Taxation Laws Amendment Bill 2002

1

#20730

23 October 2002

Ms B Hogan

Chair

Portfolio Committee on Finance

P O Box 15

CAPE TOWN

8000

BY E-MAIL:

Dear Sir

TAXATION LAWS AMENDMENT BILL 2002

Introduction

The South African Institute of Chartered Accountants South Africa (SAICA) welcomes the opportunity afforded to it to make a written submission to the Portfolio Committee on Finance on the Revenue Laws Amendment Bill, 2002, a significant and complex Bill comprising some 190 pages as well as the Explanatory Memorandum thereon comprising 74 pages.

SAICA represents approximately 21000 Chartered Accountants (SA), comprising members in commerce and industry, small and large audit and accounting firms, universities and the public service. The Taxation Committee includes members from the various constituencies of SAICA and comprises members who are engaged in fulltime careers who serve on the Committee in a part-time and honorary capacity.

The timing and nature of consultation process

The Revenue Laws Amendment Bill was released by SARS and National Treasury around midday on Monday, 14 October 2002 with the request that comments on the Bill be directed to the South African Revenue Service (SARS) or the National Treasury before Wednesday, 23October 2002.

It is appropriate to point out that the nature of the consultative process has changed and the reasons therefore are accepted and understood by SAICA.

Previously SARS would issue the legislation to, inter alia, SAICA in batches calling for comments as and when the particular parts of the legislation had been drafted. Unfortunately, it appears that certain persons who received the legislation on a confidential basis breached the confidentiality thereof and a decision was made that the Bill would only be released in a substantially complete form for public comment on the SARS and National Treasury websites.

It is appropriate to advise this Honourable Committee that in the 10 days before the formal release of the Bill the market was awash with rumours regarding certain specific proposals contained in the Bill and speculation was rife as to the effective date thereof. It would appear therefore that certain persons were consulted on the draft legislation and that such persons breached the confidentiality arrangements in terms of which such legislation was made available to them.

It is recalled that the Honourable Chair of this Committee requested that a clear 10 day period be afforded to the public to comment upon the Bill once it had been released. By virtue of the fact that the Bill was released at midday on 14 October and that comments were required to be submitted before Wednesday, 23October2002 it is clear a period of only 8 days has been afforded to the public to comment on this significant Bill. This Committee is urged to require the Bill to be released on a basis that the public have a period of 10 working days to review and comment thereon particularly in light of the significant and substantial changes contained in the draft legislation before you. The current Bill comprises a significant number of pages and is highly technical and complex and we as SAICA called for comments from the Taxation Committee, the editorial Panel of Integritax, the publication on tax matters published by SAICA as well as the five regions comprising SAICA nationally. Unfortunately, by virtue of the very limited time available to prepare comment on the Revenue Laws Amendment Bill we have not received significant comments from our broader membership. It is therefore submitted that it would be far preferable if a reasonable period of time is granted for a Bill of this nature and significance to enable us to consult our members more broadly than is currently the case. It is also observed that the Bill contains sections where different options are proposed and in certain instances effective dates have not yet been inserted. These particular issues will be dealt with in our detailed submission set out below.

SPECIFIC COMMENTS ON THE REVENUE LAWS AMENDMENT BILL

1. General

As a general comment we would like to point out that the latest number of amendments, in a year that we all thought would be a year of consolidation, does not contribute at all to creating tax certainty within the South African business environment. We strongly believe that SARS should now promote tax certainty by providing the South African business and tax community with tax legislation that does not change annually. We do not believe that the current set of proposed amendments can merely be seen as of a textual nature as there are a number of changes that will have a marked impact in the tax planning and offshore structure of South African multi-nationals.

1. Amendment of section 3 of the Marketable Securities Tax Act, 32 of 1948

It is noted that clause 1(2) of the Bill does not contain the date on which certain of the amendments effected to section 3 shall come into operation.

1. Amendment of section 1 of the Transfer Duty Act, 40 of 1949

3.1.The Minister of Finance indicated in his 2002 Budget Speech indicated that measures would be introduced to deal with those cases where individuals seek to avoid the payment of transfer duty by acquiring immovable property via companies, close corporations and trusts. The amendments made to this section seek to give effect thereto and an aspect that must be raised is whether it is intended that persons remain liable to stamp duty on the purchase of the shares in the companies owning fixed property and in addition thereto the transfer duty on the fair value of the property owned by such company.

3.2.Further, the seller of the shares will be liable to Capital Gains Tax (“CGT”) on the capital gain on the shares, whilst the purchaser will be liable for transfer duty and stamp duty on the same transaction.

3.3.We submit that if the intention is to view such purchase and sale as a property transaction, both the purchaser and seller should be treated as having concluded a property transaction.

