ATC241122: Report of the Standing Committee on Finance on the Taxation Laws Amendment Bill [B16 - 2024] (National Assembly - section 77), dated 19 November 2024

Finance Standing Committee

2. Report of the Standing Committee on Finance on the Taxation Laws Amendment Bill [B16 - 2024] (National Assembly - section 77), dated 19 November 2024

 

The Standing Committee on Finance, having considered the Taxation Laws Amendment Bill [B16 - 2024] (National Assembly - section 77) referred to it, and classified by the JTM as a Money Bill, reports the Bill as follows:

 

1. INTRODUCTION
   1. This Bill was tabled by the Minister of Finance during the 2024 MTBPS on 30 October 2024. A draft version of the Bill, published for public comment on 1 August 2024, encompasses several critical tax changes announced in the 2024 Budget in February, including adjustments related to the carbon tax, the employment tax incentive, and various corporate taxation measures.

 

2. PUBLIC PARTICIPATION
   1. Public comments were collected until 31 August 2024, and subsequent workshops were held on 12 and 13 September 2024 to discuss the input. Given the technical nature of the amendments, the consultations allowed Treasury to address concerns and refine measures aimed at improving economic efficiency, compliance, and environmental objectives, as highlighted in the Budget Review.
   2. On 17 September 2024, National Treasury and SARS briefed SCoF on the Draft Tax Bills. These include the Rates Bill, the 2024 Draft Taxation Laws Amendment Bill (TLAB), the 2024 Draft Tax Administration Laws Amendment Bill (TALAB), the Global Minimum Tax Bill, and the Global Minimum Tax Administration Bill.
   3. Following this briefing, SCoF issued a call for public comments and held public hearings on 8 and 9 October 2024, where stakeholders made written and oral submissions on the draft bills. These sessions allowed stakeholders to discuss and raise issues concerning the proposed tax legislation.
   4. On 23 October 2024, National Treasury and SARS presented to the Committee the Draft Response Document related to all the public comments and deliberations by the Committee on the draft bills. This document summarized the initial responses of National Treasury and SARS officials to the public feedback received during the public participation process, outlining the proposed actions to address the main issues raised.
   5. Following the public hearings and responses by NT and SARS, the Bill was presented to the Minister of Finance for approval. This included the Minister’s review and approval of any consequential amendments to the draft Bill. After the final revisions made as a result of public comments, the Minister formally introduced or tabled the Bill in Parliament on 30 October 2024.
   6. During the departmental consultation and the public participation process with the Committee, a total of 65 organizations and six individuals submitted comments, to which NT and SARS provided responses. This extensive engagement included a diverse group of stakeholders representing various industries, professional associations, educational institutions, government departments, and individual professionals.
   7. The organizations involved ranged across sectors such as finance, education, telecommunications, automotive, trade, and industry. Several educational institutions actively participated and key industry-specific organizations, shared industry concerns and recommendations, particularly on tax implications and administrative requirements impacting their sectors.
   8. This process of consultation and public participation reflects a comprehensive engagement, enabling NT and SARS and the Committee to consider a wide range of views and concerns, ultimately facilitating more informed and inclusive law-making for the tax Bills.
   9. The Committee also notes with the procedural issues highlighted by a stakeholder, referencing a survey conducted by the Parliamentary Monitoring Group (PMG). According to the survey, only 30% of participants felt that their submissions were adequately considered, while 37% believed that their concerns were not taken seriously. Alarmingly, 80% of respondents reported receiving no feedback on their submissions. The survey also identified several impediments to effective participation in the process, including a lack of time (51%), inadequate funding (36%), limited capacity (32%), and insufficient knowledge of policy matters (19%). These findings underscore the need for enhanced mechanisms to improve public engagement and participation in the legislative and budgetary processes.

