1 Briefing on the Municipal Fiscal Powers and Functions Bill (MFPFB) Presentation by National Treasury 13 June 2007 Presentation to Select Committee on Finance

2 Outline of presentation Legislative framework Objects of Act Municipal Taxes Link between the permanent replacement of RSC levies and the Bill/Act Municipal surcharges Other provisions Amendment/repeal of existing local government legislation Financial implications of Bill Consultation process on Bill Conclusion

3 Constitutional framework Municipalities may impose property rates, surcharges on municipal services and, if authorised by national legislation, other taxes, levies and duties to all or a category of local government, but no municipality may impose income tax, VAT, general sales tax or customs duty (section 229 of Constitution) Section 229(2) stipulates that the power of a municipality to impose rates on property, surcharges on fees for services provided by or on behalf of the municipality, or other taxes, levies or duties- –May not be exercised in a way that materially and unreasonably prejudices national economic policies, economic activities across municipal boundaries, or the national mobility of goods, services, capital or labour –May be regulated by national legislation Current local government legislation regulates –Property valuation and rating through Municipal Property Rates Act –Municipal user-charges/tariffs through MFMA and MSA Municipal Fiscal Powers and Functions Bill (“the Bill”) will deal with outstanding section 229 legislation by: –Regulating the process by which the Minister of Finance, or a municipality, group of municipalities or organised local government (SALG) may initiate a municipal tax or taxes –Defining the manner in which the national government, through the Minister of Finance, will exercise its policy oversight role, regulatory role and authorisation role in respect of municipal surcharges and taxes, other than property rates and municipal user charges

4 Aims of Bill/Act The Bill is intended to –Ensure that municipal taxation powers are pro- actively regulated as provided for in s229 of Constitution (currently intervention done reactively after macro-economic concerns are triggered) –Set a framework for introducing new municipal taxes so as to ensure that any new tax fits within the national and LG fiscal and taxation framework –Prescribing norms and standards for municipal surcharges to ensure that they are affordable to ratepayers Other legislation, such as Municipal Property Rates Act, also makes provision for ratios and limits to increases The Bill is not intended to –Impede a municipality’s ability to collect own revenues Regulations only to ensure that municipal taxes, levies and surcharges do not have adverse macro-economic implications or adversely impact on economic sectors –It does not introduce new municipal tax/es Bill/Act sets the framework for introducing new municipal taxes, which requires a detailed impact analysis to ensure that any new tax fits within the overall and LG fiscal and taxation framework

5 Chapter 1 - Objects of Bill/Act The Bill/Act seeks to –promote predictability and certainty in respect of municipal fiscal powers and functions –ensure that municipal fiscal powers and functions are exercised in a manner that will not materially and unreasonably prejudice national economic policies, economic activities across municipal boundaries, or the national mobility of goods, services, capital or labour (section 229(2) of the Constitution) –effectively oversee the exercise of municipal fiscal powers and functions by regulating the exercise by municipalities of their power to impose surcharges on fees for services under section 229(1)(a) of the Constitution authorising the taxes, levies and duties that municipalities may impose under section 229(1)(b) of the Constitution Regulating the exercise by municipalities of their power to impose taxes, levies and duties, if authorised

6 Chapter 2 – Municipal Taxes (1) Authorisation of a municipal tax –The Minister, or on application by a municipality or group of municipalities or organised LG, may authorise a municipal tax –Prior to authorising a municipal tax, the Minister Must consult the Minister responsible for LG, organised LG and the Financial and Fiscal Commission May consult any other interested organ or persons –The Minister authorises a municipal tax through regulations Application for authorisation –Application must be made to the Minister Reasons for tax, purpose/s for which it will be utilised, persons liable for tax, estimated revenues from source, economic impact of tax, tax collection authority, tax base and rate and relief measures, consultations undertaken –Minister must notify municipality/ies, SALGA, Minister for LG whether municipal tax is approved/not approved within 6 months of application

7 Chapter 2 – Municipal Taxes (2) Regulations authorising and regulating the imposition and admin of municipal tax –Authorise a municipality, group or kind of municipalities to impose the municipal tax –Must determine Date from which the municipal tax may be imposed (MFY) Tax base and any exclusions –A tax may be for a specific purpose or non-specific Tax rate (% or R value) Basis upon and intervals at which rate may be increased –May limit the period during which the municipal tax may be imposed –May limit the purpose/s for which revenue derived from a specific purpose municipal tax may be utilised –Any other matter necessary for the proper imposition and admin of tax Collection of municipal taxes by municipality authorised, unless the Minister has designated another person/institution for that purpose

8 Link between RSC levies replacement & Bill/Act Due to various deficiencies, RSC levies were abolished from 1 July 2006 As interim measure, RSC levies replacement allocations are made available to metropolitan and district municipalities while permanent options are being explored –R7b in 06/07, R8b in 07/08, R9b in 08/09 and R10b in 09/10 –Majority of these funds allocated to metros and a few districts –Some larger municipalities with large-scale economic activity have indicated that replacement grant allocations may not be growing at same rate as RSC levies Key principles to underpin choice of alternative replacements are –Endeavour to maintain local government fiscal autonomy –Meet criteria of a good local tax –Closely approximate the same incidence –Protect municipalities from fiscal shocks Various replacement options were listed in a National Treasury discussion document –VAT zero-rating of property rates introduced from 1 July 2006 (partial RSC levies replacement) –Surcharges on user charges –Tax sharing of national tax instruments (e.g. transfer duty and fuel levy) –Local business tax –Business license fees

