TLAB, TALAB and Rates Bill: National Treasury and SARS responses to public submissions

Meeting report

The Chairperson welcomed everyone present and submitted the agenda.

Apologies followed and the Committee commenced with the briefing by National Treasury.

Briefing by National Treasury (NT)

Mr Ismail Momoniat, Deputy DG: Tax and Financial Sector Policy, NT, apologised to Members for the poorly edited report submitted to the Committee. There was limited time for officials to prepare for the responses – officials were only given one week for preparation; thus, all documents and response were still in the draft phase. Treasury looked at all submissions made by the public every year, and once these submissions have been scrutinised and understood; the team prepares responses to each and every point that warrants a response.

All three bills were still in the draft phase as they had not been tested with the DG and the Minister; but the proposed drafts having been submitted to the Committee will allow the Committee to effect any changes that are deemed necessary. Once these processes have been concluded, the Bills will be published as amended. The revised Bills would also be tabled to the State Law Advisors.

In drafting the Bills, Treasury attempted to deal with issues that were raised in the February budget. The process was delayed due to the special Covid-19 Bills. It also had to take into account the possibility of drafting and tabling additional Covid-19 Bills. Treasury had a meeting where it looked at the Section 183 rule to receive a loan from private pension funds. The department has taken a view on this rule.

Treasury was still getting submissions that have been submitted through the Committee on the three Bills. When Treasury tables a Bill, it summarises the draft document and then makes additions to the Bill.

Briefing on 2020 Draft TLAB, TALAB and Rates Bill

Mr Chris Axelson, Chief Director: Economic Tax Analysis, NT, indicated that the three draft bills (Drafts Rates Bill, Draft TALAB and the Draft TLAB) were published for public comment on 31 July 2020.

 

National Treasury and SARS received written comments from 112 contributors on the 2020 Draft Tax Bills by deadline of 31 August 2020. National Treasury and SARS briefed the Committee on the Bills on 19 August 2020.  Oral presentations by taxpayers and tax advisors on the Bills were made at public hearings on 7 October 2020.

Some of the key issues that were raised during the Committee hearings on the draft bills were:

2020 Draft Rates Bill

• Increase on Tobacco excise duty

In the 2020 Draft Rates Bill, a proposal was made to increase the excise duty on tobacco from R16.66/20 cigarettes to R17.40/20 cigarettes, with effect from 26 February 2020. As a result the excise burden for tobacco is slightly above the targeted 40 per cent of the retail selling price of the most popular brand.

Comment: National Treasury has already gone beyond the 40% excise incidence (currently excise incidence sit at 41.4%). Government should not increase excise on cigarettes until the targeted incidence is maintained (or next year and inflation adjusted increases for the 2022/3 and 2023/4 financial years respectively)

Response: Noted. It is correct that the tax incidence is currently above the 40% policy guidelines, however part of the policy is to increase the excise rates by at least inflation or an amount to move towards the targeted incidence, whichever is higher, on an annual basis. Sometimes industry absorbs a portion of the excise increases and therefore the incidence is surpassed. The year-on-year increases on cigarettes prices by manufacturers has been lower than excise rate increases.

Comments: It is recommended that tobacco and tobacco products should be exempted from any tax increase. We believe the freezing of any increase will help the local legal industry to recover from instability and uncertainty that has been caused by the rampant illicit trade and the effects of COVID19 pandemic. Any increases will stimulate illicit trade and lead to a significant decline in state revenue.

Response: Not accepted. The reason there is an excise tax regime for tobacco products is that consumption of these products causes health harm, and the excise must be adjusted on an annual basis by at least inflation. The fear of loss of revenue is not a sufficient motivation for government to abandon its excise policy on tobacco products. The problem of illicit trade must be addressed through law enforcement mechanisms. Addressing the concerns regarding illicit trade in tobacco products should happen concurrently with the implementation of the excise tax policy on tobacco products.

2020 Draft TLAB

• Introduction of export taxes on scrap metals
• Addressing an anomaly in the tax exemption of employer provided bursaries
• Employment, individuals and savings
• Business tax (incentives): Changing the Minister of Finance’s discretion in lifting ring-fencing of capital expenditure per mine
• Business Tax (General): Clarifying the rollover relief for unbundling transactions

On 10 May 2013, the then Minister of Economic Development issued a Trade Policy Directive for the International Trade Administration Commission of South Africa (“ITAC”) to regulate the exportation of scrap metal through the introduction of the Price Preference System (PPS). The objective was to improve the availability of better-quality scrap metal at affordable prices for foundries and mills in the domestic market to assist them in becoming more cost competitive as against imports, enhancing investment, jobs and industrialization.

