National Treasury Q4 Performance 2020/21; BEPS Multilateral Convention; Kuwait Taxation Agreement

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Finance Standing Committee

25 May 2022
Chairperson: Mr J Maswanganyi (ANC)
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Meeting Summary

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The Standing Committee on Finance met on a virtual meeting platform with National Treasury to receive a briefing on its fourth quarter performance for 2020/21.

National Treasury said it had managed to achieve 87% of quarter four indicators.

National Treasury admitted that it was not coping with municipalities as only a handful of them were performing. “Political squabbles” were at the core of these problems. There were disputes between political parties and in some instances within a single political party. In such scenarios, there was very little that the National Treasury could do to solve the problems because this was beyond its scope. He suggested a long term solution where politicians held each other accountable on such matters.

National Treasury said the underperformance of the Jobs Fund was not because funds were not disbursed. There were stringent controls that the Jobs Fund applied prior to disbursing public money. These included performance milestones that needed to be reached by beneficiaries, or the funds that the beneficiaries needed to contribute as per the rules of the fund. National Treasury informed the Committee that the repurposing of the Jobs Fund was important and that it was under consideration. National Treasury proposed an engagement with Jobs Fund management to provide counsel to the Committee about how best the programme could be implemented.

National Treasury informed the Committee that it had always achieved 100% of performance agreements signed by SMS members. The year in which the meeting was held was an anomaly and action was going to be taken. She explained that it was not that no performance agreements were going to be signed. There were performance agreements that were not signed on time. She assured the Committee that performance agreements were going to be signed and that consequence management was going to be implemented.

The Committee, although please by the detail of the National Treasury’s report on its quarterly performance, was concerned about underachieved performance indicators. There were also concerns about the National Treasury’s squabble with the Auditor-General on the Integrated Financial Management System (IFMS) programme. The Chairperson eventually pointed out that the Auditor-General was the supreme audit institution in South Africa. Therefore, the Committee relied on it to conduct oversight. Instead of pointing out its disagreement with the Auditor-General, what had the National Treasury done to address some of the issues raised by the Auditor-General.

The National Treasury explained the two protocols that required the Committee’s ratification.

The Ratification of the Protocol Amending the Agreement Between Government of the Republic of South Africa and Government of State of Kuwait for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, and the Ratification of Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS) reports were adopted.

Meeting report

The Chairperson welcomed the Director-General of the National Treasury, Mr Dondo Mogajane, and his team, the South African Revenue Service (SARS) team, the Committee, the parliamentary support staff and the public at large to the meeting.

He acknowledged apologies from Mr W Wessels (FF+) and Mr A Sarupen (DA).

He then asked National Treasury to present its quarterly report.

National Treasury Quarter 4 Performance Report

Mr Mogajane apologised on behalf of the Deputy Minister of Finance, Dr David Masondo, who had to attend to a family emergency.

He said National Treasury had managed to achieve 87% of quarter four indicators. Important among these included measures to accelerate economic growth. He said National Treasury aimed to tackle constraints and restore confidence in public trust. It also wanted to safeguard the fiscal framework by monitoring and analysing public expenditure, as well as managing public official spending growth and fiscal risk. The main focus of National Treasury was to coordinate fiscal relations between three spheres. However, this was a daunting task as there were in excess of 40 municipalities under distress, approximately 117 municipalities under financial challenges, and about three municipalities that the courts ruled on and advised National Treasury to immediately intervene. Conducting research into strategic planning in areas of the economy to better inform the implementation of economic policy also remained an important area. He said managing annual government funding programme and governance financial systems had not been a challenge.

National Treasury was looking forward to the Committee’s visit to engage it further on the performance of the Integrated Financial Management System (IFMS) programme. He said overseeing and improving the government’s supply chain management remained a challenge. He highlighted that supporting infrastructure development, and economic integration in cities and communities remained an important programme. National Treasury had a very elaborate city support programme.

Ms Laura Mseme, Head, Office of the DG, National Treasury, said National Treasury had achieved 86.96% of its indicators. National Treasury was pleased that it reduced underperformance from 6.98% in the previous quarter to 4.35% in the current quarter. She said the National treasury was going to be able to address the 8.69% partial performance. She was confident that by the end of the financial year National Treasury would have achieved more than 80% of its indicators. Eight of the divisions achieved 100% of their indicators. She explained that the division of Public Finance and the Office of the Accountant General achieved 50% and 57% respectively due to delays in input information. In terms of total numbers, National Treasury achieved 40% of its indicators and partially achieved four.

