Presentation on theme: "PORTFOLIO COMMITTEE ON FINANCE Comments on the draft Revenue Laws Amendment Bill 2008 20 August 2008 Muneer Hassan Project Director: Tax – SAICA Wessel."— Presentation transcript:
PORTFOLIO COMMITTEE ON FINANCE Comments on the draft Revenue Laws Amendment Bill August 2008 Muneer Hassan Project Director: Tax – SAICA Wessel Smit Member of the SAICA National Tax Committee
General Wide - ranging number of amendments each year Same sections – (sections 41 – 47) Difficult to deal with in practice Additional time to consider draft changes comprehensively
Retirement issues Transfers from pension to provident fund (SAICA submission point 29) taxing transfers from pension to provident funds is accepted taxing at date of transfer encourages employees to withdrawal benefits recommend defer taxing to subsequent withdrawal from provident fund
Employers and employees Repayable employee benefits (SAICA submission point 8 & 17) deduction is limited to employees only recommend extending to personal service providers and independent contractors address in the year of receipt
Employers and employees Payroll giving (SAICA submission point 31) administrative burden (employers take donations made by employees into account for employees tax purposes) should be implemented at the option of the employer
Individuals Deductions in respect of disability expenses – SAICA submission point 16 The listing of qualified expenses should be prescribed by the Department of Health
Individuals Broad base employee share schemes – SAICA submission point 5 increase in tax free ceiling is welcomed (R9000 to R50 000) inequality of wealth recommend increase to R recommend where ceiling is exceeded the amount up to the ceiling continues to be tax free & excess taxed at marginal rates (presently if ceiling is exceeded entire amount falls outside the section)
(SAICA submission point 3.1.1) ‘New Dividend definition’ (SAICA submission point 3.1.1) Previously relied on Accounting concepts NOW, proposed contributed tax capital (CTC) would make matters even more complex as companies will now be required to maintain two sets of records, one for accounting purposes and another for tax purposes This will increase the administrative burden on companies.
(SAICA submission point & 3.1.5) ‘New Dividend definition’ (SAICA submission point & 3.1.5) Corporate rules: It is suggested that the fact that the equity shares may be reflected at a value which is more than the tax values of the assets transferred creates a situation in terms of which the company can reduce or redeem the equity shares without any tax being collected on the difference. It is therefore intended to tax this difference as a dividend in terms of the proposed dividend tax system This value will be referred to as the “contributed tax capital”.
(SAICA submission points to 3.1.7) ‘New Dividend definition’ (SAICA submission points to 3.1.7) It is suggested that equity shares may be reflected at a value which is more than the tax values of the assets transferred creates a situation in terms of which the company can reduce or redeem the equity shares without any tax being collected on the difference. This perception is incorrect in the sense that it only looks at one aspect of the tax implications relating to reduction or redemption transactions, i.e. that of the company (shareholder ignored). See EXAMPLES SAICA submission
(SAICA submission point 3.2.2) ‘New Dividend definition’ (SAICA submission point 3.2.2) The definition of CTC however potentially does not (in our interpretation of the current wording) cater for two specific scenarios that are commonplace in modern day commerce and industry― The rendering of services to the company as consideration for the issue of shares, and The capitalization of loans owing to shareholders.
(SAICA submission point 3.2.3) ‘New Dividend definition’ (SAICA submission point 3.2.3) In the case of the proviso to the CTC definition, the CTC is calculated taking into account the base cost of assets, potential capital gains and other income tax consequences (recoupments/gross income). How is the company to tell what the base cost, capital gain or recoupment/gross income impact is in the hands of the investor?
(SAICA submission point ) ‘New Dividend definition’ (SAICA submission point ) The legislation is silent on what would happen to profits that were previously capitalised to share capital and share premium (for example, scrip dividends). It may be possible to contend that as no amount was received by the company in respect of the issue of the shares, that the CTC in respect of those shares is NIL, notwithstanding that the transaction occurred prior to the introduction of a definition of CTC
(SAICA submission point 28) ‘Dividend Tax’ (SAICA submission point 28) This tax is payable on the payment of the dividend as opposed to the date of declaration or the last day to register for the dividend, as is the case for secondary tax on companies (‘STC’). It is important to clarify what Treasury will accept as “paid”, for example, if a dividend is credited to a loan account by the paying company, would Treasury accept that it is “paid” as contemplated and therefore a trigger for the payment of the dividend withholding tax?
(SAICA submission point ) ‘Dividend Tax’ (SAICA submission point ) The declaration to be obtained from the beneficial owner in the case of for example exempt entities appears to be an administrative burden. Provision should be made in the legislation that the paying company would be absolved from any penalties or interest on the underpayment of the dividend withholding tax where the company has obtained the declaration and the recipient failed to timeously inform the company of a change in circumstances
(SAICA submission point ) ‘Dividend Tax’ (SAICA submission point ) A mechanism to permit the use of STC credits is commended (proposed 3 years) It is however submitted that a deadline for utilisation of the STC credits would cause taxpayers to indulge in irrational behaviour to utilise STC credits that would otherwise be forfeited. In an economic environment such as ours, is indirectly imposing by way of legislation, a policy of divesting of profits that could otherwise be re-invested in a business.
(SAICA submission point ) ‘Dividend Tax’ (SAICA submission point ) As noted in the Media Statement, a number of so-called collateral issues must still be considered, including the taxation of foreign dividends, the taxation of deemed dividends, anti-avoidance rules etc To fully understand and comment on the legislation, draft legislation on the above items will be required.
