Employment Tax Incentive Bill [B46-2013], Taxation Laws Amendment Bill [B39-2013]; Tax Administration Laws Amendment Bill [B40-2013]: briefing & adoption

Meeting report

Briefing on Employment Tax Incentive Bill
Mr Lungisa Fuzile, Director General, National Treasury, presented the Employment Tax Incentive Bill to the Committee.

He said that South Africa had one of the highest rates of unemployment worldwide. Young inexperienced workers in SA had few credible ways to signal to employers that they would be productive.As a result, government proposed a cost-sharing mechanism with the private sector to hire young and less experienced workers.  However, it could not be guaranteed that this programme would address all structural issues in the youth labour market. Rather, it was a temporary programme to simulate demand for young workers. The programme was experimental and would be reviewed and adjusted after monitoring and evaluation.

The level of youth unemployment was extremely high by international standards. A cause of youth unemployment was that many young South Africans did not have post-matric qualifications and as a result they were not attractive to employers. Having a post-matric qualification meant better chances of attaining employment. The different sectors were now changing the structure of employment towards more skills-intensive jobs but the majority of the youth had not yet attained the necessary skills in demand. There was also a mismatch in job search methods of work seekers, and recruitment strategies by firms.

Employers were risk averse and as a result they did not want inexperienced employees. Minimum qualifications were needed.

The youth wage subsidy was first introduced by the President in the State of the Nation Address (SONA) in 2010, to table proposals to subsidize the cost of hiring workers. The Minister of Finance also made announcements in the Budgets of 2010 and 2011. Policy levers included the Youth Wage Subsidy, which had been allocated R5 billion over three years, with R9 billion to the Creation of Jobs Fund, R14 billion to FET colleges, R73 billion to Expanded Public Works, and R23 billion to tax incentives for manufacturing.

Mr Fuzile also spoke about the objectives of the incentive, which was to improve employment prospects for young people over the medium term, by giving work experience. The aim was to incentivize employment in Special Economic Zones and designated industries. Jobs created would enjoy protection under labour law legislation. This meant that there would be penalties for abuse and displacement of employees.

The government would share the cost of employment with employers. This way, the wage of the employer would stay intact and the cost of employment would be lower for the employer. This incentive would also assist in the demand for labour in that employers could afford to employ more workers, and could afford to pay slightly higher wages for young, inexperienced workers through cost–sharing. Young workers would also gain wages, experience and opportunities of long-term employment.

The government would share the cost of employment with employers, this way the wage of the employer would stay intact and the cost of employment would be lower for the employer. This incentive would also assist in the demand for labour in that employers can afford to employ more workers , employers would afford to pay slightly higher wages for young inexperienced workers to due to cost-sharing. Young workers would also gain wages, experience and opportunities of long-term employment.

Mr Fuzile also stated that those who qualified were people between the ages 18-29. In the beginning, the incentive had been for people between the ages 15-29, but the age bracket had been revised because it was believed that it would encourage children of school going age (15-year-olds) to drop out of school. The reason it had been aimed at targeting 15-29 year olds was because there were some people who were 15 years of age who were breadwinners at home, and some of them did not attend school. People who were targeted were people who were actively seeking employment.

Employers who were targeted were employers within the private sector. Public sector and state-owned entities were excluded, but designated public entities may be allowed. Companies should be registered for employees' tax (PAYE), and should be in good standing with the tax authorities.

There would be penalties for employers if minimum wages were not upheld or displacement of workers took place. The Minister may exclude employers if displacement was severe and the Minister, in consultation with the Minister of Labour, could exclude certain sectors if they did not adhere to the given rules.

The incentive value was 50% of the salary, meaning that the government would contribute 50% of the income. This applied to all amounts below R2 000.  From R2 500-R4 000, the incentive would be R1 000. The incentive would be R750 for incomes costing R4 500 and R500 for incomes costing 5 000. The duration of the incentive would only be two years.

