The meeting began an hour earlier than scheduled and PMG was not present for the first part.
National Treasury tabled a full presentation on the Mineral and Petroleum Resources Royalty Bill, B59-2008. The main concerns related to the fact that Unions could also be taxed as a result of the Bill, and whether royalties would in fact reach the members of the local communities, but explanations that satisfied Members were given on both points. It was explained that non-renewable resources were by their nature transient and it was common practice to make them subject to royalties. The rate at which royalties would be paid would be fixed for the life of a mine, so as to avoid placing uncertain burdens on operators. The provisions of the Mineral and Petroleum Resources Royalty (Administration) Bill, B60-2008 were also briefly explained, with the comment that this Bill was merely intended to facilitate the administration of the first Bill. Members agreed unanimously to adopt both Bills.
A delegation from National Treasury then briefed the Committee on the tax treaty with the Netherlands, stating that this was essentially a re-writing of an old treaty to take into account new issues. It had been ratified already by the Netherlands but had been held back by South Africa pending some changes to the Secondary Tax on Companies. The provisions of the Treaty and protocol were described. There was nothing contentious and Members agreed to recommend ratification.
The Committee then discussed the devolution of municipal rates, noting that it would be impossible to complete this if provinces and municipalities were unable to recover arrears. Many municipalities either had no, or incomplete, asset registers, inaccurate billing systems or no billing at all. Department of Public Works explained that it was proving difficult to confirm the banking details of municipalities for the payment of the devolution grant. Department of Provincial and Local Government indicated that a portion of the arrears was owed by the Department of Public Works. The Chairperson insisted that the representatives from Public Works, Provincial and Local Government and National Treasury must meet on the following day to try to reach resolution on the issues, and further that the Department of Public Works must arrange meetings in the provinces and report back on progress soon.
Mineral and Petroleum Resources Royalty Bill [B 59 – 2008] and Mineral and Petroleum Resources Royalty (Administration) Bill [B 60 – 2008] (the Bills): National Treasury briefing and deliberations
The meeting began an hour earlier than originally scheduled, so that the first part of the meeting was not attended by PMG.
Two National Treasury representatives tabled a presentation on the two Bills and addressed the committee (see attached presentation). The presentation detailed the background to the Bills, the consultation process and the provisions of the Mineral and Petroleum Resources Development Act. The economic rationale behind mineral royalties was explained, together with the distinctions behind refined and unrefined minerals. The tax base for gross sales and the formulae were set out in the presentation. The estimated mineral royalty rates were also clarified. Relief would e provided for rollovers, unincorporated bodies, and small businesses. There was a need for transitional measures and the administration aspects were set out. International examples were cited and the mining value chain was given.
The point was made that some unions had expressed unhappiness that they would also be taxed by the imposition of royalties, but there was general agreement that if one party was to be taxed for benefiting from rights to mineral resources, then it was only equitable that all should be taxed. This indeed was the substance of the Bill. There was also concern expressed that the proceeds from mining activities might not reach local communities, but these concerns seemed to have been allayed.
National Treasury stressed that the reason why royalties were collected was that they related to non-renewable resources. It was a fact that one day all of those resources would be depleted. It also emphasised that the rate structure for the collection of royalties would not change in the lifetime of a particular mine. This would give the necessary stability to the mines, in the face of many other costs that were difficult to control.
National Treasury also gave a very brief presentation on the Royalty Administration Bill B60-2006, noting that there was very little to discuss as this merely expressed how the Administration Bill was intended to support the main Royalty Bill B59-2008.
The most salient point of B60-2008 was that South African Revenue Services (SARS) would collect the royalties by way of two bi-annual payments. The final payment would take place at the end of the financial year. There would be a potential 10% penalty if the estimates of the mine fell 20% short of the final amount, and NT had the power to request any information directly from the mines.
The Chairperson thanked the two representatives for their informative input.
There were no further comments.
The Bills were adopted unanimously.
