Taxation Laws Amendment & Tax Administration Laws Amendment Bill: response to submissions; Revenue Laws Amendment Bill: update

Meeting report

Processing of the Joint Report of the Standing Committee on Finance and Standing Committee on Appropriations

The Chairperson said the first item on the agenda was consideration of the joint report. He had engaged with the chairperson of the appropriations committee who indicated that her Committee was on an oversight visit and was fine with the report.

The Chairperson asked if Members wanted to insert anything in the report.

Mr Allan Wilcomb, Secretary to the Committee, said their input had been inserted as underlined.

The Chairperson said he had made some comments and asked if this had been factored in?

Adv Frankie Jenkins, Senior Parliamentary Legal Advisor, said he had not received any comments from the Chairperson.

The Chairperson said then this would have to be done painstakingly slowly. Was it correct that he was the only one who had made comments by the deadline and no one else had submitted comments? So for now these were the only comments the Committee had from its side. Did anyone have any other comments on the Report in the meanwhile? On 1 (a), could this be checked for grammar, but if that is the way the resolution was passed in the House then it is fine, but the Committee can insert something if it is grammatically necessary. Secondly, who took this decision that the Committee must report to the National Assembly by 30 September 2016, because the Committee certainly was not consulted. The resolution was adopted on 19 May 2016. If he was correct Parliament rose at the end of May, so there would have been about six working days. Then the Committee came back and if the number of working days are put together it would probably be 21 working days. In 21 days how is the Committee supposed to report and who took this decision without consulting the Committee?

Adv Jenkins said the National Assembly Table staff was responsible for formulating the resolution.

The Chairperson asked whether Adv Jenkins had some hand in it.

Adv Jenkins replied that he had looked at it.

The Chairperson said Adv Jenkins and Mr Wilcomb should discuss and find out who took this decision. He would speak to the Speaker of the National Assembly to find out who had taken the decision, because it was not reasonable. The Speaker should not be taking decisions without consulting the Committee, with 15 working days and six Bills; it was not appropriate for the Speaker to not consult the Committee. So that 30 September 2016 deadline was ridiculous and a sentence should be put in that indicates that the decision on the deadline was taken without any consultation with the Committee and bearing in mind that there were only 15 sitting days, with the Bills that the Committee has, it is understandable that the Committee was unable to progress beyond what was recorded. Further, the wording should be sorted out outside of the meeting. Especially, with the first paragraph under background, the unwieldy sentence under establishment of and the last one is the one which comes from the NCOP Committee. He asked whether the Committee was quorate and said the Committee would vote as soon as another Member was present.

Committee invite to the Financial Intelligence Centre (FIC) and South African Revenue Service (SARS)

The Chairperson noted that a journalist had contacted him, because Mr D Maynier (DA) had indicated that the Committee would summon the Financial Intelligence Centre (FIC) and South African Revenue Service (SARS). He had pointed it out that there was no such decision taken and that it was a routine meeting to look at the annual report of National Treasury and SARS. There was no summoning. What was decided by the Committee as a whole, and not Mr Maynier alone, was concerned about what was going on and if there was not adequate cooperation between the FIC and SARS, the Committee must require the executive authority to deal with this matter and as appropriate, without intruding on executive oversight, fulfil its own oversight call the FIC here. That is the understanding and the meeting was routine. A summons is a very specific legal request and implies that someone was not coming and there was no indication of that, so it is utter nonsense. He felt the DA ought to withdraw its statement, because basically it is lying and dishonest.

Mr D Maynier (DA) said the term summon was used in line with section 56 of the Constitution and he would be happy to use invite, request or any other term. He apologised if the Chairperson was aggrieved by that. The bottom line was that SARS would be appearing and what the Committee agreed to was that the FIC would also be requested to appear. They were not included on the draft agenda. Whether they were summonsed, requested or invited, the bottom line was that the Committee agreed that they would be present on 12 October 2016 and that is what he had welcomed.

The Chairperson said that perhaps this is even a matter that the Ethics Committee should look at and ANC Members should note what Mr Maynier had said without prompting, because they are too soft on him. Perhaps Members should investigate to what extent what he had said was accurate. Repeatedly, he made claims for the DA which were nonsensical, the Committee was going to do these things in any case. The Rules of the National Assembly say that the Chairperson was the spokesperson for the Committee and he had repeatedly told Mr Maynier this. He refused to listen and this was unethical. What happens is that a Committee will decide and it is the Chairperson and secretary’s job to write to the executive about decisions taken, but Mr Maynier would write on behalf of the Committee and claim it had agreed to certain items. So basically, this should be discussed by the Committee, decide whether this is ethical behaviour and perhaps take it up with the Ethics Committee. There are wild claims and lies actually from Mr Maynier, which is unparliamentarily. “Why do you not just be honest; you can play your oversight role by being honest.” Now there is no summons and the Committee should review its decision on that Tuesday, if the matter had gone as far as needs be, there would be no need to call the FIC. The Committee wants the issue to be sorted out, he would write to the Minister, Mr Tom Moyane, Commissioner SARS and the head of the FIC. The day before the meeting the Committee would again determine who ought to be present. In short, was there any Member who would disagree with the position that the Committee invite the FIC, a normal invitation not a summons in any way, and they will be told if necessary they will have to be present for that small part of the meeting? The Commissioner will have to answer, for why he answered the way he did, but whether the FIC is necessary will depend on what happens in the interim. He suggested the Committee’s position be that the FIC would be invited, but word it to indicate that this would be if necessary, but that the Committee would indicate finally the day before, because it would not fly someone up for nothing. He would note the DA’s opposition to that, but it would be put to vote when necessary.

Mr Maynier said his view was that both SARS and the FIC should appear on this matter, but the Committee must decide if it wants to backtrack and it is entitled to do so. The FIC certainly has a case to answer and so does SARS.

The Chairperson said the Committee agrees, but how that would happen would be a matter for the majority to decide. How long have you been here Mr Maynier? Did you not get inducted on the role of a Committee’s Chairperson and that of a back bencher? You are a shadow minister, but who cares, at the moment you are not the Chairperson of the Committee and there is no provision in the Constitution or the Rules of Parliament which indicates that a shadow minister is a spokesperson for the Committee or is entitled to misrepresent the views of the Committee. So you have no more status than any other Member of the Committee.