Key concerns raised via consultation had been the problem of displacement, the problem of the two-tier labour market, that the incentive was not training-based, potential abuse from employers, the risk of early school-leaving induced by the incentive and the age range of the incentive – as well as the question of whether or not employers would create new jobs. A discussion paper had been published in 2011. Comments had been received from various members of the community and organizations. There had also been extensive consultation with stakeholders, through the NEDLAC process.

Implications for labour relations would be put in place. These would cover displacement of workers, workers who were not completely substitutable, and specific provisions to penalise employers who displaced workers to get the incentive. The Bill had no impact on labour legislation, and could not weaken the rights of the workforce. All workers had access to mechanisms described in labour laws and unions.

The legislative changes that had taken place due to Parliamentary processes, had been included. The incentive was not linked to mandatory skills development or training. The eligible years for employees had been adjusted to 18 years to ensure that the incentive did not interfere with school attendance, but newly matriculated workers would be included. Workers who were asylum seekers would be included. The incentive would apply to people who were natural persons and the age of the applicant would be determined as at the end of the month.

Eligible employees included sole proprietors.  An employee was regarded as anyone who had a direct contract of employment and an employer paid the remuneration. The employer should accommodate registration for PAYE, even if it was not required. The Minister of Finance would consult with the Minister of Labour and Trade and Industry to designate industries.

On the issue of workers not being disadvantaged, employers would be excluded at the discretion of the Minister. Penalty amounts would be set at R30 000 per dismissed employee, in order for the penalty not to be out of relation to the size of transgression. There was also an imposed penalty of 200% (100% penalty and 100% repayment) of the incentive for those months when the employer was in breach.

SARS would enforce anti-abusive provisions with information from the Department of Labour, labour authorities and from any other third party. The National Treasury and SARS would monitor the incentive closely through the bi-annual reporting requirements, for the effectiveness of job creation, cost effectiveness, and social and economic impact.

Discussion
Mr R Lees (DA; Kwa-Zulu Natal) asked how much information would be shared when screening the businesses' and employees' tax-related matters, since confidentiality was an important aspect in taxation-related matters.
He asked the Department to explain the 'sunset clause', as well as the administrative burden that would be transferred to the Department when registering employers for the incentive.   was the incentive taxable?

Mr J Joseph (DA; Western Cape) asked if the Bill made provision for people with disabilities, who would manage the incentive project and if there was a guarantee that those who were unemployed would get employment.
He also suggested that the intentions of those who wished to take part in the incentive should be monitored, so that their true intentions could be checked. The incentive programme should be viewed as an investment risk and the Department should explain the duration of the incentive, and whether NGOs would be able to register.

Mr B Mashile (ANC; Mpumalanga) said that the Treasury had done its work in terms of consultation and that there was room for improvement in this regard. It was important for the Committee to assist the Department to move forward by helping it to monitor checkpoints.

Mr Mashile then asked the Department what informed the view that the private sector would actually take part in this incentive programme, and how would the employers attract unemployed, inexperienced people whom they did not need? What strategies had been put in place to persuade employees?
He also asked who was expected to earn a salary of R1 000? Were people who were still at school being encouraged to come out of school so that they could earn R1 000? The R6 000 would also not be sufficient as a salary, especially for those who were highly trained, such as engineers, because the starting salary for engineers was usually around R12 000, therefore the R6 000 stipulated was not enough for those who had post-matric qualifications.

Mr Mashile asked what would happen if there was an industrial action in that particular sector. Would people who had been hired under the conditions of the incentive be allowed to take part in industrial actions such as strikes, and if there were wage negotiations would they be considered as well? 
Was there a specific minimum wage on which the Treasury was basing its estimations and calculations of the incentive? Also, as the incentive would be phased out after the second year, would employers not employ people on a temporary basis so that they could enjoy the benefits of the incentive?

Mr Mashile also asked if the attitudes of South African employers had been checked. What were the perceptions of employers regarding the incentive? He noted that South African employers used a new employment strategy whereby they hired employees on temporary basis – employees did not work full shifts, but instead they got called in whenever it was peak hour, or when there was a high demand for a particular product. Had the Department considered the long-term implications when it implements the Youth Wage Subsidy?

Mr Lees asked if there were any penalties if employees abused the incentive.

