BRICS New Development Bank & Contingent Reserve Arrangement agreements; FFC 4th quarter performance; Transfer pricing: EFF submission; Tax treaties: Cyprus, Lesotho, Hong Kong, Qatar, Cameroon, Granada, Zimbabwe, Singapore

Meeting report

Parliamentary Budget Office (PBO) briefing on the BRICS New Development Bank
The Centre for Applied Legal Studies had called on the National Treasury and Parliamentary Committees to insist on a participatory mechanism to allow civil society organisations the opportunity to express their views on the development projects of the BRICS New Development Bank (NDB); that human rights standards be adopted by the NDB as well as a complaints mechanism and remedies for victims of human rights violations committed in the development of NDB projects.

In response, Mr Neil Muller, PBO Economic Analyst, stated with regard to international treaties, that there were various legitimate practices that nevertheless could compromise or limit oversight of public finances. Likewise, there was scope for parliamentary committees to say that they lacked the time or expertise to exercise proper oversight. That meant that executive competence had to be relied upon. The alternative was to rework the process to allow for oversight. The Standing Committee could request information from Treasury on these matters.

Mr Rashaad Amra, PBO Economic Analyst, noted that National Treasury had identified risks and benefits related to the NDB. Only 50% of the committed US$ 100 billion was prescribed, with each country required to pay US$ 10 billion. The burden relative to each country’s national budget varied. South Africa’s contribution was equal to 13.5% of its national budget for 2013/14, compared to Brazil (2%), Russia (2.4%), India (4.7%), and China (0.8%). The initial capital contribution would be paid over seven installments. However only US$ 2 billion out of US$ 10 billion was covered in the installment schedule.

Mr Amra turned to the Contingent Reserve Arrangement (CRA). The purpose was to provide emergency funds should a member experience a shortfall in their own foreign exchange reserves. Each member country was to ring-fence a portion of its foreign exchange reserves in US$. The CRA contributions totaled US$ 100 billion. China contributed 41% (US$ 41 billion). Brazil, India and Russia each contributed US$ 18 billion and South Africa US$ 5 billion. Despite China contributing 41%, its contribution was only 1.08% of its foreign reserves, whereas South Africa stood at 11.52%. The CRA enabled member countries to apply for funds when there was a shortfall in foreign currency reserves, through swap contracts.

South Africa had signed the agreement and the treaty, but it still had to be ratified. Once ratified, South Africa would be bound to honour its commitments – particularly the capital contribution and the ring-fenced CRA component. Payments from government would be drawn from the National Reserve Fund (NRF). The Constitution stated that money could only be withdrawn from the fund through an Act of Parliament. Parliament could potentially amend or block the transfer of reserves. Ring-fencing of 11.52% of own reserves for the CRA could be a risk as it shrunk the pool of available reserves. South Africa had limited influence over BRICS decisions, with only 6% of the votes. No provision had been made for the BRICS capital contribution in the 2014 Medium Term Expenditure Framework (MTEF). That could pose a risk to the fiscus.

Mr Muller said that the PBO would provide advice on oversight. The proportion granted to the CRA could reduce South African reserves, but also protect it. There would be returns on money through the NDB. No money would be given away. A challenge was that the first installment would perhaps be required before the next budget.

Discussion
The Chairperson said that the oversight role of parliamentary committees was work in progress. There was little scope for change towards active oversight. Parliament could develop a new oversight model, but time was lacking.

Dr B Khoza (ANC) noted that there were challenges of significant risk to South Africa. Some treaties had clauses that compromised South Africa. Treaties had to be engaged with by Parliament and it had to have a say. Significant risk had an impact on the fiscus. Treaties had to be scrutinised by Parliament.

The Chairperson said that the Committee could not look at what it could not change. The NDB was different, with more political implications. Agreements had to be prioritised, and the Committee had to have an opportunity to look at them three weeks before the discussion.

Mr D Ross (DA) agreed with Dr Khoza about the impact on the fiscus. Important decisions had to be taken about guarantees to Eskom. The Committee oversight role with regard to contingent liabilities had to be determined. Currently the Standing Committee relied completely on Treasury for that. There had to be more information on the role of the Standing Committee.

The Committee Secretary remarked that the NDB was an internal process. The National Assembly had referred the treaty to the National Council of Provinces (NCOP), hence it could not be adopted today.

The Chairperson remarked that there had already been a briefing on the NDB, which was accepted by the Committee. He hoped that it would become clear over time how the NDB differed from the IMF and the World Bank. European countries were moving closer to the Asian Infrastructure Development Bank. As to extensions of BRICS to other countries, the Committee felt that it had to be different from the IMF and the World Bank. It was a politically loaded matter and the Committee had to report on it.

