TLAB, TALAB, Rates Bill and Revenue Laws Amendment Bill: National Treasury briefing

Meeting report

National Treasury overview of 2023 tax bills

Taxation Laws Amendment Bill (TLAB) & Tax Administration Laws Amendment Bill (TALAB)

Mr Chris Axelson, Acting Head: Tax and Financial Sector, National Treasury (NT), said that the Taxation Laws Amendment Bill (TLAB) had more technical laws included, as well as the Taxation Administration Laws Amendment Bill (TALAB) that would be presented by the South African Revenue Service (SARS).

Revenue Amendment Bill

The 2023 Draft Revenue Amendment Bill was published in June 2023, while the 2023 Draft TLAB and 2023 Draft TALAB were published for public comment on 30 July 2023. NT had taken the comments on both of those Bills, tried to revise them, and had them tabled at the medium term budget policy statement (MTBPS) a few weeks ago.

He explained that due to constitutional requirements, the tax bills had been split into two separate bills -- money bills in terms of section 77 of the Constitution dealing with national taxes, levies, duties and surcharges (Rates Bill, Revenue Laws Amendment Bill and TLAB), and ordinary bills in terms of section 75 of the Constitution, dealing with administration issues (TALAB). The Standing Committee on Finance (SCof)/Select Committee on Finance normally convened public hearings on the draft tax bills before formally introducing them in Parliament. NT and SARS had engaged stakeholders who had submitted comments through workshops held on 6-8 September. The Minister of Finance tabled the final Bills during the MTBPS.

Rates Bill

Mr Axelson said that regarding personal income tax tables, the Rates Bill 2023 was the largest tax instrument that brought in government's biggest revenue. They had increased all the brackets by the estimated value of inflation (4.9%) to ensure there was no bracket creep, where people would earn a higher income aligned with inflation but be pushed into higher brackets. They had also increased the medical tax credits by the same percentage. They had also increased retirement tables and transfer duties by 10%. He explained that these were not adjusted yearly, and were done on an ad hoc basis every two, three or four years. They had also increased the excise duties on alcohol and tobacco of 4.9%.

Health Promotion Levy

Mr Mpho Legote, Director: VAT, Excise Duty and Subnational Taxes, NT, said that an increase to the health promotion levy (HPL) had been delayed for an additional two years. A discussion paper on the HPL review would still be published for consultation on proposals to extend the levy to pure fruit juices, and lower the four-gram threshold.

Retirement Funds

Ms Alvinah Thela, Director: Retirement Funds, NT, referred to the 2023 Revenue Laws Amendment Bill, and said that South Africa had different retirement fund vehicles available to individuals, including pension funds, provident funds, retirement annuity funds, pension preservation funds and provident preservation funds. Each of these funds had a different tax treatment for contributions, alongside different rules for withdrawals. She said there were two primary concerns regarding the current design of the retirement system. The first concern was the lack of preservation before retirement. For pension funds and provident funds, this access was dependent on an employee terminating employment. Individuals could then access their funds, in full, when changing or leaving a job. The second concern was the lack of access, even in cases of emergency by some households in financial distress, that had assets within their retirement funds.

In an attempt to address the above-mentioned concerns, they were proposing a further reform to the retirement saving regime. This reform would see the introduction of the so-called “two-pot” retirement system. This system seeks to retain the current principle of exempting contributions and growth thereon, while taxing withdrawals of benefits -- the exempt-exempt-taxable (EET) system. The EET system had been retained as a means of, inter alia, ensuring that income was taxed only once, retaining the logic applied in the 2016 retirement reform which served to harmonise the tax treatment across various retirement funds, and minimising the complexity that came with valuing growth on contributions. She explained that in accordance with the new regime, retirement funds would on, or after, 1 March 2025, be required to create a component known as the “savings component," which would be housed within the current retirement fund.