The Chairperson said that the private sector accounted for 76% of employment. What had it said about the Incentive?

Mr Fuzile responded that the Department had consulted enough people, but that was not satisfactory. The views of other people may have not been accommodated. The Department would have preferred to get views from more people. The consultation had not been done because they had been instructed by law, but because the Department acknowledged that the views of the pubic were important.

If employers did not need employees they would not see a need to hire, but by offering employers an incentive to hire, input costs would reduced and an opportunity to hire people would be created. Sometimes people might not benefit because of little payment, but having a job helped a person to get experience and eventually a better-paying job, so being employed under the conditions of the incentive would also serve as a catalyst.

Responding to the question on the minimum wage, Mr Fuzile said that the starting point was R2 000. However, there were sector wage determinations in place where people did earn R1 000 as a minimum wage, so it was important not to exclude those sectors. The Department accepted the minimum wage as it was in the sectors, but that did not mean that the Department was in support of the minimum wage Accepting the minimum wage was just a means of dealing with the issue of high unemployment.

In response to Mr Lees’ question about the 'sunset clause', Mr Fuzile said that since the incentive was still in its experimental stage, it had to be given a reasonable amount of time to see if it would work. If it happened that it did not work then it could be scrapped or re-evaluated.

In response to the question about the R6 000 pay, Mr Fuzile said that this amount was what would be taken from tax. However there were other programmes, like internships and learnerships, which people could apply for.

The sharing of information would be done in a way which would not have negative effects on the parties. It would be discreet and done carefully.

Mr Fuzile also responded to the question about the 'sunset clause' by saying that all incentive programs had sunset clauses and that – setting sunset clauses was an international standard, and the Department had to adhere to international standards.

The Chairperson agreed that sunset clauses were an international norm.

Mr Fuzile said that SARS would be responsible for the incentive, while the market or private sector would be responsible for hiring employees.

He responded to Mr Joseph’s question on how the incentive would work, by saying that the 50% incentive would be given in the first year and in the second year, the incentive would be halved. If NGOs did not have the PAYE system, they could still apply.

Responding to Mr Mashile’s question on industrial action, he said that legislation was silent on the issue. People hired under the conditions of the incentive would not be instructed to not take part in industrial action. If provision was made regarding industrial action, then a two-tier employment system would be created.

The R6 000 would increase as the skill of a person increased. Fiscally, the cost incentive would increase as well. People could not be replaced by employers any time that they wished. The workers did not want to constrain employers, therefore the two-year contract allowed for flexibility as well.

Mr Fuzile answered the question on penalties by saying that currently there were no penalties for employees. The private sector had said that the penalties were too severe, and that the rewards were too low for them to take part in this incentive programme. However, smaller firms had said that this incentive suited them.

Mr T Chaane (ANC; North West) asked if informal traders would also qualify for the incentive, since informal traders made up a large number of employers. He added that the only people who could not be easily replaced were those in the higher levels of management.

Mr Mashile said that the answers given by the Department generated more debate. The R6 000 was more likely to exclude those who had been to FET colleges, since their starting salaries were above the amount of R6 000. Also, two years was a limited time to teach skills to people who had not been to school at all.

Mr Fuzile responded that the Department followed what was being done in sectors by providing an incentive for wages under R2 000. The people with matric certificates and post-matric qualifications would not be excluded. There were scholarships, learnerships and internships for people who had advanced qualifications. Usually the people with more advanced qualifications ended up working for provinces and departments if they showed that they excelled in their various areas.

People could learn a lot within a short period of time, and many skills could be acquired within two years.

Mr Mashile said issues, or concerns, had been raised, and the Department would look at them and respond.

The Chairperson said the issues or concerns must now be used as checkpoints by the Committee. They would be helpful for the new Committee, which would take over next year.

The Chairperson then read out the final mandate – that the Committee approved of the Bill, with no amendments. Mr Mashile proposed adoption and Mr Chaane seconded him. The Bill was adopted.

After a break, the Committee continued with the Taxation Laws Amendment Bill [B39 of 2013] and Tax Administration Laws Amendment Bill [B40-2013]

Briefing on Taxation Laws Amendment Bill
Ms Beatrice Gouws, Director of Personal Income Tax and Savings, National Treasury, presented part A of the Taxation Laws Amendment Bill 39 of 2013, which was the Taxation on Individuals.

