Diamond Export Levy Bill: Response to Public Submissions & Adoption; Portugal, Saudi Arabia, Switzerland, Lesotho Double Taxation Agreements

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Finance Standing Committee

19 June 2007
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Meeting report

FINANCE PORTFOLIO COMMITTEE
20 June 2007
DIAMOND EXPORT LEVY BILL: RESPONSE TO PUBLIC SUBMISSIONS & ADOPTION; PORTUGAL, SAUDI ARABIA, SWITZERLAND, LESOTHO DOUBLE TAXATION AGREEMENTS

Chairperson:
Mr N Nene (ANC)

Documents handed out:

Diamond Export Levy (Administration) Bill [B23-2007]
Diamond Export Levy Bill [B22-2007]

Diamond Export Levy: National Treasury Response to Public Comment
Diamond Export Levy Bill Explanatory Memorundum
Double Taxation Conventions/ Agreements: SARS presentation
South Africa – Lesotho Double Taxation Agreement: SARS Briefing
South Africa – Saudi Arabia Double Taxation Agreement: SARS Briefing
South Africa – SudanDouble Taxation Agreement: SARS Briefing
Tax Treaties: Portugal, Saudi Arabia, and Switzerland to be Ratified: Treasury presentation

Audio Recording of the Meeting: Part1, Part2, Part3 & Part4


SUMMARY
National Treasury gave a formal response to public comments received on the Diamond Export Levy Bill by South African Diamond Producers Organisation (SADP), TransHex, and De Beers. After discussing which of these proposals had been accomodated, the Committee formally approved the Diamond Export Levy Bill.

Tax treaties and double taxation agreements with Portugal, Saudi Arabia and Switzerland aiming to remove barriers to cross-border trade and investment. The Committee approved the ratification of these by Parliament. Also discussed were the proposed Double Taxation Agreements between SA and Lesotho and SA and Sudan.

MINUTES
Professor Keith Engel (Chief Director: Tax Policy) gave a formal briefing on National Treasury’s response to public comments received on the Diamond Export Levy Bill. He focussed on inputs received from the South African Diamond Producers Organisation (SADP), TransHex and De Beers. These submissions focussed on raising the threshold for small mines, transitional arrangements, the deductibility of the export levy for income tax purposes, 'unpolished diamond' definition, the reduction of credits and exemptions and the role of the State Diamond Trader.

Prof Engel said that the South African Diamond Producers Organisation (SADP) proposed that the threshold for small mines be increased from an annual turnover of R10 million to R35 million. Prof Engel said that National Treasury were prepared to shift the threshold to R20 million.

Prof Engel indicated that there were no changes resulting from Trans Hex’s comments. Trans Hex also wanted clarification on the transitional arrangements. Prof Engel said that the transitional arrangements had been explained and also an explanation was given on how the Bill would operate in the first six months.

De Beers proposed that the monetary threshold of large producers be dropped from R5 billion to R3 billion. Prof Engel indicated that this proposal was acceptable. He reiterated however that the threshold was dropped in order to tighten laws governing, and not to relax the laws, for large producers.

De Beers’s proposal that the export levy should be deductible for income tax purposes was not accepted by National Treasury. Prof Engel said that penalties are not deductible for income tax purposes. He indicated that the levy was not a revenue-raising mechanism and that the no tax offsets were given for penalties.

 Prof Engel said that amendments were also made to the Diamonds Act to upgrade the current 'unpolished diamond' definition. The new definition was more properly aligned with international customs criteria.

Prof Engel said that the Bill was not intended to raise revenue. The Minister of Finance however would have the power to reduce credits and exemptions. Reductions of credits and exemptions would be applied equally and simultaneously.

The final version of the Bill also sought to clarify the impact of diamonds acquired by the State Diamond Trader. Prof Engel said that the State Diamond Trader was formed with the object to promote local beneficiation although some leeway would be allowed in limited circumstances.


