ATC191204: Report of the Select Committee on Finance on the 2019 Taxation Laws Amendment Bill [B18B - 2019] (National Assembly- section 75), dated 03 December 2019.
Report of the Select Committee on Finance on the 2019 Taxation Laws Amendment Bill [B18B - 2019] (National Assembly- section 75), dated 03 December 2019.
The 2019 Taxation Laws Amendment Bill was first published in the 2019 Budget Review, during the National Budget tabling. The Minister of Finance formally introduced the taxation Bills in Parliament on 30 October 2019 during the Medium Term Budget Policy Statement (MTBPS) tabling. The tax proposals aim to raise additional tax revenue to cover for the shortfall in the current financial year and over the medium term.
Section 77 of the Constitution requires all Money Bills to be considered in accordance with the procedure established by the Money Bills Amendment Procedure and Related Matters Act, 2009 (Money Bills Act). Section 11 of the Money Bills Act provides a procedure for passing revenue bills. It requires that the revenue raised be consistent with the fiscal framework; consider equity, efficiency, certainty and ease of collection; the composition of tax revenues; regional and international tax trends and the impact on development, investment, employment and economic growth.
2.Taxation Law Amendment Bill
The 2019 Taxation Laws Amendment Bill (TLAB) seeks to amend the Personal Income Tax and savings to review tax treatment of surviving spouse pensions, review tax treatment of bulk payments to former members of closed retirement funds, to exempt annuities from a provident or provident preservation fund and to extend the scope of amounts constituting variable remuneration.
In terms of amending the General business taxes, the TLAB addresses abusive arrangements aimed at avoiding the anti-dividend stripping provisions; corrects anomalies arising from applying anti value shifting rules, refines provisions around the special interest deduction for debt funded share acquisitions, clarifies corporate reorganisation rules relating to exchange items and interest bearing instruments, harmonises the timing of degrouping charge provisions of intra-group transactions and controlled foreign companies and amends the corporate organisation rules to cater for company deregistration by operation of law.
The taxation of financial institutions and products clarifies inconsistencies in the current Real Estate Investment Trust (REIT) tax regime and refinement to taxation of risk policy funds of long term insurers.
The tax incentives amendment reviews the allowable deduction for investors investing in a Venture Capital Company (VCC) and the Special Economic Zone (SEZ) tax incentive rules.
The International Tax amendment, reviews the comparable tax exemption of controlled foreign companies, addresses circumvention of controlled foreign company anti-diversionary rules, reviews the definition of a Permanent Establishment to align it with the South African MLI position signed on 07 June 2017 (Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting), amends the definition of Domestic Treasury Management Company (DTMC) to encourage listed South African multinational companies which are registered with the South African Reserve (SARB) to relocate their treasury operations to South Africa) and reviews the “affected transaction” definition in the arm’s length transfer pricing rules, aligning them with the Organisation for Economic Development and Cooperation (OECD) and United Nations (UN) model tax convention.
Value Added Tax (VAT) amendment reviews Section 72 of the VAT Act to align provisions of this section with the spirit of the other provisions in the VAT act and refines the VAT treatment of foreign donor funded projects.
Ad Valorem excise duty on motor vehicles is a taxation on luxurious products which seeks to improve the progressivity of the tax system and raise revenue. It is imposed on passenger and light commercial vehicles. TLAB proposes that the ad valorem calculation be based on the full customs value without rebates to ensure that local production is not at a disadvantage.
3.Process followed by the Committee
The Committee’s work on the Bill was performed under unacceptable time constraints that require a review of how the Bill – indeed all taxation bills - are handled in the future. Revenue Bills, especially the TLAB, are technical in nature and require a thorough understanding of the potential impact of any proposed amendment on the fiscus and taxpayers.
To facilitate the legislative process of revenue Bills, the practice is for the Standing Committee on Finance (SCOF) and Select Committee on Finance (SeCOF) to receive joint briefings on the draft Bill and have joint public hearings prior to the tabling of the MTBPS. However, the SeCOF does not engage further with the draft Bill processed by the Standing Committee before the Bills are formally introduced. This is a result of the section 75 legislative procedure in accordance with which the Bill must be considered. Unless the SeCOF is also afforded a meaningful opportunity to consider the draft Bill prior to the tabling of the MTBPS, and to propose amendments to the Minister, the Select Committee would be, as it is now, at a disadvantage to propose any new amendments in terms of the Money Bills Act.
In terms of the Money Bills Act, the Minister must be afforded 14 days to comment on any proposed amendment. After this period, the Bill must still be considered by the National Assembly as a result of the section 75 procedure. Given the programme of Parliament at the end of the year when revenue Bills are considered, and within the present regulatory framework, it is difficult for the SeCOF to give due consideration to proposed amendments to revenue Bills.