Ms Gouws noted that the current tax system was too complex and resulted in increased costs and an administration burden.  The regime also allowed some individuals and employees to benefit excessively from the incentive. Reasons for the changes made were that there was a need to harmonize the tax treatment of contributions to, and from benefits from, tax retirement funds, and the requirement to reduce the complexity of the current system and to ensure greater equity.

Amendments would greatly simplify the taxation of retirement fund contributions – there would be only one tax-deductible percentage limit of 27.5%. Employer contributions would be deemed a fringe benefit in the hands of employees.  There was no need for different definitions of income, rather the greater of taxable income and remuneration. Going forward, any contributions made by an employer to an SA-approved retirement fund would be taxable as a fringe benefit.

Members of provident funds could not deduct their own contributions and were not compelled to annuitize at retirement, which meant that members often took their entire retirement amount as a cash lump sum, and many spent it too quickly. The reasons for changes in the provident fund post-retirement annuity alignment were that provident funds needed to be aligned to other provident funds so that provident fund members could enjoy the same benefits and protection. There were members who were reluctant to annuitize, since they lost old age grants if the annuity was larger than the grant.

Members would be requested to annuitize upon retirement. If anyone was above the age of 55 as at 1 March 2015, they would not be required to annuitize. Also, any accumulated balance of funds and growth on those funds from 1 March 2015, would not be annuitized.

Additional amendments to personal income tax were that the increase in the amount that could be deductable for an employer when they provided a bursary or scholarship for tertiary education for an employee or relative.  Other changes were that the tax treatment of income protection policies had been amended to be in line with other personal insurance.   Also employer-provided housing that was acquired by employee would no longer be a taxable fringe benefit if the employee earned less than R250 000 and the house was worth less than R450 000.  Excess donations above 10% of taxable income could now be rolled over.

Mr Kgaugelo Bokaba, Business Taxes Director, National Treasury, presented part B of the presentation, which dealt with business taxes, anti-avoidance proposals, and key commercial features, including debt.

After providing a background on the current legislative scenario, he put forward the Treasury's detailed proposals in the areas of acquisition and connected person debt, the removal of the exemption for dividends applied against deductible financial instruments (Section 10(1)(k)(i)(hh)), the cross-issue of shares (Sections 24B and 40CA), tax incentives for Special Economic Zones (SEZs) and refinement of the research and development (R&D) regime (Section 12D). 

One of the major components of the presentation was on the R&D tax regime, which provides substantial tax incentives aimed at ensuring that local R&D was globally competitive. Under this regime, expenses incurred for purposes of conducting R&D were 100% deductible. Moreover, these expenses may generate a further 50% if the R &D was approved by the Minister of Science and Technology.

See attached presentation.

Mr Lutando Mvovo, Director: International Tax, National Treasury, presented on international shipping transport, which was part C of the Bill. International shipping transport conducted by SA companies was subject to tax at 28%. Net income of shipping controlled by foreign companies was exempt if the shipping was conducted outside SA. The reason for this change was that the international trend was for reduced taxation, either through a tonnage tax or a total exemption for shipping activities. In view of these trends, the SA 28% tax was highly uncompetitive. South Africa was putting in an effort to revive the shipping industry. The proposed changed was for the new regime to exempt international shipping transport companies.

Mr Mvovo’s presentation also touched on E-commerce VAT registration, which was part D of the presentation. Currently, foreign suppliers of e-commerce services to SA customers were not compelled to register for VAT. These foreign suppliers transacted over the internet and had no physical presence in SA. The SA VAT Act lacked a 'place of supply' rule to allocate taxing rights to SA. This had led to an interpretive exercise to determine whether or not these foreign suppliers should be registered for VAT, with no clear answers. Recipients of e-commerce services were required to self-assess the VAT on supplies received –this VAT was known as the 'reverse-charge.'