Discussion
Mr Nene asked if the final points in the Bill had been cleared with the Department of Minerals and Energy (DME) now that it had been formally introduced into Parliament.

Prof Engel responded that the bigger issues had been cleared with DME and that technical points had been cleared with the South African Revenue Service (SARS).

Mr S Asiya (ANC) wanted clarity on the procedure followed with this particular bill. He asked for the reason why the Minister introduced the Bill in Parliament only on 19 June 2007 which was after the Finance Portfolio Committee briefing on the Bill (16 May) and its meeting on public submissions (5 June) on the Bill.

It was explained that the process had entailed dealing with a draft bill that had not yet been formally introduced. It was brought before Committee to get input from Parliament and the public before the Minister introduced the Bill. Currently, the legislative process does not permit any parliamentary amendments to Money Bills (Section 77 of the Constitution). Before the Minister had introduced the Money Bill, suggestions for amendments could be made. Once the Minister had formally tabled the Bill, then the Committee could not make any changes. Hence, the intention was to come to the Finance Portfolio Committee and establish desired changes at a stage where changes could still be made.

Mr Asiya and Mr Y Bhamjee (ANC) said that it was unfortunate that the Minerals and Energy Portfolio Committee members were not present to debate the Bill with the Finance Portfolio Committee, given their experience in that field. Mr Bhamjee also expressed his unhappiness with the process followed.

Mr Nene pointed out that the Bill has been discussed with Minerals and Energy who indicated that they were satisfied with the Bill. The Minerals and Energy Portfolio Committee was dealing with other matters and wanted the Finance Portfolio Committee to expedite the process. The Bill was brought before the Committee prior to the formal tabling in order to facilitate processing. He pointed out that at the last meeting the Finance Portfolio Committee had indicated that they were happy with the draft bill.

Mr Bhamjee said that he accepted Mr Nene’s explanation but reiterated that proper procedures should to be followed.


Mr Gibson clarified that the Committee had not yet seen the final bill which was introduced by the Minister on the previous day, the 19 June. He asked if the comment on Page 5 of their Response to Submissions (referring to the definition of producers in Section 1) meant that Treasury addressed their intention at that time and not in the final version of the law.

Treasury confirmed that they addressed their intention at that time.

 
Mr S Marais (DA) wanted to know if the issue, regarding the buyer knowing if he was selling to a beneficiary or not, had been addressed.

Prof Engel replied that under the current regulatory paradigm it was not clear but in the future it would be clear. He said licences would be easy to detect because sellers would have a beneficiation licence.

Mr Bhamjee and Mr Asiya again expressed their concerns regarding the process followed in terms of the Minister tabling the Bill.

Voting on the Diamond Export Levy Bill
The Chairperson read the motion of desirability for the Bill and the Committee agreed to approve the Bill.

Tax treaties with Portugal, Saudi Arabia and Switzerland
Ms Yanga Mputa (Director: Legal Tax Design in Tax Policy Unit in National Treasury) discussed the South African tax treaties with Portugal, Saudi Arabia and Switzerland which had to be ratified by Parliament. She noted that tax treaties were the outcome of negotiated settlements which should be in South Africa’s (SA) best interests.

With regards to the SA/ Portugal tax treaty signed in November 2006, Ms Mputa said that the aim was to strengthen existing economic relations. She also focussed on investment and trade flows between SA and Portugal and SA companies  in Portugal as well as Portuguese companies in SA.

Ms Mputa said that with the President’s visit to Saudi Arabia in March 2007, a new tax treaty had been signed. Saudi Arabia is the third largest market for SA goods in the Middle East. Generally Saudi Arabia did not levy income tax on its nationals. The exceptions were Zakat (religious tax), personal income tax for non Saudi nationals and business income tax for non Saudi nationals. The aim of the treaty was to improve economic benefits and strengthen relations with Gulf Region countries.

