an example of the aforementioned deficiency.

Ms Fubbs noted the comments on the retrospectivity aspect. She had heard balanced views on their use about when retrospectivity was valid and the burdens arising when it was not suitable. She was of the opinion that this had not been taken lightly by SARS and that their view was based on experience and track record.

Mr Liptak replied that with retrospectivity, there were issues of advance information and certainty going forward.

Ms Fubbs added that the calls for rebuttals were a good idea but not very practical, bearing in mind that they did not know when the Revenue Laws Amendment Act would be out.

Prof Arendse responded that SAIT and would like to be present on the 29 August for an opportunity to say yay or nay at that point.

Mr Lermer cautioned against the process being pushed through so quickly and suggested that they may need better controls. These could be identified more formally if consultation could be done earlier.

Prof Engel provided general comments on behalf of the National Treasury and SARS. On the instability issues, he responded that the global economy was unstable. He was sympathetic to the concerns and that there was no way around them. On the effective dates, he commented that the points were valid and that they represented a good start to a solution. On the retrospectivity, he noted that this was a problem for SARS as well.

Meeting adjourned.