ERNST &
YOUNG COMMENTS:
DRAFT
TAXATION LAWS AMENDMENT BILLS 2008
Policy and
general comments
Timing of amendment process
In recent years, most of the amendments to the tax
legislation have been passed late in the year with far fewer amendments being passed
in mid-year.
Frequently, amendments announced at the time of the Budget
in February are passed by Parliament only at the end of the relevant year. As a
result, updated and
up-to-date consolidated legislation
is available only from January in the next year. However, within a matter of weeks thereafter another Budget is
presented, followed by draft legislation that often has the effect of changing
provisions that have been passed into legislation late in the previous year. On
occasion these amendments are retrospective in effect.
This process makes it extremely difficult for tax
practitioners and taxpayers to have certainty in respect of the tax
legislation.
An example of the
lack of certainty in respect of new tax legislation was the situation that arose in
2007 when the reduced rate of secondary tax on companies of 10% applied from 1
October 2007 but at that date it had not yet been passed into law.
May we make a plea that the process of amending the tax
legislation be streamlined in the interest of certainty for taxpayers and tax practitioners?
Time period allowed for comments
Before commenting on the draft legislation itself, we would
like to comment on the short time period allowed for commenting thereon.
The draft legislation was made available on the website /
sent out for comment on 22 February 2008 with comment thereon on having to be
made to the Parliamentary Portfolio Committee of Finance by 29 February 2008, therefore allowing a period of a maximum of six working
days for comment.
We consider that this period is not sufficient for a
thorough analysis of all of the amendments to be made, some of which are
complex and have far-reaching implications.
Specific
comments: Taxation Laws Amendment Bill
Clause 5 refers to "section 12 C(A)". Should this
reference read "section 12 C (4A)"? There is no section 12
C(A) in the Act. Clause 5 also refers to
section 13quin: we suggest that for the sake of
consistency this reference should be to section 13quin(3).
Clause 8 refers in subpara (iii) to subpara (i): this should
apparently be a reference to subpara (ii)
Clause 12 does not provide an amendment to section 12D(2)(b)(i) to include “the transportation of water” although the definition of
“affected assets” has been amended to include pipelines that transport water.
Clause 23
(1) (d) amends the
definition of "group of companies" to allow foreign companies that
are effectively managed in South Africa to qualify under the group of companies
definition if that foreign company is registered as an external company under
section 322 of the Companies Act, 1973.
Firstly, we
understand that in terms of the Corporate Law Reform that is being proposed,
there will no longer be a requirement for a foreign company to register as an
external company as it is currently required to under section 322 of the
Companies Act.
Secondly, we found
the structure of the three tests set out in the new subparagraph (ee) contained in clause 23(1)(d) very confusing to apply. In addition, the
proposed wording may
allow intra-group transfers in terms of section 45 to a foreign holding company
as illustrated in Example 2 below.
We suspect that paragraph B is incorrectly worded and should read ‘that company
does not have its place of effective management in the Republic.
If all three tests in subparagraph (ee) are answered in the affirmative, then the foreign company
is excluded from the group of companies. If one of the tests is answered in the negative, then the
company is included in the group of companies as defined in section 41.
Example 1
Company X is incorporated in a Tax Haven, has
its POEM in SA and has registered in SA as an external co (it is part of a
group of companies in
terms of
section 1).
Company X is not part of the group
of companies if tests (ee)(A) and (B) and (C) are answered in the affirmative. Company X is incorporated
elsewhere ((A) yes), has its POEM in SA ((B) yes) and has registered as an
external co (therefore the answer to (C) is no) so Company X is not
excluded
from the definition of a group of companies.
Example
2
Company Y is incorporated in a Tax
Haven, has its POEM outside SA and has not registered in SA as an external co
(it is part of a group of companies in terms of section 1).