She said that individuals would be required to contribute an amount of one-third of the total individual retirement fund contributions to the “savings component”. The assets in the “savings component” would be available for withdrawal before retirement. Access amounts to the “savings component” would be provided without the member having to cease employment or having to resign or retire from their respective fund. A member would be allowed to make a single withdrawal within a year of assessment. The minimum withdrawal amount was R2 000.

Ms Thela said that on or after 1 March 2025, retirement funds would be required to create another component known as the “retirement component, " which would be housed within the current retirement fund. Individuals would be required to contribute an amount of two-thirds of the total individual retirement fund contributions to the “retirement component”. The assets in the “retirement component” would be preserved until retirement (i.e. withdrawals from this component could only be accessed by the member upon retirement per the fund rules). Once a member has reached retirement age and retires, the “retirement component” would be paid as an annuity. Withdrawals from the “retirement component” were accessible as a lump sum when an individual ceases to be a tax resident of South Africa. The payment of the said lump sums was however subject to the 3-year rule that under the current regime applies to members of a retirement annuity fund, pension preservation fund or provident preservation fund.

She said that retirement funds would on, or after, 1 March 2025, be required to create another component known as the “vested component.” Retirement funds would be required to value a member’s retirement interest on the date immediately prior to the implementation date, which was 1 March 2025, as these amounts would be subject to the current retirement regime (i.e., vested and non-vested rights arising as a result of the annuitisation reform which came into effect from 1 March 2021, would be retained). Once the regime came into effect, members would no longer be able to make contributions to their “vested component.” However, this would not apply to provident fund members who were 55 years or older on 1 March 2021.

Ms Thela said that following the publication of the draft Retirement Laws Amendment Bill, several changes had been made, including the postponement of the effective date, and a change of the seeding capital from R25 000 to R30 000. Provident fund members who were 55 years and older as at 1 March 2021 would, by default, be excluded from the two-pot regime, with the opportunity to opt-in should they choose.

Renewable energy incentives

Ms Hayley Erasmus, Director: Corporate Income Taxes, NT, said that due to the energy crisis the country was currently facing, government had devised tax incentives in terms of renewable energy to encourage investment. For individuals, there was a solar energy credit that seeks to encourage investment in solar panels. Businesses already had an existing incentive that encourages investment in renewable energy, but NT had proposed to temporarily enhance that so that businesses were encouraged to respond and invest. Both incentives would be temporary. Individuals would have a year to claim, and businesses two years. Individuals who paid income tax would be eligible, as well as businesses registered for corporate income tax, and sole proprietors who calculate business income for their personal income tax would be able to claim. The value of the incentive for individuals was 25% of the costs of solar photovoltaic (PV) panels up to a maximum of R15 000 per individual. For businesses, it would be it was -- 125% of the costs of assets that produce renewable energy.

Interest limitation

Mr Nhlanhla Radebe, Director: Business Financial and International Tax, NT, said that in 1994, Practice Note 31 of 1994, titled “Interest paid on moneys borrowed” had been issued. On 16 November 2022, the South African Revenue Service (SARS) issued a notice informing the public of the intention to withdraw this practice note, with effect from years of assessment starting on or after 1 March 2023, due to the increasing abuse of the tax deduction concession provided for in that Practice Note. After reviewing the public comments received on the withdrawal of the Practice Note, government had considered the impact of the proposed withdrawal and proposed changes to tax legislation to accommodate legitimate transactions affected by such withdrawal. As such, the practice under Practice Note 31 had been limited to minimise the adverse effect of withdrawal on companies, and proposed legislation was included in the draft TLAB that was published for public comment to allow for a deduction of interest, where one company within a group of companies raised debt that it on-lends to a fellow group company that uses the debt for income-producing purposes within its trade. After publication, the concession contained in section 11G was expanded to apply to any person who incurred interest expenditure in the production of interest income (limited to the said interest income) without regard to any shareholding threshold of any back-to-back lending arrangement.

He said that to allow for further engagements during the 2024 legislative cycle, the proposed concession would come into operation on 1 January 2025.

