ATC211208: Report of the Select Committee on Finance on the 2021 Taxation Laws Amendment Bill [B22 - 2021] (National Assembly- section 77), dated 08 December 2021
Report of the Select Committee on Finance on the 2021 Taxation Laws Amendment Bill [B22 - 2021] (National Assembly- section 77), dated 08 December 2021
1.Introduction and background
Section 77 of the Constitution requires all money Bills to be considered in accordance with a procedure for passing revenue Bills established by the Money Bills Amendment Procedure and Related Matters Act, 2009 (Money Bills Act). Section 11 (1-3) of the Money Bills Act states that, in amending the revenue Bills, the Committee must ensure that the revenue raised is consistent with the fiscal framework; it considers 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. Section 11 (4) further requires the Committee to hold public hearings on the revenue Bills and report to the House.
The Minister of Finance first introduced the draft version of the 2021 Taxation Laws Amendment Bill (TLAB) during the February 2021 National Budget tabling. The TLAB was formally tabled in Parliament on 11 November 2021, together with the Medium Term Budget Policy Statement (MTBPS).
On 30 November 2021, the National Council of Provinces (NCOP) formally referred the 2021 TLAB to the Select Committee of Finance (SeCoF), for consideration and reporting. The Committee received a briefing on Tax Bills from National Treasury and the South African Revenue Service (SARS) on 30 November 2021. Despite calling for public comments, the Committee received no submissions on the 2021 draft TLAB.
2.Overview of the proposed amendments on the 2021 TLAB
The objective of the 2021 TLAB is to amend the Transfer Duty Act, 1949, so as to amend a provision; to amend the Estate Duty Act, 1955, so as to amend certain provisions; to amend the Income Tax Act, 1962, so as to amend certain definitions; to amend certain provisions; to make new provision; to amend certain Schedules; and to replace a Schedule; to amend the Customs and Excise Act, 1964, so as to make provision for continuations; to amend the Value-Added Tax Act, 1991, so as to amend certain provisions; and to amend a Schedule; to amend the Securities Transfer Tax Act, 2007, so as to amend certain provisions; to amend the Employment Tax Incentive Act, 2013, so as to amend certain provisions; to amend the Taxation Laws Amendment Act, 2013, so as to amend certain effective dates; to amend the Carbon Tax Act, 2019, so as to amend certain provisions; and to amend a Schedule; to amend the Taxation Laws Amendment Act, 2019, so as to amend a certain effective date; to amend the Disaster Management Tax Relief Act, 2020, so as to amend the long title; to amend the Preamble; and to amend certain provisions; to amend the Taxation Laws Amendment Act, 2020, so as to amend certain provisions; and to provide for matters connected therewith.
3.Changes made to the 2021 TLAB
National Treasury reported that two changes were made to the 2021 TLAB, after the introduction of the Tax Bills by the Minister of Finance in the National Assembly. These changes were made to change the effective dates from 1 January 2022 to 01 January 2023 in Clause 56, which deals with clarifying rehypothecation of collateral within collateral lending arrangements and in Clause 4(1) (c) which clarifies the definition of Contributed Tax Capital (CTC). This extension is expected to give both National Treasury and the affected stakeholders more time to take account of the impact of the proposed amendments.
4.Key issues raised in the 2021 TLAB
This section briefly summarises the key issues raised during National Treasury’s public consultation process. SeCoF received no public comments in the 2021 TLAB.
4.1On employment, individuals and savings
4.1.1Applying tax on withdrawals of retirement interest when an individual cease to be a tax resident
The abovementioned amendment was proposed to ensure that, when an individual ceases to be a South African tax resident before he/she retires, South Africa does not forfeit its taxing rights while the taxpayer benefited from tax deductions in respect of contributions made to the retirement fund. After the public consultation process, the proposed amendments contained in new section 9(H)(C) were withdrawn from the 2021 TLAB that was tabled by the Minister. National Treasury reported that, in order to address the complexities that were raised during the public participation process, further amendments will be considered in the next legislative cycle.
4.1.2Curbing abuse of Employment Tax Incentive
The 2021 draft TLAB proposes changes to the Employment Tax Incentive (ETI) to curb the abuse discovered by the National Treasury. It was reported that some taxpayers have devised certain schemes to claim the incentive in respect of individuals who do not work for them, but are rather engaged in training programmes using training institutions, with no employment characteristics, therefore failing to meet the definition of “employee” as defined in Section 1.1 of the ETI Act. The proposed changes are that, (1) “work” must actually be performed in terms of an employment contract and the employee must be documented in the employer’s records as envisaged in the record keeping provisions contained in section 31 of the Basic Conditions of Employment Act and (2) these amendments should apply retrospectively and be deemed to have come into operation on 1 March 2021.
4.1.3Strengthening anti-avoidance rules in respect of loans between trusts
The 2021 draft TLAB proposed amendments to strengthen anti-avoidance rules such that these rules will also apply in respect of any loan, advance or credit that a trust, directly or indirectly provides to another trust in relation to which, its beneficiaries or the founder are connected persons in relation to the founder or beneficiaries of the trust that provided the loan, advance or credit, effective from the date of the publication of the 2021 draft TLAB for public comment, which is 28 July 2021.