The Chairperson said that there had to be a vote before the Moscow meeting in July. The role of the NDB had to be defined. Treasury could appear on the matter in the following week. There had to be mechanisms to allow civil society to make inputs. There had to be consultation. The World Bank could not decide of its own accord to build a dam in South Africa. The Committee could not vote on the treaty if it was allocated to the NCOP, but could deal with it informally. Treasury and the PBO could appear the following week, and the Centre for Applied Legal Studies  (CALS) open letter could also be discussed then. There had to be a response from Treasury and the PBO to the CALS open letter.

Ms T Tobias (ANC) referred to the example of her experience in the Standing Committee on Public Accounts (SCOPA). Cabinet had decided that the Department of Public Works (DPW) had to take responsibility for the Expanded Public Works Programme (EPWP). Yet , the DPW at the time had unauthorised expenditure, and lacked capacity to carry the EPWP. There were installments to be paid for the NDB. Ten billion had to be paid. Treasury would have to get the money from somewhere. She was not worried about the capital component, but the CRA would imply risk. There were implications related to returns on South African investment. The PBO did not elaborate on that. Clarity had to be given in the following week. The question was whether the country was ready for the CRA. The FFC also had to state an opinion.

Mr Ross commended the presentation. There was a need for intervention mechanisms to address infrastructure challenges in Africa. Frustrations linked to the IMF and the World Bank had to be studied. The FFC had made reference to frustrations. He found it strange that the treaty was referred to the NCOP first. Fiscal implications had to be discussed before ratification. There should be interrogation before Moscow. The PBO and the FFC had to be involved.

The Chairperson asked if the CALS letter could be discussed in the meeting, or whether there had to be engagement with the PBO. The matter could be finalised in the following week, but there could be tentative agreement in the meeting.

Dr Khoza noted that the NDB and the CRA were two separate processes. The CRA was related to liquidity shortfalls. She would like more clarity about benefits to South Africa, in terms of rands and cents. She asked if South Africa would get preferential interest rates. Treasury had said that the NDB was not a normal bank, as there was no dividend policy. She asked if member countries were to be shareholders. It would be difficult for South Africa to have a say and influence policy issues with a 6% vote influence. Policy issues could be decided according to the amount a country contributed. The question was whether South African participation was an act of goodwill, or if the country could expect something. She asked if tangible benefits had been interrogated. The NDB was different in the sense that it did not impose a fiscal policy or interfere with a country’s sovereignty. But money invested had to be looked at. The question was if South Africa would get its money back. Africa had to start from a low base to participate. There were more borrowers than shareholders. The question was whether there would be good value.

Mr Muller replied that Treasury had to provide information. In an ideal world it could be possible to state the probability of risks associated with the CRA. The PBO could not make estimates, but Treasury could. An initial two billion had to be paid, with the balance towards the ten billion as subscribed capital required in seven installments. South Africa could be asked to pay the balance later. The country had only 6% voting rights in the CRA, but for the NDB there were equal voting rights.

Mr M Ndlozi (EFF) remarked that an alternative financial institution had always been needed. It had to be possible to borrow money whilst avoiding entrapment. CALS had raised problems. Conditions for borrowing were not favourable. The question was how to avoid what happened with borrowing from the IMF and the World Bank. Countries with leadership problems were vulnerable to entrapment. Cost benefits for South Africa over 10 years had to be established. R120 billion was equal to the country’s entire education budget. The two billion of ten billion was a semantic maneuvere. The African continent had to be taken out of the dark ages into industrialisation. South Africa had a limited vote capacity of 6%. The question was how Africa could be represented properly. The IMF and the World Bank had to be compared in terms of African conditions.

The Chairperson asked if the FFC had played a role.

Mr Bongani Khumalo, FFC Chairperson, replied that it had.

The Chairperson referred to the request by Mr Ross that the PBO submit on frustrations with the IMF and World Bank. He would be pleased if Mr Ross would withdraw the request as what could those entities say that was not already known. There were implications for the fiscus. That ought to have been asked when Treasury's Director General was here. South Africa was advanced compared to other countries in Africa. Benefits could be talked to as part of the Committee's developmental role. There was limited capacity for intervention in treaties by Parliament.

Financial and Fiscal Commission (FFC) Quarterly report
Prof Ramos Mabugu, Director of Research, FFC, noted that the FFC made submissions to Parliament on the 2015 Division of Revenue Bill; the 2015 fiscal framework and revenue proposals, and the 2015 Appropriations Bill. The FFC responded to Parliamentary requests about the Strategic Plans, Annual performance Plans, and budget and audit outcomes of the DHET, DAFF and EDD. There were submissions on municipal viability and demarcation; the review of local government conditional grants, and demarcation and financial sustainability issues in KZN. An annual enterprise risk assessment and fraud prevention framework was finalised during the quarter. The FFC did work with the Forum for Institutions Supporting Democracy, and the Presidential Remuneration Review Commission.

