Public Hearings on the TLAB TALAB 14 September
Public Hearings on the TLAB & TALAB 14 September 2016
Personal Income Tax
Section 8 C – treatment as dividends of ordinary income • SAIT agrees with the principle that “amounts in cash or in kind that are received or accrue in respect or by virtue of services or employment are treated, as a point of departure, as ordinary revenue”. • Section 8 C is based on the implicit assumption that the full value of the equity shares underlying a restricted equity instrument will vest in the employee when the restrictions fall away. • The new sub-section includes in income of the employee amounts received where there was no vesting, no dividend in respect of a restricted equity instrument or no return of capital. Dealt in SAIT’s PIT submission.
Section 8 C – treatment as dividends of ordinary income • SAIT’s first concern is with the retrospective application of the legislation. – It is only fair and reasonable that the tax treatment of that restricted equity instrument (shares) during its vesting period should remain constant. • The amendment should apply only to restricted equity instruments acquired on or after 1 March 2017. • If the gain on the instruments is to be included in 8 C (normal revenue) then the gain should not be subject to CGT. Dealt with in SAIT’s PIT submission.
Section 8 CA – limited deduction • • • No tax deduction is available to the employer for the amount taxed as remuneration in the hands of the employee (i. e. there is no matching corporate tax offset), even in terms of the proposed section 8 CA. Section 8 CA gives a deduction to an employer in respect of the expenditure actually incurred and paid in respect of a restricted equity instrument scheme. The deduction should match the cash. If the employer pays a dividend which is taxed as remuneration a deduction should follow for the employer. The same principal applies when vesting takes place. The amount should be deducted when included for the employee, similar to section 7 B The existence of the shares is really irrelevant. Dealt with in SAIT’s PIT submission.
Section 7 C – interest free loans to trusts • It introduces an anti-avoidance measure that mirrors, to a great extent, existing avoidance provisions found in section 7 and the capital gain attribution rules. • Interest-free loans do not achieve tax avoidance, if the attribution rules are properly enforced. • Retroactive – The wording should make it clear that it will not apply to loans, advances or credit extended to the trust before 1 March 2017. • Loans to foreign trusts should be excluded from section 7 C, and remain subject to section 31. Dealt with in SAIT’s PIT submission.
The tax consequences of “income” or gains of a trust Receipt (accrual) in trust Settlement or other disposition Yes Donor Section 7 Attribution rules – paragraphs 68 - 72 Or a capital gain No Yes Vested rights No Beneficiaries Section 25 B Paragraph 80 80% Trust 41% Distribution after tax – no tax.
Loans to local/offshore trusts Local SA trust Offshore trust Current regime Proposed regime Growth taxed in SA No deemed interest taxed in SA Deemed interest taxed in SA (s 7 C) Growth tax free Deemed interest taxed in SA (s 31) Deemed interest taxed in SA (s 7 C/s 31)
Pensions relating to foreign activity • The proposal is to tax an individual in full on the receipt of a lump sum, pension or annuity. • It is only where the fund is not an approved fund (i. e. a foreign one) that the exemption in respect of foreign services will apply. • If a double tax arises, the individual will have to get relief for the foreign tax. Dealt with in SAIT’s PIT submission.
Business Tax Basics, Financial Products and Incentives
Hybrid Debt (Section 8 F) • Specific Problem – Debt interest payments that are conditional on solvency / liquidity are treated like share dividends (because this debt operates like commercial shares) – The 2016 proposed legislation narrows the anti-avoidance rule for domestic groups Broader Resolution Required Foreign Parents Exempt Payment • Debt on Shares? (-)? – Section 8 F is impractical and only catches the unwary – The proposed amendments only take aim at the symptoms – Section 8 F should apply solely to debt only if the creditor is foreign and the interest is not treated as interest in the foreign country Dealt with in SAIT’S Business Tax. South Africa Sub
Securities used as Collateral • Treasury Proposal – In 2015, listed shares became usable as collateral without adverse tax consequences – The proposed legislation extends the relief to government debt • • Recommendation The amendment should be further extended to debt of state-owned enterprises (and presumably all listed debt) We fail to see the revenue risk given the small levels of gain or loss on the debt Investors also view state-owned enterprise debt as akin to government debt Dealt with in SAIT’S Business Tax.
