ATC241203: Report of the Select Committee on Finance on the 2024 Taxation Laws Amendment Bill [B16 - 2024] (National Assembly- section 77), dated 03 December 2024
NCOP Finance
Report of the Select Committee on Finance on the 2024 Taxation Laws Amendment Bill [B16 - 2024] (National Assembly- section 77), dated 03 December 2024
1.Introduction and background
Section 77 of the Constitution requires all money Bills to be considered by a procedure for passing revenue Bills established by the Money Bills Amendment Procedure and Related Matters Act, 2009 (Money Bills Act). Section 11 (4) of the Money Bills Act requires the Committee to hold public hearings on the revenue Bills and report to the House.
The 2024 Taxation Laws Amendment Bill (TLAB) was formally tabled on 30 October 2024. On 20 November 2024, the Committee received a briefing from the National Treasury (NT) and the South African Revenue Service (SARS). The Committee held virtual public hearings on 26 November 2024 and received three submissions from Webber Wentzel, Congress of South African Trade Unions (COSATU), and Business Unity South Africa (BUSA). NT and SARS responded to the issues raised during the public participation process on 29 November 2024. The Committee held a meeting on 03 December 2024 to consider the Bill clause by clause and adopt the report.
2.Overview of the 2024 TLAB
The objective of the 2024 TLAB is to amend various pieces of legislation. The Income Tax Act (ITA), 1962, the Customs and Excise Act (CEA), 1964, the Value-Added Tax (VAT) Act, 1991, the Securities Transfer Tax Act (STTA), 2007, the Mineral and Petroleum Resources Royalty Act, 2008, the Employment Tax Incentive (ETI) Act, 2013 and the Carbon Tax Act (CTA), 2019 seek to amend certain definitions, provisions and schedules and to make new provisions. Taxation Laws Amendment Act (TLAA), 2013, 2018, 2021 and 2023 amend certain effective dates and certain provisions.
3.Summary of proposed 2024 TLAB amendments presented by National Treasury
3.1Curbing abuse of the Employment Tax Incentive scheme:
The Bill proposes to refine punitive measures to support amendments made to the ETI Act in 2021 and 2023. These amendments were made to curb abuse of the incentive by aggressive tax schemes, which used training institutions to claim the incentive for students.
3.2Introduction of a new tax incentive:
The 2024 TLAB proposes to introduce a 150 per cent allowance targeting new investments in the production of electric and hydrogen-powered vehicles in South Africa, to encourage investment in the local production of electric and hydrogen-powered vehicles.
3.3Customs and Excise Tax
The Bill proposes a retrospective amendment applicable to fuel products of heading 27.10 under the Schedules to the CEA and retrospective amendment applicable to fuel products of heading 27.10 under the Schedules.
3.4Amending the Value Added Tax Act
The 2024 TLAB proposes to amend the VAT Act to:
3.4.1Provide relief for non-resident lessors of parts of ships, aircraft or rolling stock required to deregister because of recent amendments to the VAT Act, following the unintended consequence identified.
3.4.2Clarify the VAT treatment of the Mudaraba Islamic financial arrangement, mostly used as an investment account.
3.4.3Clarify the VAT treatment of supply of services to non-resident subsidiaries of companies based in the Republic. The proposal is to exclude such subsidiaries from the definition of “resident of the Republic”.
3.4.4Simplify the foreign donor funded project regime: To ease the administrative burden on the implementing agents.
3.4.5Change the prescription period for input tax claims: To ease the administrative burden on both taxpayers and SARS and to ensure ease of audit functions and clarity of returns. Also, to clarify that such deductions be made in the original period in which the entitlement to that deduction arose.
3.4.6Make provision for VAT claw‐back on irrecoverable debts subsequently recovered.
3.4.7Clarify the policy intention relating to supplies by educational institutions to third parties: VAT treatment of supplies provided by educational institutions to third parties is unclear, resulting in differing treatment of these supplies.
3.5Amending the Carbon Tax Act
The Bill proposes to amend the CTA, to:
3.5.1Align Schedule 1 of the CTA, 2019 with the updated greenhouse gas emissions methodological guidelines: It is proposed that the density factors for calculation of the carbon fuel levy be changed from 0.75 to 0.7405 kilogram per litre for petrol and from 0.845 to 0.8255 kilogram per litre for diesel, effective from 1 January 2024.
3.5.2Include default emission factors for additional fugitive emissions source categories: The proposal seeks to update the fugitive emissions table in schedule 1 of the CTA to include activities and emission factors for the relevant emission source categories based on the 2019 refinements to the 2006 Intergovernmental Panel on Climate Change Guidelines for National Greenhouse Gas Inventories.