Briefing on the ratification of the Tax Treaty with The Netherlands:
Mr Ron van der Merwe, Manager: International Treaties, SARS, and Ms Yanga Mputa, Tax Policy Unit, National Treasury, addressed the Committee on the tax treaty with the Netherlands.
Mr van der Merwe tabled two documents with protocols and indicated that both resulted from a process beginning in 2003. The intention of the main agreement was to eliminate double taxation between South Africa and the Netherlands, prevent fiscal evasion, provide for assistance in the collection of taxes and provide for a direct tax dispute resolution channel. The agreement followed the model for the Organisation for Economic Cooperation and Development (OECD) agreement and also contained elements of the United Nations model. There were certain aspects to the treaty which were not relevant to South Africa, merely because the treaty was a merging of the South African and Netherlands approaches to taxation.
It was noted that before a tax treaty came into force it would have to be ratified by Parliament, and this tax treaty had been concluded in the best interests of South Africa. It was essentially a renegotiation of an existing treaty and had been ratified already by the Netherlands, although South Africa had held back ratification to deal with taxation of dividends, following a change to the legislation on Secondary Tax on Companies (STC). The investment flows, imports and exports were described.
The main articles of the treaty were reviewed.
In respect of Article 4, paragraph 1(b), he explained that this was not necessary from South Africa’s point of view, but was required by the Netherlands.
Article 5 related to permanent establishment, and noted that tax would be paid in the locality where the fixed place of business was situated. A time limit would be introduced to provide for cases such as construction sites.
Article 8 referred to shipping and transport. The operator’s residence would be determined by the place of effective management. Paragraph 2 dealt with smaller companies whose abode might not be fixed. Paragraph 3 referred to taxation in terms of rental of ships or containers.
Article 10 was the most problematic as withholding taxes in terms of dividends varied widely internationally.
Article 11 referred to royalties.
Article 17 referred to pensions, annuities and social security payments. They would only be taxable in the State where they were payable (as per paragraph 2). Paragraph 4 stipulated that the source of the pension should be the country where contributions had been made and in which deductions had been claimed. This country would retain the right of taxation.
Article24 dealt with offshore activities, stipulating that any permanent establishment would pay tax in the place where it carried out its activities. In the case of offshore and short term operations, tax may be collected in the jurisdiction of the State where the natural resources were found.
Article 26 referred to the mutual agreement procedure. Paragraph 5 provided that competent authorities should make an attempt to resolve any disputes but if this was not possible the disputes would be referred to an arbitration body.
Article 30 concerned members of diplomatic missions and consular posts.
Mr Van der Merwe moved on to describe the Protocol, which contained a number of clarifications, only some of which applied to South Africa. The most substantive were found in Article 10, dealing with harmonised dividend tax; Article 17, dealing with pensions; social security and annuity payments; Article 27, dealing with exchange of information and Article 28, concerning assistance in collection of taxes.
Mr M Robertsen (ANC, Eastern Cape) proposed that as there was little new information the Committee should proceed with the motion for adoption.
The Committee resolved to propose the ratification of the Treaty and Protocol.
The Chairperson agreed and asked for a second for the motion of adoption. When this was duly obtained he thanked the delegation and indicated that the meeting would adjourn until the expected members from the Department of Public Works (DPW), National Treasury (NT) and the Department of Local Government (DLG) arrived.
Devolution of Property Rates to Provincial and Local Government: Deliberations
The Chairperson listed the main concerns around devolution of property rates. He raised the issue of historical debt and wondered whether the Department of Public Works (DPW) would be able to deal with this. He also cited the need for drastic improvement of billing systems, which were so inaccurate in some cases that arrears could not even be collected. He observed that a speedy resolution by DPW was essential to ensure that sorely needed funds reached municipal coffers.
Mr E Sogoni (ANC, Gauteng) questioned how municipalities could set up realistic budgets if they could not bill properly. This problem alone could prevent the implementation of the devolution of property rates to provincial and local government.