There had been a re-negotiation of the existing SA/ Switzerland tax treaty. Economic ties between SA and Switzerland continued to grow strongly. Swiss investments in SA amounted to R 7.2 billion in 2004 while SA investments in Switzerland totalled R354 million in 2004.

Preliminary hearings for a tax treaty with Lesotho and Sudan
Preliminary hearings for a tax treaty with Lesotho were also proposed. One of the main objectives was to prevent double taxation of the same income and to promote economic growth by providing certainty to cross border investments. Investments by Lesotho in SA were R 3.1 million in 2005 and investments by SA in Lesotho were R 991 million in 2005.

Sudan had approached South Africa for a tax treaty. Levels of investment between SA and Sudan were still insignificant. Exports to Sudan by South Africa were R 463 million in 2006 and imports from Sudan were R2.5 million in 2006.

Double taxation agreements with Switzerland, Saudi Arabia and Portugal
Mr Ron van der Merwe (Manager: International Treaties) gave a presentation on double taxation agreements with Switzerland, Saudi Arabia and Portugal. The purpose of agreements was to remove barriers to cross-border trade and investment. 

The SA and Swiss double taxation agreement followed the Organisation for Economic Development and Cooperation (OECD) Model Convention. Mr van der Merwe focussed on permanent establishment, associated enterprises, dividends, interest, royalties and pensions.

Article 25 of the double taxation convention focussed on the exchange of information. An exchange of information article was introduced for the first time between SA and Switzerland. Mr van der Merwe noted that it used to be a problem to get information from Switzerland.

With regards to the Saudi Arabia and SA double taxation convention it was indicated that an exemption from tax in the host State was provided for two years in respect of visiting professors, teachers or researchers.

The SA and Portugal double taxation convention also followed the OECD Model Convention.
   

Discussion
Mr Asiya asked with regard to Article 24 who would be the arbitrator in case of a conflict.

Mr van der Merwe replied that it would be a panel of arbitrators from both countries under the treaty.
He reiterated that decisions would never be a one sided.

Mr Asiya and Mr M Mbili (ANC) expressed their happiness with the information-sharing agreement between SA and Switzerland.

Mr Marais commented that he always wondered how Saudi Arabian banks make money and that he was interested to hear that they earned interest on debt claims.

Mr van der Merwe said that at the United Nations, papers were being considered on Islamic financial instruments. In the future there might be different approaches to income which flowed from the use of capital.

Mr Marais asked for clarity on tax exemptions for South African teachers and nurses within Saudi Arabia. He wanted to know if South Africans were taxed in the host state or in South Africa.

Mr van der Merwe replied that teachers, health workers and professional were not covered by the article under discussion. SA nationals were paid and taxed within Saudi Arabia. In SA domestic law there is an exemption when SA citizens were outside the country for more than 183 days of which 60 days should be consecutive.

Mr Nene asked why in the Saudi Arabia convention there was reference to teachers and researchers while in the Portugal convention there is only reference to professors and researchers. He also wanted to know how other professions were treated.

Mr van der Merwe replied that the issue was a difficult one at times. Usually SA did not propose but other countries made proposals regarding professions. He indicated that those countries hoped to import SA expertise to their countries for short periods.

In response to Mr S Dithebe asking if there was a treaty between SA and Sweden, Mr van der Merwe said that there was.

Mr M Johnson (ANC) wanted clarification on the variations between permanent establishment amongst the different countries (Switzerland, Saudi Arabia and Portugal) and South Africa. There were variations and he wanted to know what the rationale for this was.

He explained that when the construction industry was active between two countries, they would look at getting taxing right at least after six months. If the construction industry was not particularly active, the OECD model proposed a twelve-month period.

Mr Johnson asked if a UK/ South African citizen won the lottery, and they wanted to come back to SA what would their position would be.

Mr van Merwe explained that there would not be a penalty for bringing money back but that it would be open to capital gains tax.

Mr Johnson also asked if health professionals were included under Article 21 with teachers and researchers but this question was not answered.