On the interest limitation rules, he said that changes had been made in 2021 to the Income Tax Act as part of the corporate income tax package to broaden the tax base and reduce the headline corporate income tax rate in a revenue-neutral manner. One of these measures included strengthening the rules dealing with the limitation of interest deductions for debts owed to certain persons not subject to tax in section 23M of the Income Tax Act. It was proposed that legislation be amended to align with the policy intent of adding only the balance of assessed losses from prior years to taxable income. The starting point for adjusted taxable income should be taxable income calculated before applying the section, and setting off any assessed loss. To address the uncertainty arising from the treatment of exchange gains and losses, it was proposed that exchange gains be classified as interest received or accrued for the purposes of section 23M of the Act. Government proposed that the legislation be clarified to make it clear that the proviso to section 23M(2) was applicable only to interest when withholding tax on interest was payable on the interest. Government was also proposing that section 23M(6) of the Income Tax Act be amended to extend the exemption for lending institutions to also apply to South African banks.

He said that they were making an amendment to exempt deposit insurance schemes to cater for government, having actually established a deposit scheme in 2022. After public comments, they amended the VAT Act to cater for the corporation for deposit insurance.

Oil and gas royalties

Ms Erasmus said there were refinements of the royalty rates for oil and gas companies. Royalties were levied on extractors to compensate government for the extraction of non-renewable mineral and petroleum resources within the Republic. For oil and gas companies, the royalty rate was based on a formula and was adjusted according to the oil and gas company’s profitability. The rate applied to the royalty base (gross sales) ranged from a minimum of 0.5% to a maximum of 5%. To ensure that the country was adequately compensated for the loss of its finite resources, the minimum royalty rate for oil and gas would be increased from 0.5% to 2%, with the maximum remaining at 5%.

Given the country’s continued struggle to produce reliable electricity through the national grid, she said that government was proposing to temporarily enhance the current renewable energy tax incentive available in section 12B of the Income Tax Act to encourage greater private investment in renewable energy generation. The proposed enhanced renewable energy tax incentive would apply to currently eligible renewable energy sources – wind power, PV solar energy, concentrated solar energy, hydropower in the generation of electricity, biomass compromising organic wastes, landfill gas or plant material with no electricity generation limits.

Telecommunications companies

The Committee was told that there was a proposed amendment seeking to introduce a provision in the VAT Act to permit the telecommunications companies to deduct input tax to the extent that a subscriber acquired services from a third-party supplier, whether taxable or exempt, in instances where the telecommunications company acted as an agent for such supplies.

Carbon tax

Ms Kuhle Mxakaza-Mngxaso, Economist, National Treasury, referred to the Carbon Tax, and said that in October 2022, the Department of Forestry, Fisheries and Environment (DFFE) had gazetted the amended methodological guidelines for quantifying greenhouse gas (GHG) emissions. The amendments included updated carbon dioxide emission factors for domestic (tier 2) emissions reporting for existing fuel types, and had also added fuel types. The guidelines further included default emission factors for fugitive emissions based on the 2019 Intergovernmental Panel on Climate Change's (IPCC's) refinements study on emission factors. To align the Carbon Tax Act with these guidelines, it had been proposed that tables were added to Table 1 and Table 2 of Schedule 1 of the Carbon Tax Act to provide the tier 2 emission factors and default emission factors for fugitive emissions. After publication, it was proposed that the table on country-specific carbon dioxide emission factors be withdrawn from the TLAB. Further consultations would be held with the DFFE and SARS on applying the tier 2 emission factors and determining the appropriate net calorific values to be used for the different fuel types, and for calculating GHG emissions under the Carbon Tax Act. It was also proposed that the table on the default emission factors for fugitive emissions from coal mining, oil and gas operations was withdrawn. Further announcements would be made in Budget 2024.