Transitional Relief for Hybrid Shares (3 rd Party Backed / Section 8 EA) • • Current law – In 2013, changes were made to remedy certain structures – These changes were made retrospectively to 2012 also to provide relief for BEE structures – Preference shares secured by 3 rd parties are treated like debt – This rule came into effect from 1 April 2012 • Treasury Proposal – Taxpayers can unwind these structures until close of 2017 without adverse consequence – The ability to unwind will assist many pre-existing BEE schemes where the 3 rd party security had little commercial meaning (i. e. was installed mainly as a “belt-and-suspender” measure) Prior changes • Administrative inability to claim reduced assessments – Section 93 of the Tax Administration Act allows for reduced assessments for a variety of reasons – However, section 93 does not allow for reduced assessments based on retrospective changes in law Dealt with in SAIT’S Business Tax.
Innovation Incentives • Supporting Infrastructure for renewable energy (Section 12 U) – The incentive is intended as an • extension of pre-existing incentives for renewable energy Whole new regime added • Research and development (Section 11 D) – The incentive remains heavily – – Comments – The proposal should be greatly simplified by extending pre-existing incentives (e. g. section 12 B) without a new addition of rules – The incentive should not apply to pre -existing contracts or commitments (to prevent any dead-weight loss) – – • Energy savings initiative (Section 12 L) – SARS has taken the interpretation – Dealt with in SAIT’s Business Tax Incentives. bogged down by administration Taxpayers would like the option of obtaining the normal section 11(a) deduction without the hassle The proposed legislation allows for readjusted tax returns in the case of Department of Science & Technology Department delayed approval We instead suggest that R&D deductions be fully-ring fenced / suspended until approval is granted (this avoids the amendment of preexisting returns) that energy savings projects need advanced approvals like R&D projects Advanced approval is unrealistic for energy projects, which are in a continuous process of upgrades
Big Ticket Incentives • Section 12 I industrial projects – We agree with Treasury that taxpayers who shift from preferred status to standard status should recoup a portion of the incentive; however, the recoupment should be by formula rather than by discretion – In addition, we note that governmental fuds allocated to section 12 I remain unspent: • DTI should be allowed to grant unfunded approvals • Unused funds can then flow to these projects if available • Section 12 R/S Special Economic Zones (SEZs) – We have no objection to the new special relief for small business companies within SEZs, but note that the relief will have little commercial consequence – We note that the straight prohibition against connected person relationships enacted in prior years has effectively eliminated the incentive for large companies seeking to move a portion of their operations into the zone (note that most larger companies operate in multiple locations) Dealt with in SAIT’s Business Tax Incentives.
Small Business Relief • Treasury / SARS proposal – Small business company relief currently does not apply to “personal liability companies” – The omission was overlooked when the Income Tax Act was coordinated with the Companies Act, 2008 – The amendment is effective from 1 March 2016 • Small businesses remain vulnerable – While small business obviously welcomes the relief, many smaller practitioners are arguing that the relief should be backdated to 2008 because the problem stems from an inadvertent error – The failure to backdate the relief means that • Substantial taxes may be owing • Plus penalties and interest Dealt with in SAIT’s Business Tax.
Mining Companies • Permissible write off for mining communities – Treasury proposal • 10% write off • For residential housing, infrastructure, recreational buildings / facilities – Comment • Much of this expenditure was fully deductible under he Warner Lamber decision as a regulatory requirement imposed by Department of Mineral Resource until the enactment of section 36(11)(e)(capital expenditure definition) • The offending section should be removed (including the rule against deducting mining rehabilitation expenses occurring during the operating life of mine) Dealt with in SAIT’s Mining Tax.