Mr Mavuso Vokwana, CFO, FFC, briefed on fourth quarter financial performance. Additional funding of R800 000 was received to aid with replacing obsolete assets. Temporary staff costs were incurred for an employee on extended sick leave, and recruitment costs for a vacant position during the financial year. Cost containment measures were implemented in cleaning and repairs; maintenance costs; printing and stationery and travel expenses.

Discussion
Mr Ndlozi remarked that the FFC was renting at prime lending interest. The rent was R95 000 per month. He asked why the FFC could not go somewhere downtown. The high rent in Midrand was flamboyant.

Mr Bongani Khumalo, Chairperson, replied that accommodation was not chosen by the FFC, but by the DPW. The DPW owned the lease. A cheaper alternative could be obtained through the Public Investment Corporation. The FFC had submitted about that to the Finance Minister, but it was not accepted. The FFC had no say in the matter. The DPW had not signed a lease.

The Chairperson said that the FFC could therefore leave at any time.

Mr Khumalo replied that he would raise the matter with the Minister.

The Chairperson said that it had to be conveyed that the Committee felt that office accommodation had to be more modest.

Dr Khoza asked if the FFC followed the same process as Treasury with regard to service providers. Treasury entered into negotiations with bidders to bring prices down, or would shop around for lower prices. The FFC performance report was  at times vague about dates. Performance dates were sometimes withheld, so that it was not known the activity/target was already finalised or not.

Mr Ross referred to the withholding of funding from 59 municipalities due to their non-compliance. Treasury had intervened in dysfunctional municipalities by withholding funds until payment was made to Eskom. The FFC had to decide if that was unconstitutional.

Mr Khumalo replied that the FFC had prepared a report on the local government equitable share formula, which was presented to the Appropriations Select Committee the previous week. The FFC could not pronounce on the constitutionality. It insisted on following the process. Parliament had consulted with individual municipalities. There was legislation for the resolution of such issues.

The Chairperson said that the matter would be followed up with the Department of Cooperative Government and Traditional Affairs (CoGTA).

Mr Ross remarked that the CoGTA Portfolio Committee Chairperson did not support interventions related to agreements with Eskom.

The Chairperson said that he would consult with the CoGTA Committee Chairperson. A report had to be processed in cooperation with that Committee.

Dr Khoza said that the prime interest of the Committee was whatever affected the fiscus. Withholding of grants could have a negative knock-on effect.
 
Mr D Van Rooyen (ANC) remarked that he missed detail in the FFC financial performance report. It had to be reported how much had been spent on Annual Performance Plan (APP) items. He said that the FFC did not do enough to report to Parliament on the performance of institutions. The question was if the FFC was really providing help. It had to be known if FFC submissions had any impact, and if FFC recommendations were being considered.

Mr Khumalo replied that the quarterly report only referred to the budget process of the current quarter. It was too early to comment on impact. The FFC recommended to Parliament. It was not in a position to ask if its recommendations were accepted. Conversations with entities did not complete the circle. It was completed in Parliament. The last time an independent assessment of value was done was during the 20th anniversary conference. A report was tabled on 5 February 2015. There had been an objective conversation about the FFC. Various forums could ask questions and pass judgement. The quarterly report could assist the FFC. The FFC had to decide on its own research agenda, but Parliament could say what it wanted the FFC to look at. The FFC was willing to submit to an interrogation of value. Stakeholders commissioned an independent service provider report in 2009. A questionnaire was administered to Parliament only. Some of the findings were that FFC was not visible enough, and too technical in its approach. There could be a conversation in Parliament about FFC responsibilities.

The Chairperson remarked that what was tabled on 5 February could be looked at in the next quarterly report. Members had questioned added value. The question was what stakeholders did with FFC recommendations. The FFC had to say what its goals were when it submitted to an entity. There had to be more work with provincial legislatures. FFC stated that it submitted the same submission to Treasury, but Treasury was not looking at it.

Prof Daniel Plaatjies, FFC Commissioner, replied that the quarterly report only covered the period from January to March 2015. The Committee was asking about the whole year.

The Chairperson said that the Committee received quarterly reports that conformed to the standards Members had referred to. The quarterly report had to be related to the Annual Report.

The Chairperson said that obligation rested on the FFC, Treasury and the Reserve Bank to manage effectively towards productivity. He agreed with Members that it was difficult to see what the FFC had achieved in terms of performance outcomes. There had to be parliamentary guidelines the FFC could refer to when writing reports. There were documents in Parliament to guide entities. The quarterly report was not acceptable. There had to be more focus and direction. He agreed with Mr Ndlozi about the exorbitant rent.