Briefing by National Treasury on Revenue Laws Amendment Act

The Chairperson said this relates to 10 March 2016 Report by the Standing Committee on Finance. The Chairperson, as mandated by the Committee, and leader of government business Mr Cyril Ramaphosa, Deputy President, negotiated a deal with Congress of South African Trade Unions (COSATU), the other unions, to some extent business. It came to be that there was substantial consensus on the contents of the above report and what was to be done. He had written to Ms Bathabile Dlamini, Minister of Social Development, and Mr Pravin Gordhan, Minister of Finance, indicating that this act must be gotten together, although the Committee understands the disruptions of the elections. Looking at the Committee’s recommendations, it will be seen that the Social Security Reform Paper (SSRP) would be tabled in NEDLAC for consideration within three months after the promulgation of the Bill. National Treasury (NT or Treasury) was present and would explain where things are and where they would go.

Mr Ismail Momoniat, Deputy Director General: Tax and Financial Sector Policy National Treasury, said the Revenue Laws Amendment Bill was signed into law in May and that is relevant, because the Committee had asked that the SSRP be tabled at NEDLAC for consideration within three months of promulgation of the Bill. Those three months passed in August 2016 and the SSRP had not been released at that time. The local government elections meant that Cabinet was not meeting and there may be issues around there. The Minister of Finance soon after the Act was promulgated wrote to the Minister of Social Development. There has been quite a lot of work done on the SSRP and Treasury’s position is that it was ready to be taken through the necessary Cabinet approval processes and then published. The Minister of Social Development responded in July and had a different view. The two Ministers are engaging on how to get it through as soon as possible. Certainly from Treasury’s perspective, the SSRP which was sent is in a form which can be published. As he had said many times before, there are high expectations for the SSRP as if it is going to be a panacea to all the social security issues in the country. It certainly will not, it will provide a road map on some important issues and Treasury thinks that even after the SSRP is published a lot of perspectives will come out. A lot of it relates to how much the state can afford in terms of grants, what economic spending should therefore look at to boost growth and how to cover people between the child grant and retirement age, who do not have work. Some of those issues are not really covered. Treasury would certainly like it out, because it would help. The Committee had requested that the appropriate package of government social security measures and retirement reforms should be deliberated at NEDLAC. NEDLAC has a task team on social security reform and meetings took place in 2015, but in 2016 it had not met, because the social partners do not want to engage until the SSRP is released. So there has been no progress made in discussing annuitisation. The Committee had requested that that conversation take place. The Committee also recommended that Treasury engage with parties outside NEDLAC. This referred to other partners such as NUMSA who are not represented at NEDLAC. Obviously, because the SSRP is not out they did not want to engage. He added that the annuitisation proposals came into law and took effect from 1 March 2016 and no one has protested that they do not want the benefit. Treasury feels the benefit is extremely costly, but the figures will not be had until the 2017 IRP forms, because the monthly EMP 201 forms do not provide the figures on what the take up is currently. Recommendation D required Treasury to report on progress with negotiations every quarter, but there is not much to report because there have not been meetings due to the SSRP. The next recommendation was that the Minister of Finance must submit written reports to Parliament every six months with the first report expected 15 December 2016. There is still time for that.  Further, all participants in the NEDLAC process must commit to actively participating in the deliberations. Treasury has felt that retirement reform could have been discussed, but it understood that people interpreted the absence of the SSRP almost as an indication of bad faith by government. So the mood is not there to discuss the issues, so even if discussions went ahead he was unsure whether the mood was right for these discussions. The point was made that should annuitisation be scrapped the tax deductions for provident fund members would cease.  Briefly, that is the report which Treasury has and COSATU has requested the Deputy President to intervene and take the process forward. Treasury feels there is a role for the Deputy President to play and would welcome the intervention.

Discussion

The Chairperson said he had spoken to the Deputy President and it is good. As the invitation indicated that this part of the meeting would not be more than an hour, the Committee Researcher should put together what Mr Momoniat had just said as Treasury’s response to be forwarded. He asked to hear from the other stakeholders, because in this Committee Members believe that the public must participate, which does not just mean industry.

Mr Matthew Parks, Parliamentary Officer COSATU, said COSATU wanted to thank the Committee for trying to speed up the process and heard Mr Momoniat’s report on behalf of Treasury. COSATU’s fear is that there is not much time, the Revenue Laws Amendment Act suspended compulsory annuitisation  until the end of February 2018, which if you take into account holidays there are two months left for engagements in 2016 and six months the following year, because the new Bill must be tabled by August 2017. COSATU wanted to avoid an ugly standoff as has happened twice already on this annuitisation issue in November next year. Treasury is correct that it has been three months after the Bill was signed, but in real terms that is six months wasted and this time could have been used for engagements already. When one talks to Treasury and the Department of Social Development, you do not get two responses, you get four responses. So COSATU is frustrated by government not having one position on the SSRP. COSATU agrees that the SSRP is not a panacea to the budgetary pressures, but rather it should be released, tabled and the ball set rolling. The more it is delayed the more it feeds into the political tensions and mistrust. People have lamented that there has been a 10 year delay already, so the SSRP should be tabled as soon as possible. At NEDLAC it is impossible to engage if there is no paper to engage upon. Minister’s Gordhan and Dlamini were meant to appear before NEDLAC in August, but this was not possible because they were not ready. At the NEDLAC summit about two weeks prior, Minister Oliphant had committed government to bring the two Ministers to NEDLAC on 25 November and this would presumably be with a piece of paper to spark engagement. COSATU requested for government to find itself and for the DSD to play a leading role, because the sense is that it is waiting as a passenger for Treasury to do its work while it should be a joint effort with Treasury dealing with the money and DSD bringing the policy framework.

The Chairperson asked for other stakeholders from civil society.

Mr Wilcomb said the Association for Savings and Investment South Africa had indicated it would be present.

The Chairperson asked what the other trade unions had indicated and the small civil society group.

Mr Wilcomb said BUSA requested the Committee’s report, but did not confirm their attendance and no one else did so.        

The Chairperson said the report would be sent to everyone and it seems that not many parties are showing interest at present. He asked for input form industry.

Ms Rosemary Lightbody, ASISA, said ASISA agrees wholeheartedly with COSATU’s position and is also very anxious to see the SSRP published, so that progress can be made towards consensus, because ASISA was also concerned that in 18 months’ time we will find ourselves back where we were in 2015. Any assistance which Ministers could give to relieve the impasse and get the SSRP published would be greatly appreciated. It is as if some mediation is required for the different views.

Mr C De Beer (ANC,) said Mr Momoniat had remarked that the mood is not right for discussions. If so, then the mood will have to be changed. At present we are five months away from the tabling of the national budget. Parliament rises on 5 December 2016 and Committees resume on 24 January 2017. So this thing has to be pushed and the stakeholders need to get their acts together, because the Finance Committees are serious about this matter as seen in their reports. Therefore, the request is that the stakeholders come together otherwise Parliament must call them and facilitate the roundtable discussion.