For Programme 1: Administration, National Treasury achieved 100%. Information and Communications Technology (ICT) achieved 90%. ICT remained the focus of National Treasury not only because of the recent hybrid model of working but because much of the work was reliant on it. National Treasury achieved 3.5% of its Risk Management Maturity Levels. This was a key priority for the year and there had been challenges in terms of risk. The organisation had done significant work, both in terms of governance and operations, to raise risk within the culture of Treasury.

She mentioned that National Treasury also produced the implementation of the action plan on gender- mainstreaming and the special committee that Mr Mogajane set up to deal with gender matters.

For Programme 2: Economic Policy, Tax, Financial Regulation and Research, National Treasury achieved 100%. The financial sector legislation was submitted for tabling in Parliament. An economic forecast was developed and research on microeconomic policy review and microeconomic reform agenda had also been produced.

Programme 3: Public Finance and Budget Management, National Treasury achieved 77.78% of its indicators. Significant achievements here were the 30 catalytic projects that were approved in spatially targeted areas within metropolitan cities, secondary cities and rural towns. Two quarterly financial reports were published and 100% of requests to draft financial recovery plans were responded to within 90 days of receipt. However, 22.22% of indicators were partially achieved. These included the 96% of Cabinet memorandums that were received and commented on. This was below the 100% target. This was partial because some of the memorandums were submitted on the day they were due. The underperformance with technical advisors was due to factors like the five terminations that were received during quarter three and quarter four. Some of the advisors when they got closer to the end of their contracts did not indicate whether or not they wished to renew their contracts.

Programme 4: Asset and Liability Management, achieved all its indicators (see slide 8).

Programme 5: Financial Accounting and Supply Chain Management Systems, achieved 66.67%. Significant achievements included the 23 governance reports that were produced. These were above the four that were planned. There was also 100% availability of transverse systems - also above the 98% target. National Treasury also managed to approve 100% Supply Chain Directives. However, 16.67% of the indicators were partially achieved and 16.67% were not achieved. The partially achieved ones were the 86% implementation of the strategic sourcing opportunities plan. This was below the 100% target. For the non-achieved targets, functional and technical specifications of the Integrated Financial Management System (IFMS) were not developed. In addition, the IFMS Generic template was not completed and the acceleration of the I-Recruitment - Rollout was not achieved.

Programme 6: International Financial Relations, and Programme 7: Civil Military Pensions, Contribution to Funds and other Benefits, both achieved 100% indicators (see slides 10 and 11). In terms of human capital, National Treasury achieved 13.77%. A total number of 1 065 staff was achieved. Of this group 89% were black, 59% female and 1.13% were persons with disabilities. A total of 44 promotions were made. A total of 98% of Senior Management Service (SMS) members entered into performance agreements. Those who did not sign were not eligible for any performance rewards. A total of 29% of employees participated in skills development and leadership programmes.

Ms Mseme explained the reasons for under and overspending. Among these was the compensation of Employees. The underspending of R10.3 million was mainly due to vacant positions. In terms of goods and services, delays in the implementation of projects and finalising procurement were the top reasons. Overspending on the other hand was mainly because of transfers and subsidies and the payment of capital assets.

Discussion
The Chairperson thanked National Treasury for its presentation. He then opened the floor for discussion.

Dr D George (DA) thanked National Treasury team for its presentation. The understanding was that National Treasury was responsible for overseeing the management of public finances. This was a very broad responsibility considering the amount of money in the public financial system. However, it was known that there were massive leakages, irregular spending, and fruitless and wasteful expenditure. This did not reflect in the presentation as National Treasury had scored itself high on public finance and budget expenditure. Although there was a wide network of responsibilities across government given the large amounts of money involved, National Treasury was ultimately responsible for the effective application of these funds and conducting oversight. If this was not sufficiently implemented, it was responsible for the consequences that followed. He asked for clarity on how the National Treasury was going to measure the factors he pointed out.