The PPS seems not to have provided sufficient support such that the sector can flourish in competition with global counterparts, many of which benefit from an export tax on scrap and lower domestic prices for scrap. ITAC conducted its investigation and based on the findings, recommended that the current PPS be replaced with export duties since it has not effectively provided support to the foundries and mills with availability of affordable, quality scrap The DTIC consider an export tax to be superior to the PPS in terms of its easy administration and believe it should be more effective in reducing the domestic price as it will have the effect of reducing the export price achieved by local scrap dealers, unlike the PPS. Based on the above, it is proposed that changes be made in the Customs and Excise Act and schedules to the Customs and Excise Act to insert provisions dealing with the introduction of export duties on scrap metals.

Comment: The Price Preference System (PPS) has so far proved to be ineffective in achieving its objectives. We strongly support this initiative of export tax on scrap metal replacing the PPS, as this will assist local manufacturers in their foundries to supply material locally which will stimulate and grow the economy and will also assist manufacturers to be competitive in the export market.

Response: Accepted. Scrap metal is a key input for downstream manufacturing supporting local beneficiation. The system however, has been circumvented by both illegal means and using loopholes in the PPS, resulting in illegal and excessive exports of scrap with the consequence of a shortage of affordable scrap for local consumers. The export duty was recommended as an alternative for regulating the export of scrap from South Africa. Due to the shortcomings in the PPS, National Treasury, ITAC and the DTIC have been working on replacing the PPS with a proposed export tax. It should be noted that South Africa is a signatory to a number of key trade agreements, which limit the use of export taxes – both in number and timing, but also through the implications of the most favoured nation concept and the web of overlapping trade agreements, and there remains a very real threat of retaliation from those outside of such agreements. For example, the EPA only allows up to 8 export taxes at one time and their use comes with time restrictions. Export taxes are a blunt tool to use to achieve the intended objectives and need to be carefully considered as they directly harm one industry for the direct benefit of another, which hopefully creates wider benefits for the broader economy.

Comment: In light of the shortage and insecurity of supply in our own country, government should ban the exportation of scrap in the interest of championing manufacturing and industrialisation. Otherwise, any avenue left to export ferrous scrap will be used even by false declarations, since inspecting every container by authorities seems impossible.

 

Response: Not accepted. The application of a ban on export of scrap metals on a permanent basis is not currently considered prudent. Theoretically, a ban, a quota and an export tax all have similar effects on the domestic price – they increase the domestic supply and thus lower the domestic price. These three only differ in the severity of their impacts. An export ban and a quota sever the price link between the domestic and the international markets. For this reason, a quota and/or a ban can provide poor incentives to consumers and may encourage inefficient consumption of the commodities. In contrast, an export tax does not sever the link between the domestic and the global markets for commodities but creates a wedge between the domestic and “world” prices. This accords the domestic consumers of commodities some cost advantage, but the two prices will continue to move in tandem. This provides better efficiency incentives to the domestic consumers. Consequently, an export tax is generally preferable to either a quota or a ban.

The Act contains provisions that provide exemption in respect of bona fide scholarship or bursary granted by an employer to an employee or relative of qualifying employees, subject to certain monetary limits and requirements.  When this exemption was initially introduced in 1992, the applicability for tax exemption was dependent on the fact that the employee’s remuneration was not subject to an element of salary sacrifice.  In 2006, changes were made in the Act to remove the requirement that the employees remuneration should not be subject to an element of salary sacrifice.  Government has noticed that a number of tax schemes have emerged in respect of employer bursaries granted to the relatives of employees, for example: – These schemes are developed by an institution other than the employer and marketed to the employer and seek to reclassify ordinary taxable remuneration received by the employee as a tax exempt bursary granted to the relatives of employees. The portion of the salary sacrificed by the employee is paid directly by the employer to the respective school and is treated as a tax-exempt bursary granted to the relatives of the employees.

Comment: The requirement that bursaries to relatives of employees also be bursaries available to the general public is restrictive. It would also be extremely costly for employers (especially considering the impacts of the current COVID pandemic). The loss to the fiscus is minimal considering the benefit arising from the current legislation.

Response: Accepted. Changes will be made in the 2020 draft TLAB to remove the requirement that bursaries to relatives of employees shall only be exempt if said bursary is an open bursary available to members of the general public. As a result, the tax exempt status will not be dependent on whether or not the bursary is open to members of the general public.

Comment: The 2020 Budget announcement only catered for an amendment as relates to bursaries granted to relatives of an employee. The proposed legislative amendment, as relates to salary sacrifice, however caters for both bursaries to employees and relatives of employees.

Response: Accepted. Changes will be made in the 2020 Draft TLAB to limit the proposal to bursaries granted to relatives of employees. As such, subject to meeting the monetary thresholds, a bursary granted to a relative of an employee shall be tax exempt if the provision of such bursary is not subject to an element of salary sacrifice.

 

Comment: Reinstating the salary sacrifice requirement undermines Government’s objective for skills development.