RAF levy refund

On the Customs and Excise Duty Act, Ms Mxakaza-Mngxaso said that in light of the current electricity crisis, a refund similar to the diesel refund for the farming, forestry, fishing and mining sectors would be extended to the manufacturers of foodstuffs on the Road Accident Fund (RAF) levy for diesel used in the manufacturing process. The new RAF levy refund for foodstuffs manufacture would be in respect of the new refund item 670.05, subject to the new Note 14. The refund would apply to the purchase and use of distillate fuel for the manufacture of foodstuffs during the period 1 April 2023 to 31 March 2025. Persons that may apply for the new refund were those persons who both purchased and used distillate fuel for the manufacture of foodstuffs, who had successfully applied for refund user and manufacturing premises registration for purposes of refund item 670.05, and who were also registered for value-added tax purposes. The listed manufacturing activities must be performed by the registered refund user at the registered manufacturing premises in the realisation of foodstuffs for commercial gain.

Anti-money laundering and combating terrorism financing

Mr Franz Tomasek, Head of Legislative Policy, SARS, said that to give effect to the national strategy on anti-money laundering, countering the financing of terrorism, and countering the financing of proliferation (AML/CFT/CFP), developed as a response to the mutual evaluation report of South Africa adopted by the financial action task force (FATF-MER), and to give effect to the FATF action plan, Parliament had adopted the legislative changes in the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act, 2022 (the GLA Act). To align with the National Strategy on AML/CTF/CFP and achieve consistency with the GLA Act, amendments had been inserted in the Income Tax Act to provide for similar grounds for disqualification of office bearers in tax-exempt bodies corporate and similar bodies, public benefit organisations, recreational clubs, associations and small business funding entities. It should also be noted that should a public benefit organisation, recreational club, association or small business funding entity appoint a disqualified person as proposed and fail to remedy such non-compliance upon notification by the Commissioner; the Commissioner may withdraw the approval of the relevant body as provided in the various sections of the Act.

Advance Pricing Agreement

Mr Tomasek said the Advance Pricing Agreement (APA) programme would provide taxpayers with a greater level of certainty when embarking on large-scale international transactions that had transfer pricing implications. SARS released a discussion paper on an APA programme for public comment in November 2020, followed by the release of a high-level model and draft legislation in December 2021. The proposed legislation sought to introduce the enabling framework for the APA programme, and the framework had been inserted in the Act in the light of its close relationship with section 31 and other provisions of the Act. As the APA programme would require scarce resources, it was envisaged that the programme would commence with a pilot shortly after the legislative framework had been put in place. They also envisaged that the pilot would accept only bilateral APA applications, which would allow for learning from other jurisdictions and the managed expansion of capacity before SARS extended the programme.

Distinction between resident and non-resident employers

He said that Clause 13 of the TALAB proposed to remove the distinction between resident employers and non-resident employers conducting business through a permanent establishment in South Africa. This meant that such employers must deduct employees’ tax (PAYE), and also widened the deduction obligation to include all representative employers. In terms of clauses 14 and 15 of the TALAB under the current wording of paragraphs 9 and 10 of the Fourth Schedule, the foreign taxes paid in respect of section 8C gains could not be taken into account for purposes of determining the PAYE due on the gain. This could result in cash flow implications for the affected employees, as they would be entitled to claim a foreign tax credit only at the time of completing their ITR12s. The proposed amendments aimed to rectify this situation.

He said that section 39 provided for the Commissioner of Tax to allow the deferment of payment of duties on such conditions as may be determined by him, and for such periods as he may specify. The proposed amendment provided for the Commissioner to prescribe conditions under which deferment of duties would be allowed by rule. The proposed amendment to section 120 sets out the various matters in relation to a deferment that the Commissioner may prescribe by rule.

See attached for full presentation

Discussion

Mr D Ryder (DA, Gauteng) thanked National Treasury for the presentation which made the Bills, which were technical, simpler to understand. He said the deferral of the two-pot system implementation was incredibly disappointing, as the proposal had been made partly in response to the loss of income because of Covid. It was implemented as a way of ensuring that South Africans had a way of putting food on the table when their income stream had been interrupted. He saw no point in a person having a lovely pension scheme, but were starving to death. He was disappointed by the deferral -- it was caving into the big insurance companies. He did not believe implementing it was a massively difficult thing for them. It had a starting date and was not retrospective. Because it had a starting date, implementing the two-pot system should not be such a big mission going forward. He expressed annoyance at the request to defer it, and more annoyed that the request had been acceded to by the executive.

