Rates and Monetary Amounts and Amendment of Revenue Laws Bill: public hearings

Meeting report

South African Institute of Tax Professional (SAIT) presentation

Ms Erika de Villiers, Head of Tax Policy: South African Institute of Tax Professional (SAIT) said the proposed amendments to section 107(1)(g) of the Income Tax Act and section 74(1A) to the Value-Added Tax Act were a welcome development as provisions could be used to harness greater transparency and accountability (in line with administrative justice principles). Proposed amendments were supported because Treasury cannot make policy unless they have the full facts. South African Revenue Service (SARS) administration can influence policy so Treasury needs to see how the laws are applied in practice. SARS used to be part of Treasury so information used to be fully shared on a voluntary basis. This facilitated the proper functioning of the relevant departments. Other agencies such as the Reserve Bank must fully share information. The FIC and Reserve Bank also should be allowed a much freer flow of information between each other as enforcement agencies, especially in terms of offshore transactions (e.g. Panama papers). However, the real problem was that section 70(1) of the Tax Administration Act, which allows SARS to reveal certain information to National Treasury, is too narrow. Firstly, the term “may provide” gives SARS a discretion whether or not to provide the information. Secondly, the extent of the information that SARS may provide is limited to taxpayer or SARS information in respect of: a taxpayer which is an institution referred to in section 3(1) of the Public Finance Management Act; an entity referred to in section 3 of the Local Government: Municipal Finance Management Act; and a class of taxpayers to the extent necessary for the purposes of tax policy design or revenue estimation.

On the dividends tax increase, there were two issues. These being; the rate increase from 15% to 20%, and the coming into effect of increase in rate. The rate increased in line with increase of marginal individual tax rate from 41% to 45%- with the reason given being the prevention of tax arbitrage. Therefore, effective combined company tax and dividends tax rate increased from 38.8% to 42.4%. SAIT believed small and medium business owners would be affected by the change. Not only high income earners but all resident individuals who receive dividends, including pensioners and B-BBEE shareholders will also be affected. By contrast, many non-resident shareholders will benefit from a reduced dividends tax rate of 5% under a double tax agreement and will not be affected by the increase. On timing, increased rate of 20% applied to all dividends paid from 22 February (Budget Day) onwards. Dividends declared before the Budget but paid after the Budget were also caught. SAIT felt dividends declared before the Budget should not be caught as this undermines tax certainty. Deemed dividends such as interest forgone on loans will also be caught for the whole year unless pro-rata relief is given - this could not have been intended.

Ms de Villiers outlined the process of declaring company dividends. Companies have to meet corporate governance requirements, including those set out in the Companies Act, before declaring a dividend. At that stage, the amounts required for a dividend, including tax set-asides are determined. Any excess tax distorts the outcome either for the shareholders (who will receive unexpectedly less) or for the company (if forced to pay an extra unintended amount). SAIT felt the amendment has an unfair element of retrospectivity as a declaration triggers a commitment to pay the dividend. When the dividends tax was introduced, it applied in respect of any dividend declared and paid on or after 1 April 2012. Similarly, all Secondary Tax on companies’ rate changes applied to dividends declared on or after the date of the announcement. In all these instances, any dividends declared prior to the date that the amendment of the rate was announced, remained subject to the old rate.

SAIT was aware that government has tax avoidance concerns about terms of payment; however, an unlisted company could still back-date a dividend resolution. Tax avoidance concerns arising from illegal backdating of dividends is an enforcement issue. SAIT’s concern was that the impact of the proposed amendment goes against the principle of tax certainty. SAIT cautioned that fundamental principles should not be undermined in an attempt to mitigate the risk of avoidance. One reason given for the increase was to address arbitrage opportunities for individuals who could pay themselves with dividends rather than salaries (e.g. small businesses). The individual tax rates were only increased with effect from 1 March 2017. Therefore, increasing the dividend tax rate from 1 March 2017 would largely have addressed this risk. There was no need to impose the dividends tax rate change before the 1 March individual year of assessment (YOA) change.