Ms P Kekane (ANC) said she would take the Committee back to where this process began. She commended the Chairperson for ensuring the Committee reached out to various stakeholders, because of the implications or intentions of what this Act brings. The Chairperson was at pains for everyone to have information on the process, so that when the conclusion comes the Committee must have touched base with everyone. The Committee had even checked what means Treasury had used to reach out to critical stakeholders. So it is a call that Members will also make, that while an inclusive process is being directed by the Chairperson, from government’s side a parallel process should continue. There is also this initiative to have the leader of government business pull everyone together. The reason why the Social Security Agency was put together was to have all these monies under one roof, including compensation regarding labour. So as this process continued, how the Minister of Labour could be pulled in should be investigated, because this will allow their inclusion form the outset. So when the leader of government business takes the process up it can be holistic. Perhaps, when this process runs Parliament should be requested to run a round of adverts to invite everybody, so no one can claim they were left out.

Mr S Buthelezi (ANC) said he agreed with this suggestion.

Mr A Lees (DA) said having gone through a long process on this and through all sorts of possible consequences, has there been any other unintended consequences which have come about or been raised which may affect how we go forward?

Mr Momoniat said Treasury had not heard directly and it is a bit too early to tell, so no. I guess people are happy that their take home pay has increased.

Mr Cecil Morden, Chief Executive: Economic Tax Analysis, National Treasury, said the overall reforms were important to bring uniformity to the way contributions to retirement savings are treated and encourage people to save and preserve their savings. With provident funds half the job has been done and it has revenue implications. The numbers would be available the following year, but the estimate was above R2 billion. That is in place, but the reverse of the coin must be considered, because it would affect people’s take home pay and the like.

The Chairperson said looking at the Committee’s Report the conditions are interdependent. The idea was that parties have a vested interest in participating. He summarised, that the Committee needs to signal to the stakeholders that it means business. It may be useful for the Committee to note with concern that there has not been any significant progress on this matter and while recognising the elections and other challenges; it is unacceptable that the SSRP has not been tabled in NEDLAC. Further, that the Committee urges that this be done and has notified the leader of government business who played a role previously to process this matter expeditiously. The statement did not have to be long, but it ought to be released. The Committee may need to be slightly tougher in tone. The Committee recognises the problems, but Parliament has no choice but to push. Further, what would follow was not mandated by the majority, but he believed would be consistent with its position. Firstly, treasuries all over the world are under pressures to conserve money, especially in these difficult economic times. However, at the same time our Treasury is seen as too obdurate and difficult, stuck looking at the Rands and cents, without looking at some broader issues to which Rands and cents must be in a significant and prudent way related. So the perception is that NT is not budging. On the side of the Minister of Social Development, his view and he thought it was the majority’s view, was that we can not now get what would have been the case in 2007. Then the economy was growing at about 5% and even the 2008 global financial crisis had not truly been felt in our country. He was pleading to COSATU as well and had said to the Minister of Social Development that she could not be stuck with the proposals from the 2007 era. Mr Aaron Motsoaledi, Minister of Health, would be up in arms if money was removed from the National Health Insurance and the students are up in arms as well. On Treasury’s side concessions would also have to be made, given the unemployment rate. Programmes have to be looked at. So both parties need to compromise and COSATU must also be realistic. He asked for any Member to respond to what he had raised and noted that he had not spoken on behalf of the majority, but had raised these matters with the Deputy President, Mr Gordhan and Ms Dlamini. Perhaps a line should be put into the Report requesting the respective departments to compromise reasonably and expedite the matter along with the Deputy President. The Committee should require a report back fairly soon and a deadline would achieve this. He suggested that Treasury be required to report back as soon as the MTBPS was over, around 15 November 2016. He again asked if any Member had a contribution and receiving none, asked for the Report to be voted on.

Mr S Buthelezi (ANC) moved for the adoption and Ms P Kekane (ANC) seconded.

National Treasury Response to Public Hearings on Draft Tax Laws Amendment Bill and Draft Tax Administrations Laws Amendment Bill

Mr Momoniat asked that the Committee not to expect a response document so soon after the hearings every year and noted that the reason for the speed this year was that Treasury had been having engagements with many stakeholders during the local government elections. The process so far has been that the Minister of Finance made proposals on Budget Day, the Draft Tax Laws Amendment Bill (TLAB) and Draft Tax Administrations Laws Amendment Bill (TALAB) were published on 8 July 2016, NT received written comments from 64 organisations by its deadline of 8 August and workshops were held on 15 and 16 August on any major issues. NT and SARS then briefed the Committee on 24 August 2016 and the public hearings were on 14 September 2016. Treasury also had meetings with the long term insurers and on the Research and Development Incentive. Presently, Treasury would present the draft response document which contains the current proposals. Treasury and SARS develop these proposals, but the Minister had not approved them at this stage. The Minister would only come in following the comments which would emerge from the presentation of the draft response in formulating the final response document which will effectively be incorporated into the Bill which would be tabled. Lastly, he noted that this would only be the response to the TLAB, with the responses to the TALAB and Rates and Monetary Amounts Bill having already been done. Further, the changes to the draft Bill would be published later to the year. At the same time NT would be publishing the draft changes which would be made to the Employment Tax Incentive and Learnership Incentive. Treasury would be proposing that these be extended for two or three years. Treasury has been through a process in NEDLAC and something would be put out for comment. Treasury would therefore like to present these at the workshop in October.

Minister of Finance Announcing Tax Rates

Ms Yanga Mputa, National Treasury, said the Draft Response Document is comprehensive and deals with all the issues raised, but the presentation is limited to the key issues. The first matter was aligning the provisions which enable the Minister of Finance to change the tax rates in all the tax Acts. In this proposal Treasury would like to formalise this issue, so that the Minister is able to increase or decrease the rates with effect from the Budget. There was provision in the TLAB which made the announcement effective for 12 months, unless Parliament passed legislation to this effect. There were comments which indicated constitutionality concerns and NT accepted this. The proposal was therefore changed to make the announcements effective, subject to Parliament passing legislation to this effect. So if Parliament does not pass the relevant legislation then the rates would revert to the pre-announcement rates.

Mr Lees said in the current instance the Minister would make an announcement of personal income tax rates, the tables are published and employers start deducting immediately. So with these proposals nothing much would be changing?  Then how far does that go and could the Minister announce a new tax all together?

