TLAB, TALAB, Rates Bill & Income Tax Amendment Bill: Treasury & SARS response to public submissions

This premium content has been made freely available

Finance Standing Committee

18 September 2019
Chairperson: Mr M Maswanganyi (ANC)
Share this page:

Meeting Summary

The meeting of the Standing Committee on Finance was primarily intended to hear the National Treasury’s responses to submissions made at public hearings the previous week on proposed amendments to the tax laws.

However, it started with brief submissions by Mercedes Benz South Africa and the National Association of Automobile Manufacturers. Both organisations raised concerns about a proposed change to the Customs and Excise Amendment Act to include rebates on customs duty when calculating the value of imported goods for determining ad-valorem duties. They said this would increase their production costs, affect their competitiveness in export markets and raise the price of vehicles in South Africa. In response, the National Treasury said it accepted the motor industry’s arguments on ad-valorem duties. The current ad-valorem formula would be adjusted to be revenue-neutral for the fiscus.

The Treasury rejected a call by the tobacco industry for excise duties on tobacco to be frozen at current levels for three years. The Tobacco Institute of Southern Africa had argued that an increase in tobacco taxes would increase the price of cigarettes and encourage consumers of legal tobacco products to switch to cheaper, untaxed illicit products. The Treasury responded that increases in excise duty were not responsible for the growth of the illicit trade in tobacco products. This was instead a law enforcement issue.

In dealing with submissions on proposed changes to tax incentive regimes, the Treasury agreed to amend provisions aimed at refining the incentive scheme for Special Economic Zones (SEZs). It accepted that requirements relating to the expansion of businesses were too inflexible. It also agreed that the test of whether a taxpayer was carrying on a new business should look back to 2013, when the SEZ tax rules were first introduced.

The Treasury said “a plethora” of issues had been raised about its proposal to place a R2.5 million cap on tax deductible investments in venture capital companies (VCCs). VCC fund managers had argued that a cap would limit the viability of VCC funds. The Treasury said a cap was needed to balance the effectiveness of the VCC tax incentive with the revenue foregone by the fiscus. It proposed that the R2.5 million cap remain for individual investors, but that the cap for corporate investors be raised to R5 million.

Several submissions were made on proposed changes to the Carbon Tax Act. The Treasury rejected opposition to its proposal to repeal a tax exemption for income generated from the sale of certified emission reduction credits. It said the repeal was necessary to prevent double benefits being claimed under the Income Tax Act and the Carbon Tax Act.

It said the implementation of amendments to the tax treatment of surviving spouse pensions would be postponed to March 2021. The proposal was that tax rebates should not be taken into account when calculating the taxes to be withheld by retirement funds in order to avoid an unexpected tax liability for surviving spouses who had a second income, which pushed them into higher tax brackets. The Treasury said SARS needed more time to develop the necessary systems for interacting with retirement funds.

 

 

Meeting report

The initial part of the meeting was a continuation of the previous week’s public hearings on proposed changes to the tax laws. The Chairperson invited Mercedes Benz South Africa (MBSA) and the National Association of Automobile Manufacturers of South Africa (NAAMSA) to make their submissions.

Both Mr Andreas Engling, Chief Executive Officer (CEO), MBSA, and Mr Michael Mabasa, CEO, NAAMSA,  raised concerns about a proposed change to the Customs and Excise Amendment Act to include rebates on customs duty when calculating the value of imported goods for determining ad-valorem duties. They said this would increase their production costs, affect their competitiveness in export markets and raise the price of vehicles in South Africa. They said the incentives provided by the government’s Motor Industry Development Plan (MIDP) had been effective in attracting overseas manufacturers, and pointed to the large investments made by the motor industry in South Africa. They said policy certainty was needed to maintain the confidence of these investors who could otherwise shift production to plants in other countries.

The Chairperson then invited the National Treasury to present their responses to submissions made at the public hearings:

Ad-valorem duties

The Treasury said accepted the motor industry’s arguments on ad-valorem duties. The current ad-valorem formula would be adjusted to be revenue-neutral for the fiscus to mitigate the impact on the automotive industry. It accepted the need for policy certainty. Any future changes would be aligned with the new SA Automotive Master Plan.