3.5.3Allow renewable energy premium deduction: This will allow electricity generators to continue to claim the renewable energy premium deduction for power purchase agreements ceded to the National Transmission Company of South Africa (NTCSA).
3.6Amending the Income Tax Act, to:
3.6.1Make changes to payroll reporting and refunds made in the current year: With SARS’ requirement for payroll administrators to report monthly, the proposed amendment will cater for taxpayers seeking to make refunds of amounts received or accrued during the same year of assessment.
3.6.2Allow transfers between retirement funds by members who are 55 years or older: This would allow involuntary transfers, since the government discovered that the law excludes transfers from one retirement annuity fund to another.
3.6.3Relax the assessed loss restriction rule under certain circumstances: The amendment would exempt companies from applying the assessed loss restriction rule while in the process of liquidation, deregistration or winding up.
3.6.4Extend exclusions to the ownership requirement in section 8EA: The proposal is that the ownership requirement exclusions be extended to include corporate actions relating to listed share substitutions on a recognised exchange in a country other than South Africa. Also, to include the settlement of any amounts of dividends, foreign dividends or interest accrued in respect of the redemption of a preference share.
3.6.5Address the impact of International Financial Reporting Standard (IFRS) 17 on the taxation of insurers: Proposed changes would cater for unintended consequences caused by the significant adjustments required due to implementing IFRS 17.
3.6.6Adjust the rebate for foreign taxes on income in respect of capital gains: Amending section 6quat provision would explicitly allow for a full foreign tax credit against tax payable in South Africa on a capital gain, for taxes payable in the relevant foreign jurisdiction on the disposal of an asset.
3.6.7Align the section 6quat rebate and translation of net income rule for Controlled Foreign Companies (CFCs): The proposed amendment would address a mismatch that arises when the year of assessment of the resident and the foreign tax year of the CFC are different.
3.7Amendments, deletions, and reviews of definitions, and clarifications in the Income Tax Act
These include amending the definitions of “remuneration proxy” to include a reference to “an ‘associated institution’; “connected person” in relation to partnership to “qualifying investor”; “adjusted taxable income” and the formula applied to limit an interest deduction in section 23N; “enforcement right” to a connected person in section 8EA of the ITA; and deletion of a provision related to the definition of “amalgamation transaction”, as it is superfluous.
The 2024 TLAB further proposes to clarify, (1) anti-avoidance rules for low-interest or interest-free loans to trust to avoid the possibility of an overlap or double taxation, (2) the interaction of section 24JB(3) of the ITA and gross income, (3) the translation for hyperinflationary currencies, (4) the 18‐month period in relation to shareholdings by group entities, (5) refine the definition of “exchange item” for determining exchange differences, and (6) review the interaction of the set‐off of assessed loss rules and rules on exchange differences on foreign exchange transactions.
3.8Postponement of effective date
For amendments made in the 2023 TLAA, that sought to translate “Contributed Tax Capital” from foreign currency to rands from from 1 January 2024 to 1 January 2025.
4.Key issues raised during the Committee’s public participation process
4.1Congress of South African Trade Unions
COSATU raised concerns about NT’s silence on government’s repeated commitments between 2018 and 2022 to review the fuel tax regime, as well as the basket of goods exempt from VAT. It asked that this commitment be honoured as workers are struggling with debt and the rising cost of living. COSATU emphasised that similar commitments were made to review the basket of goods by the 5th Parliament.
COSATU proposes that NT must return to Nedlac and engage in good faith on reviewing both the fuel tax regime and the basket of goods exempt from VAT with the objective of providing relief to workers and the economy as a matter of urgency.
4.2Webber Wentzel
Webber Wentzel made comments on two technical issues, namely, Collective Investment Scheme (CIS) and interaction of the set-off of assessed loss rules and rules on exchange differences on foreign exchange transactions.
Webber Wentzel argues that the 2024 TLAB omitted to include the corresponding amendment in proviso (D) to section 9D (2) to include participation rights held by a portfolio of a hedge fund CIS is possibly an error. It proposes that the ambit of proviso (D) in section 9D (2) be extended to include participation rights held by a resident portfolio of a hedge fund CIS, and that the effective date of the amendment be aligned to the date on which the amendment to paragraph (e)(ii) of the definition of “company” in section 1 of the Act comes into effect.
On interaction of the set-off of assessed loss rules and rules on exchange differences on foreign exchange transactions, Webber Wentzel is of the view that the wording in section 24I(3A) (a) may be misleading, in that it appears to restrict the foreign exchange gains to those received in respect of foreign currency option contracts, rather than to all foreign exchange gains. It suggests that the proposed wording be changed to mirror that in respect of foreign exchange losses.