The reason for the change was that compliance with the self-assessment nature of the reverse-charge was low. Local suppliers of e-commerce were at an unfair advantage, as local suppliers of e-commerce services charged 14% VAT on supplies made to SA customers. Foreign suppliers did not charge VAT on supplies to SA, and thus enjoyed a 14% advantage which allowed them to slash their prices.

The proposal was that the 'place of supply' for foreign e-commerce suppliers would be compelled to register for VAT if  E-commerce services were supplied to (i) a SA resident customer or (ii), if payment for the e-commerce services originated from a bank registered in SA. Foreign suppliers were also compelled to register, irrespective of the aggregate value of supplies made in a 12-month period. Foreign suppliers would be allowed to register on the payment basis, to streamline administration.

Discussion
Mr Lees asked about the VAT on E-commerce, if its implementation was going to be practical and how the Department was going to force sellers to register for E-commerce VAT. He asked if the banks were going to be allowed to deduct VAT from the amount which was paid for an online purchase.  He commented that the VAT registration tended to be too complicated and a long process, as tax payers had to transfer a lot of documents from one area to another, and this was usually time consuming. He asked if R&D was going to be less attractive to SA companies.

Mr Mashile said that more needed to be done regarding shipping in SA. As SA was not gaining any revenue from shipping because it did not have a large number ships (passenger and cargo) registered, this meant it was losing out and therefore more needed to done. There was a problem with exempting everything, as there were costs which needed to be recovered.

The Chairperson added to Mr Mashile’s point by asking if shipping vessels in Cape Town were also taxed, or included in the taxation process.

Mr Mvovo said that the Department of Transport managed the arrival and departure of ships. The vessels of local fishing companies were registered and they did pay tax. Any fishing company which started up would also pay tax. Ships were registered, and they were taxed a license fee. The Department of Transport managed the tax aspect and, together with the SA Marine Safety Agency (SAMSA), also regulated shipping.

There were ways of taxing foreign E-commerce suppliers which had been put in place. One way was by looking at where the order had been made, which bank had been used and how much had been used to pay for the purchase. From that information, the tax could be determined.

The Department appreciated that the proposal would have an impact on provisional calculations. It would assist companies with their financial statements. However, the committee responsible for R &D would be better suited to respond to the question on R &D.

Briefing on Tax Administration Laws Amendment Bill
The Tax Administration Laws Amendment Bill was presented by Mr Christopher Axelson, Director: Personal Income Taxes and Savings, National Treasury.

Acts which were amended by the Bill included the Transfer Duty Act (consequential amendment), Income Tax Act (technical corrections), Customs and Excise Act (substantive and technical amendments), Skills Development Levies Act (consequential act), Value Added Tax Act ( technical corrections), Unemployment Insurance Contributions Act (consequential amendment ), Mineral and Petroleum Resources Royalty Act (consequential amendment ), Mineral Resources and Petroleum Royalty Act (administration act and technical amendment) and the Tax Administration Act (substantive and technical amendments).

Mr Christopher talked about the clauses which had been amended. Clause 16 dealt with Customs and Excise – the duties and powers of officers. The search and seizure provisions dated from 1964, thus pre-Constitution, and afforded officers wide powers to search any premises whatsoever at any time, without the requirement of a warrant.

The reasons for the change were that SARS accepted that these provisions should be reviewed in light of the Constitution. This was evident from the provisions relating to search and seizure in the new Customs Control Bill and the Tax Administration Act. Furthermore, in a recent judgment of the Western Cape High Court, some of the subsections of section 4 had been declared unconstitutional. The proposed amendment aimed to rectify the position in the following way: the main rule would be that an officer would enter premises only on the authority of a warrant. Provision was, however, made for exceptions to this general rule, when an officer may enter certain premises without a warrant: premises licensed or registered in terms of the Act; business premises of licensed or registered person; premises managed or operated by the State or organ of state as part of a port, airport, railway station or land border post; and premises entered with the consent of the owner, or a person in physical control of the premises. Warrantless entry to premises was also allowed in circumstances where an officer believed that a warrant would have been issued if applied for, but that delaying obtaining the warrant was likely to defeat the purpose for entry which was sought. Requirements were provided for the conduct of officers when they entered and searched in these circumstances.