Mr I Morolong (ANC) thanked Mr Mogajane and his team for the comprehensive presentation. He said although the Jobs Fund programme was a “beautiful concept”, there were always going to be concerns when it was unable to fulfil its purpose. He was concerned because disbursements had not been made in the past financial year. If this persisted, what was to become this “beautiful concept?” He asked National Treasury team to outline the pattern of disbursements for this programme in the past financial years. This was going to help the Committee to assess its performance in the past year and to juxtapose it with its inability to reach desired targets in the past financial year.

Ms P Abraham (ANC) asked for clarity on municipalities. Before they failed dismally, did they receive any assistance from National Treasury? She also asked how National Treasury was coping with so many municipalities in distress. What was its long term solution to this crisis?

The Chairperson asked if it was optional for SMS members to sign a performance agreement. This was because some members had not signed it. He was under the impression that it was mandatory for SMS members to sign a performance agreement with the Director-General and the Accounting Officer. He asked why National Treasury had extended the IFMS contract yet the programme was not performing as expected. He asked National Treasury to explain to the public why R300 million was being channelled to this underperforming system. He also requested feedback on the AfriForum case against the government concerning the Broad-Based Black Economic Empowerment (BBBEE). He was aware that tenders were being issued but asked what the government was doing to ensure that its mandate for transformation was not stopped by right-wingers. He stressed that the South African government was not neutral. It had the responsibility to affirm women, black women who were oppressed, blacks and Africans in general. When the government came into being in 1994, it had a clear mission, therefore, any right-wing tendencies had to be dealt with. The government could not be intimidated by structures that had not been elected. Thus, together with National Treasury, it had to firmly defend the majority and not protect the interest of the minority.

Mr Mogajane agreed that the principles underpinning the South African Constitution had to inform how National Treasury and government dealt with the AfriForum case. He said indeed right-wing tendencies had to be dealt with when they showed “their ugly neck” and this was informed by South Africa’s history. National Treasury recognised the independence of the courts and, abided by, the processes it had put in place. However, there was a process issue whereby National Treasury filed an affidavit seeking clarity with the courts. Unfortunately, feedback was taking a long time. As a result, National Treasury had to wait for the court to rule and clarify what National Treasury was dealing with. However, the Department did not stop procurement. Instead, it implemented measures for procurement to continue without what the court had ruled unlawful. He also clarified that National Treasury had not stopped tenders. This was made clear in the letters that National Treasury wrote in February and March 2022. By April, National Treasury had already confirmed, specified, and clarified that procurement processes were to continue. Therefore, there was not supposed to be any confusion concerning that matter.

He said there was a clear misunderstanding about what the IFMS was, based on the Chairperson’s question. He explained that there was no contract that was just IFMS. It was a programme that was established years ago to integrate the financial management systems of the government. There were various legacy systems that National Treasury had to manage in parallel with the rollout. He then suggested that National Treasury had to engage the Committee on the origins of the IFMS, its spending to date, and its implementation. He explained that in 2016 National Treasury had bought licences. Thus, it was currently paying for a licence to Oracle. He pointed out that during engagements with the Auditor-General (AG), there were always issues about fruitless and wasteful expenditure which National Treasury always disputed. He pleaded with the Committee and explained that long before IFMS, many departments and organs of the state used Oracle in their small systems. In light of this, National Treasury was looking into every licence agreement that Oracle had with government departments and entities. When the Committee visited National Treasury, it was going to make its letters with Oracle available. Other organs of state were also engaging Oracle concerning the use of the licences. He mentioned that National Treasury was piloting a procurement module and the Department of Public Service and Administration (DPSA) was also piloting its own programme. He described this as being part of the problem. In addition, he said the problem with the IFMS was that implementation was slow. This was partly because the funds that National Treasury had budgeted for a tender may have been below what was being bided by service providers. As a result, it had to evaluate its budget to ensure that there was no misunderstanding about what it was looking for. He mentioned that there was a steering committee made up of the DPSA, State Information Technology Agency (SITA), and the Department of Communications and Digital Technologies concerned with the work of the IFMS. The IFMS was only going to be abandoned when Cabinet ordered so. However, it had to be considered that money had already been spent and National Treasury could not withdraw services that were being performed and could be accelerated. He added that abandoning IFMS would create problems with data storage.

Mr Mogajane clarified that it was mandatory for all SMS members to enter into a performance agreement. This was highlighted in the Public Service Act of 1994.