9 Chapter 3: Municipal surcharge (1) Although surcharges currently form part of municipal tariffs, for regulatory purposes, a distinction needs to be made between the “core” components of a tariff and a “surcharge” “Municipal base tariff” means the fees necessary to cover the actual cost associated with rendering a municipal service and includes – –Bulk purchasing costs in respect of water and electricity reticulation services –Overhead, operation and maintenance costs –Capital costs –A reasonable rate of return, if authorised by a regulator of or the Minister responsible for that municipal service –Administration and regulatory costs “Municipal surcharge” means a charge in excess of the municipal base tariff that a municipality may impose on fees for a municipal service provided by or on behalf of a municipality, in terms of section 229(1)(a) of the Constitution

10 Municipal base tariff and surcharge Current process –Cost of providing service xx –Refurbishment and maintenance, etc xx –Surcharge (hidden) xx –Tariff payable by xx consumer as approved by Municipality Regulator/Minister Future process –Cost of providing service xx –Refurbishment and maintenance, etc xx –Reasonable rate of return xx –Base tariff to be regulated by regulator/Minister xx –Maximum surcharge rate (explicit) xx –Tariff approved by municipal council xx

11 Chapter 3 – Municipal surcharges (3) The Minister may prescribe compulsory national norms and standards for imposing municipal surcharges –Maximum surcharges Ratio, percentage of base tariff or R value Bands or ranges within which municipal surcharges may be imposed –Differentiate between Different kinds of municipalities (category, type, budget size) Municipal services (e.g. water, sanitation, electricity) Levels of municipal services Categories of users, debtors and customers Consumption levels Geographic areas –Determine the basis upon and intervals for increasing municipal surcharges –Determine matters that must be assessed and considered by municipalities in imposing surcharges

12 Chapter 3 – Municipal surcharges (4) Obligations of municipality i.r.o. municipal surcharge –Municipalities to comply with prescribed norms and standards –If authorised by notice in Government Gazette, exemptions may be granted to Municipalities generally Particular municipality or kind of municipality –A municipality must disclose any municipal surcharges when complying with section 75A of the MSA –A municipality must annually review municipal surcharges as part of its budget preparation process

13 Chapter 4 – General (1) The Minister may issue regulations –Any matter that must or may be prescribed i.t.o this Act –An appropriate division of fiscal powers and functions where two municipalities have the same fiscal powers and functions to the same area –Any ancillary or incidental admin matter for the proper implementation of this Act The Minister must at least every five years review the regulations made under this Act Before any regulations are made under this section, the Minister must –Consult the Minister for LG, relevant cabinet members and/or MEC on any matter affecting their executive authority, the Financial and Fiscal Commission, and organised LG –Publish draft regulations in Government Gazette for public comment –Submit draft regulations to Parliament at least one month before their promulgation

14 Chapter 4 – General (2) Transitional provisions –A municipality must within 2 years of the date on which the Act commences, apply to the Minister for the continued authorisation of a tax, other than RSC and JSB levies –A tax will lapse 2 years after the date on which this Act commences, if a municipality fails to apply for authorisation –A tax will lapse 6 months after the Minister has notified the municipality that an application for the continuation of a tax has not been approved by Minister Amendment of legislation and savings –Repeal of paragraph (d) of sub-section (1) of section 86A of Municipal Systems Act ( to avoid dual regulation of municipal surcharges ) – Amendments to Municipal Finance Management Act Repeal of subsection (2) of section 20 ( reference to a municipality exercising its fiscal powers i.t.o. s229 of Constitution removed ) Repeal of subsection (6) of 28 ( reference to increases to municipal taxes and tariffs mid-year removed ) Sub-section (4) added to section 43 ( so that MFMA will only apply to tariff capping, not tax capping ) Substitution of paragraph (c) of section 168 ( so that MFMA will only apply to tariff capping, not tax capping )

15 Financial implications Bill will not have financial implications for national or provincial government The implementation of municipal surcharges by municipalities will not have any additional financial implications for municipalities as procedures and systems already in place to collect fees for the services on which surcharges will be imposed Some existing surcharges may be beyond what could be considered reasonable for the sector/country Limited costs associated with making an application for authorisation of a municipal tax and start up costs associated with the initial implementation of a municipal tax, but this is considered necessary and good practice anyway

16 Consultation process on Bill Prior to submission into parliamentary process, NT consulted dplg, SALGA and FFC on Bill Most of the comments of dplg, SALGA and FFC were incorporated into Bill that was submitted to Cabinet Public consultation process was also provided for

17 In conclusion This Bill/Act will ensure that all local government finance matters as contained in section 229 of the Constitution are appropriately regulated This Bill/Act is not intended to infringe on the rights of local government to optimise the collection of its own revenues, but to ensure that municipal taxes –Fit within the national and local government fiscal and taxation framework –Do not have adverse macro-economic implications (taxpayers/affected sectors/etc. must be able to afford the taxes, tariffs and surcharges levied by municipalities) Prior to the introduction of any new municipal tax, a detailed evaluation process as prescribed in the Act will be undertaken so as to ensure that an appropriate balance is struck between –enhancing local government fiscal autonomy and accountability (this is achieved where municipalities collect revenues directly from ratepayers) –implications of such new tax for taxpayers

18 The end!!! Thank you ….