3.4.In the event that the above is not acceptable, in the alternative we submit that the Stamp Duties Act be amended to reduce the dutiable value of the shares in these circumstances by the fair value of the property which is subject to stamp duty.

3.5.The Transfer Duty Act is to be amended to subject the acquisition of “residential property companies” to transfer duty under certain prescribed circumstances. Whilst the intention with regard to this amendment was mentioned in the 2002 Budget Review document, we believe that this aspect should have been addressed and communicated at the same time as the special dispensation from transfer duty to “re-acquire” primary residences from companies and trusts was legislated. This would have allowed taxpayers to evaluate the opportunity to take full advantage of the special dispensation to “re-acquire” their primary residence free of transfer duty and capital gains tax.

3.6.Section 3(1A) of the Transfer Duty Act is being inserted as a result of the amendment in respect of “residential property company” to provide that the public officer of the company and the seller of the shares will be jointly and severally liable for the transfer duty in the event that the purchaser fails to pay the duty within the prescribed period. In respect of the purchase of a contingent right in a trust, the trust and trustees will be jointly and severally liable in the event of a default by the purchaser.

3.7.We recommend that a further sub-paragraph be inserted in the Transfer Duty Act to give the public officer, company, trust or trustee a right of recovery against the purchaser, as it could be construed that if the purchaser does not pay within the prescribed period, he has no further liability or obligation to anyone with regard to the transfer duty.

3.8.The word “of” is missing before the last word “property” in the definition of “acquired”.

AMENDMENTS TO THE INCOME TAX ACT, 58 OF 1962 (“the Act”)

1. Amendment of section 1 of Act 58 of 1962

4.1.At the definition of “average exchange rate”, it is accepted that in paragraph (a) the average rate based on the spot rate for each day of the year of assessment is the official annual average exchange rate provided by a banking institution. It is not clear how for the purposes of paragraph (b) the weighted average of the spot rate is to be calculated. More detail would be appreciated in this regard.

4.2.Clause 6(1)(c) contains a definition of “controlled foreign company” and reference is made to the amendment to the Act but unfortunately the date thereof is not specified. It is clear therefore that the effective date of the particular amendment in mind needs to be referred to in the definition referred to above.

4.3.There are changes to the definition of business establishment. One of these affects companies which operate aircraft. A company which operates an aircraft in a foreign country, solely within the country the plane is based in, will have a permanent establishment, even if it has no place of business. This seems a bit narrow. For example, a company which based a plane in Pakistan, and operated it into Afghanistan, would not qualify since the plane will be based in one country, but also operated into another country. Is it the intention to be so restrictive?

4.4.It is proposed that paragraph(a) of the definition of “dividend” is amended in regard to profits of a capital nature. The 2002 Budget Speech indicated that the definition of “dividend” would be amended so as to include profits of a capital nature in respect of distributions awarded by a company in liquidation to its shareholders. Unfortunately, the Budget Speech made no reference as to the date on which such proposed amendment would take effect. From a review of the Explanatory Memorandum on the Revenue Laws Amendment Bill it appears that it is proposed that the provisions must apply in respect of dividends declared on or after 1 January 2003 from any profits which are attributable to any gain that accrued on or after 1October2001. It is submitted that clause6(2) of the draft Bill is deficient in that it does not refer to the date on which clause6(1)(f) shall take effect, whereas the Explanatory Memorandum contains a clear intention that it shall take effect in respect of dividends declared on or after 1January2003. Clause6(2) in our view, should therefore be amended to specifically refer to the date on which clause 6(1)(f) shall take effect.

4.5.In the event that a company has disposed of its assets prior to 1 October 2001 and awards such profits to its shareholders as a dividend prior to 1 January 2003 such dividend can continue to be paid to the shareholders free of secondary tax on companies (STC) in accordance with section 64B(5)(c) of the Act. It is unfortunate in our view that the legislation has been drafted such that it will apply to capital gains realised after 1October2001 and before the date on which the Bill was made available to the public for the first time. It is submitted that it would be far more equitable if the amendment was drafted such that it applied only in respect of capital gains which accrued on or after either the date of promulgation of the legislation or at the earliest, the date on which the Bill was released for public comment, namely, 14October2002.

4.6.Clause 6(1)(f) refers to the term “capital gain” which is not defined in the principal Act but only in paragraph3 of the Eighth Schedule of the Act. Technically, there cannot be an accrual of a “capital gain” prior to 1 October 2001 for this reason. According to the Explanatory Memorandum, it appears that the intention is to exclude from the definition of dividend that portion of the gain attributable to a period pre-1October 2001 which is made on the disposal of an asset on or after the effective date of this amendment. Should the clause therefore not be reworded along the following lines:

“Capital gains other than those defined in paragraph3 of the Eighth Schedule of this Act.”