He replied that National Treasury was not coping with the municipalities. Only a handful of municipalities were performing. National Treasury could conduct oversight on improvements in financial management. However, if the whole system of oversight governance was not functioning in the whole country, then it could not optimally conduct its duties. Just as the Committee was holding National Treasury accountable for its performance, oversight bodies in councils had to hold municipal managers and Chief Financial Officers accountable too. Unfortunately, this was not happening because “politics” was “in the space” of municipalities. He said Standing Committees were not honest with themselves about the reasons behind dysfunctional municipalities. “Political squabbles” were at the core of these problems. There were disputes between political parties and in some instances within a single political party. In such scenarios, there was very little that National Treasury could do to solve the problems because this was beyond its scope. He suggested a long term solution where politicians held each other accountable on such matters.

He replied that the repurposing of the Jobs Fund was important and that it was under consideration by National Treasury. National Treasury could have a detailed engagement to address questions about the programme’s operation in the past three years as well as the trajectory of disbursements. He suggested that the Jobs Fund management had to be present in the meeting to circulate documentation and to provide counsel to the Committee about how best the programme could be implemented.

He suggested that perhaps the division of Public Finance had to be renamed because Dr George’s questions indicated that there may have been a misunderstanding of the particular programme and what it did. He agreed that the South African Constitution was very clear on the management of public finance. However, the division under discussion only looked at oversight. He mentioned that the division also looked after national government departments and entities. The top six directors in this programme were responsible for overseeing the implementation of national budgets on a daily basis. The broader role of National Treasury in these divisions included debt financing, monitoring the state of the economy, and ensuring that appropriate tax policies were implemented. There was therefore a need for a clear distinction between these divisions. Although National Treasury was failing based on the indicators displayed in the presentation, it had a dedicated team that was working hard to fulfil these objectives.

Ms Mseme thanked the Committee for its questions. She said the underperformance of the Jobs Fund was not because funds were not disbursed. In the quarter in which the meeting was held, National Treasury intended to allocate R6.3 million but disbursed R6 million to the programme. In the last three-year period, its target was R5 million to R5.8 million but disbursed R5 million. For 2021, the target was R5.7 million and it disbursed R5.6 million. For the 2021/22 financial year, the target was R6.3 million and it disbursed R6.7 million. These figures showed that although the intended targets were not met, funds were disbursed. They did not indicate underperformance but the stringent controls that the Jobs Fund applied prior to disbursing public money. These included performance milestones that needed to be reached by beneficiaries, or the funds that the beneficiaries needed to contribute as per the rules of the fund.

She reminded the Committee that National Treasury had always achieved 100% of performance agreements signed by SMS members. The year in which the meeting was held was an anomaly and action was going to be taken. She explained that it was not that no performance agreements were going to be signed. There were performance agreements that were not signed on time. She assured the Committee that performance agreements were going to be signed and that consequence management was going to be implemented.

She said the references made by the Chairperson about the IFMS were to maintenance and support. She explained that licences bought from Oracle were in perpetuity unless one decided to change their systems and elect to adopt a different model. Without support and maintenance, the IFMS was not going to have access to updates. This made it impossible to roll out I-Recruitment which was being developed. In addition to this, no access to updates meant that there would be no access to security patches. Security in Information Technology (IT) was an absolute priority for the government, therefore, it was important to secure every window that may have posed security risks. This was especially considering that the systems that IFMS was rolling out were linked to the government’s finances. If support and maintenance were to be suspended, National Treasury was going to lose the discounts that it received from the onset of the Oracle licensing process. These constituted 98% of the costs. In the event that it wished to reactivate support and maintenance, it was going to incur a 150% penalty. This, effectively, was going to reflect as irregular and wasteful expenditure. She also said the renewal was not in terms of a contract. The discount schedule that was originally obtained as part of the original licencing contract had a discount scheduled across a number of years. As the IFMS reached a step-change in the discount schedule, it resigned because there was a change in the amount of money it was paying.

Ms Mseme pointed out that the implementation of IFMS, whilst recognising delays, was accelerating the appointment of full-time management as well as better governance processes. As a result, resources to do with implementation were going to be accessible. Henceforth, National Treasury was going to be reporting implementation or delivery. In addition, in an endeavour to mature performance systems, she said the National Treasury not only calculated the performance of the Treasury but its impact when it was not performing its task.