4.3Business Unity South Africa
BUSA raised concerns that the current Bill omit several critical recommendations made. These are summarised below.
4.3.1The proposed amendments in the ITA related to consequential amendment to the definition of a “provisional taxpayer”; export bills entry in the CEA; and extended timeframe for accounting and paying VAT on imported services in the VAT Act may undermine stability, introduce uncertainty and potentially lead to significant unintended economic consequences.
4.3.2The amendment to Section 9D related to tightening taxation rules for CFCs could increase the administrative burden on South African companies with foreign subsidiaries, requiring more complex tax calculations and potentially higher tax liabilities. BUSA recommended the government should provide clear guidance, possibly including a grace period for companies to adjust their structures to comply with the new CFC rules and reducing tax rules for CFC to encourage income retention in South Africa.
4.3.3The amendment to phase out of VCC Section 12J incentives could harm the availability of capital for emerging businesses. It is recommended that rather than completely phasing out the VCC incentive, the government should explore refining the scheme to prevent its abuse while continuing to support Small Micro and Medium Enterprises (SMME) growth. This could involve setting more stringent criteria for qualifying investments, and a phased reduction in the incentive, with regular impact assessments.
4.3.4The amendment to Section 11D related to Research and Development (R&D) incentives which introduces stricter criteria for qualifying R&D activities eligible for tax incentives may limit the ability of businesses to claim R&D tax deductions. BUSA recommended that government should adopt a more flexible approach that recognises the diverse nature of R&D across different sectors and consider introducing sector-specific R&D incentives that recognise the varying nature of innovation across industries.
4.3.5The amendment to Section 9 related to ETI eliminates the R6,000 cap on the excess ETI amount that can be rolled over. While the amendment may be aimed at reducing potential abuse of the ETI, there could be unintended negative consequences for SMMEs. An Impact Assessment study designed to determine the potential impact on SMMEs should be conducted before any further consideration of the proposed amendments. BUSA further recommended that ETI should be enhanced to ensure its continued effectiveness in promoting access to employment.
4.3.6The amendments to Section 19C of the CTA still indicate the fugitive emissions for coal mining which are not aligned with the emission factors presented in the Methodological Guideline for Quantification of Greenhouse Gas Emissions. BUSA recommends aligning the CTA with the technical Guidelines to reduce the need for constant updates to the CTA and the CEA. Also, this alignment should be consistent with the Department of Forestry, Fisheries and Environment (DFFE) approved methodology.
Overall, BUSA recommends that the government should further consult industry stakeholders before finalising the amendments; conduct comprehensive impact assessments for all significant amendments including those affecting the ETI, Section 12J, and CFCs; consider implementing the amendments in a phased manner, allowing businesses time to adjust and ensuring that any unintended consequences can be addressed promptly; and issue detailed guidance and support to businesses regarding the technical aspects of the new CFC rules and the updated R&D incentive criteria.
5.National Treasury’s response to the issues raised by the stakeholders
5.1On proposed review of the fuel tax regime, NT’s response was that the work is underway with the Minister of Finance and Minister of Minerals and Petroleum Resources on the options. The general fuel levy and Road Accident Fund (RAF) levy have not been increased since 2022 and that has provided much needed assistance for consumers and addressed some of the concerns around higher cost of living.
5.2On the proposed review of the basket of goods exempt from VAT, NT said that the government recognises that consumers have faced numerous challenges in a difficult economic climate. This has led to calls for relief measures that include additional VAT zero-rating of several food items. The President’s announcement that the Government of National Unity (GNU) will look to expand the basket of essential food items exempt from VAT and undertake a comprehensive review of administered prices, including the fuel price formula, to identify areas where prices can be reduced, is receiving attention. The Minister of Finance will make announcements at an appropriate time.
5.3Regarding the omission to include the participation rights held by a portfolio of a hedge fund Collective Investment Scheme, NT clarified that this issue has been submitted as part of the Annexure C process that will be discussed on 3 and 4 December 2024.
5.4Pertaining to reviewing the interaction of the set-off of assessed loss rules and rules on exchange differences on foreign exchange transactions, where the stakeholder proposed that the wording in section 24I(3A) (a) and (b) regarding "foreign exchange gains and premiums” or similar consideration received under foreign currency option contracts" be revised to match the wording for foreign exchange losses by placing a comma between "gains" and "premium, NT’s response was that this is an interpretation issue.
5.5On recommendations to increase the ETI remuneration threshold from R6,000 to R6,500, extend the age threshold to 18–35 years, and introduce sector-specific incentives, NT said that this is part of the broader policy issues that it will undertake to review all thresholds.
