ATC171108: Report of the Standing Committee on Finance on the Taxation Laws Amendment Bill [B27 – 2017] (National Assembly - section 77), dated 8 November 2017
Report of the Standing Committee on Finance on the Taxation Laws Amendment Bill [B27 – 2017] (National Assembly - section 77), dated 8 November 2017
The Standing Committee on Finance, having considered and examined the Taxation Laws Amendment Bill [B27 - 2017] (National Assembly- section 77), referred to it, and classified by the JTM as a Money Bill, reports that it has agreed to the Bill.
- The 2017 draft Taxation Laws Amendment Bill (TLAB) was published by the National Treasury (NT) and SARS on 19 July 2017 for public comments. NT and SARS briefed the Standing Committee on Finance (Committee) on the draft bill on 15 August 2017. On 29 August 2017 the Committee held public hearings on the draft bill. On 14 September 2017, NT and SARS replied to key proposals on the draft bill made by stakeholders during the public hearings. On 10 October 2017, NT and SARS gave an update to the Committee on the steps taken to address the key issues on the draft bill raised during the consultation process.
- The TLAB contains several proposals, but the report will deal with six key proposals. In respect of the repeal of foreign employment income exemption, the original proposal was adjusted in order to mitigate its impact on lower income South Africans abroad. It was decided that foreign remuneration earned by South Africans up to R1 million will be exempt and its implementation delayed to 1 March 2020.
- The TLAB makes provision for the introduction of specific relief for Bargaining Councils that have been non-compliant with tax legislation. Non-compliant Bargaining Councils will be required to pay a levy of 10% of the total PAYE that should have been deducted from all payments made to their members between 1 March 2012 and 28 February 2017, as well as 10% of the total untaxed investment income between 1 March 2012 and 28 February 2017. The relief will apply in respect of the 5-year period, starting from 1 March 2012 to 28 February 2017. Non-compliant Bargaining Councils must submit a return and pay the levy to SARS on or before 1 September 2018 to benefit from the relief. Based on the Committee’s recommendations, National Treasury also held further meetings with the Bargaining Councils and requested further information from the Bargaining Councils to inform the future tax treatment of Bargaining Councils.
- In order to assist companies in financial distress, the TLAB contains three amendments dealing with tax implications for debt relief; namely, (i) specific rules to align the tax treatment of debt relief for mining companies with companies in other sectors; (ii) limiting the current rules dealing with intra-group debt relief rules to apply only to dormant group companies; and (iii) definitive rules dealing with the tax treatment of conversions of debt into equity. NT and SARS subsequently held a public workshop on 26 November 2017 with the relevant stakeholders. To avoid unintended consequences, NT and SARS proposed that the provisions in the draft bill (sections 19A & 19B) dealing with the tax treatment of conversions of debt into equity be removed and the current provisions in the Income Tax Act contained in section 19 be revised to reflect the comments received.
- On 10 October 2017, NT and SARS gave an update to the Committee on the steps taken in addressing some of the key issues in the TLAB. NT and SARS advised that the taxpayers welcomed the above-mentioned changes in section 19, however, SAIT did not agree with the proposal dealing with the trigger of a debt benefit whenever there is a change in any term or condition of the loan. SAIT opposed the position that a taxpayer should be subject to tax when a benefit is received from a loan restructuring if the debtor is in financial difficulty or seeks more funding. In the meeting with taxpayers on 26 September 2017, NT and SARS explained that failure to include this proposal in the TLAB would create a loophole as connected parties may be able to defer the recognition of any debt benefit indefinitely by repeatedly postponing the terms and conditions of the subordination agreement. However, in view of the fact that the commencement date of this proposal is effective from 1 January 2018 and applies in respect of years of assessments commencing on or after that date, any unintended consequences as a result of the practical application of this provision, based on facts and circumstances, will be dealt with in the following budget cycle.
- On 6 November 2017, after the TLAB was tabled in Parliament, SAIT submitted a written submission to the Committee. During the Committee meeting on 8 November 2017, SAIT made representations on this issue. National Treasury reiterated the policy rationale for the development of the current version in the TLAB. It was conceded that there may be issues arising in the implementation of this provision and these will be considered during the next budget cycle.
- Further, the TLAB contains amendments dealing with the tax treatment of banks and financial institutions due to changes in the financial reporting standard from IAS39 to IFRS9. To avoid a negative impact on the banking sector due to the fact that banks that are registered under the Banks Act are treated differently from other financial services providers (in that they are highly regulated by the South African Reserve Bank and subject to stringent capital requirements) the TLAB proposes definitive rules dealing with the tax treatment of impairment adjustments for banks as follows: (i) 25% of IFRS9 loss allowance relating to impairment based on annual financial statements (ii) 40% of IFRS 9 loss allowance relating to impairment based on annual financial statements as is equal to the difference between the amount of loss allowance relating to impairment that is measured at an amount equal to the lifetime expected credit losses and the amount that is classified as being in default; (iii) 85% of an amount classified as being in default (including retail exposure) in terms of Regulation 67 issued under the Banks Act and administered by the South African Reserve Bank.
- The TLAB also contains tax avoidance measures aimed at curbing the use of share buy backs schemes and dividend stripping by corporates. The original proposal was revised so that the anti-avoidance measures will be limited to apply in respect of dividends that are considered excessive as compared to normally acceptable dividends. In addition, the effective date of this provision was amended so that transactions already fully entered into before the coming into effect of this provision (19 July 2017) are not impacted. On 10 October 2017, NT and SARS explained that the revised proposal was welcomed by taxpayers. On 6 November 2017, SAIT made a written submission to the Committee regarding the fact that the proposed rules applying to share buy backs and dividend stripping will hamper innocent commercial transactions. However, NT and SARS are of the view that the transactions quoted by SAIT in its submission involve straightforward redemption and liquidation, which constitutes disposal of shares which are in general subject to capital gains tax.
- The TLAB contains further tax avoidance measures aimed at extending the application of controlled foreign company (CFC) rules to foreign companies held via foreign trusts or foundations and whose financial statements form part of consolidated financial statements (as defined in IFRS10) of a South African resident company. These companies will be treated as CFC for South African tax purposes. Based on the comments received during public hearings, a meeting was held with taxpayers on 18 September 2017. In order to mitigate the unintended consequences, NT and SARS proposed that amendments be made to the draft bill to delete some of the provisions including the proposed section 25BC. On 10 October 2017, NT and SARS explained that the stakeholders welcomed the above-mentioned changes NT and SARS proposed that measures to address these issues are included in the 2018 budget cycle.
- The matter of the removal of zero rating on certain types of bread, for example, whole wheat fibre bread, high fibre brown bread, high protein brown bread and brown health bread was raised. National Treasury explained that the changes in clause 87 of the TLAB are of a technical nature (and not a change in policy), to update reference to the most recent regulations issued by the Department of Agriculture. The VAT Act still refers to the 1991 regulations which were replaced by the 2008 and then 2017 regulations. The issue regarding removal of zero rating on certain types of bread relates to the withdrawal of the SARS VAT Practice Note No 12 with effect from 1 April 2016. An official announcement will be made to provide certainty to consumers and vendors until an announcement is made by the Minister in the Budget and legislative effect is given to that announcement.
The Democratic Alliance (DA) reserves its position on the Bill.
Report to be considered.
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