(SAICA submission point ) ‘Dividend Tax’ (SAICA submission point ) In the case of share buy backs through the JSE, for the buyer to identify the seller and withhold tax according seems almost impossible as the trade is executed on the JSE. It is therefore recommended that share buy backs which take place through the JSE be exempt from the proposed withholding tax to avoid these practical difficulties
(SAICA submission point 7.1) From Explanatory Memorandum ‘Passive Holding Companies (SAICA submission point 7.1) From Explanatory Memorandum “The STC will be discontinued and will be replaced by a dividend tax. The new dividend tax will be a tax on the shareholder receiving the dividend. Dividends will offer an arbitrage opportunity because company-to-company dividends will be exempt under the regime. As a practical matter, the deferral of dividends is probably the largest revenue item of concern. The 28% company rate also offers an arbitrage advantage for individuals who face a top 40% marginal rate. Of concern is passive income, such as interest, that can just as easily be earned in individual hands but for the tax”.
(SAICA submission point 7.1) ‘Passive Holding Companies (SAICA submission point 7.1) We have performed an exercise in which the current tax regime is compared with a scenario where an individual will earn the interest in his/her individual capacity. Our calculations suggest that the arbitrage opportunity which SARS suggests exists does not exist to this extent. See EXAMPLE SAICA submission point 7.1.1
(SAICA submission point 7.1.1) ‘Passive Holding Companies (SAICA submission point 7.1.1) Results of example:
(SAICA submission point 7.1.3) ‘Passive Holding Companies (SAICA submission point 7.1.3) The only situation where SARS does not currently benefit is when an individual who indirectly holds investments in financial instruments also earns interest in his/her own capacity. SARS currently benefits from situations where individuals decide to earn passive income such as interest through investment holding companies and they do not indirectly hold such investments through a company in which they own the shares.
(SAICA submission point 7.4) ‘Passive Holding Companies (SAICA submission point 7.4) it is proposed that any company which fits into the “Passive Holding Company” criteria should be given the opportunity to restructure, on a tax-free/roll-over basis, even for a limited period, e.g. to allow the assets to be awarded to the shareholders and the company to be wound up. This would be similar to the concession relating to moving primary residences from companies and trusts to natural persons, which was done on a tax-free basis.
(SAICA submission point 7.6) ‘Passive Holding Companies (SAICA submission point 7.6) POTENTIAL ARBITRAGE: In total the potential arbitrage is the difference between 35.2% (being 28% +7.2%) and 40%. This potential arbitrage already exists to a greater extent under the current STC system (at present 34.5% v 40%) and there is no evidence to suggest that this has not led to an explosion in the creation of passive investment companies.
(SAICA submission point 7.6) ‘Passive Holding Companies (SAICA submission point 7.6) The only real way to address this problem is to reduce the individual tax rates to levels more commensurate with corporate tax rates. The reality is that the reduction of corporate tax rates while maintaining the top individual marginal rate at 40% has skewed the tax burden between companies and individuals inappropriately.
(SAICA submission point 7.8) ‘Passive Holding Companies (SAICA submission point 7.8) The reference to ‘Passive holding companies’ could cause confusion as the word ‘holding’ could be seen as a reference to a parent company within a group of companies.
(SAICA submission points 21 to 26) ‘Corporate rules’ (SAICA submission points 21 to 26) We refer you to our detailed submission and our comments regarding the proposed amendment in sections 41 to 47 of the Act contained in paragraphs 21 to 26 of the details SAICA submission.
Small business Small business presumptive tax – SAICA submission point 32 exemption contained in section 10(1)(zJ) to prevent a double tax is not clear the concept of taxable turnover (inclusions / exclusions) is still relatively complex compulsory deregistration: recommended that a business must complete a year of assessment returns & payment of tax: two options will lead to confusion. Keep option 1 (2 returns per year September / March – align submission dates similar to VAT requirements)
Value-Added Tax Industrial Development Zones – SAICA submission point 42 this amendment is welcomed we recommend that consideration be given to the extension of the 30 day period under specific circumstances where goods are never returned to the CCA i.e. beyond economic repair and subsequently sold there will be tax cascading – consideration must be given to provide relief in such instance
Value-Added Tax Vat registration threshold – SAICA submission points 38 & 42 the effective date of the proposed legislation is 1 March 2009 a number of businesses did not register following the announcement of the new threshold by the Minister recommend that consideration a sunset clause be enacted for businesses that have acted upon this announcement in error (but have acted bona fide in all respects)
Estate Duty General anti-avoidance rule Transplanting similar legislation from other Acts - unintended consequences Section 25B(1)(b)(i) “bona fide business purpose” test – inappropriate / activity that is linked to a taxpayers private & personal affairs unintended result: all estate planning activities caught by GAAR
Estate Duty Conventional estate duty planning technique – the sale of growth assets into a family trust, with the purchase price left outstanding as a loan account – will this be attacked by GAARConventional estate duty planning technique – the sale of growth assets into a family trust, with the purchase price left outstanding as a loan account – will this be attacked by GAAR Recommend specific anti-avoidance legislation insteadRecommend specific anti-avoidance legislation instead
The Revenue Laws Second Amendment Bill Clause 13 – paragraph 20 (SAICA submission point 46) safe harbour of the basic amount is removed in relation to second provisional payments this will have the effect that companies will not be able to use its basic amount to determine the second provisional payments
The Revenue Laws Second Amendment Bill Clause 13 – paragraph 20 (SAICA submission point 46) the following are extremely difficult to determine until actual results become available: The net profit before tax Provisions required to be added back; Wear and tear rates; and Income received in advance
Additional comments We commented on numerous other clauses as contained in our submission. These comments are in many instances related to the Major Comments and are significant in their own right. These have not been addressed today in the interests of time.
Closing remarks We encourage the Portfolio Committee of Finance to grant serious consideration and full deliberation of comments made by us and other interested parties.