The Chairperson thanked the National Treasury Team for its responses. He asked for more clarity on the IFMS. He reminded Mr Mogajane that on 30 November 2021 when the Committee was compiling the Budget Review Recommendations (BRRR), he said fruitless and wasteful expenditure had been incurred primarily for technical support maintenance of software licences for the IFMS. This finding had been expected as this had been a matter of contestation between the Auditor-General and National Treasury for some years. Mr Mogajane explained that National Treasury had provided a detailed response to the material irregularity notice, and it was to continue engaging with the Auditor-General on that issue. Mr Mogajane was also quoted to have said National Treasury had obtained legal advice, and that it would take the Auditor-General’s findings through the objection process. He also reported that there was progress in the implementation of the IFMS project although it was not as rapid as he desired. There had been delays in its procurement processes.

The Chairperson also pointed out that Mr Mogajane developed a template of how National Treasury was addressing the findings of the Auditor-General. The finding description was that effective and appropriate steps were not taken to prevent fruitless and wasteful expenditure on the IFMS. The Accounting Officer did not implement adequate oversight. This was followed by recommendations. In light of this, the misunderstanding that Mr Mogajane was referring to was not clear. On the one hand, National Treasury disagreed with the issues raised by the Auditor-General, and on the other hand, it still had not taken the Auditor-General for review yet it had intended to do so. The Committee had been doing its work for years, therefore, it had sufficient experience to conduct its duties. The Auditor-General assisted Portfolio and Standing Committees to conduct their oversight where there was procurement involved. Thus, the Committee did not just generate things from nowhere. It was on the basis of the Auditor-General. The Committee did not have a solution for the National Treasury’s disagreement with the Auditor-General’s report but asked it to respond to the issues that were raised with regard to the IFMS. It was an insult that Mr Mogajane thought that the Committee had a complete misunderstanding of the IFMS programme.

Mr Mogajane apologised and said it was not his intention to undermine the Committee’s ability to conduct its work. He explained that the misunderstanding that he was referring to was only the part of the Chairperson’s question that referred to the extension of the IFMS contract. No contract had been extended. National Treasury had held countless meetings with the Auditor-General concerning the issue of material irregularities. It was going to take some time for National Treasury and the Auditor-General to reach a consensus about that matter. National Treasury and the Auditor-General were at odds about whether there was fruitless and wasteful expenditure. This also made it difficult to pinpoint an official who was responsible for the irregularities. It would be irresponsible for National Treasury to stop paying licences to Oracle because of the penalties it would incur. The Auditor-General was aware of this. He stressed that the licences were in use contrary to the perceptions of the Auditor-General that they were just in the “cupboard”. He then suggested that there was a need for the Committee to engage with National Treasury on this programme. He suggested that the Minister of Finance, Mr Enoch Godongwana, and the Deputy Minister had to be present in this meeting. This would help National Treasury to be understood. However, if Parliament advised that the programme had to be abandoned, then that decision had to be taken.

He said as part of rectifying the implementation of the programme, National Treasury wanted to start using the licences that the Auditor-General referred to as fruitless and wasteful expenditure. For example, the Western Cape was going to be using them. National Treasury was going around the system to check where Oracle licences were being used, so that they could be replaced if the agreement permitted. He pointed out that in the previous week the KwaZulu-Natal Department of Transport requested to be part of Oracle licences so that they could advance whatever they wanted to do in the province. Therefore, until it was advised that the programme had to be abandoned, he was going to continue looking for opportunities to reduce irregular expenditure. He provided background about how the Oracle licences were acquired. Initially, the licences were going to cost approximately R700 million. However, National Treasury was awarded a discount which resulted in the licences being acquired for R400 million. At that time, it made sense for the Accounting Officer to save the government around R300 million in acquiring licences. This occurred against the backdrop of a programme that was going to be implemented. When he took office as the Director-General, there were programme implementation challenges. As a result, he stopped payments and engaged in internal audit reports to correct the programme. The Auditor-General was consistent in reporting that there were delays in implementation but these delays were because National Treasury did not want to incur expenditure that could not be accounted for.