Tobacco excise duty

The tobacco industry had argued that an increase in tobacco taxes would increase the price of cigarettes and encourage consumers of legal tobacco products to switch to cheaper, untaxed illicit products. The industry called for excise duty to be frozen for three years or until the illicit trade had been drastically reduced.

The Treasury rejected this argument. It said increases in excise duty were not responsible for the growth of the illicit trade in tobacco products, but was rather due to a lack of law enforcement. However, the Treasury accepted an argument that less harmful products such as electronic cigarettes should be taxed at a lower level than cigarettes.

Mr Momoniat, Head: Tax and Financial Sector Policy, National Treasury, said the government had indicated in the February Budget that it intended taxing these products. The process would be completed in consultation with the Department of Health.

Carbon Tax Act

The Treasury rejected opposition to its proposal to repeal a tax exemption for income generated from the sale of certified emission reduction credits. It said the repeal was necessary to prevent a double benefit scenario, where the same emissions reductions would lead to both an income tax exemption under the section 1the 2K of the Income Tax Act and a lower carbon tax liability under the Carbon Tax.

The Treasury said it noted broad support for its proposal to extend the Energy Efficiency Savings Tax Incentive to the end of 2022, and would consider calls for it to be extended further.

It partially accepted views that the calculation of greenhouse gas (GHG) emissions under the Carbon Tax and GHG emissions reported to the Department of Environment, Forestry and Fisheries could produce different results due to the use of different net calorific values. The necessary technical changes to the Act would be made.

Income Tax

The Treasury said it had been asked for clarity about a review of the tax treatment for surviving spouse pensions. The proposal was that tax rebates should not be taken into account when calculating the taxes to be withheld by retirement funds in order to avoid an unexpected tax liability for surviving spouses who had a second income, which pushed them into higher tax brackets. The Treasury said it had found that taxpayers other than surviving spouses were impacted. An amendment was needed to include any taxpayer receiving two or more sources of employment income, provided one of those was from a retirement fund or insurer. It accepted arguments that the amendment would be burdensome for both SARS and retirement funds, and proposed that the effective date be postponed to March 2021.

The Treasury responded to several submissions seeking clarity on provisions pertaining to pension funds.

In dealing with submissions on the taxation of businesses, it rejected an argument that measures aimed at preventing dividend stripping were too broad. It said the pre-2017 anti-avoidance rules were limited in their scope and were being undermined by taxpayers. However, it was proposed to limit the application of the anti-avoidance rules to scenarios that posed the most risk.

It told the hearing that it would withdraw a proposed provision in the anti-value shifting rules dealing with the effect of deferred tax on the market value of shares.

Calls for a rethink on a proposed amendment of the special interest deduction in share acquisitions funded by debt were rejected. However, the Treasury undertook to provide greater clarity on these provisions.

The Treasury said it would push ahead with measures aimed at clarifying corporate reorganisation rules relating to exchange items, interest items and interest bearing instruments.

Several submissions were made on proposals to clarify inconsistencies in the tax regime for real estate investment trusts (REITs). The Treasury said the 2019 legislation would be amended to address some of the concerns raised.

An argument that an amendment to the taxation of risk policy funds for long term insurers would cause an additional administrative burden was rejected.

Tax incentives

The Treasury agreed to amend provisions aimed at refining the tax incentive scheme for Special Economic Zones (SEZs). It accepted that requirements relating to the expansion of businesses were too inflexible. It also agreed that the test of whether a taxpayer was carrying on a new business should look back to 2013 when the SEZ tax rules were first introduced. However, it rejected a call for measures relating to the value-shifting of profits from companies outside an SEZ to be replaced by transfer pricing rules. Instead, the proposed measures would be withdrawn and the current all-or-nothing rule would continue until the South African Revenue Service (SARS) had determined if it had the capacity to deal with domestic transfer pricing.