International Tax Perceived Avoidance
Proposed Narrowing of the High-Tax Exemption (Section 9 D) • • No harm in group loss offsets – The proposed amendment seeks to eliminate the adjustment for group member losses – We see no reason for the deletion given that the current offsets are limited to the same country – Group losses are common in many high-tax jurisdictions (e. g. the United States and Australia) – The proposed change will leave South African CFCs worse off than locally-owned companies Inadvertent deletion of loss carry forwards – The proposed amendment also inadvertently eliminates all loss carry-forwards of the same CFC from the high-taxed calculation South African Parent 1 US Holdco US 1 (profit) Dealt with in SAIT’s International Tax. US 2 (loss)
Narrowing of Reorganisation Rollover Relief for Foreign Currency • Background – The Income Tax Act allows built-in – • gains and losses to be rolled over (i. e. deferred) if move as part of a tax-free reorganisation This form of rollover relief is regularly allowed by various foreign countries Proposal – Foreign currency built-in gains and – – SA Holdco loss will no longer be eligible for reorganisation rollover relief We see nothing unique about built -in foreign currency gains / losses If an abuse exists, the problem could apply to any large built-in gains and losses; section 103 should instead be extended to cover unrealized built-in losses to prevent built-in loss trafficking Dealt with in SAIT’s International Tax. SA 1 SA 2 Section 45 Foreign Currency Loan
VAT
Cash invoice method for municipal entities • • SAIT has no objection to the extension of the full cash-basis system of invoices for municipal entities. We fail to see why similar relief cannot be provided to smaller businesses. The same relief should at least be allowed when smaller businesses are dealing with public authorities, municipalities and municipal entities. As is fully recognised in section 15(2 A), these entities frequently fail to make payment in a timely fashion. Delays are often a year or longer. This creates a cash flow problem for vendors. Especially smaller ones, contracting with public authorities, municipalities and municipal and they should be allowed to account for VAT on a payments basis. Dealt with in SAIT’s VAT submission.
Relief for defective invoices • We support the proposed attempt to provide relief for vendors with defective invoices due to circumstances beyond their control. • However, we believe that the requirement of a formal rulings process for relief would be fairly onerous and excessive. • SAIT proposes that a quick less-formal process is required to deal with this. Dealt with in SAIT’s VAT submission.
Tax Administration
Tax Ombud • The independence of the Tax Ombud is essential to the entity’s success. SAIT supports the funding and staffing proposals. • SAIT fails to see why the Tax Ombud can only review systemic service matters at the request of the Minister of Finance. The Tax Ombud should be free to advise and comment on systemic issues as the office sees fit. • The office of the Tax Ombud needs to have some powers beyond mere advice to Parliament. • The legislation requires SARS to respond to Tax Ombud queries but sets no timelines. The Tax Administration Act consistently imposes various strict timelines for taxpayers with no corresponding timelines on SARS. This one-sided approach is perceived to be patently unfair and cause of common complaint. Dealt with in SAIT’s Tax Administration submission.
Time periods for objections • Under current law, taxpayers have essentially three periods for objections – an initial automatic 30 -day period for objection, – a 21 day extension for reasonable grounds – and up to three years for special circumstances. • • • SARS has 3 years to amend an assessment. Problems arise in practice where additional assessments are issued. SARS assesses to soon during the review or audit process and the taxpayer in most cases is unaware of the delivery of these. SAIT strongly requests that – the period for reasonable ground extensions be extended to a period of 6 months as opposed to a mere 30 days. – the initial 30 -day period should be extended to 90 days for complex cases. Dealt with in SAIT’s Tax Administration submission.
“Awareness” and Voluntary Disclosure • • • One of the most important preconditions for voluntary disclosure relief is the lack of awareness of SARS pre-existing involvement in regards to the matter of tax disclosure. SAIT suggests that this be limited to a written (printed or electronic) form of notification aimed directly at the taxpayer. Public statements / warnings from SARS about their general direction (e. g. about the HSBC investigation) should be outside the ambit of the notification intended. A taxpayer must know whether the request for information relates to the matter to be voluntarily disclosed. The SARS target of examination should have to be disclosed (at least in a general way) for voluntary disclosure to be removed. Open-ended requests should not cut-off the opportunity for relief. Dealt with in SAIT’s Tax Administration submission.
Extended power to add a category of provisional taxpayers • Under this proposal the Commissioner will be given the power to, by public notice, notify any category of persons that they are provisional taxpayers. • The primary aim of the amendment is to allow SARS to request local employees to pay provisional tax in respect of remuneration derived from foreign employers. • The SAIT suggestion is that the amendment should be limited to on the fact that it is remuneration derived from an employer who is not a resident or an agent (of such an employer) with authority to pay remuneration. Dealt with in SAIT’s PIT submission.
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