Mr Khumalo replied that the FFC presented what was presented to Treasury in terms of Treasury guidelines. He asked that the Committee be specific about the areas that it wanted the FFC to report on. It was the first time the FFC had reported to the Standing Committee.

Dr Khoza said that the starting point had to be the APP. All reporting had to be consistent with that.

Ms Tobias said that when she requested quarterly reports as a Chairperson, she had made it clear what was expected in terms of details and figures.

EFF submission on transfer pricing
The Chairperson said that Mr Floyd Shivambu (EFF) was asked by the Committee what it was that the EFF was saying that was new. He was not present at meetings where he was meant to submit on behalf of the EFF. The Committees of Trade and Industry; Minerals and Energy, and the Finance Standing Committee had an interest in the matter. There would be a joint meeting on the following day, but the matter could be processed in the meeting and fed into the following day.

Mr M Ndlozi, EFF Member, remarked that it was in fact an old problem related to levels of inequality, but that did not absolve responsibility to deal with it. The flow of illicit finances had to be arrested and resources recovered. Parliament could mandate forensic investigation into the impact of transfer pricing. Big auditing firms were openly advertising help with tax avoidance to big corporations. There was no explicit criminalisation of tax avoidance in South Africa. Legislation was weak and firms like Price Waterhouse Coopers were exploiting that. He advised that such firms be called to Parliament.

Ms Tobias referred to a speech made by Nelson Mandela in 1994. The ANC had set principles and policies, but was not to close its ears to other viewpoints. Problems had to be addressed within an expanding economy. In making policy the various parties could differ, but in the end they had to find one another. There had to be engagement with different opinions about profit shifting. There was no tangible evidence in the literature about how to deal with that. The EFF document mentioned that Price Waterhouse Coopers had rated South Africa number one in Africa for fraud. It could more likely be true for sub-Saharan Africa. Fraud occurred, but there were government mechanisms to deal with it. A system of tax information sharing between countries could help deal with the problem. Profits were being moved to safe tax havens.

The Chairperson said that issues raised could be dealt with at the following day's meeting. The EFF had submitted nine points. He asked if there was broad agreement with that. The content could be dealt with on the following day.

Ms Tobias said that there had to be agreement about the legislative framework.

The Chairperson said that everyone agreed that it was bad. The EFF was pushing the matter. A study group had looked into the substance of the matter in the previous week.

Dr Khoza submitted that it had to be acknowledged that it was a cross-cutting issue, to be dealt with using a multi-disciplinary approach. Tax base erosion was a definite issue, but the EFF had also raised beneficiation. The position of transfer pricing in a digital economy had to be known. The EFF had elevated the issue, but it was not a party-political issue. The various parties had to go into it as the Standing Committee. Tax avoidance had to be distinguished from tax evasion. Tax evasion had a stronger meaning. There was a global trend related to monopoly capital to be hard on individual taxpayers, and lenient with corporations. Such a trend could not be moral. It was essential to have a multi-committee approach to the matter.

The Chairperson said that each Chairperson would report on the following day. The Committee agreed about the value of the report. There would be a joint structure report. The EFF report was too long, and unclear and over-technical in parts. The ANC agreed with the report, but would ask what was possible in terms of the State.

Mr Ross noted that he supported intervention into illegal activity. The South African Revenue Service (SARS) was saying that it was a global problem. However, the EFF tended towards support of draconian interventions against the business sector. It had to be recognised that the big corporations paid the bulk of tax.

Mr Ndlozi remarked that there had to be consensus about ethical business practices. He disagreed with Mr Ross about the contribution of big business to tax. According to him it was 23%. The country had to industrialise, but had to be aggressive against corruption. Corruption drained resources. There had to be consensus about dealing with aggressive tax avoidance.

Tax treaties: Cyprus, Lesotho, Hong Kong, Qatar, Cameroon, Granada: consideration & adoption
Mr Lutando Mvovo, Director: Tax Policy and Ms Oshna Maharaj, Manager: International Development and Treaties, briefed the Committee on tax treaties. The purposes of tax treaties were to prevent double taxation of the same income; to create fiscal stability, and to prevent tax avoidance and evasion through exchange of information and assistance in tax collection. Tax treaties limited the right of a source country to tax passive income by reducing tax to a lower rate and the resident country had to provide credit or exemption. Termination had to be made by giving six months' notice to the other treaty partner. A dispute resolution mechanism was provided for.

The Committee considered and adopted tax treaties with Cyprus, Lesotho, Hong Kong, Qatar, Cameroon and Granada.

Due to time constraints there could only be preliminary briefings on Zimbabwe and Singapore.
 
The Chairperson adjourned the meeting.