Voting on Double Taxation Agreements
The Committee agreed to recommend that the Bill be ratified by Parliament.


Lesotho and SA Double Taxation Agreement
Mr van Merwe focussed on the tax status of people with dual residentship and indicated that SA and Lesotho should by mutual agreement determine the mode of application.

With regards to income from employment (Article 15), remuneration derived by a resident of contracting in respect of an employment exercised in the other Contracting state, should be taxable only in the first–mentioned State, if the recipient was present in the other State for a period or periods not exceeding 182 days in any 12 months period.

In order to prevent double taxation it was proposed that “Lesotho tax payable” and “South African tax payable” should be deemed to include the amount of tax which would have been paid in Lesotho or South Africa.

Sudan and SA Double Taxation Agreement
Mr van der Merwe said that with regard to business profits, no deduction would be allowed in respect of amounts paid by the permanent establishment to the head office of the enterprise or any of its offices, by way of royalties, fees or other similar payments.


Discussion
Mr Asiya asked if Lesotho had the same tax regime as South Africa. He also asked if the agreement between SA and Lesotho were feasible given the movement of goods and people between these countries.

Mr van der Merwe replied that international agreements provide for powers to collect taxes. If there was a request to collect taxes between countries, they would use their domestic tax laws to collect the tax. A country would only ask the other country if it was a final assessment and there was no possibility of appeal. Where there were reciprocal arrangements, one country would send a cheque to another country when they had collected taxes as requested.

Mr Marais asked if the onus would be on the South African company, which operates in Lesotho, to provide proof to Lesotho authorities in terms of schemes promoting economic development (Article 23). He wanted clarification on the procedure in that regard.

Mr van der Merwe replied that SA would not look at a request for giving a credit without having the relevant certification from Lesotho. SA would also have discussion regarding schemes with the relevant authority in Lesotho. In terms of mutual agreements, both countries will not tolerate schemes which entertain offshore financial centres, insurance and passive income.

Mr Asiya said that he was still concerned about the ability to collect taxes given movement between Lesotho and SA.

Mr Dithebe asked what would happen when SA has a treaty with a country that was not as well capacitated as the South African Revenue Service. He wanted to know if there was anything that the two countries could do to assist with capacity development.

Mr van der Merwe replied that SARS was actively busy with capacity building in Southern African Development Community (SADC) neighbouring countries.

Mr Johnson said that there were a lot of daily transactions happening between SA and neighbouring countries. Tax collection on a practical level might still be difficult and he wanted clarity from National Treasury.

Mr van der Merwe said that one should not take the 'assistance in tax collection' concept too far and that the daily flow across the border is not a problem. Tax collection would only applicable if an independent person did business in SA and took back money. If SARS determine that that person needed to pay tax, then SARS would approach Lesotho for tax collection assistance.

Mr Asiya asked how one would distinguish between independent professionals and employees such as  ordinary mineworkers from Lesotho who were working in SA.

Mr van der Merwe said that there was a difference in treatment between independents and employees. If a Lesotho citizen became an employee in SA, SA has the right of taxation. However an independent Lesotho person operating as a business in SA was a different issue. If the independent person becomes a permanent establishment, then SA can tax him. If however, the person did not have a physical presence in SA, then the country would not be able to tax him.
 
In reply to Mr Nene asking when the agreements would be signed, Mr van der Merwe said that they would want to finalise the Lesotho agreement as soon as possible. He indicated that with Sudan there was no immediate urgency. Mr Nene asked that the Committee be updated on a regular basis regarding progress with the agreements.

Mr Moloto asked if the Committee was required to document their meetings.

Mr Gibson suggested that minutes should not be unnecessarily long but should record decisions in order to do follow-ups.

Mr Asiya suggested that the Finance Portfolio Committee have some meetings in the Northern Cape and Eastern Cape given the serious problems with their finances.

The meeting was adjourned. 


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