Referring to the royalties on oil and gas profits, he asked whether there was a specific kind of table determining what level of profit was going to be taken into account.

On the Telecom issues involving a VAT concern, he asked if they were placing the burden of VAT on big telecoms providers, rather than the spaza shop owners.

He askedTreasury to unpack Practice Note 31 and some of the rebates they had mentioned. It was unclear whether it related to companies or individuals.

He welcomed the grey-listing changes. The APA pilot was welcomed, but he would like to know the outcome of the pilot. This could be published so that the Committee could see exactly what the outcome was. It was important for any pilot project to have some sort of timeline. It was often the case with pilot projects that they became almost semi-permanent and were never broadened, or they just fizzled out. The definition of work, as well as the conduct of business, were changing in the country, and SARS welcomed that agility, but it was something that they needed to keep an eye on going forward.

 He said that Section 45 of the Taxation Laws Amendment Bill referred to a rebate on fuel and removed a large portion of the Road Accident Fund contribution on fuel. He asked whether that provision was going to benefit farmers. How did they define the manufacturing of foodstuffs? Was this going to benefit farmers not using tractors or combine harvesters on the roads but using them on their farms? He asked why it was being limited to the manufacture of foodstuffs and not looking at the generation of electricity, considering the substantial costs currently being absorbed by large retailers to generate their own electricity and keep servicing South Africa. This had a direct impact on the bottom lines of many food distributors. It was common knowledge that they did not like to absorb increased costs, and passed them on to consumers.

Mr M Moletsane (EFF, Free State) referred to the issue of illicit trade, and asked whether government had made any improvements in its efforts to fight or reduce it. He said that the tobacco industry had once made a plea for relief from excise duty -- was government considering this plea? Is it possible to consider it?

National Treasury's response

Mr Axelson said they recognised that they had to get the two-pot system going as soon as possible, which was why a very ambitious date had been put in the draft legislation. Unfortunately, the changes that were required to put into the system were substantial, and needed a lot of time not only for the industry, but also for SARS to put in place to be able to implement the withdrawals, but also the allocations of the amounts and the components. He explained that they had made many similar changes to the retirement system before and had harmonised some of the tax treatments, and put the legislation through and given the industry a year to make the changes to implement it. Later, they changed provident funds to a system that would require an annuity at the time of retirement. There had been a year's delay and a longer delay before that for the systems to come through.

In all the large personal income tax changes that National Treasury made, they always put it in legislation that allowed a year's delay for systems to get ready for members to actually know what was happening, so that they could be educated about the changes being made, as well as to align themselves with the tax system and the assessments made. This was to ensure that there was only one tax treatment for that tax year, otherwise it could get quite complicated and difficult. There had been just over three months until the implementation date in the previous proposal, which would have been very tight for administrators for them to allow individuals to access a portion of their funds immediately, and to start allocating those funds between the different components.

He did not think that National Treasury was bending the knee to big companies by providing an additional delay. This was a very large reform which would create a better retirement system and hopefully a better retirement outcome for everybody involved.

In terms of the relation to COVID, he said that if one was to lose one's employment, they could access their pension in full, and for individuals who did not, government had introduced new measures. National Treasury had not looked at it purely as a COVID-related amendment -- it was a fundamental retirement system reform. It would be risky to rush it, as it might undermine confidence in the system. That was why they had pushed the date forward to March 2025, which was a date proposed by many administrators and firms, including the Government Employees Pension Fund (GEPF).

On the royalties, he said that they look at the major uses of earnings before interest over sales, so there might be some calculations there, but in their opinion, that was an appropriate measure. They could provide further details.

He said there had been a lot of effort by SARS to deal with illicit trade, which was still ongoing. They had looked at the excise duty proposal but included an inflationary adjustment of increasing it to 4.9% for a few years in a row, so they have not been pushing those duties in the last few years. However, they recognised that illicit trade had become entrenched in the tobacco industry, and they might create some difficulties with excise duty if it were to be increased too dramatically.