It is also not quite clear what the words “ attributable to any capital gains” mean. For example, an accounting capital profit may be made on the sale of an asset and this profit may be distributed via a liquidation distribution. This asset may not necessarily have attracted CGT (ie resulted in a capital gain for tax purposes). Is the intention therefore that these profits will fall outside the scope of the definition?

4.7.Clause 6(2)(e) does not contain the date on which sub-section (1)(r) shall come into operation.

4.8.The definition of “resident” refers to a person who regularly commutes. This word appears a bit vague, as “commutes” usually refers to travelling between home and work regularly. This does not appear to be the concept that the law is trying to introduce.

4.9.In addition, this relaxes the “days” test for a person to be deemed to be a resident. Should it not also be used to relax the “60 consecutive days” test for section 11(o)?

1. Amendment of section 6quat of Act 58 of 1962

5.1.At section 6quat(1)(c), “any sphere of Government”, it is understood that this amendment means that a credit would be granted in respect of all federal, state, provincial and city taxes payable on income and we welcome the expansion and clarification. Is our understanding correct?

5.2.At section 6quat(1)(j), we welcome the reduction of three definitions to the single definition of “group of companies”.

5.3.At sections 6quat(1)(l) and (m), the conversion of foreign taxes actually paid at the average exchange rate may create an unfair effect and be to the disadvantage of the taxpayer. Foreign taxes are in fact paid and accounted for at the specific spot rate on the date of payment. Should the average exchange rate be worse than this spot rate at which the foreign tax has been paid, the taxpayer would only obtain a tax credit for the average amount and not the amount physically paid. Should the average exchange rate be better than this spot rate, the taxpayer will in turn obtain an unfair advantage.

1. Amendment of section 8 of Act 58 of 1962

6.1.The Bill proposes that section8(1)(i)(a) be amended to exempt from income tax allowances paid to persons stationed outside South Africa where such persons are employed by any national or provincial public entity funded by Parliament. Should the term “stationed” not be defined or expanded upon as to what is intended thereby?

6.2.It is important, in our view, also that the allowances paid to the affected persons are reasonable relative to their salaries which will remain taxable in South Africa and that measures are in place to prevent possible abuse of the concession granted such that the allowances are increased whereas the affected persons’ salaries are allowed to stagnate or increase at a lower rate than the allowances concerned.

6.3.It has been proposed that section8(1)(c)(ii) be amended such that the Minister will publish a notice in the Gazette specifying specific amounts in respect of deemed daily expenses in respect of meals and incidental costs in relation to foreign travel and also domestic travel. It is proposed that the amendment shall take effect on 1March 2002 and it must be pointed out that this means that the amendment affects allowances already paid to persons from 1March 2002 to date. Would it not be preferable were the amendment to take effect from 1March 2003 thereby not affecting allowances paid by employers to their employees in accordance with the announcements made in the Budget during February 2002 and enacted in the Taxation Laws Amendment Act, Act30 of 2002? In the event that it is decided that the effective date should remain as 1March 2002, it is hoped that the required notice will be published in the Gazette as soon as possible thereby enabling employers to ensure that they have complied with the monetary limits that were made known in the budget speech and later enacted in the Taxation Laws Amendment Act 2002 and can rectify the allowances paid from 1March2002 until now.

1. Amendment of section 9D of Act 58 of 1962

7.1.If we are interpreting the proposed changes correctly, the taxable income of the controlled foreign company (CFC) (determined in accordance with South African legislation) will be taxed in South Africa, and in addition any non-arm’s length transactions will be adjusted in the CFC’s taxable income and be taxed in South Africa without a corresponding adjustment in the South African “holding” company. This will amount to economic double taxation and cannot be the intention of the legislature.

7.2.If, however, this is the intention; then the change to section 9D at paragraph (i) on pages 32 and 33 of the Bill should be incorporated in section 31 as an extension of the definition of “international agreement” (paragraph (i) (aa) page 33) and in section 1 as an extension of the definition of resident (paragraph (i) (bb) page 33).

7.3.At section 9D(1)(b) – (d), it is not clear whether the requirement that the CFC must be ‘carrying on the operations/activities’ will be satisfied by the use of an agent or subcontractor of such CFC to actually undertake the mentioned operations/activities. We require clarity on this matter.

7.4.Section 9D(1)(e) appears to be a very impractical provision. The main purpose of transportation companies is to transport goods between harbours/airports of different countries. For instance, not many shipping companies are involved in merely shipping goods between Durban and Cape Town. We are of the opinion that all vessels and aircraft operated by a CFC outside of South Africa should create a business establishment for such CFC.

7.5.At section 9D(1), does the fact that the ‘jointly or individually’ requirement has been removed from the definition mean that there must be an element of collusion between South African resident shareholders in order to create a CFC? If this is not the intention, we are of the opinion that the definition should be amended to clarify this and to ensure that a CFC can only be created where South African residents acting in collusion jointly hold more than 50% of the shares in the foreign company.