South African Institute of Chartered Accountants (SAICA) submission

Mr Pieter Faber, Senior Executive: Tax, South African Institute of Chartered Accountants (SAICA) said SAICA believed the current public consultation process was not effective in implementing policy changes. Effective public participation challenges identified were a lack of a structured policy position or discussion preceding draft proposals and no timely feedback (before the Committee) on why stakeholder submissions were accepted or rejected by National Treasury. Also, SAICA felt the Committee gave stakeholders inadequate time to engage, and expressed concern on the lack of feedback on why submissions were accepted or rejected. This diminished the ability to properly consult and inform position on changes and created negative public perception on Parliament’s commitment to public participation. SAICA recommended that Treasury should provide a response to submissions or hold consultations prior to Committee seeking public comments. Also, the Committee ought to better manage Treasury/SARS consultation/feedback, give longer notice, explain process going forward and provide feedback on final position and why specific submissions are not accepted. The Committee should collaborate with current participants to assist to enable broader participation.

Ms Tracy Brophy, Chairperson: National Tax Committee, SAICA asked about the policy intent of a dividends withholding tax rate change. Treasury’s stated policy intent was to match employment income to business profit extraction. However, SAICA felt the intent did not align to the National Development Plan (NDP) policy on small businesses. The fact was that creating a small business involves higher risk and more effort than employment. If both employment and small business income earnings were equally promoted, there would be little incentive for someone to start a small business. It recommended that small business creation should be promoted above employment uptake in all aspects of fiscal policy to align to the NDP, as creating employment is more important than just being in employment. Treasury should be offering a favourable dividends tax rate regime for small businesses to ensure that it becomes more favourable to start a small business rather than simply taking up employment. Applying a policy of equalised tax rates does not support such distinction.

SAICA’s third concern related to the legality of the dividend withholding tax (DWT) rate change. Despite the fact that corporate SA embraced the DWT rate change announced in the Budget, SAICA expressed concern in respect of the policy and practice, that tax rate increases were imposed without the existence of an apparent legal mandate by the legislature to do so. If the amendment of tax rates other than those applying to “taxable income” was a policy requirement of Treasury going forward, then the law should be amended to accommodate such policy (and extend the Minister’s powers in this regard). SAICA did not support such extension and harboured concerns in respect of the legality of the executive having de facto legislative powers. Furthermore, Treasury needed to acknowledge the difficulties faced by industry in applying this policy by requiring industry to implement immediate rate changes. This creates fiscal uncertainty (and the resultant negative sentiment towards South Africa for foreign investors) if such power was arbitrarily invoked on an annual basis.

SAICA expressed concern about the apparent lack of legal mandate under which the DWT rate increase had been achieved and the need for resolution in this regard. There existed no reason to implement a retrospective rate change and even less so, a retroactive rate increase as any avoidance concerns are speculative at best. It should be Treasury’s policy to adhere to the principle of prospective legislative amendments at all times, including instances relating to such a rate change, except in exceptional circumstances such as material tax evasion practices, which was not applicable in the current instance. Treasury needed to be cognisant of the manner in which both industry and SARS are required to respond to an immediate tax rate change, with the attendant risk of errors for industry due to the lack of adequate testing systems. Consequently, Treasury should not resort to such immediate tax rate changes as a matter of policy and should rather entertain such a practise on an exceptional basis. Furthermore, where such rate changes are necessitated due to exceptional circumstances, it would be assumed that SARS would be consulted with sufficient lead time to ensure that they can practically consider and resolve implementation challenges.

South African Constitutional Property Rights Foundation (SACPRIF) submission

Mr Peter Meakin, Valuer, South African Constitutional Property Rights Foundation (SACPRIF) proposed a new section in the budget for land-use charges, the nation’s land rents. These are to gradually replace income taxes and VAT. Most taxes and other sources of public revenue undermine the economic productivity of an economy. Three types of public revenue do not: prices for public services that are no more than the marginal costs of those services, charges for harms such as pollution and congestion, and public collection of land use-charges, the land rents. Public collection of the rental value of land does not undermine economic efficiency because when properly administered, the amount of tax that is collected is independent of any action that might be taken by the owner of the land. This means that the owner has no tax incentive for reduced productivity, like leaving idle.

