2021 Draft Tax Bills & Rates Bill: public hearings

Meeting report

The Chairperson welcomed everyone, indicating that a number of stakeholders would be making submissions on three draft bills: Taxation Laws Amendment, Tax Administration Laws Amendment and the Rates and Monetary Amounts and Amendment of Revenue Laws Bills. Each presenter was allocated ten minutes. Questions or comments from Members would be taken after a group of presentations.

Presentations by the Tobacco Sector

Presentations by SA Tobacco Transformation Association/Black Tobacco Farmers Association
Mr Shadrach Sibisi, Chairperson of the SA Tobacco Association, stated that the industry had seen a loss of 50 00 jobs and a collection of R8 billion less in taxes in the previous year.  He said that the proposal in the Draft Rates Bill to place an 8% excise increase on cigarettes was unjustifiable in the context of a projected inflation rate of only 4.9% and the hike proposed in the Bill would put the excise incidence on the cigarette’s Most Popular Price Category (MPPC) at 45%, which was 12.5% or 5 percentage points higher than what National Treasury’s own excise policy stipulated.

The platform was shared by Mr Jabulani Tembe, General Secretary of the Black Tobacco Farmers Association, who explained that members of his association had been very hard hit by the five-month ban on tobacco during the Covid-19 lockdown. He fully endorsed the views of the SA Tobacco Transformation Association and stated that it was “enough already”.

(See Presentation)

Presentation by British American Tobacco South Africa (BATSA)
Mr Johnny Moloto, General Manager, BATSA, made a submission on the 2021 Draft Rates Bill, making it very clear that the key problem in the past year had been the enormous increase in the sales of illicit tobacco and that, consequently, the excise increase was unsustainable and detrimental to the continued survival of the already distressed legal cigarette industry in South Africa. The priority for Government at that juncture should be focused on putting in place an effective customs and excise administration and enforcement system for the tobacco industry. The fact of the matter was that the cost of illicit tobacco encouraged the unhealthy use of tobacco and currently two out of every three tobacco products sold were sold illicitly. The proposed review of the excise policy would affect less than 36% of the true market and that would do little in terms of meeting Government’s public health goal of reducing consumption.

(See Presentation)

Presentation by Phillip Morris South Africa (PMSA)
Mr Neetesh Ramjee, Director: Corporate Affairs (Reduced Risk Products), PMSA, stated that the company was discontinuing the sale of cigarettes and was committed to selling reduced risk products in which the user put the tobacco in a device but did not burn the tobacco. He submitted that the base for taxation should be on the nett weight of the tobacco and not the total weight of the consumable, which was minimal in the new form of tobacco consumables. Phillip Morris SA argued against two separate taxes – one for the old product and one for the new product. Mr Ramjee also argued that where the rates applied to risk products, the differential should be closer to the European rate of 72% rather than the 25% applied in SA, if the intention of government was to discourage unhealthy use of tobacco. PMSA also recommended that (i) Tariff Subheading 2403.99.90 be deleted; (ii) that Tariff Subheading 2403.99.05 remain but be amended to read “Products intended for inhalation without combustion”; and (iii) that excise tax be levied on a /kg net basis to ensure a level playing field.
The Chairperson called for questions or comments from Members but there was no discussion.

The Chairperson noted that the Committee had previously taken a number of resolutions regarding the clamping down on illicit tobacco. He requested the Secretary to check the resolutions taken as he was concerned that the SA Revenue Service (SARS) had not implemented ‘track and trace’. He also asked for the Secretary to obtain a response from SA Police Service (SAPS). In the next meeting with SARS and National Treasury, he would require an explanation as to how they were with dealing with illicit trading.

Presentations by Agri SA
Mr Christo van der Rheede, Executive Director, Agri SA, made submissions in respect of three proposed amendments to the Income Tax Act No. 58 of 1962 (ITA): section 20 of the ITA (‘Set-off of assessed losses’); definition of “contributed tax capital” in section 1 of the ITA; section 7C of the ITA (‘Loan, advance or credit granted to trust by a connected person’). He also made a submission regarding the inclusion of super fine maize meal in the list of grades of maize meal that qualify for zero rating, but stated that the critical submission related to the proposed change to section 20 of the ITA which would negatively impact the agricultural sector and hinder South Africa’s economic recovery and food security as it did not take into account the cyclicality of farming and the fact that farming required long-term investments before profits might be made.

Mr Kulani Siweya, Chief Economist, Agri SA, endorsed the views put forward by the Executive Director.

The Chairperson asked the Committee Research team to look at some of the issues raised by AgriSA and to show the relation between the concerns and government policy for the next meeting.

(See Presentation)

Presentations by the Liquor Sector

Presentation by the South African Liquor Brand Owners Association (SALBOA)
Mr Kurt Moore, CEO, SALBOA, spoke on the economic contribution of the alcohol industry to the GDP, the impact of the Covid-19 alcohol ban and the increase in illicit trade in alcohol, especially during the lockdown. The alcohol industry contributed R200 billion towards the GDP in 2019, while there had been a loss to GDP of R64.8 billion in 2020 as the lack of access to the legal alcohol market created higher demand for illicit alcohol products and more players entered the market to make a profit. Illicit traders were able to expand operations under the dry sales ban, through controlling both the supply and price.