 

3. KEY PROVISIONS
   1. The Taxation Laws Amendment Bill [B16-2024] introduces significant updates to South Africa’s tax legislation, targeting economic modernization, environmental sustainability, and improved tax administration. The Bill proposes amendments to the Income Tax Act, Customs and Excise Act, Value-Added Tax Act, Employment Tax Incentive Act, and the Carbon Tax Act, with the overall aim of enhancing compliance, stimulating investment in green technology, and aligning South Africa’s fiscal framework with international standards.
   2. The Income Tax Act, 1962, undergoes extensive changes. Key amendments include the introduction of definitions for “battery electric vehicle” and “hydrogen-powered vehicle,” reflecting a focus on green technology. Updates to the definition of "connected person" refine tax rules on related-party transactions, while provisions for trusts and retirement annuities are clarified.
   3. The Bill also strengthens anti-avoidance measures, particularly with Section 7C, which tackles loans made below market rates within certain trust structures. Importantly, Section 12V provides a 150% tax deduction for capital investments in green manufacturing technologies, encouraging adoption of sustainable practices. Other changes address depreciation and capital allowances, enhance foreign tax credit rules, and modify the treatment of functional currency for controlled foreign companies to better manage high-inflation jurisdictions.
   4. The Customs and Excise Act, 1964, is updated to reflect changes in international trade and taxation practices. Amendments include retroactive adjustments to tariff schedules for specific fuels, such as aviation kerosene and illuminating kerosene, ensuring compliance and transparency in fuel taxation. Additionally, new provisions allow for rebates and levies under specific circumstances, facilitating smoother trade operations.
   5. In the Value-Added Tax Act, 1991, the Bill introduces significant revisions to streamline VAT compliance. Donor-funded projects are granted more flexible VAT registration options, enabling multiple branches to merge into a single registration. Updated provisions for electronic services simplify VAT treatment, allowing supplies made through intermediaries to be deemed as made by the intermediary, provided both parties agree. These changes are intended to reduce administrative burdens while maintaining strict compliance.
   6. The Employment Tax Incentive Act, 2013, sees refinements to eligibility criteria for tax incentives, ensuring that only qualifying employers and employees benefit. The Bill also introduces strict penalties for non-compliance, with employers who incorrectly claim incentives facing a penalty equal to 100% of the claimed amount.
   7. The Carbon Tax Act, 2019, incorporates revisions to align South Africa’s tax framework with its climate change commitments. Updates to Schedule 1 adjust thresholds and tax rates for various emissions, ensuring that carbon pricing mechanisms are more reflective of the country’s transition to a low-carbon economy. These amendments aim to encourage industries to reduce greenhouse gas emissions and invest in cleaner technologies.
   8. Finally, administrative provisions across these Acts are harmonized to improve overall efficiency and compliance. The proposed amendments reflect the government’s commitment to fostering sustainable development, enhancing fiscal integrity, and maintaining alignment with global best practices. These changes, particularly the incentives for green technology, signify a progressive step toward meeting South Africa’s environmental and economic goals while ensuring a fair and efficient tax system.

 

4. PUBLIC SUBMISSIONS AND NT AND SARS RESPONSES
   1. The public submissions on the 2024 Draft Taxation Laws Amendment Bill (TLAB) centred on proposed amendments to key pieces of legislation, including the Carbon Tax Act, the Income Tax Act, and the Value-Added Tax (VAT) Act. Stakeholders provided feedback on a broad range of issues, such as the treatment of renewable energy deductions, anti-avoidance rules, special tax incentives, and administrative complexities. The proposed amendments aim to modernize the tax framework, address policy gaps, align with global best practices, and promote economic growth. Through this process, NT, SARS and the Committee engaged stakeholders to refine proposals, address unintended consequences, and ensure that the tax system remains equitable, efficient, and aligned with South Africa's developmental goals.

 

CARBON TAX

Renewable Energy Premium Deduction

1. Stakeholders raised concerns about the renewable energy premium deduction under Section 6 of the Carbon Tax Act, particularly in light of power purchase agreements (PPAs) being transferred to the National Transmission Company of South Africa (NTCSA). The submissions emphasized the need to maintain eligibility for these deductions, including for Eskom’s legacy PPAs and new renewable energy purchases. NT accepted the proposal and committed to amending the Act to ensure electricity generators retain access to the deduction. These amendments align with the Electricity Regulation Amendment Act, addressing equity concerns in renewable energy expenditure treatment.