The Committee will consider whether this matter should be addressed with amendments to the Money Bills Act, or whether there are other ways of addressing this challenge before the new budget cycle.
The Committee mandates the Chairperson to engage with the SCOF Chair to ensure that the Bill reaches the SeCOF at least two weeks before the MTBPS. This may mean that the informal Bill may have to be introduced earlier by National Treasury each year, and the Committee mandates the SeCOF Chair to also engage with National Treasury on this.
In terms of the process followed, on 03 September 2019, the Select Committee of Finance held a joint briefing by the National Treasury and the South African Revenue Service (SARS) with the SCOF on the 2019 taxation Bills.
On 19 September 2019, the SeCOF and SCOF held joint public hearings on the taxation Bill in Parliament. The Committees received submissions from nine stakeholders, namely, Business Unity South Africa (BUSA), Banking Association of South Africa (BASA), JA Transactions Solutions (JATS), Section 12J Fund Association, Kingston, PricewaterhouseCoopers (PwC), South African Institute of Chartered Accounts (SAICA), South African Institute of Tax (SAIT) professionals and Southern African Venture Capital and Private Equity Association (SAVCA).
On 26 November 2019, the National Council of Provinces (NCOP) officially referred the Taxation Law Amendment Bill [B18B - 2019] (National Assembly – section 75) to the SeCOF for consideration and report.
The SeCOF received a second briefing on the Bills by the National Treasury and SARS on 27 November 2019. The Committee received two written submissions from Meghan Cormak of the ENSafrica tax law firm, PricewaterhouseCoopers and an oral submission from Section 12J Industry Association (S12J).
4.Summary of inputs from the stakeholders
4.1Ms Meghan Cormak
Ms Meghan Cormak of the ENSafrica Tax Law Firm submitted that the provisions of Section 8E essentially re-characterise dividends as taxable income in respect of any “hybrid equity instrument”.
The 2019 TLAB proposes certain amendments to Section 8E of the Act to amend the concept of redeeming a share “in whole or in part”, since a share cannot be partially redeemed. In the first draft of the 2019 TLAB released on 21 July 2019, the wording proposed to achieve this object referred to circumstances where the issuer is obliged to distribute, or the holder has an option to receive, an amount constituting a return of capital or foreign return of capital. However, the wording included in the revised 2019 TLAB, inter alia, to circumstances where the issuer is obliged to redeem the shares or to distribute an amount determined with reference to the issue price of that share within the three-year period. It also refers to circumstances where a holder of a share has an option to require the issuer to redeem the share or to distribute an amount determined with reference to the issue price of that share.
Ms Cormak does not understand the above to be in line with the intention of the proposed amendment to section 8E of the Act, and recommend that the current wording of section 8(1)(a) and 8(1)(b) of the Draft 2019 TLAB be changed back to the wording contained in the first version of the Draft 2019 TLAB, released on 21 July 2019.
In the briefing held on 27 November 2019, the National Treasury has confirmed that Ms Cormak’s concern regarding Section 8E of the TLAB has been taken into consideration.
Pricewaterhousecoopers (PwC) submitted that the proposed amendment to definition of “hybrid equity instrument” in section 8E of the Income Tax Act, 1962 Section 8E of the Income Tax Act, 1962, is an anti-avoidance measure aimed at financing schemes in which certain shares have debt-like features and are more akin to debt than equity in substance. Amendments to section 8E proposed in the TLAB, 2019, expand the definition of “hybrid equity instrument” so that it includes within its ambit a share where the issuer is obliged to “distribute an amount determined with reference to the issue price of that share”, as well as a share where the holder of the share may exercise an option in terms of which the issuer must “distribute an amount determined with reference to the issue price of that share”. The proposed amendments drastically expand the scope of section 8E on the basis that almost all distributions made in terms of preference share arrangements are determined with reference to the issue price of that share. The effect is that almost all dividends received in respect of preference shares will be taxed as income (as opposed to being exempt dividends).
In a letter written to the Committee, PwC has acknowledged and commended the National Treasury for having taken into consideration, the amendments it proposed regarding section 8E of the Income Tax Act, 1962. The proposed changes will be published in a Bill to be tabled before Parliament.
On the review of the Special Economic Zones (SEZs) anti-profit shifting measures, PwC is concerned that the proposed rules would not only be administratively burdensome, but would effectively result in a single entity being subject to tax at two tax rates. As an alternative, PwC suggested that a more appropriate manner in which to address the concern would be to make the already existing transfer pricing rules applicable to transactions between companies within an SEZs and other connected South African residents. PwC further submitted that it should not take a full legislative cycle for SARS to assess whether it has the requisite capacity to administer domestic transfer pricing.
PwC recommended that, should the concept of “associated enterprise” be introduced into the Income Tax Act, this should be accompanied by detailed elaboration, thresholds and further definitions within the Income Tax Act itself to clarify the ambit of the transfer pricing rules, as well as to target the transactions and relationships that are of concern. In this regard, they believe it is preferable that the definition of a connected person be expanded for transfer pricing purposes to specifically cover those relationships to which the transfer pricing rules should apply and which the existing definition does not cover. In the interim, they recommend that the proposed amendments be removed from the 2019 TLAB and be reintroduced in 2020 in a form that addresses concerns raised.
4.3 Section 12J Industry Association
The purpose of Section 12J Industry Association (S12J) submission is to outline the potential impact on the Venture Capital Company (VCC) industry, and to propose an alternative suggestion regarding the National Treasury’ proposal. S12J raised the following concerns:
4.4The calculation of the annual deduction limitation should be quantified based on far more complex statistics than just a simple average and that its limitation should not result in making the industry uneconomical.
4.5The impact of policy uncertainty on the industry’s ability to raise capital from investors, the industry’s ability to successfully invest this capital in South African (Small Micro and Medium Enterprises) SMME’s and the fund/asset managers’ ability to run sustainable business models and invest capital in their businesses, especially in the context of the June 2021 “sunset” clause being less than two years away.
4.6The proposal will pose risks to VCCs that raised capital on the basis of anticipated further investments of larger than R2.5 million or R5 million, who under the proposed amendments would be unable to raise further meaningful investment capital from key anchor investors.
4.7The proposed investment cap will effectively mean that no anchor investor can invest in a VCC and without a significant anchor investor, a number of VCCs would not have been able to raise sufficient capital, thereby failing prior to launch.
4.8The role SMMEs play in the South African economy and indicative 12J job creation statistics in the context of the proposed R2.5 million 12J deduction limitation.
4.9S12J believes that a cap will impact its incentive in a negative way and in turn impact the success it is having on job creation and economic growth in South Africa. They propose that a cap should be R5 million for all investors, including individuals, trusts and companies. They further propose that VCC’s should be given a period of time to remedy the compliance issues they face. They further recommend a need for policy certainty, more time for them to make a meaningful impact on the economy and an extension of the June 2021 “sunset clause” with amendments.
5.National Treasury input
The key issues raised by the stakeholders with respect to TLAB include reviewing the tax treatment of surviving spouse pensions, reviewing the SEZs and VCC tax incentive regimes, ad valorem excise duty on motor vehicles and technical corrections on carbon tax amendments.
The National Treasury made the following changes before and after the Bills were introduced in Parliament on 18 September 2019:
5.1Changes were made to the VCC tax incentive regime to limit the upfront amount to be deducted in respect of taxpayers investing in VCC shares to R2.5 million. During the joint public hearings in Parliament, some of the stakeholders were concerned that the proposed cap would limit the viability of VCC funds and makes it an undesirable investment for corporate investors. As a result, the 2019 TLAB introduced by the Minister of Finance, revised the cap to R2.5 million for natural persons and R5 million for corporate investors.
5.2On the revision of the ad valorem formula on excise duty on motor vehicles, the South African Original Equipment Manufacturers (OEMs) raised concerns that the incentives offered by the Automotive Production and Development Programme (APDP) contribute to the competitiveness of their exports. Furthermore, the reduced incentives under the South African Automotive Masterplan (SAAM), combined with a further benefit reduction in rebates on excise duties will substantially impair production competitiveness to the disadvantage of local production. The National Treasury has taken such proposals into consideration and removed them from the 2019 TLAB introduced by the Minister of Finance.
5.3After the Bills were introduced in Parliament, a technical correction was made to the definition of “hybrid equity instrument” in clause 8 of the 2019 TLAB, to explicitly refer to amounts paid to redeem or repay some or all of the original issue price of the shares. The technical correction entails replacing the words “determined with reference to” with the words “constituting a return of”.
6.National Treasury’s responses on the section 12J tax incentive
6.1The Venture Capital Company (VCC) tax incentive regime was introduced in the Income Tax Act, 58 of 1962 (the Act) in 2008. The main aim of the VCC tax incentive regime is to raise equity funding in support of the development of small business which otherwise would not have had access to market funding due to either or both their size and inherent risk.
6.2When the VCC tax incentive regime was introduced in 2008, the rules contained very strict investor criteria. As a result, a natural person who invested in the VCC shares was eligible for a 100 per cent tax deduction of the amount invested, however, the deduction was limited to R750 000 per tax year. In turn, individual investors were also subject to a lifetime deduction limit of R2 250 000.
6.3In 2011, changes were made in the VCC tax incentive regime in order to make it more attractive which included the removal of the limitations as mentioned above. It is important to note that no new additional VCC’s were registered from 2011 until 2015, and only once additional substantial policy amendments were made in 2015 did the VCC tax incentive regime take off.
6.4An investigation of data from SARS on the use of the incentive over the past few years has shown that the revenue foregone has disproportionately benefitted a small number of very high income individuals. The statistics show that nine individuals were able to get tax deductions of R690 million. At a 45 per cent marginal tax rate, this is an upfront reduction in actual tax paid of around R310 million for those nine individuals.
6.5The objective of the incentive was to provide SMEs access to finance where they would not have been able to access that finance otherwise. The data from SARS has shown that the majority of investments have been in low-risk, asset-backed rental projects. This view seems to be corroborated when looking at the advertising from industry. This does not appear to align with the original motivation for the incentive since asset-backed projects are more likely to access debt-finance (as the asset can be used as collateral).
6.6National Treasury has some concerns on the “additionality” of the incentive, i.e. whether this has created any actual additional investment or employment compared to what would have happened if the incentive was not available. There are large investments into property and accommodation (hotels, time shares and student accommodation) as a result of the incentive, but if this would have happened anyway the only result is a loss in tax revenue. Similarly, those investments may have taken place in other, possibly more productive, industries.
6.7The upfront deduction for the highest earning individuals in South Africa undermines the both the progressivity and the fairness of the tax system, with what initially appears to be questionable benefits. These deductions have occurred in a fiscally constrained environment where taxes have been increasing, including from higher taxes on the those with lower incomes.
6.8To limit the revenue loss, improve equity and fairness before a review of the incentive, the Minister of Finance re-introduced an annual cap on the incentive at R2.5 million rand for individuals and R5 million for corporates in the tabled Taxation Laws Amendment Bill, 2019 from 21 July 2019 (when the draft legislation was published).
6.9National Treasury did not retrospectively change the amount that could be contributed, as it recognizes that those contributions were allowable according to the law. However, National Treasury does need to continually assess legislative provisions to make sure they are in line with the original objectives and take prompt action when concerns arise.
6.10National Treasury and SARS met with the S12J Association to discuss this matter on 2 December 2019 at their Pretoria offices.
6.11From the perspective of National Treasury this was a constructive meeting and there were robust discussions.
6.12The industry association stated they appreciated hearing more details on the concerns of National Treasury and SARS and would like direction on which aspects of the incentive they should research to provide evidence on the potential impacts.
6.13National Treasury stated that they would carry out a survey next year and complete a review of the incentive to inform the decision about whether the incentive is extended beyond the current sunset date of 30 June 2021.
6.14National Treasury agreed to meet the association again in January 2020 for them to provide a presentation and to start engagements for the review process.
7.Committee observations and recommendations
7.1The Committee acknowledged that the timeframe within which it must process the taxation Bills is constrained and agreed that the SeCOF and SCOF will hold joint briefings and public hearings in future and that the Committee will explore the possibilities of receiving the Bills earlier. .
7.2The Committee welcomes the changes effected by the National Treasury on the VCC tax incentive regime, ad valorem formula on excise duty on motor vehicles and the technical correction to section 8E of the Income Tax Act. This addresses Ms Meghan Cormak and the PricewaterCoopers submissions on section 8E.
7.3The Committee recommends that VCC tax incentive should be encouraged to grow the economy. National Treasury and the SARS should review its design and ensure its effective implementation to prevent abuse and that these incentives are targeted at the intended beneficiaries, which are SMMEs. National Treasury and SARS should brief the Committee on progress made on the review of the VCC incentive upon its expiry in 2021. S12J association in addition to other stakeholders should play a role in seeking to direct investors to invest in areas that secure return on investment, but at the same time, serves the country’s development needs and are more consistent with the aims of the original incentives. If necessary NT should consider ensuring this through a regulations after effective consultation with relevant stakeholders.
7.4On Special Economic Zones’ tax incentives, the Committee, following its participation in the joint public hearings with SCOF on the Taxation Bills, recommends that the National Treasury briefs it on the outcomes of the review of the sunset clause to determine whether it is still achieving the intended objectives.
7.5The Committee welcomes National Treasury’s engagement with S12J on processing their differences further as agreed to at the 2 December meeting referred to above that they had.
7.6The Committee mandates the Chairperson to engage with the Standing Committee on Finance Chair to ensure that the Bill reaches the Select Committee at least two weeks before the MTBPS in future. This may mean that the informal Bill may have to be introduced earlier by the National Treasury each year, and the Committee mandates the Select Committee Chair to also engage with National Treasury on this.
The Select Committee on Finance, having considered and examined the Taxation Law Amendment Bill [B18B - 2019] (National Assembly – section 75), referred to it, and classified by the JTM as a section 75 Bill, accept the Bill without amendments.
Report to be considered
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