Therefore Company Y is a company incorporated elsewhere ((A) yes),
its POEM is not in SA ((B) no), its memorandum is not registered in SA ((C)
yes), so Company Y is not excluded from the definition of a group of
companies. The intra-group transfer provisions of section 45 could then be used
to transfer assets,
for example foreign shareholdings, out of the South African tax net to
Company Y.
Clause 29 deletes certain obsolete provisions in respect of
secondary tax on companies payable by long-term insurers. Although the
provisions are obsolete, the effective date of the amendment is not immediate
but only for dividends declared on or after 1 January 2010.
Clause
38
provides that the Commissioner may
on application by a taxpayer amend the amount of SITE payable by the taxpayer
where his net remuneration is less than his annual equivalent for a year of
assessment. There is however no amendment to
para 11B(3) that requires SITE to be calculated on the annual equivalent -
should this also be amended?
Clause
40(1)(b) provides
that the concession in respect of residential accommodation will not be
available if the relevant employee was in
We consider that the period of 30 days is too short. Expatriates who will be
engaged on major projects in
Does the period of 30 days include days spent in
Specific comments: Taxation
Laws Second Amendment Bill
Clause 14 provides
for interest to be payable by taxpayers who are not provisional taxpayers
unless they make ‘top-up’ payments within six / seven months of the end of a
year of assessment if their credit amount for that year of assessment is less
than their normal tax liability for that year.
We consider that this provision will place an undue burden
on individual taxpayers.
If employees’ tax has been under-deducted by an employer,
it is unfair to penalise the affected employee by
charging him interest.
The provision will also place an administrative burden on
those taxpayers who
receive two sources of remuneration on which they pay employees’ tax. These taxpayers will often find that the employees’ tax
deducted from their remuneration is less than their normal tax liability. In terms of the amendment they will be required to calculate their normal tax
liabilities in order to make a top-up payment, unless they are able to submit
their annual tax returns early enough for them to settle their liability on
assessment before the end of the seven month period.
Clause 18
(b) introduces a penalty
on an employer that fails to submit the required employees’
tax reconciliation. This penalty is 10%
of the total employees’ tax for the period covered by the reconciliation.
With the introduction of section 75B relating to
administrative penalties in respect of non-compliance, it seems a little
strange that a specific penalty is being introduced to the Fourth Schedule at
the same time.
The quantum of the penalty, being 10% of the total
employees’ tax deducted or withheld, also appears to be excessive.
Clause 20
(1) inserts a paragraph
after paragraph 28 of the Fourth Schedule.
However, the amendment starts “28. Notwithstanding …”.
The numbering of the proposed introduction repeats a
paragraph number that already exists.
Clause 20
(1) introduces a paragraph
that limits the set-off of employees' tax against an employee's liability for
normal tax unless the employer has submitted the employees' tax reconciliation
and this has been found acceptable by the Commissioner. There is a proviso that the Commissioner may
allow the set-off if satisfied that the circumstances warrant it.
Although it is understandable that the Commissioner wants assurance that the
employees' tax has been properly deducted and paid over prior to allowing the
set-off of that amount against the normal tax liability of the employee, one
must remember that the employees' tax is, effectively, a prepayment of tax by
the employee.
We consider that this provision unduly prejudices employees
who have in good faith had employees’ tax deducted: the envisaged transgression
is on the part of the employer but it is the employee who is to be penalised.
It must also be remembered that an employee is bound by the provisions of the
Income Tax Act to leave the responsibility for the payment of his employees’
tax in the hands of his employer and the employee has
no right to take over the responsibility for this into his own hands if he
suspects or knows that his employer is not complying with its obligations in this regard.
Clause 26
(2) provides for a general
effective date in respect of amendments to the Income Tax Act. Unless otherwise provided or the context indicates
otherwise, the changes come into effect as from the commencement of years of
assessment ending on or after 1 January 2009.
Certain clauses of this Bill propose amendments to the
Securities Transfer Tax Administration Act, 2007 and the Diamond Export Levy
(Administration) Act, 2007 without specific effective dates. We suggest that specific commencement dates
be provided for these clauses.