Mr Momoniat said this does not cover new taxes and like with the personal income tax it comes into effect and if Parliament does not pass legislation then come January or February SARS will have to revert to the previous year’s tax brackets. This could lead to a refund in years where the tax rate was increased or more probably taxpayers owing SARS. When there is an increase, then more money will be levied immediately, but if Parliament does not pass the required legislation then it would go back to the lower rate. This means that taxpayers would be entitled to a refund or decreased future liability. Currently what happens is the brackets are changed, even if the rate is not changed and most people end up paying a lower amount proportionately. So this evens out when Parliament does pass the legislation giving effect to the change. He noted that it would be a vote of no confidence if Parliament did not pass the legislation under the proposal and therefore the Minister has every incentive to ensure that Parliament has no objections to the proposals. If there are major objections up front, then they would not make the proposal, because this would be putting the fiscus at risk. All that is being done was extending this regime to all taxes.

Mr Maynier said he understood Treasury’s solution and presumed that the anticipated wording specified that the rate would revert back to the previous rate. Secondly, did Treasury receive a legal opinion on this matter as it is a constitutional concern to be sure that the provision is constitutional?

Ms Mputa replied that Treasury was speaking to the state law advisor and the Bill would be submitted to them after the meeting.

Mr Momoniat said the point was that if the rate is increased and Parliament does not pass it, then the old law applies, so there is no basis to continue with it.

Mr Kyle Mandy, Tax Policy Leader PwC, said this concern was raised by PwC and had suggested that this would be the solution. He was not a constitutional law expert, but he would expect this to resolve the issue. Secondly, the real issue here is the length of time it takes to pass the Rates and Monetary Amounts Bill. If that could be passed within a short time period after the budget, then this issue becomes moot. Presently, we are sitting in October and the Rates and Monetary Amounts Bill is yet to be passed. That is the real issue that needs to be resolved. Thirdly, the original proposals were based on existing provisions in the Customs and Excise Act. These read differently, but have the same effect. He would suggest that those provisions need to be looked at as well, to bring them in line to ensure they are constitutional.

Ms Mputa said the proposal had been taken on board and noted that these further issues would be raised with the State Law Advisors.

The Chairperson asked what about the idea of bringing the Rates and Monetary Amounts Bill earlier, so it can be finalised earlier.

Ms Mputa said that is Parliament’s responsibility.

Ms Momoniat said the Rates and Monetary Amounts Bill was published on Budget Day and with the local government elections this year it was not possible. However, the idea was to have the Bill passed in the first part of the year.

The Chairperson said that what could be done was to convince Treasury not to put so many Bills before the Committee.

Mr Lees said should the 12 months then not be reduced, because that takes the pressure off and allows it to run on as long as it will.

Mr Morden said he would urge caution, because there could be instances such as this year where other things happen. So the point that needs to be made sure of is that the Bill is signed into law before the end of the fiscal year and a 12 month period is therefore reasonable.

Ms T Tobias (ANC) said she was concerned about operational questions, becoming political questions at a later stage. Members should leave the process where it belongs and the Chairperson should decide when the Committee is to cover the ground. The Committee knows that the Rates and Monetary Amounts Bill must be passed. She was unsure what was to be achieved by this, politically speaking.

The Chairperson clarified that it was not the Chairperson who determined the programme, Members drafted the programme and the Committee decided collectively. Further, the Committee could not do better at this stage; there is very limited room for doing better.

Anti-Avoidance Measures for Trusts and Donations Tax

Ms Mputa said the second point was the introduction of measures to prevent avoidance using trusts. The TLAB proposed the introduction of specific anti-avoidance measures in section 7C, which was aimed at curbing the tax free transfer of wealth through the use of low interest or interest free loans to trusts. This was a matter which was discussed at length and the TLAB proposed imputing a notional amount of interest on loans between low interest or interest free loans to trusts. The effect of that would be to subject the lender to a deemed amount of income tax on the deemed amount of interest. Many comments were received indicating that Treasury was using the wrong instrument to combat this avoidance, by deeming the interest to be income, instead of a donation. Treasury accepted this and now proposed treating the interest foregone as an ongoing and annual donation on the last day of assessment. Therefore, it was accepted that the correct tax instrument was being used.

Ms Mputa said the next problem raised was that Treasury was assuming as a starting point that all interest free trusts to loans are for avoidance purposes, while there are many legitimate uses for trusts such as maintenance for children with disabilities, public benefit organisation trusts and employee share incentive scheme trusts. Treasury accepted these comments for now and proposed making specific exclusions from the proposed section 7C to exclude trusts which are created solely for the benefit of minors with disabilities, public benefit trusts, vesting trusts in respect of which the vested rights and contributions of the beneficiaries are clearly established and loans to trusts to fund the acquisition of a person’s primary residence. Loans which constitute affected transactions and are subject to the transfer prancing provisions under section 31 will not be subject to section 7C. Also, loans to trusts under Sharia compliant finance arrangements will also not be subject to section 7C.

Mr B Topham (DA) said special trusts were not only for minors with disabilities, it was for minors or people with disabilities.

Ms Tobias hoped that trusts would be treated on a case by case basis, like Treasury was saying trusts for charitable purposes will not fall into the scope. There should be a different dispensation for trusts that are meant to benefit people. People have ways of shifting funds for tax avoidance purposes and this is a basic principle. In this case the fiscus needs to try and find as much money as it can, given the challenges that the country will face. So how the wording is couched will be very important. What can be done is to alert people in advance to let them know, like with the voluntary disclosure programme, that if they have a non-compliant trust they can come forward in time to be properly registered. This will help prevent a cumbersome implementation process.

Ms Gloria Mnguni, Finance Analyst, Parliamentary Budget Office, said seeing that the notional interest will no longer be included as income and will be seen as an ongoing donation, donations tax would be used. As non-residents are not subject to donations tax, does this mean they would be excluded from the proposed section 7C?

Ms Tobais said she had taken it for granted that if non-residents are paying tax in their country of residence then it would not apply, but should it be applicable if they have trusts here and are paying tax here? It is a very interesting question being raised, because it will mean that all the checks and balances need to be looked into.

Mr Robert Gad, Chair of Law Society of South Africa Tax and Exchange Control Committee, said the exception for Sharia compliant financing was due to concerns raised by the Law Society of South Africa and he asked for confirmation that this would be compliant financing structures as per the Income Tax Act.

Mr Mandy said PwC acknowledges the proposal and agrees that this is a vast improvement over the original proposal. One concern with the revised proposal is around vesting trusts. What is really at issue for Treasury is loans made to family trusts, rather than all the other trusts. The concern is that by not closely targeting this provision to family trusts may lead to a lot of unintended consequences. The issue is what has not been covered by the exclusions and this will only come out in time. Basically, this needs to be more closely targeted at family trusts and this could be done by making the provision applicable to loans to trusts which have relatives as beneficiaries. If that is done then a lot of the other exclusions relating to family trusts will become unnecessary.