Emission Factor and Calorific Value Alignment

1. There was significant focus on the alignment of fuel combustion emission factors and net calorific values (NCVs) with updated DFFE guidelines. Stakeholders supported retaining NCV ranges to improve the precision of greenhouse gas emissions calculations, which NT accepted. However, other proposals, such as adjusting NCVs for coal and diesel or adding specific emission factors for natural gas, were not accepted. NT clarified that the current values align with DFFE guidelines and IPCC standards, ensuring consistency in emissions reporting.

Fugitive Emission Factors

1. Stakeholders emphasized the need for alignment between fugitive emission factors in the Carbon Tax Act and updated DFFE guidelines. NT accepted this recommendation and introduced amendments to Schedule 1 to reflect these changes, including new fugitive emission activities in Schedule 2. These updates align with IPCC refinements and aim to improve accuracy in carbon tax assessments while maintaining coherence with the DFFE’s methodological framework.

INCOME TAX: INDIVIDUALS, SAVINGS AND EMPLOYMENT

Employment Tax Incentive (ETI) Scheme

1. Submissions regarding the Employment Tax Incentive (ETI) scheme supported efforts to curb abuse but suggested extending penalties to promoters of aggressive schemes and providing relief for employers collaborating with SARS. NT clarified that penalty provisions in the Tax Administration Act would apply in addition to the ETI-specific penalties. However, proposed changes to Section 4 of the ETI Act were not accepted, as NT aimed to preserve the existing framework’s effectiveness.

Retirement Fund Transfers

1. Concerns were raised about the limitation of tax-neutral transfers between retirement annuity funds (RAFs) to involuntary transfers. Stakeholders argued for the inclusion of voluntary transfers, which NT accepted. The amendments will allow for both voluntary and involuntary transfers between RAFs to be tax-neutral, ensuring equitable treatment of retirement fund members.

Anti-Avoidance Rules for Trust Loans

1. Submissions on Section 7C of the Income Tax Act requested exclusions for arm’s-length transactions with lower interest rates. NT rejected these proposals, emphasizing the anti-avoidance nature of Section 7C. The legislation aims to prevent tax-free wealth transfers, and NT maintained that the current framework sufficiently addresses the interaction between anti-avoidance and transfer pricing rules.

INCOME TAX: GENERAL BUSINESS TAX

Reviewing the Connected Person Definition in Partnerships

1. The definition of "connected person" under paragraph (c) of Section 1 of the Income Tax Act created concerns for corporate investors in partnerships, particularly in en commandite partnerships, where limited partners inadvertently became connected to unrelated corporate entities. Stakeholders recommended amending the definition to exclude qualifying investors, ensuring that their isolated involvement in partnerships does not result in unintended tax implications. However, NT did not accept broader amendments to include members themselves, citing the anti-avoidance purpose of the connected person concept and the need to maintain its policy intent. Proposals to remove the connected person provision for partnerships entirely were also rejected as they would constitute a significant policy shift.

Limiting Interest Deductions: Reorganization and Acquisition Transactions

1. Amendments to Section 23N were proposed to align the limitation of interest deductions with the provisions of Section 23M, replacing the formula-based calculation with a fixed 30% threshold. Stakeholders raised concerns that this change would adversely affect transactions concluded in a high-interest rate environment. In response, NT accepted the recommendation to postpone the effective date to 1 January 2027, mitigating the impact on already concluded transactions. Proposals to adjust wording in the legislation and align definitions with Section 23M were also accepted, ensuring consistency in interest deduction rules across both sections.

Relaxing Assessed Loss Restrictions for Liquidating Companies

1. Section 20’s restriction on assessed loss carry-forwards to 80% of taxable income created challenges for companies undergoing liquidation, deregistration, or winding up. NT proposed exempting such companies from the restriction, allowing full utilization of assessed losses. Stakeholders suggested broadening the exemption to include companies in business rescue and revising the effective date to an earlier period. While NT rejected the broader inclusion, it accepted amending the effective date to apply to years ending on or after 31 December 2024, addressing unintended consequences for liquidating companies.

Taxation of Unlisted Property Companies

1. The REIT framework, which provides flow-through tax treatment for listed property entities, excluded unlisted property companies. NT proposed extending the definition of "REIT" to include unlisted property companies regulated by the FSCA under a newly developed framework. Stakeholders welcomed the proposal but expressed concerns about delays due to the absence of an effective date and pending FSCA regulations. NT responded by empowering the Minister of Finance to issue regulations for unlisted property companies, ensuring alignment with existing frameworks for listed entities.