 

Response: Not accepted. While Government remains committed to the skills development objectives, Government also needs to acknowledge when policy decisions previously taken are making tax abuse easier for taxpayers. Further to the above, and in the strictest interpretation of the law, a bursary that is subject to an element of salary sacrifice is not a bona fide bursary as defined. In fact, a bursary that is subject to an element of salary sacrifice enables employees to pay for their children or relative’s school fees with “pre-tax income”, whereas employees who do not receive the benefit of an employer provided bursary pay for their children or relative’s school fees with “after tax income”. Allowing a tax exemption in cases where a bursary is subject to an element of salary sacrifice results in the employee effectively paying for educational costs and receiving a tax deduction for those educational costs.

 

The definitions of “pension preservation fund”, “provident preservation fund” and “retirement annuity fund” in section 1 of the Act currently make provision for a payment of lump sum benefits when a member of a pension preservation, provident preservation or retirement annuity fund withdraws from the retirement fund due to that member emigrating from South Africa, and such emigration is recognised by the South African Reserve Bank (SARB) for exchange control purposes. As outlined in Annexure E of the 2020 Budget Review, Government will be modernising the foreign exchange system. As a result, a new capital flow management system will be put in place. In relation to individuals, one of the changes to be implemented during modernisation of the foreign exchange system is the phasing out of the concept of “emigration” for exchange control purposes. The phasing out of this concept will have a direct impact on the application of the tax rules as the tax legislation makes provision for a payment of lump sum benefits when a member emigrates from South Africa and such emigration is recognised by the SARB for exchange control purposes. In order to ensure efficient application of the tax legislation, it is proposed that the definitions of “pension preservation fund”, “provident preservation fund” and “retirement annuity fund” in section 1 of the Act be amended to include a new which will make provision for the payment of lump sum benefits when a member ceases to be a South African tax resident (as defined in the Act), and such member has remained non-tax resident for three consecutive years or longer.

Comment: There is uncertainty as to whether the requirement to be a non-resident for 3 years refers to the physical presence test or ordinarily resident test. The 3-year test conflicts with other existing residency tests (e.g. section 9H). There is also uncertainty whether the 3 years refers to tax or calendar years. Clarity is also sought with regard to the interaction between Double Tax Agreements (DTA) and the new proposal. Many commentators recommended ceasing residence in terms of the ordinary residence test as a more appropriate measure.

Response: Not accepted. The 3-year rule applies if an individual has ceased to be tax resident in South Africa, irrespective of the particular test under which that tax residency is determined. Therefore, the 3-year rule does not focus on the ordinarily resident test alone.

Comment: Clarity is required with regards to how cases where the emigration process commenced before 1 March 2021, but have not yet been finalised when the effective date kicks in, will be dealt with.

Response: Accepted. All complete applications received by the SARB before 1 March 2021 will be finalised through the existing process, provided that they are approved by the SARB (even if the approval should occur after 1 March 2021). The amended provision will apply to all cases that meet the requirements on or after 1 March 2021 including individuals that did not receive formal approval to emigrate from SARB. In most cases, a change in tax residence, triggers capital gains tax on the deemed disposal of assets. National Treasury and SARS encourage taxpayers to weigh their options carefully and not be swayed by superficial advice, often at exorbitant fees.

Ms Yanga Mputa, Chief Director: Legal Tax Design Tax Policy Unit, NT, stated that the Act contains rules in sections 15 and 36 that entitle taxpayers that are engaged in mining operations to a full upfront deduction of any capital expenditure in respect of mining operations. The change in mining business models has led to the increase of “contract mining”. The current provisions of the tax legislation do not adequately address the tax treatment of capital expenditure incurred by taxpayers carrying on activities of “contract mining”. Treasury has proposed that clarification be made in the tax legislation that only the taxpayer that holds a mineral right as defined in section 1 of the MPRDA can claim for a full upfront deduction of any capital expenditure in respect of mining operations.

Comments made on changing the Minister of Finance’s discretion in lifting ring-fencing of capital expenditure per mine and the Carbon Tax Cost Pass through was partially accepted by Treasury.

2020 Draft TALAB

 

• Tax Administration Act, 2011
  • Raising of assessments based on an estimate
  • Grace period to determine if a payment in excess of an assessment was erroneous
• Income Tax Act, 1962; Value-Added Tax Act, 1991 & Tax Administration Act, 2011
  • Removal of requirement to prove intent from certain statutory tax offences

 

 

Comment: The proposed amendment denying the taxpayer the right to object to an estimated assessment, particularly where the taxpayer may be pursuing a dispute with SARS as to the legitimacy of the underlying issue (extent of request for relevant material) denies the taxpayer both critical constitutional rights and the right to administrative justice.