The Treasury said “a plethora” of issues had been raised about its proposal to place a R2.5 million cap on tax deductible investments in venture capital companies (VCCs). VCC fund managers had argued that a cap would limit the viability of VCC funds, which would have to find greater numbers of investors to achieve effective scale, and that it would discourage corporate investors. It said a cap was needed to balance the effectiveness of the VCC tax incentive with the revenue foregone by the fiscus. It proposed that the R2.5 million cap remain for individual investors but that the cap for corporate investors be raised to R5 million. It did agree to amend the proposed 2019 legislation so that current VCC investors would not be prejudiced by “connected person” anti-avoidance measures.

The Treasury rejected a call for amendments to the Employee Tax Incentive (ETI) regime to become effective only in March next year, instead of from August 1 this year. It said the amendments were to align the ETI with the National Minimum Wage Act, which came into effect on January 1. August 1 was the start of the first month after the draft Taxation Laws Amendment Bill was published for comment.

Concerns were raised about the removal of the SARS Commissioner’s discretion to retrospectively approve tax exemptions for a public benefit organisation or recreational club. The Treasury said it noted the concern that the limited resources of these entities made it difficult for them to deal with technical tax issues timeously. It said retrospective approval would remain at the Commissioner’s discretion, subject to the entities meeting certain additional criteria.

The Treasury responded to submissions on the tax treatment of companies operating overseas. It rejected a call for the comparable tax exemption for controlled foreign companies to be set at 53.5% instead of the proposed 67.5%. It took note of comments on proposed refinements to transfer pricing rules and said SARS would provide further guidance on the interpretation of the term “associated enterprise.”

Value Added Tax (VAT)

The Treasury said SARS would provide guidelines on the process to be followed in registering foreign donor-funded projects for VAT purposes. It said such projects would have to be registered individually, and did not accept that where one entity managed many such projects, they should be registered under one VAT number.

It undertook to implement transitional rules in the implementation of amendments to section 72 of the VAT Act. It said the discretion given to the SARS Commissioner to make rulings to overcome difficulties experienced by VAT payers had to be aligned with the mandatory wording of other provisions of the Act. The transitional rules would deal with current rulings and applications for the extension of rulings.

Draft Taxation Laws Amendment Bill (TLAB)

The Treasury had received various submissions on proposed amendments to provisions on declarations and written undertakings on withholding taxes. It agreed that a proposed two-year time limit on the validity of declarations on dividends tax would not apply to financial intermediaries who applied the Financial Intelligence Centre or Common Reporting Standards regulations.

It rejected an argument that it was not necessary to amend the TLAB and the Customs and Excise Act to provide authorisation for the sharing of information on the reporting of greenhouse gas emissions with the Department of Mineral Resources and Energy (DMRE) and the Department of the Environment, Forestry and Fisheries. It said SARS might need to share taxpayer specific information with the DMRE in order to verify carbon allowance claims.

Other interactions between the Treasury and stakeholders dealt with the setting of a period of 10 business days in which to provide written notice of legal proceedings against the Commissioner; mandatory non-disclosure penalties; criminal sanctions for intentionally submitting false, erroneous or incomplete documents to SARS; and the updating of provisions for the confirmation of taxpayers’ compliance status.

Discussion

The Chairperson invited comments and questions from members.

Ms P Abraham said she had sympathy for surviving spouses who were hit by unexpected tax burdens because they received both a pension and a second income. She commended the Treasury for being responsive to the problem, but was concerned that implementation of the measure had been postponed to 2021.

Mr Chris Axelson, Chief Director, National Treasury, replied that SARS would have to compile information on surviving spouses who received additional incomes and share this information with retirement funds. SARS needed time to develop the systems to do this,.

Ms Yanga Mputa, Chief Drector, National Treasury, said people receiving spousal pensions could in the meantime voluntarily approach their retirement funds and ask for more tax to be withheld. She said efforts were being made to communicate this to members of the Government Employees Pension Fund.

Mr Momoniat said many members still did not know about the potential problem, and the Treasury was thinking constantly about ways of addressing this.

There were no further questions.

The Chairperson adjourned the meeting.

 

 

Share this page: