Taxation Laws Amendment Bill comes under the microscope

Compared to the original draft version that was released in June this year, the final Taxation Laws Amendment Bill (TLAB) has proved to be an overall success in terms of the legislative process, despite concerns from business that a proposed suspension by National Treasury on section 45 could see the end of sustainable black economic empowerment (BEE).

After intensive consultation with business, tax practitioners and other stakeholders, including public comments on the Bill and hearings in Parliament, National Treasury has seen fit to amend many of the initial proposals. This is indicative of the extent to which Treasury is prepared to take into account stakeholders’ concerns – particularly where they are legitimate – and to accommodate them.

The parameters within which the South African Revenue Service (SARS) can exercise discretion when considering the use of section 45 of the Income Tax Act for tax-free group reorganisations have been defined. It has outlined the criteria that will be applied.

Proposals have been done away with, restricting the use of preference shares in BEE deals using section 45. However, there is much cynicism as to whether Treasury ever had the intention of doing away with section 45 permanently.

Further, the section 45 debacle once again has raised the issue of tax morality. For years, taxpayers have enjoyed the right to arrange their commercial tax affairs within the constraints of the tax laws, without exposing their liability. This principle has been upheld countless times by the tax courts, both in South Africa and internationally.

However, the tax authorities – in South Africa and internationally – increasingly are focusing their attention on tax avoidance schemes. It seems the authorities have a notion that taxpayers have a ‘moral obligation’ when it comes to their taxes. Apart from complying with the law, no such obligation exists. The legislation has been changed on more than one occasion when too many taxpayers take advantage of a particular provision in the tax law. Treasury has more than enough legislation at its disposal, such as the General Anti-Avoidance Rule, to penalise those who overstep the boundaries.

It is necessary to punish tax evaders and those who enter into transactions that do not have any commercial substance. However, taxpayers should be entitled to manage their commercial transactions within the boundaries of the law without any ‘moral’ duty imposed on them, nor should they be entitled to contribute more than their fair share, as is required by them under the legislation.

This onslaught by Treasury is unlikely to settle, and companies and individual taxpayers can expect to see an increasing focus in the new year on the use of so-called “abusive schemes”. This is in line with international norms, particularly in the United States, where tax advisers have spent their time developing abusive tax shelters.

SARS is focusing its attention on policing transfer pricing activities. This is a target area and a boost for additional revenue in the coffers. Unfortunately, the TLAB is disappointing, in that it is flawed with grammatical errors and inconsistencies.

Furthermore, it contains a number of unworkable commercial provisions. For instance, there are a number of inconsistencies in the implementation of effective dates, which places taxpayers in a ‘no man’s land’. It is encouraging to see, however, that Treasury quickly has initiated a rectification process.

Taxpayers’ concerns

National Treasury has taken into consideration taxpayers’ concerns around the headquarter regime. The TLAB removes various tax hurdles that a multinational company would face if it bases its regional headquarters in South Africa. The government is in the process of revising exchange control regulations to support such initiatives.

Another area in which Treasury has taken the initiative is the increasing use of Islamic financing, which contains certain prohibitions against interest, immoral substances and the lack of transparency relating to certain investments. Currently, the tax system focuses largely on traditional forms of finance and does not recognise Islamic finance.

This year’s TLAB further refines and expands the proposals that were initiated in 2010 to level the playing field, particularly in respect of certain Islamic financial products and when banking finance.

One way of attracting foreign investment into the country is by means of exempting foreign investors based in South Africa from tax on interest received or accrued from operations outside the borders. Treasury, however, has raised concerns that the exemption for cross-border interest appears to be far wider, and that billions of rands are flowing out of the country without any tax being paid on them.

Last year’s amendments pronounced that many forms of cross-border interest payments will be subject to a 10% withholding charge. Those amendments, however, will come into effect only in 2013 because the change in the taxation of cross-border interest requires the renegotiation of several tax treaties. Further, an administrative system has to be implemented in order for the withholding regime to become operational, so this year’s TLAB focuses on setting the administration ground rules.