Mr Meakin proposed an additional line in the budget for land-use charges, with other taxes reduced by the amount of rent that is collected. He suggested that rents be phased in over four years, replacing first 25%, then 50%, then 75%, then 100% of income taxes and VAT. Government revenues would therefore remain stable. The government should be considered to have an obligation to reduce the income tax and other harmful taxes whenever it can, since the Constitution requires that the taxing power not be used in economically destructive ways. Also, replacing other forms of taxes with land rent would lower the curtain and make land affordable to everyone.

Discussion

Mr B Topham (DA) asked if SAICA implied that there was no legality in the DWT rate change or felt it was not the best way to effect the change. Was there a legal argument to the effect that the rate change cannot be backdated?

Mr A Lees (DA) asked about the consequences of Mr Meakin’s radical tax reform proposals. What would be the implications on land zoning and subdivision, and productivity? Commenting on SAICA presentation, he pointed out that the presentation mentioned the sharing of information between SARS and Treasury. Was SAICA suggesting that there should be no sharing of information between the two? What would be the implications on Treasury’s oversight role?

Ms T Tobias (ANC) said people should understand that legislation applies incrementally. A framework needs to be put in place. She suggested a relook on the retrospectivity of a DWT rate change, to encourage productivity and revenue generation. A balancing act was needed.

The Chairperson said Mr Meakin had been replied to before, concerning SACPRIF tax reform proposals. Mr Meakin did not accept the responses and would further develop his arguments- that was part of parliamentary dialogue. He suggested that Treasury meet with Mr Meakin for discussions on the latter’s proposals. He asked if the system proposed by Mr Meakin existed anywhere in the world, and how it was performing. On SAICA’s concerns around public participation, the Chairperson indicated that there were some restrictions beyond the control of Parliament. The Committee believed Treasury team was very competent, and had extensive consultations before coming up with said proposals. SAICA was not being fair to Treasury as the latter seemed to consults more than any other revenue entity does. SAICA and SAIT proposals seemed reasonable, although it was unclear if they were practicable.

Ms de Villiers, SAIT, replied that they believed information sharing should not go beyond the purpose shared information sought to serve. Information should be kept confidential and exceptions should be made to the extent that they are necessary. Informal sharing of information could lead to the infringement of people’s rights.

Mr Faber noted the Chairperson’s comments on the workings of parliamentary consultative processes. The challenges were valid and acknowledged. He explained that SAICA felt the SARS should have waited for the passing of the Rates Bill before collecting DWT tax.

Mr Meakin said land rent would be expected to fetch the very same revenue being collected through other forms of taxes currently being used. On land zoning, he said municipal records would be used. Places best known for the proposed tax model were Hong Kong and Singapore.

Ms Yanga Mputa, Chief Director: Legal Tax Design, National Treasury, said the Tax Administration Act prohibits SARS from sharing taxpayer information. However, SARS shares information enough for revenue policy formulation with Treasury. Sharing of information between SARS and Treasury was determined by regulations. Also, legislation recently strengthened the tax ombudsman’s powers. The DWT rate changes announcements were in line with global best practises and Treasury believed in the legality of the pronouncement. She added that Treasury communicates with SARS before any tax proposals to enable a smooth transition.

Mr Chris Axelson, Director: Personal Tax Income, National Treasury, said Treasury always invited comments through long policy position papers as part of the consultation process. Treasury will improve in giving feedback. However, Treasury cannot consult about some tax rate changes as they could be market sensitive, among other attendant considerations. On the land tax, Mr Meakin had strong supporters in some OECD countries. It was an interesting avenue. However, the challenge was that it would not flow to national coffers, it was best for local government levies. 

Mr D Hanekom (ANC) pointed out that Hong Kong and Singapore did have interesting property tax regimes but they do have income taxes as well. There was no other country that uses Mr Meakin’s tax regime. 

Mr Topham added that it was not a practical solution on its own but could work hand in hand with other taxes. The world has become more complicated since the tax regime was first proposed, in the 1940s.

The Chairperson suggested the issue around the legality of the DWT rate change be put on hold until the Committee gets an opinion from the parliamentary legal advisor, SARS and Treasury’s legal teams. Input from stakeholders was valued and welcome.

The meeting was adjourned