Ms Mputa said the Sharia compliant arrangements and public benefit organisations are as contemplated in the Income Tax Act. With vesting trusts, this was raised at the consultative meeting held on 15 September and Treasury had indicated that it would like to start in the manner proposed and to deal with unintended consequences when they arise.

Mr Franz Tomasek, Group Executive: Legislative Research and Development, SARS, said Ms Mnguni was correct and because this was to be run through the donations tax system it would not apply to a non-resident. That should be qualified, by the specifics of the legislation.

Ms Tobais said so the matter she raised does not apply then.

Mr Tomasek said the issue is that you have a non-resident making an interest-free loan to an onshore trust. Firstly, the transfer pricing provisions probably apply, but probably if no interest is being charged SARS would likely not have an objection in that case. Then the question is whether there ought to be a deemed donation under section 7C, but donations tax does not apply to someone who is a non-resident and it would not apply to them. That does not change the fact that the trust is taxable in South Africa.

Ms Mnguni asked if the absence of donations tax on the notional interest give an advantage to a non-resident, over a resident.

Mr Tomasek said the point to be made is that we are protecting estate duty here and someone who is not a resident is not subject to estate duty either. So it is internally consistent.

The Chairperson noted that Members were simply exploring the issues at present. Further, that Treasury and the stakeholders could agree on a point, but ultimately Parliament would decide.

Ms Mputa said submissions had also been received to the effect that the proposal is ambiguous on whether it would apply to all loans currently in existence or loans entered into before 1 March 2017, which is the effective date of the proposal. Specifically, that it would be grossly unfair to apply the proposal to existing loans, because these were created in anticipation of a particular tax treatment. If the proposal is to apply to existing loans, then individuals should be afforded a chance to adjust their tax affairs without facing unduly harsh tax treatment, such as capital gains tax for selling assets in the trust. Treasury did not accept this comment, because the proposed section 7C was intended to apply to all loans, including existing loans. Further, this provision is not retrospective, because it does not change the liabilities for previous years, but rather changes to treatment of the structures going forward. Further, the exclusion of loans to fund the acquisition of primary residences would remedy some of the concerns.

Ms Mputa said another comment was that the Income Tax Act currently contains attribution rules in section 7 and the Eight schedule, which aim to restore the economic benefit derived by any person which has an element of generosity, back to the transferor. Treasury did not accept this comment, because the current attribution rules indirectly deal with the situation where interest is foregone and the section 7C is needed to address some of the issues. The treatment as a donation, also remedies some of the double taxation concerns.

Ms Mputa said the next comment was that in the proposed section 7C the R100000 donations exemption would not be available for use and this creates an uneven playing field, because it can easily be avoided by taxpayers. Treasury accepted this comment and proposed deleting the exclusion from the annual donations exemption.

Mr Tomasek said the R100000 is often misunderstood, because it is meant to cover the gifts given everyday. Some planners then use that entire amount of R100000 in their planning structures and treat it in a particular way to use up the exemption. He hoped that the people doing so were scrooges and did not give their family or friends any gifts, because those would then be subject to donations tax. That is meant to be a de minimus and was not intended to be a planning tool.

Ms Mputa said the next comment was that the proposed section 7C created uncertainty around loan arrangements involving foreign trusts, because of section 31 which deals with transfer pricing. Treasury accepted that and an ordering rule would be inserted into section 7C to say that if the transaction falls under section 31, then it would not fall under section 7C.

Ms Mnguni asked for the Members to be taken through the interaction with section 31. Would this mean that SARS is going to include the income from the deemed interest, because this would be inconsistent with what the revised section 7C does with the deemed continuous donation.

Mr Tomasek said the purpose of section 31, the transfer pricing provision of the Act, is to ensure that the correct amount of consideration is charged for cross border transactions. So the case in point would be a loan by a South African resident to an offshore trust and under cross border principles we would expect interest to be charged and section 31 states that if interest is not charged then it would be treated as if interest were charged. So once it is treated as if interest were charged, then there is no donation and section 7C cannot apply. Further, there is a degree on inconsistency and this was because we do not have domestic transfer prancing rules. Theoretically the justification is that both entities are within the South African income tax net and this would not hold as soon as you cross a border. That is an internationally accepted distinction and is enshrined in article 9 of both the Organisation for Economic Cooperation and Development and UN model double tax conventions.

Ms Tobias asked what if the liability is not transferred to a South African resident, but to a person in a tax haven.

Mr Tomasek said if an asset was transferred for no consideration, then section 31 would apply. If it was a capital asset that was transferred, then capital gains tax could kick in and if it was a revenue asset is transferred normal tax could kick in. There are also secondary adjustments, but for simplicity this is unnecessary.

Ms Mputa said the next comment was that there is no need to introduce a specific anti-avoidance measure through section 7C, because there are already the court judgements which deem interest free loans to be donations to the extent of interest foregone by the lender. Treasury did not accept this, because it wants specific anti-avoidance provisions in the Act for certainty. The court judgements can be relied upon, but there should be a rule in the legislation and it also applies a standard rate of interest to these cases.

Ms Mputa said there was a comment which argued that the proposals in the section 7C are contrary to the Davis Tax Committee (DTC) recommendations.

Mr Morden said the confusion here is between the principle and the specifics. The proposal being put on the table is very much in line with the principles of the DTC recommendations. Treasury differs on certain technicalities, but the revised proposal to make it a donation rather than income is probably more in line with the DTC’s thinking. There are proposals by the DTC which are much more onerous and the input of taxpayers on these would be interesting. In sum, Treasury was very much in line with the DTC principles.

Ms Tobais asked to what extent were traditional leaders consulted in this process.   

Mr Momoniat said Treasury does not seek out specific constituencies and only puts the proposals out for comment. Treasury then relies on the comments which are forthcoming. If there are smaller constituents who do not have access to tax advisors and cannot come forward, these are taken into account for example with the medical aid caps. There are special processes for those, but in this instance he would not think so.

Ms Kekane said many traditional authorities have trusts and some of them are even transferred to government. For example, in Limpopo the trust was not even able to be tax compliant and it also owns properties. The National House of Traditional Leaders (National House) and South African Local Government Association (SALGA) are constituencies which could be consulted by Treasury. She mentioned SALGA because often municipalities and traditional leaders work closely together, including around the sale or donation of traditional community land, with the exchange of money. If they are not taken on board it will come back to “hit us” and these are unintended consequences to raise.

