Revenue Laws Amendment Bill: briefing; Gas Regulatory Levies Bill: finalisation

Meeting report

Prof Keith Engel (National Treasury) briefed Committee on four important facets of the Draft Revenue Laws Amendment Bill: Corporate Reorganisation, Basic International Changes, Currency Rules and Capital Profit Liquidations.

Corporate Reorganisation
Prof Engel continued his presentation started on 23 October. He reminded the committee that the purpose of the Bill, the main driver, was corporate reorganisation. There were a lot of issues that had to be addressed and problem areas that had slowed reorganisation down.

Prof Engel commented that there should have been one more slide on the issue of Retroactivity. The intention was originally to say that all these changes would have been retroactive back to the 1 October 2002. However it would have been unfair to change the rules midcourse and people who have been relying on the old regime should be getting the benefits and rights of the old regime. The new regime is an overall improved one and therefore they would like to see it in effect as soon as possible. This regime will be tabled at the beginning of November. (See document for his presentation).


Basic International Changes
In his introduction, prof Engel noted that international changes come in two forms:
- basic world changes to the tax landscape and
- currency rules.
In the basic international changes, one is dealing with basic foreign tax credits, foreign source income, foreign subsidiary income and so on (see document for his presentation).

Dr Conroy (NNP) commented that diplomats had always been tax exempt until two years ago when SARS decided they should be taxed. He asked Prof Engel if he would say that this was because it had not been well thought through well when they decided to tax them.

Prof Engel told him that this issue has been on the table long before 1999. SARS's job was to enforce the law, not make the law. The laws were there and SARS was faced with a situation where they had to enforce the law which said they must tax them.

Prof Engel emphasised that most of these issues needed more discussion and that he is very interested to hear what the public has to say.

Currency Rules
Prof Engel told the committee that the Currency Rules are the most difficult of all the rules. He added that this is not unique to the South African tax system but is the same for all tax systems around the world. The complexity of the rules stem from the difficulty of the subject matter and the fact that it is all encompassing. The rules can not be limited to certain transactions. Prof Engel stated that he is very keen to hear what the taxpayers have to say on this matter as the National Treasury needs all the help they can get from the taxpayers (see document for his presentation).

Capital Profit Liquidations: Briefing by Prof Keith Engel (National Treasury)
Prof Engel reminded the committee that he discussed tax-free liquidations under company reorganisations. The tax-free liquidation requires the parent company to own more than 75% of its liquidating subsidiary. That is a situation where two companies within the same group become one entity. The reason why this was made tax-free is because they are actually just two branches of a single group. Prof Engel emphasised that what is being dealt with in this presentation is basic liquidation which is a taxable event.

Submission by the South African Institute of Chartered Accountants (SAICA)
Mr Croome (Current Chair: SAICA Taxation Committee) and Mr N Nalliah (Chair Elect 2003, SAICA Taxation Committee presented their submission (see document).

Discussion
Ms Hogan thanked SAICA for their thoughtful and detailed input. She felt strongly that this committee should make a ruling about the consultation period. This refers to the time period available for the public and other interested parties to make submissions on the new amendments. Ms Hogan proposed changing it from 10 days to 10 working days. She urged SARS and the Treasury to allow as much time as possible for inputs from the public. She emphasised the important role these valuable inputs play. Ms Hogan excused herself and Mr Nene (ANC) took over as acting chairperson.

Ms Joemat (ANC) suggested that the National Treasury give their opinion on the concerns raised in SAICA's submission.

Ms Taljaard (DP) commented that she would like to open up some issues a little further. She wondered whether other members also have some issues to raise before the Treasury and SARS be asked to comment.

Mr Hanekom (ANC) suggested that Ms Taljaard's additional questions be taken so that they can also be addressed.

Ms Taljaard wanted to comment on the question of double taxation that is raised in paragraph 7.1 of SAICA's submission. It was not specifically addressed but she felt that it clearly is an area that could generate a degree of concern because the intention throughout the legislation is to avoid any instances of double taxation and if there are areas where there could be an implication of double taxation one would want to avoid it. She also requested elaboration on paragraph 7.13. She also asked for more clarity on the spot and average rates.

Mr Croome (SAICA) said that SAICA's concern in paragraph 7.1 is that you have a adjustment under the transfer pricing provisions in section 31 which effectively increases the income of the one CFC but there is no recognition for that on the company with which it has transacted. On the one hand income is increased without giving a corresponding deduction on the other hand. Effectively the same amount of income is double taxed. SAICA understands that this is meant as a penalty but they feel that the other CFC or entity should receive a credit which results in the transaction being adjusted.

Mr Nalliah (SAICA) said that for accounting purposes, spot rates are being used because the actual economic cost of benefit is determined using spot rate. The average rate may from an administrative viewpoint be simpler but it does not bear any semblance to economic reality especially in South Africa where there is a fluctuating currency. SAICA would support the use of spot as it is being used for accounting and that information is readily available daily.

Prof Engel commented about the concerns on the transfer pricing that, as far as he is aware, the adjustment procedure does exist. He would be happy to engage Mr Croome on that issue. He also told the committee that the taxpayers needed these tax relief measures as soon as possible and therefore the amount of time for consultation is so short. In this case there had to be a trade-off between consultation and the speed of implementing tax relief.