Clarifying the Interest Limitation Rules

1. Further clarifications to Section 23M addressed instances where a deemed debt would arise despite the repayment of an original debt. Stakeholders requested additional clarity on the scope of the amendments, particularly regarding the creditor relationship. NT confirmed that the amendments intend to cover scenarios with or without controlling relationships, ensuring consistency in application across various debt arrangements.

Addressing Third-Party Backed Shares

1. Amendments to Section 8EA sought to expand exclusions to ownership requirements, allowing for corporate actions involving share substitutions on foreign exchanges. Stakeholders recommended further expansions, including intra-group transactions and securities lending arrangements, but these suggestions were not accepted, as they fell outside the scope of the proposed amendments. The effective date for amendments clarifying redemption provisions was adjusted to 1 January 2024 for consistency.

Translating Contributed Tax Capital (CTC) from Foreign Currency

1. Proposed amendments to Section 25E clarified the translation of contributed tax capital (CTC) for shares denominated in foreign currency. Stakeholders raised concerns about potential interpretive shortcomings, including the application of translation rules for reductions in CTC. NT maintained that the current provisions sufficiently distinguish between creation and reduction points and emphasized that the proposed wording intentionally accommodates the functional currency of tax-resident companies.

INCOME TAX: TAXATION OF FINANCIAL INSTITUTIONS AND PRODUCTS

Impact of IFRS 17 on the Taxation of Insurers

1. The implementation of IFRS 17 as the new accounting standard for insurers, effective from January 2023, prompted adjustments to tax legislation under Sections 28 and 29A of the Income Tax Act. Stakeholders raised several issues concerning unintended consequences, such as excessive phasing-in amounts and ambiguities in liability definitions. For short-term insurers, NT accepted proposals to revise the wording of Section 28(3C)(a) to eliminate unnecessary phrases, address net asset situations in Section 28(3C)(b), and clarify the treatment of net creditor positions under Section 28(3C)(c). For long-term insurers, amendments will ensure consistency in recognizing transactions involving cell captives, aligning the definition of “value of liabilities” with the adjusted IFRS formula.

Deductions for Research and Development (R&D)

1. The R&D tax incentive under Section 11D of the Act has undergone significant changes to better align with international standards, such as the OECD Frascati Manual. Stakeholders requested further clarity on qualifying activities and expenditures. NT did not accept this suggestion, emphasizing that revised criteria introduced in 2023 sufficiently define eligible activities as systematic, experimental, and aimed at resolving scientific or technological uncertainty. Guidance from the Department of Science and Innovation will continue to assist taxpayers in determining eligibility.

Special Economic Zones (SEZs)

1. Amendments to Sections 12R and 12S of the Act aim to clarify the application of SEZ tax benefits, set to end in January 2031. Stakeholders suggested extending the sunset date or modifying anti-avoidance measures that disqualify companies not abusing transfer pricing. NT noted these concerns but highlighted that such changes fall outside the scope of the current draft TLAB. A task team has been established to address broader SEZ-related issues.

Investment Allowances for Electric and Hydrogen-Powered Vehicles

1. The proposed Section 12V introduces a 150% investment allowance for assets used in the production of electric and hydrogen-powered vehicles, effective from March 2026. Stakeholders raised concerns about the lack of definitions for manufacturers and qualifying vehicles, the exclusion of hybrid vehicles, and the omission of costs for foundations and improvements. NT accepted amendments to define “motor vehicle manufacturer” and “electric and hydrogen-powered vehicles” and to include foundations and improvements in the allowance. However, NT rejected extending the allowance to hybrids and earlier commencement dates, emphasizing alignment with national policy goals and industry timelines.

Renewable Energy Tax Incentives

1. Section 12B offers accelerated depreciation for renewable energy assets. Stakeholders requested relaxation of leasing restrictions and increases in generation thresholds, aligning Section 12B with temporary enhancements under Section 12BA. NT acknowledged the proposals but stated that additional time is needed to reconsider these changes, reflecting the government’s broader review of renewable energy policies.