 

Response: Partially accepted. Section 95(1) read with section 95(4) will be redrafted to provide that a taxpayer will only be barred from lodging an objection against the assessment based on an estimate if the taxpayer does not submit a return or does not submit a response to a request for relevant material in respect of the taxpayer under section 46, after delivery of more than one request for such material. The response may thus set out valid grounds as to why the relevant material is not available or need not be supplied to SARS. It is implicit that the response must be something more than a frivolous response.

 

Mr Franz Tomasek, Group Executive: Legislative R&D, SARS, briefed the Committee on the raising of assessments based on an estimate. SARS may currently issue an estimated assessment if:

• A taxpayer does not file a return
• No return is required but a taxpayer fails to pay the tax required
• A return or information supplied is inadequate

This approach ensures that all the facts are available when the assessment is revisited and that the dispute resolution timelines that would otherwise apply may be relaxed.

Some of the proposed changes were:

• Estimated assessments also be permitted where no tax is due or a refund is due, to assist taxpayers and personal income tax administration reform.
• Cases where specific relevant material was requested from a taxpayer on more than one occasion, without an adequate response also be subject to the limitation on disputes for the reasons set out above.

 

Discussion

Mr G Hill-Lewis (DA) appreciated the comprehensive nature of the replies received from Treasury. He was pleased that the department had attended to the concern of expat workers. It was gratifying to see that Treasury officials considered the concerns of Members and was able to respond appropriately. He indicated that he had three questions.

 

He was pleased that the department decided to move from the metal exports tax, to an ad valorem tax. He indicated that he was not in agreement with the metal exports tax. He asked what the ad valorem rate would be as it was not contained in the slides.

When the Committee first discussed the Bills in August, the Chairperson had asked Treasury to determine who the most beneficiaries of the bursary scheme were: was it the working class or the emerging black middle class? He asked for an update on this.

The Chairperson wanted to know how much the bursary scheme had cost the fiscus. With the proposals provided in the meeting, the Department had met the Committee halfway; however, it had not received a response on either request.

Mr G Skosana (ANC) mentioned that the department was acceding to requests from companies that it should keep the bursaries in place. He asked to what extent were the institutions that administer the bursaries regulated and monitored to ensure that employees received value for money.

Mr Axelson, referring to the ad valorem tax, mentioned that Treasury did not include the table in the presentation but if the Members received the response document, it should be found on page 17. Treasury created a new category for stainless steel which stood at 15%. Ferrous metals stood at 20%; aluminium at 15%, rate metals at 10% and others at 20%. These were in line with percentages that were provided in the initial consultation on the export duty on scrap metal that was put forward by ITAC. All correlate the same fixed rate amounts, an equivalent duty in the initial consultation.

 

Ms Mputa said that Treasury is not reinstating the element of salary sacrifice. What it meant was that if an employer is providing bursaries and there is an element of salary sacrifice, the bursary would not qualify for exemption (as it is not a bona fide bursary). Bursaries can be provided to members of the public and relatives of employees qualify, but the employees cannot be included, which is in line with the amendments. According to the income thresholds, this provision applies to employees are earning R600 000 (the threshold was increased in 2016). It cannot be viewed as a bursary if there is an element of salary sacrifice. Money used to pay school fees are taken pre-tax.

 

Referring to the actual cost to the fiscus, she said that the department can provide the Committee with a document that included all of the information.

Mr Tomasek indicated that neither SARS nor Treasury have the statistics on who benefits from the bursary scheme. This information would reside with the employers and they had not provided it to either SARS or the department.

Mr Axelson said that regulation was in relation to training and education offered by National Qualifications Framework (NQF) qualified institutions. There are strict restrictions present and these can be correlated. 

Mr Skosana said he misunderstood the matter on salary sacrifice and sought clarity based on the response whether employers were then allowed to continue with the bursary schemes.

Ms Mputa explained that employers are permitted to have the bursary schemes, but their employees will be subject to tax. Any individual is allowed to restructure their salary, but once that is done, there would be a fringe benefit tax and other tax consequences. There are no exemptions and taxes that apply as contemplated in the Income Tax Act.

The Committee Secretary indicated that a member of the public wanted to make a contribution to the discussion.

The Chairperson mentioned that the member of public would not be permitted to do so, as the agenda of the meeting dictated that only SARS and Treasury would provide their responses and the Committee would make additions. In the next process, each of the Bills will be tabled alongside the MTBS and would include any amendments. Then the Committee would deliberate on the 4th of November and vote on the adoption of each Bill. Once that occurred, the Bills would be considered by the NA House and then taken to the National Council of Provinces.  

He asked for clarification on when the MTBS would be tabled.

The Committee Secretary indicated that it would be tabled next week Wednesday.

The Chairperson thanked officials from SARS and Treasury for their input. He indicated that members of the public should feel open to engage with government departments and entities, including Parliament.

The meeting was adjourned.