In response to the VAT issue, Treasury said that it was one of the universally accepted principles of VAT that must be imposed on the end consumer, and that businesses in between must be left VAT-neutral. Spaza shops had an output tax to declare if they were registered for VAT, but they had a corresponding input tax for the same amount that left them in a VAT-neutral position. On the other hand, the telecoms supplier was left with the position where the supply they had made had fundamentally changed from a supply that was their own supply to that which a third party was making. VAT was due upfront when the supply was made, and not when the consumer redeemed it for anything else. The problem with the big telecoms suppliers, and the benefit of two output taxes was something the fiscus was dealing with at the moment, where there was a gain of one output tax from the telecom supplier and one from the third party. To neutralise that situation for the big telecom supplier, they were proposing that an input tax be claimable by the third party, and this would ensure that the fiscus did not gain twice.

Ms Erasmus said the royalty profits were earnings before interest and tax, and the denominator was sales. The fact that it was before interest was because interest was one of the items that often came up in the transfer pricing space and sales. That was an issue faced throughout the income tax system, and one that SARS was addressing. So while they recognised the Committee's concern, it was also important to balance business with the commercial reality and the cost profiles that such companies would face in deeper waters. Increasing the minimum rate from 0.5 to 2% essentially tried to bring in a low flat rate, but one with still an element of flexibility in the formula.

Ms Marle van Niekerk, Director: Personal Tax, NT, said that the interest rate on money borrowed cut across both companies and individuals. A lot of the comments from the public had pointed out that while the deductibility was fairly clear-cut on the corporate side, there could be various circumstances on the individual side that they might need to consider before withdrawing the practice notes. The proposal was to delay the withdrawal of the practice notes to look at both individuals and corporations, and how they could be impacted.

Ms Mxakaza-Mngxaso responded on the diesel refund system and said that forestry and fishing have already been benefiting since 2002. The agricultural sector received a 40% refund on the general fuel levy and a 100% refund on the RAF. Because the system was originally designed for primary producers in the sectors, manufacturers of foodstuffs were considered as being part of the food sector, and this would have benefit along the value chain of the sector. That was why it had been extended only to manufacturers of foodstuffs. Fiscal considerations and administrative complexities were also aligned or related to implementing the diesel refund system. Because of those issues, they had considered an extension of the diesel refund only to the manufacturers of foodstuffs. It was also important to consider that there had not been an increase in the fuel levy for the past two budgets to take into account the current debt of the economy, and the fuel levy not being increased had had a significant benefit across the economy, and not just to the specific sectors.

Mr Tomasek referred to the APA pilot and assured the Committee that the Commissioner was very keen on APAs, which was now in their annual performance plan (APP) and strategic plan. There was a great deal of commitment to bring APAs in. When one looks at the international experience across a number of countries, the timeframe for finalising an APA was between two and three and a half years. It was such a complex matter - consideration had to be given to the implications of signing up to an APA and the interactions with other tax authorities that needed to be in the picture and agree to what the result was. He would think that the pilot was something that had to run for at least two years before they could get a sense of what the next step was, because, at that point, they would have been in a position to negotiate some APAs and in fact, start concluding some of them, and at that point, there would be lessons learnt. This was all subject to the people who were going to be on the ground. He was looking at the issue from a legislative perspective and experience in other countries.

On fighting illicit trade in the tobacco industry, he said that there had been a number of issues where SARS had taken enforcement action and had received press coverage. There were also a number of legislative interventions they had put in place, like the minimum weight of tobacco products, to ensure what was received was the same as what had left. The loss factors could not be used to manufacture other tobacco products. They also had a move to introduce closed-circuit cameras into the production and warehousing loading space in the industry. This had been met with some resistance and had been challenged on a constitutional basis, which they were defending.

The Chairperson thanked National Treasury for the briefing and responses.

The meeting was adjourned.