The Chairperson said the State Law Advisor is meant to refer all Bills which affect traditional leaders to them for comment. This is specifically limited to the powers and functions of traditional leaders. The Chief State Law Advisor has indicated that strictly speaking government is not required to refer a Bill to the National House of Traditional Leaders unless it affects a power or function of traditional leaders. Otherwise every Bill gets referred. However, he agreed with Ms Kekane that the National House should be consulted, because the Committee did not want the Bill to be passed and then issues come up with traditional leaders. What he was saying in short was that even if it does not strictly affect the powers and functions of traditional leaders, on some of these issues it would be best to consult the National House.

Mr Momoniat said it is difficult for Treasury to know how any tax measure is going to affect anyone. Personal income tax for example affects you whether you are a king or a plain citizen. So unless there is a specific thing which would hit some party more, proportionally Treasury would not seek out specific constituencies. On the other hand, if you are running a trust you better get tax advisors and in a way a lot of the people who make submissions are those tax advisors and make representations on their behalf. Treasury does not have a principled position of not consulting, whether it is done formally or otherwise. He did not think that the formal route was required, given the time constraints, but Treasury would go elsewhere to consult as issues arose.

Ms Tobias said she was raising the point for strategic reasons, because it was not a given that certain people will have tax advisors. She wanted Treasury to take care of it, to ensure it has its ducks in a row.

The Chairperson said the Committee wanted to indicate to stakeholders that it was increasingly concerned that it was only the big power players involved. The traditional leaders do not have the access or may not have the sensitivity, even if they can afford to approach the sorts of lawyers that big business and other trusts have. The Committee really must consult beyond the industry and the Committee needs to apply its mind, because Parliament does not have the money to invite people.

Mr Momoniat asked whether the Committee was indicating that as issues are identified Treasury should consult the specific party.

The Chairperson agreed.

Anti-Avoidance Around Employee Share Schemes

Mr Morden said Treasury was trying to deal with the situation where some senior employees manage to circumvent their income tax liabilities, by receiving income in the form of dividends. This is done through the granting of restricted equity instruments and also covers employee share option schemes which are broad based. The question then is can we as a principle ensure we treat anything which is remuneration as such and tax it accordingly. The flipside of that is that there should then be a deduction for the payment of such remuneration. Quite a few of the commentators agree with that principle, but the question is the practicality of this and the unintended consequences for BEE schemes for example. Then there is the issue that in some cases these restricted equity instruments are housed in a trust and the trust then pays the dividend and how do you collect Pay As You Earn (PAYE) when the employer is not directly paying you. So there are quite a few issues and Treasury therefore proposes temporarily withdrawing that proposal and looking at the instances where the current provisions not only allow for the undermining of the principle of treating remuneration as income, but go further and allow the liquidation of the shares through distributions, called dividend stripping. The proposal therefore is to focus specifically on an anti-avoidance measure to deal with clear instances of abuse.

Ms Tobias asked at what point does one treat any income as remuneration which is taxable, because to her it made no difference whether it was earnings from a share or winnings. It comes down to what people have as individuals that should be treated as taxable income. For example, are you taxed on your lotto winnings?

Mr Morden said currently the way the tax system is structured, that is not taxable, because it is not done in the production of income. If gambling were your occupation, then it would be. Otherwise it is regarded as capital income.

Ms Tobias said that is why she had asked at what point remuneration is treated as income, because people could simply invest in shares and receive tax free dividends.

Mr Morden said then you would pay dividends withholding tax.

Ms Tobias said that is still less than other taxes. Further, Mr Morden had mentioned BEE share schemes and what is the approach to those.

Mr Morden said this was not looked at from a BEE perspective specifically. It is just that BEE schemes are caught in the net. There is a specific provision, section 8B which looks at broad based schemes.

Mr Buthelezi said one of the things which South Africans are often accused of is not saving or investing and that is why consumption is taxed in order to disincentivise it.

Mr Morden said Treasury agrees and this is why for good or bad dividends are taxed at a slightly lower rate, to encourage saving and investment.

Extension of the Small Business Tax Incentive

Mr Morden said here this is more of a technical, than policy matter. Small businesses have a special tax dispensation, the presumption being to encourage small business growth. The introduction of the new Companies Act has a specific impact on this, in that personal liability companies have not been included in this regime. This went unnoticed for four or five years and it is surprising that this has not been picked up given all the experts. This came to Treasury’s attention the previous year and proposed extending it from 2017. There had been requests for this to be backdated, which Treasury partially agreed to, backdating it to 2013 rather than 2011 when the original change occurred. He noted that looking at the DTC this incentive has been questioned, in the sense of how it has been targeted.

Ms Mputa said Treasury proposes going back to 2013 and not 2011, because past 2013 the assessment would have prescribed.

Mr Buthelezi said he did not like the idea of backdating, because there should be certainty. He would argue about backdating these things, especially as it was government’s fault that the problem was created. Whatever was to be corrected should be corrected going forward, but backdating may not be fair to the taxpayers.

Mr Topham said everyone agrees that retrospectivity is a bad idea, but in this instance it is favourable to the taxpayer, because of a mistake which government made. That there can be prescription here is interesting and he would argue for backdating it to 2011 for simplicity’s sake.

Mr Gad said there are numerous taxpayers who are concerned that SARS is going to come after them for the period between 2011 and 2013 should the proposal be accepted. Would it be fair to go back to them to state that it is not SARS’ intention to circumvent the current prescription rules and challenge them on the basis on fraud, non-disclosure or misrepresentation on this specific issue?

Mr Morden said his discussion with the lawyers had indicated that the taxpayers had not been fraudulent and therefore SARS’ case would be very flimsy.

Mr Mandy said the issue here is whether there actually is prescription with regard to the earlier years, which is not clear at all. There are two issues here: firstly that prescription only runs from the date of assessment and many of those 2012 returns may not have been assessed or have been queried and already subjected to additional assessments before prescription had actually kicked in. Secondly, prescription does not always run, specifically where there has been fraud, misrepresentation or material non-disclosure. In this instance, arguably where a taxpayer has elected to treat their company as a small business corporation, when in fact it did not, could amount to a misrepresentation. So there could be a situation where an overzealous SARS auditor alleges misrepresentation, hence that there was no prescription at all and they could go back to earlier years. So there is a concer with the earlier years as well.

Mr Topham said the point has been made that going back to the earlier years would avoid all these other concerns.