INTERNATIONAL TAX

Clarifying the Translation for Hyperinflationary Currencies

1. The proposed amendments to Sections 9D(2A) and 9D(6) of the Income Tax Act address translation rules for controlled foreign companies (CFCs) operating in hyperinflationary environments. Stakeholders supported the effort to simplify these rules, which would translate exchange items in foreign currencies to Rand when the country has an official inflation rate exceeding 100% throughout the tax year. However, concerns about potential retrospective application were noted. NT clarified that the amendments will take effect from 1 January 2025 for years of assessment commencing on or after that date, negating any retrospective concerns.

Refining the 18-Month Holding Rule for Group Shareholdings

1. Amendments to Paragraph 64B of the Eighth Schedule aim to clarify the 18-month holding requirement for participation exemptions related to foreign return of capital. Stakeholders pointed out that the proposed refinement does not adequately address cases of multiple transfers within the group during the 18-month period. While NT acknowledged this limitation, it deferred further refinements to the 2025 Budget Review.

 

Tax Credits for Capital Gains

1. The proposed changes to Section 6quat(1A)(a)(iii) ensure that taxpayers receive a full foreign tax credit for taxes paid on capital gains in foreign jurisdictions. Stakeholders raised concerns about inconsistencies between the Draft TLAB and Explanatory Memorandum effective dates. NT accepted this input and aligned the Explanatory Memorandum with the Draft TLAB, applying the changes to foreign tax years ending on or after 31 December 2024.

Aligning Net Income and Foreign Tax Translation for CFCs

1. To address mismatches between the translation of CFC net income and foreign taxes payable, the proposed amendments align both translations to the foreign tax year of the CFC. Stakeholders welcomed the clarification but highlighted ambiguity in the exchange rate to be used. NT accepted the suggestion to use the average exchange rate for the foreign tax year, ensuring consistency with Section 9D(6) of the Act.

Refining the Definition of Exchange Items

1. The proposed expansion of the definition of "exchange item" under Section 24I to include certain preference shares sparked concerns about unintended consequences. Stakeholders noted that the broad wording could inadvertently apply to other types of shares, such as investments in subsidiaries. NT accepted these comments and refined the definition to specifically target preference shares as defined in Section 8EA, removing references to the broader "financial asset" definition under IFRS.

Interaction of Assessed Loss Rules and Exchange Differences

1. The proposed amendments to Section 24I sought to ringfence foreign exchange losses on exchange items for future set-off against foreign exchange gains. Stakeholders raised concerns about the blanket application of this rule and suggested it only apply to non-trading entities. NT partially accepted this suggestion, introducing a separate section for non-trading companies to address the issue without impacting trading entities.

VALUE-ADDED TAX (VAT)

Reviewing the Foreign Donor Funded Project (FDFP) Regime

1. The FDFP VAT regime previously required separate branch registrations for each project. To reduce administrative burdens, NT proposed consolidating registrations into a single branch for implementing agents. Stakeholders raised concerns about unintended output tax liabilities when merging existing branches. NT accepted these concerns, amending the proposal to allow implementing agents to elect whether to merge existing branches or maintain separate registrations for pre-2025 projects, avoiding adverse tax consequences.

Supplies by Educational Institutions to Third Parties

1. The proposed amendment to Section 12(h)(ii) of the VAT Act aimed to clarify the policy intention behind VAT exemptions for supplies by educational institutions. Stakeholders argued for retaining the current wording and requested more time for consultation. NT accepted these concerns and withdrew the amendment to allow for further stakeholder engagement.

Prescription Period for Input Tax Claims

1. NT proposed amendments requiring unclaimed input tax deductions to be made in the original period rather than a future tax period. Stakeholders opposed the change due to practical difficulties, system limitations, and increased risks of errors. NT acknowledged these issues and withdrew the amendment for further consultation.