Gas Regulatory Levies Bill, 2002
The Committee was asked to vote on the Gas Regulatory Levies Bill. The Portfolio Committee on Minerals and Energy had sent a report to the Finance Committee on the Gas Regulatory Levies Bill (see Appendix). In the report submissions by various stakeholders, as well as a presentation by the Department of Minerals and Energy, are reflected. The Portfolio Committee on Minerals and Energy had recommended that the Bill be passed unaltered.

The Chairperson put the Bill to vote and it was passed with no objections.

Appendix:
Portfolio Committee on Minerals and Energy
Report to the Finance Committee on the Gas Regulatory Levies Bill

Background:
Since this Bill is a Section 77 (money) Bill, and since the Bill deals with the gas industry, the Finance Committee has mandated the Minerals and Energy PPC to report to them on the Bill. Last year the Gas Act was passed by parliament. This Act provided for the establishment of a Gas Regulator. The current Bill empowers the Gas Regulator to impose a levy on any gas entering a facility licenced in terms of the Gas Act, from its point of production (or the border in the case of importation), as well as specifying various terms and conditions related to that imposition. The aim of the levy is to fund the establishment and operation of the Gas Regulator.

The PPC for Minerals and Energy met on the 23^rd October to consider the Bill. The following stakeholders were invited to give their opinions on the Bill:
· Sasol
· PetroSA
· Egoli Gas
· Forest Exploration International
· IGas
Since the gas industry is still in its infancy in South Africa, these were the only stakeholders who will be or will potentially be affected by the legislation in the near future. Of these stakeholders, only Sasol and Egoli Gas chose to make oral submissions to the PPC. Forest chose to make a written submission, which was circulated to the PPC and passed onto to DME.
The Department of Minerals and Energy, which drafted the legislation, was represented by Dr Rod Crompton and Dr Anthony Surridge. The DME made two presentations to the PPC. The first dealt with the content of the Bill, and the second dealt with the question of the merging of the economic regulators in the energy sectors.
The principles of the Bill were presented, namely that:
The Gas Regulator imposes levies, subject to consultation and ministerial approval
Levies are imposed on gas entering transmission or distribution pipelines, rather than at the point of consumption, because of administrative efficiency, international best practice, and a government policy of taxing at source
The Gas Regulator should submit an annual budget and business plan to the Minister of Minerals and Energy
The performance of the Regulator should be assessed at least every five years
The DME also made a presentation on the merging of regulators in the energy sector; this was in response to a Cabinet decision, motivated by efficiency concerns and the increasing convergence of different energy carriers. The merging process will take place over a number of years, in a number of stages, and does not require legislation at this stage. The Gas Regulator will still be established as a separate regulator; thus this decision and consequent process does not affect the passing of the Bill.
Several questions of clarification were asked by Members, and answered by the DME; amongst the issues raised were whether the proposed energy regulator would include liquid fuels and what the rationale was for merging regulators.
Sasol then gave a presentation in which several objections to the Bill were raised:
Sasol claimed not to have been properly consulted on the current Bill
Sasol objected to imposing levies on gas entering the transmission/distribution system, proposing instead that gas be metered at the point of sale; since the infrastructure for this existed, this would save capital costs
- Sasol claimed that if a gas user was also a producer, a levy could be paid twice on the same gas
- Sasol objected to paying a levy on "operational gas", i.e. the gas required in the pipeline at all times to sustain operational pressure. The same point applied to gas stored in the pipeline.
Members asked why Sasol had not been consulted; in reply the DME stated that they had been consulted extensively in the drafting of the Gas Act; that they had been limited consultation in the drafting of this Bill, and that the state law advisor has advised the DME that consultation on the Gas Act rendered further consultation on the accompanying money bill non-mandatory. The Chairperson made the point that stakeholders and government should raise issues pertaining to money bills while the main bill was being considered.
Other issues raised by Members, and replied to by the DME or Sasol, were:
Whether Sasol had any problem with the principle of gas levies? Sasol replied that they agreed with the principle of paying levies, but that they disagreed with the DME on how the gas should be measured
- Whether only producers or importers would be levied? The DME answered that the owner of the gas would be levied at the point at which the gas entered the licenced part of the gas network.
- Whether the money would be paid directly to the fiscus, or to the gas Regulator, and if the latter, what the need for a money bill was? The DME replied that section 77 of the Constitution required that any levy imposed by any state body required a money bill. Why gas levies could not be collected like petrol levies, which were collected at the point of sale? The DME replied that government was moving towards taxing liquid fuels at source too.
- Whether "flange" could be added to the definition section of the Bill?
Egoli Gas made a short presentation, the main concern being that there was a lack of clarity in the bill concerning the implications for payment of levies if ownership of gas changed several times. The DMF clarified this point, stating that gas would only be levied once at point of source. Forest Exploration International made one point in their written submission concerning the nature of the process of consultation in deciding on levies; they felt that the process should be spelt out more precisely so as to be more transparent.

The PPC considered all the presentations by stakeholders, and recommends that the Bill be passed without changes, and further to that, ways and means be sought to clarify issues that have been raised that are unclear, and that the possibility of amending the bill later in this regard be considered.

Signed by: Mr M T Goniwe
Chairperson: PC on Minerals and Energy
Date: 23/10/200_