The Chairperson brought to the attention of the Committee that a total of R44 billion was currently outstanding to local municipalities, and that both old and new issues would have to be dealt with before the devolution process could continue. It was incumbent upon this Committee to assist the Department of Provincial and Local Government (DPLG), DPW and National Treasury (NT) in resolving the matter.
The Chairperson said that the injection of funds by a grant to aid the process of devolution was timely, but that the existing problems he had outlined would rob it of its effectiveness.
The Chairperson said that historical debt should be resolved by DPW. The allocations of grants did not take this into account, so the Chairperson assumed that they were dealt with elsewhere. Secondly, the new tariffs and rates had also not been factored into the allocation. He asked how it would be possible to allocate funds equitably to all municipalities, especially in light of the fact that some provinces had not received any allocation at all.
He noted that the billing procedure was also extremely problematic because it was inaccurate and led to disputes. In the light of the inadequacy of the allocations, there was a need to communicate with local municipalities on how best to resolve their problems. The Chairperson suggested that larger municipalities could seek funding from the private sector in the form of bonds. He continued that if the three departments were to interact with the provinces and municipalities directly, the Minister would be able to make a more informed decision when the Devolution Bill was finally passed and final allocations were made.
Mr Thabelo Motswaneng, Acting Chief Executive Officer, DPW, replied that it was imperative to first deal with the historical debt which accrued before 1 April 2008. This process was ongoing, and required that disputes with outstanding bills be resolved, to wipe the slate clean. He acknowledged that these arrears had not been taken into account. The grant applied to outstanding funds from 1 April 2008 to the present. He had already asked National Treasury to make a conditional adjustment to the grant, as in reality DPW would not be able to collect all the arrears.
The total amount of the grant was derived from considering properties serviced by DPW only. An allocation schedule had been gazetted, but the intention had not been to make payments until September 2008. The conditional grant would be paid in four tranches. System problems had derailed the first tranche, so that it would only go through later than gazetted. However, the rest would go through as scheduled. He continued that capacity constraints had not been cited originally by the provinces but, subsequently, since April, one province had sent a letter to this effect. With assistance of a technical team from NT he would make proposals to adjust the grant where required.
An official from the Department of Public Works added that in fact most provinces agreed that capacity constraints existed. The billing system was admittedly a huge challenge for DPW; some invoices had not even been received from provinces. It seemed apparent to her that some municipalities did not even have billing system.
Ms Sue Masegomi, Chief Director: Finance and Procurement, DPW, explained that the delay in paying out the grant was due to the fact that instead of using the DPW system, the NT system had been used. This necessitated an immense amount of checking. She went on to note that a number of provinces had not sent forms confirming their banking details yet, and Mpumalanga and KZN had not even responded to the request. If this process proved unsuccessful, she undertook to work with the existing bank details on the NT system.
Mr Robertsen interjected at this point that he was very concerned that when the Committee had visited the municipalities it had not once found an asset register. If this was the case in most municipalities, then the billing and collection problems would never be resolved.
The Chairperson agreed that the incomplete asset registers were a serious problem and asked whether DPW could not assist the municipalities in this regard.
Mr William Ramphele, Senior Manager, Department of Provincial and Local Government said that his Department (DPLG) should also be brought into the loop. He observed that probably half of the R44 billion was owed by DPW itself, and this was an issue that should be engaged upon. Further, he said that if the arrears could not legitimately be recovered this must be made clear. The grant could only be paid to municipalities who could justify why the arrears were not paid. Processes such as writing off of debt must also be fast-tracked.
The Chairperson then firmly insisted that since the representatives from NT, DPW and DPLG were literally across the street from each other in Pretoria they must arrange a date to meet as soon as possible.
All agreed to meet on the next day.
The Chairperson expressed satisfaction at this. He then also suggested to DPW that it must come up with a schedule to ensure that it met with all the provinces. He agreed with Mr Robertsen that the DPW must report back honestly on the progress made, in the near future.
The meeting was adjourned.
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