 

5. COMMITTEE OBSERVATIONS AND RECOMMENDATIONS
   1. The Committee observed that the deliberation of the draft Taxation Laws Amendment Bill (TLAB) [B16-2024] was marked by a comprehensive and inclusive public participation process. This engagement brought together a diverse range of stakeholders, including industry representatives, professional bodies, academic institutions, government entities, and individual experts. The process reflected significant public interest, with 65 organizations and six individuals submitting detailed comments on the proposed amendments. However, the Committee also notes the procedural concerns raised by a stakeholder, referencing a PMG survey as outlined in paragraph 2.9 above. While the Committee acknowledges these concerns, it also notes that it does not have information on how the survey was conducted and therefore cannot independently verify its findings. This highlights the need for greater clarity and transparency in evaluating public participation feedback.
   2. The Bill aligns with South Africa's strategic goals by fostering renewable energy adoption, enhancing youth employment opportunities, addressing environmental challenges, and modernizing the tax system in line with global best practices. It also aims to support economic growth through targeted incentives for green technologies, improved tax compliance, and reduced administrative burdens.
   3. The Committee noted stakeholders' key concerns, such as maintaining renewable energy deductions to ensure equity among electricity generators, clarifying technical provisions in carbon tax and employment incentives, and addressing administrative challenges in VAT compliance and Foreign Donor Funded Projects (FDFP). Many of these issues were addressed through amendments or clarifications by NT and SARS, demonstrating their willingness to engage constructively. However, some proposals—such as extending hybrid vehicle incentives or redefining connected person rules—were deferred due to policy limitations or the scope of the Bill.
   4. The amendments introduced by NT and SARS addressed several technical refinements and clarified ambiguities in the tax framework. These included defining key terms, aligning South African tax provisions with international standards like IFRS and IPCC guidelines, and streamlining administrative processes to reduce compliance burdens for taxpayers. The Committee particularly welcomed the postponement of implementation dates for measures like the revised interest deduction thresholds, ensuring stakeholders have adequate time to adapt.
   5. The Committee recommends the National Assembly approve the Taxation Laws Amendment Bill [B16-2024], subject to specific considerations. It also emphasizes the need for enhanced monitoring and reporting on the implementation of key provisions, such as the renewable energy premium deduction, employment tax incentive, and investment allowances for electric and hydrogen-powered vehicles. NT and SARS are urged to provide periodic updates, at least once a year, on the effectiveness of these measures in achieving their policy objectives.
   6. Further consultations and policy development should be prioritized in areas identified by stakeholders, including refining the SEZ tax framework, addressing challenges related to hybrid vehicle incentives, and resolving administrative issues like VAT prescription periods for input tax claims. The Committee encourages NT and SARS to revisit these areas in future legislative reviews to ensure they are addressed comprehensively.
   7. To support effective implementation, NT and SARS should expedite the publication of detailed guidelines for new provisions. These guidelines should clarify definitions, compliance standards, and methodologies for measures such as the carbon tax amendments, REIT regulations, and vehicle manufacturing incentives. This clarity will help stakeholders align their practices with the updated tax framework.
   8. The Committee also highlights the importance of continued stakeholder engagement to strengthen the legislative process. Expanding representation from diverse sectors and addressing gaps identified during consultations will ensure the tax framework reflects the needs of all stakeholders while maintaining alignment with South Africa’s developmental goals.
   9. Tax legislation is inherently complex and requires technical expertise to inform the Committee's oversight processes effectively. Recognizing the critical role of specialist input, the Committee has resolved to review the timelines for public consultation to ensure that stakeholders are afforded adequate time to engage and respond comprehensively. To enhance transparency and inclusivity in the legislative process, the Committee further resolves to require that NT obtains public input on two sets of Bills. This would involve presenting the second set of bills to the Committee, accompanied by public participation inputs and National Treasury’s responses to these submissions. Additionally, the Committee requires that NT publishes a response to every stakeholder submission annually, fostering accountability and reinforcing the significance of stakeholder engagement in shaping tax policy.
   10. Finally, the Committee recognizes the importance of aligning South Africa’s tax framework with global trends in areas like carbon emissions reduction, international tax compliance, and renewable energy incentives. Ensuring consistency with international best practices will enhance the country’s competitiveness and support its transition to a sustainable, inclusive economy.

 

6. CONCLUSION
   1. In conclusion, the Committee acknowledges the collaborative efforts of stakeholders, NT, and SARS in refining the TLAB. The proposed amendments will significantly enhance South Africa’s tax framework, create a conducive environment for economic growth, and address pressing environmental and social challenges. The Committee recommends the adoption of the TLAB.

The MKP reserve their position, and the EFF objects the report.

Report to be considered.