Mr Axelson also presented the amendments to the Tax Administration Act: Prior notice and service of legal proceedings. SARS was a huge organization and, particularly with respect to urgent applications, the size of the organization could be deliberately exploited by litigators. Legal proceedings against SARS were often instated with as little as two hours notice. The reasons for the change was that a lack of proper notice and incorrect service of legal proceedings resulted in unnecessary and costly litigation and prejudice to the fiscus if adverse judgment. Prior notice of an intended court application would ensure that a matter was brought to the attention of an appropriate senior SARS official, who may resolve it outside court. The proposed amendments were that tax payers were required to give one week's notice of intended legal proceedings, unless the court waived this requirement in the case of extremely urgent matters, and service must be at the prescribed address to avoid applications being presented haphazardly at SARS branch offices or the offices of the State Attorney.

Another important feature of the Bill was the Amendments to Tax Administration Act: Withdrawal of assessments after expiry of prescription periods.

In practice, erroneous assessments were often discovered only after all prescription periods and remedies had expired. Examples were assessments that resulted from fraud by a person not authorized by the taxpayer to complete or submit a return, an undisputed error by the taxpayer in a return or a processing error by SARS in making the assessment.

The reason for the change was that if it appeared that it would be unreasonable and inequitable to recover the tax due as a result of erroneous assessments, taxpayers should not be left without remedy. Proposed amendments were that the withdrawal of such amendments would be allowed in specified narrow circumstances. Further, a senior SARS official may agree with a taxpayer as to the amount of tax properly chargeable and issue a revised assessment. Also, an “agreed” assessment would be subject to objection and appeal.

Discussion
Mr Mashile asked what would happen if the person searching without a warrant encountered problems whilst doing so – for example, a violent attack. Was it possible for the warrant to be fast tracked, as that way the person being searched would not resist, since there would a valid a search warrant or provisional search warrant? He asked about the process of cross-border criminal prosecutions. He also asked the Department to explain what or who the 'senior SARS official' would be, and how normal citizens or customers could identify the senior official.

Mr Joseph asked for clarity on the third parties mentioned in the last sentence of the last slide.

Mr Lees asked about the tax returns which were to be received by the customers or receivers, and about correspondence between SARS and the client, how it worked and how reliable it was.

The Chairperson commented that the SARS office in Kimberly had improved and that it now offered better services.

Mr Axelson responded to the question of fast tracking search warrants by saying there were mechanisms which were already in place, but sometimes they did not work or produce the desired results. He defined a SARS senior official as person appointed to oversee tax-related matters in a particular region.

On the question of e-filing, he said that e-mails were not suitable for sending confidential information, such as information on tax returns, and therefore people who had access to the website should use the website to access their details.

Mr Axelson clarified Mr Joseph’s question on the protection of certain third parties against recovery actions by taxpayers. The third party in this case was the bank which had been appointed by SARS to act on its behalf and to follow its instructions, so if a person had a claim against a bank, the person must take the issue to SARS and not the bank, and SARS would protection the bank.

Mr Mashile asked how normal citizens would identify the senior SARS officials.

Mr Axelson said that SARS officials, and any other management position, were listed on the SARS website.

Mr Mashile replied that the Department should bear in mind that not everyone who visited the SARS offices had access to websites.

The Taxation Laws Amendment Bill [B39-2013](National Assembly – Sec 75) was put to Members for acceptance.

Mr Lees said that he did not accept the Amendment Bill.

Mr Chaane proposed acceptance of the Bill, and Mr Mashile seconded the motion.

The Chairperson then asked the Members if they supported the Tax Administration Laws Amendment Bill [B40-2013] (National Assembly –Sec77).

Mr Lees said he supported the Bill.

Mr S Montsitsi (ANC, Gauteng) and Mr Mashile also supported the Bill.

Members supported the Taxation Laws Amendment Bill [B39-2013](National Assembly –Sec 75) and the Tax Administration Laws Amendment Bill [B40-2013](National Assembly –Sec77)

The Chairperson thanked the Members and the Department for their participation and adjourned the meeting.