The Chairperson thanked Mr Mogajane for his response. The Committee was scheduled to visit the National Treasury but received a letter stating that Mr Mogajane, together with the Minister, were travelling to the United States of America (USA). He said the Committee was going to create space for a meeting. He also stressed that according to the South African Constitution, the Auditor-General was the supreme audit institution. If they made an audit, there was no reason for Parliament to differ with them because its findings helped the Committee to conduct their oversight. He suggested that in the following meeting the Auditor-General had to be present so that National Treasury could explain its problems in simpler terms. This problem had been going on for more than five years without a solution.

Presentation: Ratification of the Protocol Amending the Agreement Between Government of the Republic of South Africa and Government of State of Kuwait for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income

Ms Yanga Mputi, Chief Director, Tax Policy Unit, National Treasury, greeted everyone and apologised on behalf of Mr Ismail Momoniat, Head of Public Finance, National Treasury, who could not be present to lead the briefing. She said the purpose of the protocol was to amend an existing tax treaty. She explained that in September 2021a briefing on this protocol was scheduled in Parliament but it had to be removed because the legal advisor advised that it had to be served before Cabinet based on the delays. The background to the protocol which amended the tax treaty between South Africa and Kuwait emerged from the fact that the existing tax treaties between South Africa and Kuwait came into force in 2006, and the proposed amendments to that tax treaty became necessary as a result of changes to the South African tax legislation. These were changes to the secondary tax of companies (STC) to dividend tax at a shareholder level. This change, however, was dependent on the renegotiation of ten tax treaties that had a zero withholding tax rate on dividends. These were tax treaties with other trading countries like Australia, Cyprus, the United Kingdom and Sweden. For approximately ten years South Africa requested Kuwait to sign the Protocol. As the proposed dates for the signature drew closer, Kuwait proposed amendments to the technical issues that arose from its side. These delays subsequently led to the possibility of terminating the treaty. Despite these setbacks, Kuwait continued to engage South Africa to finalise the signing of the protocol.

In 2019, the former Minister of Finance, Mr Tito Mboweni, signed the South Africa/Kuwait protocol. Kuwait on the other hand signed it in 2021. However, although the Protocol was signed, it still required parliamentary ratification by both South Africa and Kuwait. She said the urgency regarding the implementation of the South Africa/Kuwait Protocol was due to the fact that on 19 January 2019, the Netherlands Supreme Court issued a judgment in favour of the taxpayer on the application of the Most Favoured Nation Clause (MFN) in the South Africa/Netherlands Tax Treaty. Later, on 12 June 2019, the South African Tax Court issued a similar judgment in favour of the taxpayer on the application of the MFN clause in the SA/Netherlands Tax Treaty. The MFN clause in the South Africa/Netherlands Tax Treaty provided that, should South Africa grant a preferential tax rate to a third State relative to the one agreed upon with the Netherlands, after the date of conclusion of the South Africa/Netherlands Tax Treaty, the same preferential rate was going to apply to dividends flowing from South Africa to the Netherlands. As a result, taxpayers were not subject to a withholding tax on dividends in terms of the South Africa/Netherlands Tax Treaty. The delays in the entry of the South Africa/Kuwait protocol resulted in continued revenue loss for the fiscus. In slides 7 to 13, she outlined the proposed amendments to the protocol. Amendments in Article 1 concerned taxes covered, Article 2 resident, Article 3 dividends, Article 4 interest, Article 5 capital gain, Article 6 exchange of information, and Articles 7 and 8 entry into force and status of the protocol.

Ratification of Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS)

Ms Mputi provided a background to what BEPS were. She explained that after the 2008 world financial crisis, G20 Ministers of Finance agreed to a framework to address the issue of tax havens and how to get multinational enterprises (MNEs) to pay more tax in the countries in which they earned their profits. This led to the creation of the Base Erosion and Profit Shifting (BEPS) project. In 2015, the Organisation for Economic Co-operation and Development (OECD) presented a final package of the BEPS measures which were endorsed by the G20 Finance Ministers and Heads of States. South Africa is the only African country that is a member of the G20. Although South Africa was not part of the OECD, it was one of the member countries of the Inclusive Framework on BEPS. This consisted of 137 countries of which 23 were African. She said the Inclusive Framework on BEPS assisted in developing standards for the implementation, review and monitoring of the OECD/G20 BEPS packages. It also peer-reviewed processes that had been adopted as one of the measures for monitoring the OECD/G20 BEPS package. The OECD/G20 BEPS package consisted of 15 Action Items. One of these 15 Action Items was the Report on Action 15, which provided for the development of a multilateral instrument capable of swiftly implementing the BEPS treaty-related measures and amending the existing tax treaties. In 2017, South Africa signed the BEPS MLI. However, despite signing it, it was still not in force as South Africa had not yet ratified it and deposited the instruments of ratification with the OECD. In the 2021 Budget Review, an announcement was made regarding the importance of the BEPS MLI and the finalisation of the legal and constitutional process required for the BEPS MLI to enter into force in South Africa. On 16 March 2022, the BEPS MLI served before Cabinet and it approved ratification.