It was reported that after the public consultation process, the proposed amendments in section 7(C) were withdrawn in order to address the complexities that were raised and that specific amendments will be considered in the future.
4.2On General Business Tax
4.2.1Strengthening the rules dealing with limitation of interest deductions in respect of debts owed to certain persons not subject to tax
The 2021 draft TLAB tabled by the Minister proposed changes to strengthen the abovementioned rules in line with the recommendations of the government study published in February 2020. These changes are, (1) expanding the meaning of the term interest for purposes of these rules, (2) moving to a fixed ratio (30 per cent of earnings) restriction rather than one based on a formula, (3) reducing opportunities to avoid the rules with back to back loans, (4) amending the definition of adjusted taxable income as it applies to Real Estate Investment Trusts (REITs) and (5) interaction between the level of tax on interest and the current rules.
After the public consultation process, the changes were made in order to take into account comments received. These changes are (1) to postpone the effective date of implementation to after the announcement by the Minister of Finance in the annual National Budget, (2) the definition of “controlling relationship” will now cover companies that are directly or indirectly under a common controlling relationship and (3) to replace the reference to the current Corporate Income Tax (CIT) rate of 28 per cent with the standard dividends tax rate of 15 per cent in order to recognise that the tax base for CIT and withholding taxes is different.
4.2.2Restricting the set off of the balance of assessed losses in determining taxable income
The 2021 draft TLAB proposed broadening the CIT base by restricting the offset of the balance of assessed losses carried forward to 80 per cent of taxable income, such that the only companies that would be in a positive taxable income position before setting off the balance of assessed losses would be affected. While the overall tax liability will not change, a portion of the tax liability will be brought forward. The purpose of providing for the deductibility of assessed losses for corporate taxpayers is to smooth the tax burden for companies whose primary business is cyclical in nature and not in line with a standard tax year, and for start-up companies that are not profitable in the early years of trading, National Treasury explained.
After the public consultation process, the changes were made in order to take into account comments received. These changes are (1) to postpone the effective date of proposed changes to after the announcement made by the Minister of Finance in the annual National Budget and (2) introduce a de minimis threshold beyond which the proposal takes effect. It was explained that this is done to cater for a variety of companies that may experience cash flow challenges at different times. To the extent that the balance of assessed loss exceeds 80 per cent of current year taxable income, companies will be able to set off the higher of R1 million or 80 per cent of taxable income when calculating their tax liability.
4.2.3Clarifying rehypothecation of collateral within collateral arrangement provisions
The 2021 draft TLAB proposed changes to clarify rehypothecation of collateral within collateral arrangement provisions such that (1) the shares or bonds transferred as collateral in terms of a collateral arrangement may subsequently only be used for collateral and not be used for trading or in other financial transactions, (2) the transferee enters into a contractual arrangement and agrees that the listed share or listed bond transferred in terms of the collateral arrangement will either be held by that transferee for the duration of the arrangement or be used for purposes of providing security in respect of an amount owed by that transferee and (3) that these proposed amendments should apply retrospectively and come into operation on the date of the publication of the 2021 draft TLAB for public comment, which is 28 July 2021.
After the public consultation process, changes were made to take into account comments received. These changes are (1) to remove the contractual requirement, (2) accommodate the following regulated transactions and current market and regulatory developments, (i) a repurchase agreement entered into with the South African Reserve Bank (SARB) in terms of section 10(1)(j) of the SARB Act, (ii) complying with Regulation 28 of the Pension Funds Act, (iii) securing overnight cash placement in order to comply with the Basel III Supervisory Framework for measuring and controlling large exposures, and (3) to postpone the effective date to 1 January 2023.
4.2.4Clarifying the definition of Contributed Tax Capital
The 2021 draft TLAB proposed changes to the definition of CTC to clarify the principle that shareholders within the same class of shares should share equally in the allocation of CTC as a result of a distribution. It was discovered that some companies are exploiting the current provisions of CTC by allocating CTC on the basis of an alleged “share premium” contributed by a particular shareholder but not to all shareholders holding shares in the same class of shares.
After the public consultation process, changes were made to take into account comments received. These changes propose to exclude a general repurchase of listed shares by companies listed on the Johannesburg Stock Exchange (JSE) or other South African Exchanges and to postpone the effective date to 1 January 2023.
4.3On Carbon Tax Act
4.3.1Clarifying renewable energy premium beneficiaries
The 2021 draft TLAB proposed amendments to clarify that only entities that are liable for the carbon tax, conduct electricity generation activities and purchase additional primary renewable energy directly either under the Renewable Energy IPP Procurement Programme (REIPPPP) or from private Independent Power Producers (IPPs) would be eligible to claim the tax deduction for its renewable energy purchases, provided the power purchasing agreement/contract exists. The proposal seeks to amend Section 6(2)(c) of the Carbon Tax Act to clarify that the renewable energy premium to be deducted for purchases of additional renewable electricity is the product of the amount of Renewable Energy purchased (kWh) under a power purchase agreement and the applicable rate for that technology as specified in the Renewable Energy Notice gazetted by the Minister of Finance, as follows Deduction (B) = quantity of renewables purchased (kWh) × rate (Rand) per technology as per the Gazetted notice.
After the public consultation process, the changes were made to account for comments received, to include examples of eligible renewable energy purchases under the different types of Peddle Power Associations (PPAs).
These provisions are intended to address stakeholders’ concerns on possible double taxation due to the introduction of the carbon tax in addition to the renewable IPP tariff already applied under the REIPPPP.
4.3.2Clarifying the definition and scope of carbon sequestration limitation on biological sequestration to forest plantations
National Treasury reported that there were concerns about the permanence of sequestered emissions in Harvested Wood Products (HWPs) and lack of control of the production processes by forestry companies beyond the mill gate and the robustness of the available emissions calculation methodologies. The 2021 draft TLAB proposed changes that only actual forestry plantation sequestered emissions within the mill gate should be eligible for the deduction under the Carbon Tax Act and that the definition of biological carbon sequestration in section 6(3)(4) of the Carbon Tax Act be limited only to directly sequestered emissions by forest plantations.
After the public consultation process, the changes were to consider comments received. As such the 2021 draft TLAB expands the scope of the sequestration deduction to also include HWPs for the pulp, paper and print activity. The sequestered emissions will be determined using the mass flow approach combined with the landfill approach to account for sequestered emissions as per the Department of Forestry, Fisheries and environment (DFFE) Carbon Sequestration Guideline, in the short term. From an emissions accounting perspective, for forestry management and HWP pools, it will be important to account for gains and losses occurring from within the mill’s operational boundaries. For future carbon tax periods, as recommended in the Carbon Sequestration Guidelines, the 100-year accounting approach should be developed once industry specific studies are completed on suitable half-life and product use period assumptions.
4.3.3Aligning Schedule 2 emissions activities and thresholds with the greenhouse gas emission reporting regulations of the DFFE.
The Carbon Tax Act came into effect on 1 of June 2019. The tax base for the carbon tax are the Greenhouse Gas (GHG) emissions that are reported annually by taxpayers to the DFFE. On 11 September 2020, the DFFE published the amendments to the National Greenhouse Gas Emission Reporting Regulations. Annexure 1 of the GHG emissions reporting regulations was amended to include changes to the activities required to report their emissions and thresholds, and the inclusion of new activities now reportable to DFFE.
After the public consultation process, the following changes were made to change the effective date for the Schedule 2 amendments from 11 September 2020 to 1 January 2021 and to align Schedule 2 of the Carbon Tax Act with the amended GHG Emissions reporting regulations.
5.Observations and recommendations
5.1The Committee notes the withdrawal of some proposed amendments in the 2021 Tax Laws Amendment Bill, after the public consultation process and that these amendments may be considered in the next legislative cycle.
5.2The Committee supports the proactive measures taken by the National Treasury to curb abuse of the Employment Tax Incentive and ensure that the incentive achieves its intended objectives. The rate of unemployment in South Africa is very high, at 34.9 per cent in the third quarter of 2021 and persistent. The incentive is expected to encourage employers to hire young work seekers by providing a reduction in the amount of employees’ tax to be paid over to SARS by employers for the first 24 months of their employ.
5.3The Committee notes the proposed amendments on Carbon Tax Act, which includes clarifying the renewable energy premium beneficiaries and aligning emission activities and thresholds with greenhouse gas emission reporting regulations of the Department of Forestry Fisheries and Environment. The Committee supports these proposed changes with the understanding that effective implementation of the Act will encourage users, firms and consumers to adopt cleaner technologies over time, reduce greenhouse gas emissions and support South Africa’s to honour its climate change commitments. While the Committee acknowledges that the tax was introduced recently in June 2019; and that there might be teething problems, it is recommended that the National Treasury should continuously review the impact of the tax to determine whether it is achieving its intended objectives.
5.4The Committees notes the proposed amendments to Corporate Income Tax, which are aimed at clarifying definitions, extending the effective dates, strengthening the rules dealing with limitation of interest deductions in respect of debts owed to certain persons not subject to tax and providing for deductibility of assessed losses for taxpayers to smooth the tax burden for companies, amongst others. From a policy perspective, the Committee supports the proposed amendments and government’s efforts to restructure the Corporate Income Tax system over the medium term by broadening the base and reducing the Corporate Income Tax rate to benefit businesses, employees and consumers. The Committee further note that these changes are expected to contribute towards enhancing efficiency, transparency and fairness in the business tax system; to improve the country’s competitiveness; encourage investment; promote economic growth and reduce appeal of Base Erosion and Profit Shifting.
The Select Committee on Finance, having considered and examined the Taxation Law Amendment Bill [B22 - 2021] (National Assembly – section 77), referred to it, and classified by the JTM as a section 77 Bill, accepts the Bill.
Democratic Alliance (DA), Economic Freedom Fighters (EFF) and Freedom Front + (FF+) reserve their position.
Report to be considered
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