Mr Moore suggested that both Treasury and the alcohol industry faced significant challenges in the coming years but he believed that the alcohol industry could be part of the solution to the revenue challenges that Treasury faced and that government should be taking active steps to return to its policy framework, over the short term, which could include a freeze on excise increases or below inflation increases. Affordable legal alcohol would limit the harm and tax leakage caused by illicit substitutes.

(See Presentation)

Presentation by the Beer Association South Africa
Ms Patricia Pillay, CEO, Beer Association of South Africa, explained that the Association included CBASA, Craft Brewers Association of SA. She described the impact of Covid and the lockdowns on the 200 SA craft brewers, all family-owned businesses that employed at least ten people. The lack of relief offered to craft brewers was untenable.

Ms Fatsani Banda (SAB): BASA spoke on the implications of the variance between the excise rate and the inflation rate and the fact that the increase was in contradiction of government’s current excise policy framework which led to an inability for the industry to plan and to negative investor sentiment. Two real examples of deteriorating investor sentiment were the Heineken plant in KwaZulu-Natal that was meant to provide over 400 jobs but did not go ahead and the opening of SAB operations in Mozambique as opposed to South Africa. She spoke of the opportunities taken by illicit alcohol that did not pay excise duties and which could therefore sell cheaper alcohol, even though that was often dangerous alcohol.

Ms Pillay concluded with a plea from the CBASA that was fighting for survival. She noted the unintended consequence of Excise Duty increases which stimulated the growth in the Illicit Alcohol Economy and appealed for collaboration and certainty. The industry requested an opportunity to contribute substantially to the review process.

(See Presentation)


Presentation by Agricultural Business Chamber (AGBIZ)
Mr Theo Boshoff, Head of Legal Intelligence, AGBIZ, addressed section 19 of the Amendment Bill which sought to amend section 20(1)(a) (i) of the Income Tax Act by capping the assessed losses that could be carried over to 80% of the taxable income.  Currently, companies had a choice of either opting for an unlimited period of carrying over losses or a five-year period, which was ringfenced for tax losses. The first alternative was often the preferred choice. That particular amendment could disproportionately impact the agricultural sector, where incomes were cyclical depending on weather and climate. The severe current and recent droughts in South Africa had persisted for a period of seven years or more in some regions and recuperation would take an equally long time. The primary sector had to take full advantage of profitable seasons to cover bad seasons. Capping a roll-over also meant that there would not be funds for the eight-year lead-in required in certain areas of agriculture. He pointed out that other sectors were also climate exposed and all industries, including agricultural, exposed to climate would be exposed to increased pressure as the extremes of climate were increasing.

(See Presentation)


Presentation by Dr Seán Muller
Dr Muller, Senior Research Fellow, Johannesburg Institute for Advanced Study, spoke on the employment tax incentives (ETI). He had done extensive research on the incentive and suggested that ETI was not having the impact that it was intended to have, but was serving as an incentive to private companies, and firms were able to claim the incentive for workers they would have employed anyway. Evidence to support the ETI was either weak or flawed. The key point was that the ETI was paid for jobs that already existed and therefore did not act as an incentive for creating new jobs.

This conclusion was based on extensive analysis and research done on: the original basis for adopting/legislating the ETI; the supposed evidence to support that; the parliamentary process and evidence available since the ETI was implemented.

Dr Muller said the underlying problem is that firms are able to claim the Incentive for workers they would have employed anyway. The result is that the state loses tax revenue but there is no corresponding increase in employment. If the vast majority of claims are of this type, the Incentive will be ineffective but nevertheless costly. Abuse of the Incentive, including of the kind mentioned in the Draft Tax Bills, simply exacerbates the more fundamental problem.

(See Presentation)


Presentations by the Financial Sector

Presentation by Banking Association of SA (BASA)
Ms Itireleng Kubeka, Head of Tax, BASA, introduced the Association and its interest in the Amendment Bills.

Ms Jeanette Maree of First Rand/BASA made the presentation on the collateral arrangements dispensation. She spoke to the limitation on the re-use of collateral. In 99% of the time, collateral was not used and none of the tax relief measures applied. She did not believe that there was a need for collateral in terms of the current arrangement because when one moved away from collateral, one moved into full taxation. There were much more subtle ways of dealing with anyone who was abusing the system. There was also a concern because the measure was to be applied retrospectively. The matter was a concern because the re-use of collateral tied into market liquidity and stability. BASA proposed the entire deletion of the proposed amendment in its entirety.