She explained that the BEPS MLI was aimed at updating the existing network of bilateral tax treaties to reduce opportunities for tax avoidance and base erosion by multinational enterprises. It incorporated from treaty-related BEPS recommendations Action 2 which dealt with hybrid mismatches, Action 6 dealt with tax treaty abuse, and, among other Actions, Action 7 dealt with artificial avoidance of permanent establishment status. She outlined the application of BEPS MLI in South Africa Tax Treaties (see Slide 7). The Articles of the BEPS MLI were divided into six parts. Part I was on the Scope and Interpretation of BEPS MLI. Part II was on the Hybrid Mismatches, Part III on the Treaty Abuse, Part IV on the Avoidance of Permanent Establishment Status, Part V on Improving Dispute Resolution, Part VI on Arbitration and Part VII on the Final Provisions (see slides 10 to 19).

Discussion
Ms Abraham welcomed the presentations and said she was impressed by them. However, she asked for clarity on BEPS MLI. She asked Ms Mputi to first explain what BEPS was. She also asked for clarity on the statement that South Africa was the only country in the G20. Did she mean the only African country in the G20? She asked Ms Mputi to explain the issue of companies with dual residences. From the presentation, it was the two countries hosting these said companies that decided where the companies could belong. Ms Abraham said it was more logical for the owners of these companies to decide which residence they wanted for taxation purposes.

Ms Mputi apologised for not explaining what BEPS was. It was a project introduced by the G20 heads of state after the 2008 financial crisis. It was founded on the background that multinationals were shifting funds from high to low tax jurisdictions. A lot of money was being shifted to tax havens. Many countries were not aware of this because there was no proper exchange of information because of security measures like bank secrecy laws. Therefore, BEPS were synchronised measures that were international standards that were aimed to stop base erosion and profit shifting. She explained that the importance of South Africa being the only African country in the G20 was that it represented other African countries. This was the case with the Inclusive Framework and this was the reason behind the African Tax Administration Forum (ATAF). Before G20 meetings and those of the ATAF, African countries met in order for South Africa to convey both its position and that of other African countries to the G20. For example, a common African position was to avoid mandatory binding arbitration because this tended to benefit developed countries.

Mr Franz Tomasek, Head: Legislative Policy Tax, Customs and Excise, SARS, thanked the Committee for its feedback. He said, generally speaking, the first place a tax system looked at was where the company was formed. Therefore, if a company was created in South Africa, the assumption was that it was going to be resident in South Africa. There were other scenarios where the company was created elsewhere but was managed in South Africa. While awarding companies the choice to select which country to be resident in was an attractive proposition, the tax system used a more objective approach to avoid incidents where companies evaded taxes. That was the reason why the countries, or competent authorities, decided on behalf of the companies. He explained that a competent authority was the person who, in the treaty, represented the country for the tax agreement purposes. For South Africa, it would be the South African Revenue Service. The reason behind having competent authorities was that in their absence, diplomatic channels may have had to be used. This would have been a much longer process. In addition, the agreements may have been conducted by non-experts in tax issues.

Adoption of Ratification of the Protocol Amending the Agreement Between Government of the Republic of South Africa and Government of State of Kuwait for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income

Ms M Mabiletsa (ANC) moved for the adoption of the Agreement.

Ms Abraham seconded.

Adoption of the Ratification of Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS)

Ms M Mabiletsa (ANC) moved for the adoption of the Treaty.

Ms Z Nkomo (ANC) seconded.

Closing remarks

The Chairperson thanked the National Treasury and SARS teams as well as Committee Members for attending the meeting.

The meeting was adjourned.

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