Tax Treatment of Long Term Insurers

Ms Mputa said Members would recall that the previous year there had been a proposal to make changes to the tax treatment of long term insurers, due to the introduction of SAM and the Long Term Insurance Act. Then during public hearings concerns were raised and Parliament instructed Treasury to return with proposals in the 2016 cycle. The TLAB proposed new changes and the overall concern was with transitional rules, because of the change from the regulatory basis which will change the tax calculation. The TLAB proposed a phasing in period of six years and these transitional rules were intended to cover the difference in treatment of negative liabilities under the new regime, SAM which will come into force along with the new Insurance Act.

Ms Mputa said according to the comments received, the phasing in period was short and the industry wanted between 10 and 20 years. Further, the current IFRS reporting standard permitted different treatment of negative liabilities, so there is no one size fits all in the tax legislation. Thirdly, there are smaller players in the long term insurance industry who would be affected more harshly by the amendments.

Ms Mputa said based on those comments Treasury had a meeting on 1 September 2016 with the long term insurance industry, tax advisors and the Financial Services Board which is the regulator of the long term insurance industry. With the treatment of negative liabilities NT indicated it would clarify the meaning of negative liabilities, which may nullify the need for an extended phasing in period. Further, a new provision would be introduced which excludes negative liabilities recognised as an asset for accounting purposes and reported as such to shareholders. The definite of risk policy would also be clarified. During this meeting consensus was reached on the phasing in period and treatment of negative liabilities, although there were other outstanding matters. The taxpayers were happy with the proposal, but as Mr Momoniat had indicated the Minister had to approve the compromised position.

Ms Mputa said other comments included that the adjusted IFRS value was silent on the treatment of the deferred acquisition cost. This was agreed with by Treasury, because it was felt that it could be dealt with through a SARS interpretation note. If this could not be issued then perhaps it could be considered in the following year.

Mr Johan de la Rey, Specialist SARS, said the deferred acquisition cost is more to do with commissions paid by the insurance company, which are not recognised immediately, but spread over a period of time, that of the policy itself. The problem is that treatment in the industry is not aligned and there are three or four different methods in which they recognise it for tax and financial reporting purposes. It is for that reason that it is proposed to be delayed until 2017, to get more information on it.

Ms Tobias asked to hear what the long term insurers’ concerns were here so that Members are informed in dealing with the clause.

Mr Momoniat said the Committee would be briefed by the Financial Services Board in the next session and this could be raised there.

Ms Mputa said the next comment was that if the Insurance Act comes into force early in 2017 it will have a negative impact on those insurers who have a year end at 30 June year end. Treasury spoke to the FSB and proposed that the Insurance Act should not come earlier than 1 July 2017. However, it is acknowledged that with insurers who have a 31 December year end they may be affected. At the 1 September meeting both parties understood that with the December yearend insurers at least they will have the advantage of knowing the changes in advance, when preparing their mid-year financial statements, minimising the impact.

Ms Mputa said the proposal may allow abuse where insurance companies change their accounting approach and reflect negative liabilities as assets on a gross basis going forward. Treasury noted this and a proviso would be added to ensure that the basis of determining the asset will be consistent with basis of disclosure of policy liabilities for financial reporting in 2015.

Ms Mputa said lastly an issue was raised by the cell captive insurers who indicated that the proposals do not cover the way they are doing their accounting treatment and this may cause revenue loss. Treasury accepted this and changes would be made to the TLAB so that the provisions for the taxation of both long and short term insurers should be calculated using an adjusted IFRS basis.

Research and Development Incentive

Mr Morden said this has been a bit of a contentious issue, around the administration of the R&D Incentive. The Minister of Science and Technology appointed a task team in 2015, which has made a few recommendations that unfortunately came very late, preventing their full incorporation. One important one was that due to delays some of the taxpayers have been disadvantaged because of prescription and Treasury is proposing a deduction, if it is approved, waiving prescription. Treasury feels this is a reasonable request and proposed a particular approach. There had been a request that this be a once off deduction, but Treasury feels this would be complicated having consulted with SARS. Taxpayers get the same benefit if returns are opened for previous years, deducted there and therefore there are no risks with that approach.

Mr Morden said the second proposal was that taxpayers wanted to start pre-emptively start deducting the benefit before the approval. Treasury felt this was very risky, because it would undermine the basic pre-approval process. Clarity was also received from SARS that to the extent that taxpayers have incurred an expense which is a normal operating expense they would be able to deduct it under section 11(a). Should the adjudication committee approve the research and development as falling under the R&D Incentive, that deduction can be reclassified and the additional funds claimed. The only problem is where funds are of a capital nature and then taxpayers would have to wait until formal approval is given.  

Mr Morden said some taxpayers raised concerns about penalties imposed, because of underpayment of provisional tax payments. Treasury felt this was a very flimsy request and did not support it, because why should penalties imposed due to underpayment for reasons unrelated to the R&D Incentive be rectified here.

Mr Morden said at this stage many of the other issues are not of a legislative nature and are procedural issues. The Department of Science and Technology has been doing a lot to streamline the application process. They have an online application process and will be publishing guidelines. Treasury suggests giving that two years to see if it works and if not, then the whole pre-approval process will have to be reconsidered. To drastically alter the pre-approval process at this point would be premature, because there are definitely benefits which flow from the pre-approval process both for the taxpayer and the Department of Science and Technology.

Ms Tobias asked how controversial is this subject and how many people were raising these concerns, which constituencies?           

Mr Morden said the public had presented to the Committee. There was a person from KPMG who was very vociferous and another patent lawyer who gives Treasury big headaches. These are bright people and they have not been dismissed.

Mr Topham said the R&D Incentive was important, because it makes South Africa competitive globally. On the pre-approval process, would people then be able to re-open the assessments for the year?

Mr said with the provisional tax quite often when you need to submit the return, not all the information is on hand and an estimate must be used. Can it really then be held against you, when there is no malice from the taxpayer’s side?

Mr Tomasek said the taxpayer would open the assessment going back and this would assist the taxpayer, because there is an interest to be paid on the refund following an overpayment of provisional tax in light of the subsequent approval. On the provisional tax estimates, there is quite a large margin of error permissible. If you have a taxable income of less than R1 million, then you can use your previous year’s return, otherwise you must be within 90% of actual income. If you have taxable income of more than R1 million then you have to be within 80% of the final assessment.