Although National Treasury has not issued more details on the proposed gambling tax, taxpayers should not assume it has fallen off the agenda. Finance Minister Pravin Gordhan unveiled the government’s intentions in the February Budget, that winnings above R25 000 – including those from the National Lottery – be subject to a final 15% withholding tax.

The proposals are intended to come into effect in April 2012 in order to generate extra revenue of about $1.1 billion.

Paying the piper

Minister of Trade and Industry Rob Davies recently issued a stern warning that it is illegal for online gambling sites to offer their services in South Africa, even though their servers are hosted outside the country. It should be noted that the banks have the authority under the Financial Intelligence Centre Act to question South Africans who net winnings from Internet gambling sites.

In all likelihood, this issue is likely to surface its head in next year’s Budget. A consultative process is expected to take place between Treasury and the gambling industry.

It remains to be seen how the new tax will be policed. There are concerns in industry that the legislation could have an effect on job losses and lower the stakes of winnings.

National Treasury has not issued a policy document giving more details on proposals regarding the deduction of retirement fund contributions. The budget review proposes a R200 000 upper deduction limit in respect of retirement fund contributions. However, this proposal was heavily criticised as going contrary to one of Minister Gordhan’s stated objectives of encouraging saving – so the absence of further news may mean Treasury is reconsidering this.

As part of its response to climate change, the government is considering introducing a carbon tax. Treasury has indicated that it will issue a second discussion document before the end of the year on the carbon tax.

The government is moving ahead with research into a carbon tax to cut down on greenhouse gas emissions. The design features of a proposed tax and a schedule for introduction are expected to be announced in the 2012 Budget.

The 17th Conference of the Parties to the United Framework Convention on Climate Change will give this some momentum.

A vehicle emissions tax was introduced in September last year in an attempt to cut down on the number of polluters on the road. The tax was intended to apply initially to passenger vehicles, and later to be extended to commercial vehicles once agreed emissions targets for these vehicles had been set.

Heated debate

The tax has caused heated debate, with business and industry raising concerns as to the form it should take. There are views that it is simply another way in which the government can raise money from embattled taxpayers.

Treasury has responded, however, saying it could well be “revenue-neutral” and be used to lower other taxes. Certainly, Australia’s recent decision to press ahead with its carbon tax will be seen as significant and potentially influential in the South African debate.

Many companies can expect to face an administrative nightmare in the wake of the implementation of the new dividends tax system. The new tax will replace Secondary Tax on Companies (STC). Practically, STC was a much easier tax to administer. However, STC is fraught with complexities while, on the other hand, the dividends tax is simpler to calculate.

The difficulty with dividends tax arises for unlisted companies. These companies need to employ resources to administer and manage the new tax. On the other hand, listed companies pass the administration and management of the tax downstream to intermediaries such as brokers and bankers who themselves will need to introduce additional systems and employ resources to manage the dividends tax.

Companies need to take steps now to change their accounting, financial reporting and internal control systems to avoid unnecessary expenses and technical errors. This will involve consultation with internal accounting departments and a risk advisory committee.

Poor communication

It is disconcerting to note that SARS has not communicated effectively to companies as to the steps they should be taking in preparation for the implementation of the dividends tax. The Association for Savings and Investment South Africa and the banking industry, however, are engaged in dialogue; it is hoped that stakeholders will have an idea of that which is expected of them before year end.

Proposals contained in the Tax Administration Bill to establish a tax ombudsman’s office are a welcome initiative. It is the role of the tax ombudsman to investigate matters where taxpayers feel they have been treated unfairly. Tax matters can be complicated, and not everyone has the knowledge or skills to deal with the tax authorities, particularly where they feel aggrieved.

The Tax Administration Bill gives the voluntary disclosure programme a permanent place in tax legislation. The voluntary disclosure programme allows taxpayers in default to rectify such defaults without additional tax, penalties or prosecution. Interest remains payable, however.

The tax net still needs to be widened considerably. The government has indicated that there are a number of economically active individuals such as taxi operators and small business entrepreneurs who still need to be brought into the net. Taxpayers can expect this to be a focused area of activity in next year’s February Budget.

It is anticipated that the government will expand the tax base through stricter enforcement of regulations and the imposition of penalties.

Charles de Wet (PricewaterhouseCoopers director)

and Sanchia Temkin