5.6NT believes that the comment on the proposed amendment to Section 9D related to tightening taxation rules for CFCs is misplaced and clarified that this amendment assists taxpayers in clarifying the treatment of third currency in hyperinflationary cases. The comments on Section 12 J VCC and on the R&D incentives are also considered “misplaced”.
5.7NT does not accept that fuel emission factors are not aligned with methodological guidelines and regulations, i.e. the calorific value for other bituminous coal does not align with the DFFE’s value. NT however accepted a comment that the fugitive emission factors must be aligned with the DFFE Methodological Guidelines, and further clarified that the amendments were made in 2023 TLAA to divide fugitive emission factors by 1000. This resulted in either an underestimation or overestimation of the carbon tax liability for some activities. After consultation with the DFFE, the emission factors will be corrected for Coal Mining and Handling, Charcoal Production, and Gas Transmission and Storage activities. This amendment will ensure alignment with the Methodological Guidelines and will be effective from 1 June 2019.
6.Committee’s observations
6.1The Committee notes the proposed amendments in the 2024 TLAB which are made through various pieces of legislation. The Committee further notes the concerns raised by the stakeholders during its public participation process, the recommendations made, and responses by NT and SARS to the comments made.
6.2The Committee notes that while there are substantive amendments proposed in the 2024 TLAB, most of the proposed amendments seek to clarify certain clauses and policy intentions and amend and review definitions in various legislation.
6.3The Committee notes the concerns raised on the need for adequate consultation of the industry stakeholders before the amendments are finalised and the need to conduct comprehensive impact assessments for all significant amendments including those affecting the tax incentives.
6.4The Committee notes the concern regarding the delays in reviewing the fuel tax regime considering high cost of living. The Committee also notes NT’s response that amongst other interventions done, a temporary fuel levy relief of R10 billion was provided in 2022 during the Covid-19 pandemic to mitigate the Russia/Ukraine war impacts, the fuel levy was decreased by 10 cents a litre and has not been increased since 2022.
6.5The Committee notes the plea for a review of the basket of goods exempt from VAT and NT’s response that while the recommendation does not form part of the current tax Bills legislative cycle, NT will raise these issues with the Minister of Finance for consideration in the 2025 February budget cycle.
6.6The Committee welcomes the proposed amendments to the ETI aimed at curbing abuse by aggressive tax schemes who use training institutions to claim the incentive for students. The Committee notes the stakeholder’s concern that the proposed amendment eliminates the cap on the excess ETI amount that can be rolled over.
6.7The Committee welcomes the incentive for new investments in the production of electric and hydrogen-powered vehicle.
7.Recommendations
7.1To give credence to the taxation Bills public participation process, NT and SARS should do due diligence to proposed legislative amendments, adequately consult and consider comments and submissions made by the stakeholders in various sectors in its public consultation process, and make amenable changes where possible, before the Bills are tabled in Parliament.
7.2While the proposed amendments in the TLAB and TALAB may generally be technical by nature, NT and SARS should try to simplify these proposals by giving practical policy examples and providing sufficient background information and explanatory memoranda to enable members of the Committee to better understand them and make informed decisions.
7.3Noting that some of the stakeholder’s concerns do not form part of the current tax Bills process, the Committee recommends that NT should consider the recommendations made by the stakeholders, which include the review of fuel tax regime, basket of goods exempt from VAT, and tax incentives. NT should generally, carefully consider potential unintended consequences of proposed amendments in the legislation before it is tabled before Parliament.
7.4The Committee welcomed the introduction of the ETI in 2014 and has subsequently approved several amendments which include its extension by a further ten years to 2029, align it to the minimum wage and provide tax relief in the wake of the Covid-19 pandemic and the national lockdown. The Committee believes that the ETI continues to play a critical role in encouraging employers to hire young and less experienced work seekers, in a country where the rate of youth unemployment currently measures 45.5 per cent. The Committee recommends that NT and SARS should continue to implement ETI and take proactive measures to prevent its further abuse.
7.5The Committee supports the policy intent of the incentive for new investments in the production of electric and hydrogen-powered vehicles. The Committee believes that if implemented successfully, the incentive may contribute to economic growth, creation of much needed jobs, attraction of investment, tax revenue and reduction of carbon footprint. The Committee, however, cautions NT and the relevant stakeholders about the financial implications and potential unintended consequences of this new incentive to the government over the medium to long term period.
The Select Committee on Finance, having considered and examined the Taxation Law Amendment Bill [B16 - 2024] (National Assembly – section 77), referred to it, and classified by the JTM as a section 77 Bill, accepts the Bill.
Report to be considered.