Prescription Period for Input VAT

Mr Tomasek said this generated a bit of confusion and he had begun responding to this point in the previous meeting. This had been a feature of the VAT system since 1991 and essentially it recognises that you may not always have the invoice which you need to legally claim your input VAT, when the transaction occurred. Unlike other taxes with VAT you can have a late claim, in a later period up to five years from the supply. In an attempt to do what a lot of the commentators would like to be done, this was moved into the Tax Administration Act, but this caused problems because other taxes do not work on that basis. Then the question came up whether taxpayers need to apply for their income tax refunds, which does not make sense. So what is being done is to return the provision to the VAT Act where it was since 1991 until earlier this decade. It is accepted that the memorandum of objects may need to clarify the point further and there are some cross references in the TALAB which may be confusing the matter, but that is simply what is trying to be achieved. The comment is therefore partially accepted to the extent that clarity needs to be given.

Timing of the Final Royalty Return

Mr Tomasek said the TALAB proposes to bring this forward from 12 months after year end to 6 months after year end. It has been raised that this creates a number of difficulties. This is terrain which government has covered before and after consulting the people dealing with the systemisation of the payments, in pursuit of payment automation, it has been accepted that the 12 month period makes sense and this will be retained.

The Tax Ombud

Mr Tomasek said the first comment was that the phrase “the funds of SARS” created the wrong impression and reduced the perceived independence of the Office of the Tax Ombuds (OTO or the Office). The proposal is to remove the phrase, leaving the provision to read “in accordance with a budget approved by the Minister of Finance”. The fact of the matter is that the Minister would approve a budget for the Office of the Tax Ombud.

Mr Tomasek said there were questions around the appointment of staff. Currently the Act says that staff are seconded from SARS to the Office. This is pretty common internationally, in the model we have adopted. This has raised questions about its independence. So the intention is to stipulate that the Tax Ombud appoints the staff, in terms of the SARS Act. The reference the SARS Act is necessary so that the staff’s conditions of service are stipulated. So it is under the SARS conditions, but it is clear that the choice of who is appointed is the Tax Ombud.

Mr Tomasek said a point had been raised that it is not optimal to having the Tax Ombud’s broader review at the instance of the Minister and they should be able to initiate, even with the approval of the Minister. This is accepted and essentially there are two ways which the Ombud could end up reviewing things: where a complaint is made and secondly where there is no live complaint, but the Ombud wishes to investigate a matter.

Ms Tobias said the Office is represented and could we have their comment.

Adv Eric Makhwane, CEO Office of the Tax Ombud, said the OTO accepts that the changes are going to be made and with the last change it is noted that Treasury has taken the compromised position. For now the OTO accepts it, but it may have to revisited at a later stage.

Ms Tobias said initiating investigations of cases may come from a place of good faith, but may be interpreted as a witch hunt at some point. There may be an element of good intent and the justification thereof could even be questions in court. Maybe we should treat matters as they come and the imitation process can be used when a pattern has been discerned. With Ministerial approval, it is a compromised position.

Mr Maynier asked for a comment on why investigations on own initiatives would have to be on approval of the Minister, because that seemed to be a significant constraint on the Tax Ombud’s independence. Given that the OTO is based on the UK and Canadian models, what is the position there?

Mr Topham on employment under the SARS Act, said this makes sense, but how would the human resources and disciplinary processes work? Would that be done by SARS and if so will these processes only be at the instance of the OTO?

Mr Momoniat said an incremental approach is being taken with the Tax Ombud. Initially there was no Tax Ombud and they were formed based on a particular model. An ombud with regard to tax is quite different from an ombud in the financial sector for example. We are dealing with one agency and is another alternate form of dispute resolution with SARS for the taxpayer. The Minister is very clear that the OTO has done sterling work, has gotten off the ground and needs to move towards a more autonomous/independent position. That is why some of the issues with employment and so on have been sorted out. Treasury also did not want to come with a new Bill. However, if he were in the Tax Ombud’s position he would also want as much power as possible. The issue with ombuds is that the system also breaks down where they become too independent and begin to feel that they need to side with one side more and become civil activists. So the notion of independence has to be seen as a progressive widening of the options to small taxpayers who have complaints.

Mr Tomasek said it is relatively uncommon for a tax ombud to be exist on its own and are normally associated with the tax authority or the equivalent of the Public Protector. So the model chosen was where it is associated with the tax authority, but with a degree of independence. The UK model is purely a contractual arrangement between the tax authority and the tax adjudicator. It started off as just Her Majesty’s Revenue and Customs and the tax adjudicator. A number of different departments have now entered into the contractual relationship with the tax adjudicator. In Canada the tax ombud is formed by way of regulation and the reason we look to this model is that it is a bit more formalised in regulation, rather than contract and because Canada has a similar constitutional framework. If he recalled correctly, the UK does not have the power to initiate, but Canada does. On the question why with the Minister’s approval, this is a question of balance, because an investigation is being started on something which is not complaints driven, so there must be some basis. It is accepted that the OTO will have good bases, but there are also concerns about too many investigations or that they are timed incorrectly. Further, the Minister is the person who the Tax Ombud reports to. On the disciplinary process, it would be using the SARS procurement and human resources processes, but driven by the Tax Ombud as the head of the particular unit.

Ms Tobias said the principle of incremental application was enough and the other factors advanced seek to question the integrity of the institution and that will lead to debate. She had thought the way it have been couched had been agreed to. She then proposed parking the matter, because she did not agree with other Members.

Adv Makhwane said issues of independence ideally would be solved by having a Tax Ombud Act, giving it autonomy and may have to be considered in future. Secondly, on initiating an investigation this has to be looked at on the basis that the OTO will not just go on a witch hunt. It is also to bring credibility to the tax administration overall. Taxpayers must know that if they have an issue they can go to the Tax Ombud who is not captured by SARS. At the end of the day it is based on good faith and the OTO has looked at various models, such as Australia and Mexico where the tax ombuds are completely independent.

Mr Topham said there were two issues which Treasury should come back on next time, firstly the reference on page 19 the reference to the Audit Professionals Act should be for accounting officers and independent reviewers. On page 32, the non-allowance for partial transfer of land, this is a big political issue in the country and any initiative should be followed all the way through to the fiscal side.

Mr Maynier asked what the OTO’s budget is?

Adv Makhwane said the budget is around R28 million. In the first year it was R2.4 million, covering just a few months, the second year it was R12 million and presently it should be running with R36 million, but has been allocated R28 million.

Mr Peter Faber, South African Institute of Chartered Accountants, said the response by SARS on the VAT input aspect has confused the issue more. There are two limitations: the five year period for the refund and one for the input. The refund one was section 44 which was transferred to section 190 of the Tax Administration Act. The other was the proviso to the input claim in section 16 (3). So SARS was now saying that the input claim limitation is being reintroduced with a repealed refund section.

Mr Tomasek said you will note that this has been the case since 1991 and both are required.

The Chairperson then declared the meeting adjourned.