(See Presentation)

Presentation by the VAT Technical Work Group at the SA Institute of Taxation (SAIT)
Prof Keith Engel, Chief Executive Officer, SAIT, raised a concern regarding what he considered the biggest issue and that was the decision to limit losses. Losses would be limited to 80% of taxable income. There were few countries that did that but the United States under President Trump had been one such country. Most people seemed to support the reduction but queried how much of a reduction they would get.
Businesses were looking for a reduced rate of 25% but the question was whether small businesses were going to see a change to their rate of 10%. He also looked at the unfair impact on select businesses that operated according to intermittent seasonal profit and loss and so the system would not work for farming, especially as SA was one of the few countries that did not pay a farming subsidy. The Mining sector also needed a special dispensation. The 30% limitation might be too low, especially for real estate businesses and foreign-owned banks. He addressed the question of the section 23M and thin capitalisation in border limitations. He also picked up on loans to trusts being problematic in respect of taxation.

Ms Beatrice Gouws, Head of Strategic Development and Stakeholder Management, asked that the sunset clause for research and development into energy efficiency, that had not yet been resolved, be extended in the light of the impact of Covid-19. She referred to the Employment Tax Incentive and applauded the fact that illicit learnerships would be shut down as often there was no real job and it was just a person receiving training without a stipend or any support. She was, however, concerned about the support for legitimate learnerships.

(See Presentation)
 
Presentation by SA Institute of Chartered Accountants (SAICA)
Dr Sharon Smulders, Project Director: Tax Advocacy, SAICA, raised a concern about policy changes, technical amendments and matters not in the Bills. Ms Smoulders addressed the tax on retirement funds when people left the country and ceased tax residency (Section 9HC). It could be in violation of all international tax agreements and a real concern was that many people were removing their money from the country in anticipation of the proposals. It also did not cater for individuals ceasing to be a resident and then becoming one again. She recommended that the proposal be withdrawn and that the officials went back to the drawing board and consulted widely. Dr Smulders was of the opinion that the changes to Assessed Losses had not considered the threshold for SMEs, the timing was ill advised, considering the impact of COVID and the unrest. She recommended a two-year delay while technical failings and the impact on additional allowances were also re-considered. Technical changes included the Contributed Tax Capital that was retrospective; inter-trust loans and ETI that was being widely abused. She requested clarity regarding the technical changes. Matters not in the Bill included associated enterprises, section 18A certificates and disability expenses.

The Chairperson experienced technical difficulties with is connectivity and requested Ms P Abrahams (ANC) to assist as Acting Chairperson.

(See Presentation)

Presentation by PriceWaterhouseCooper (PWC)
Mr Kyle Mandy, Head of National Tax Technical, PWC, addressed retirement funds and the proposed exit tax. His concerns with the proposal was that it overrode the negotiated terms of existing treaties between SA and other countries which included terms that were negotiated in good faith. He doubted that it would achieve its objective as the Netherlands and Belgium had attempted similar exit taxes and the courts had held that tax to be in contravention of the applicable treaties. It was likely that SA courts would follow the same approach. It could give rise to double taxation implications for investment and attracting skills and the interest limitation rules.

PWC was broadly supportive of the proposed interest limitation rules as part of the base broadening measures. However, Mr Mandy had significant concerns with numerous technical issues that Treasury needed to address in that regard and being subject to tax at 28% was draconian and inequitable. There were particular uncertainties for mining regarding application of the proposed interest limitation rules in the context of capital expenditure and ring fencing.

(See Presentation)

Presentation by Tax Consulting SA
Mr Jean du Toit also represented a group of some 15 000 expatriates who found that the proposal to withdraw retirement interests had a negative effect on their circumstances and the proposal would result in pushing individuals to remove their retirement funds if that proved to be the best option. It would actually be counter-intuitive to keep that segment in the tax base. It also discouraged South Africans from retaining any retirement funds in the country. He referred to the technical issues, especially the fact that the section was against South Africa’s international treaties, and as those were consumed into SA law, the proposals actually contravened the SA tax law.

Discussion
Ms Abrahams informed the Committee Members that all presenters had completed their presentations and invited discussion.

Dr D George (DA) referred to the submissions by SAICA, SA Tax Consulting and PWC about people who wished to relocate elsewhere in the world. He urged both SARS and National Treasury to think very carefully about what the tax Bills were intended to do because it had created confusion and fear amongst taxpayers. SARS and National Treasury had surely looked at other jurisdictions, such as the United States of America, but the USA implemented treaties to protect its citizens and he asked that SARS and Treasury clarify details for the Committee. The proposals for retirement tax changes had been coming for 20 years but taxing funds before a retirement fund member could access the funds made no sense whatsoever.  He suspected that it was a desperate attempt to gain taxes, knowing that the number of taxpayers was dwindling. Why make tax payers pay taxes on something they could not have?

The Committee Secretary announced a briefing the following day by SARS and National Treasury on the Germany, Swaziland and Switzerland Double Taxation Agreement. The Formal Ratification of the Kuwait Double Taxation Agreement had been postponed. The response from SARS and National Treasury to the public submissions would be made on 13 October 2021.

Ms Abrahams thanked the presenters for fulfilling their duties in presenting their views to Parliament and assured all organisations present that they would be invited to observe the meeting during which National Treasury and SARS presented their responses to the submissions.

The meeting was adjourned.