Deloitte & Touche
Submission to the Standing Committee on Finance: Draft Revenue Laws Amendment Bill, 2003
Introduction Firstly, we would like to express our thanks to the Standing Committee for the opportunity to present to it our comments in regard to the draft Revenue Laws Amendment Bill 2003. We trust they will be of assistance in the deliberations of the Committee.
However, thanks are also due to National Treasury who has previously engaged in discussions with Deloitte & Touche in regard to its legislative programme and who have shown willingness to debate the issues in an open and constructive manner. That is not to say that there are still some fundamental areas of disagreement as regards certain of the proposed amendments.
To say that the latest amendments are complex and at times difficult to decipher would be to state the obvious. The complexity, not only of the amendments but also of the tax laws themselves, is an issue of grave concern to the firm. While tax experts who are fully engaged on a daily basis in providing advise as regards the import of the laws and recent changes grapple with the law, it is evident that business, that are required to administer these complex laws, are increasingly falling foul of the provisions through an inability to comprehend the complexity of the laws. We are also concerned that the complexity will also adversely impact the ability of SARS to properly administer the provisions across the country. Our plea would be for a moratorium on any further significant changes for the foreseeable future to enable taxpayers and SARS to absorb the very significant changes that have taken place over the last few years.
Corporate Rules We fail to understand why there continues to be a distinction drawn between the criteria for a "domestic financial instrument holding company" and a 'foreign financial instrument holding company". The proposed amendment to the definition of "domestic financial instrument holding company" (clause 54(1)(c) of the Bill) makes it far more restrictive in application than a 'foreign financial instrument holding company" (clause 28(1)(e) of the Bill). It is recommended that the exclusion in respect of shares in, and loan, advance or debt entered into with, a "controlled group company" should be amended to relate to companies that form part of the same "group of companies" as defined.
Any losses (current and assessed) incurred by the transferor cannot be transferred to the transferee under the rollover relief provided for in the corporate rules. This is a deterrent to the application of the provisions. A method should be found to allow the losses to be transferred under the corporate rules, even if it entails some sort of ring fencing. The failure to provide for the transfer of losses also adversely impacts the ability of foreign companies to convert their South African branches into subsidiaries. This was previously provided for in respect of branches of foreign taxpayers in terms of the Income Tax Act, but was withdrawn on adoption of the corporate rules. We Deloitte &Touche
believe that providing for the transfer of losses would make the corporate rules user-friendlier.
The import of the proposed amendment to section 45(4) - clause 58(1)(b)of the Bill -is unclear and should be made clearer.
Individuals
A proposed provision would allow SARS to recover employees' tax withheld from employees, but not paid to SARS, to be recovered from the public officer, directors and shareholders is, with respect, too sever (clause 89(1) of the Bill). It is not impossible that public officers, directors, especially non-executive directors, and shareholders may be unaware of the fact that this transgression had taken place. It is suggested that these parties should only be personally liable for the debt due to the State to the extent they have benefited from the transgression or it can be shown that they were aware of it and colluded therein. That is, there should be some requirement on SARS to prove mala fides before this recovery process is instituted. It is also unclear whether the person affected is empowered in terms of the law to recover any tax recovered by SARS from the employer who should have withheld the employees' tax.
As regards directors of private companies, the time has surely come to treat them the same as any other taxpayer or director of a public company. The fact is that the provision is administratively burdensome and can give rise to adverse consequences for both the director and the employer. While the proposed amendment to the present regime (clause 91(1)(e) of the Bill) seeks to mitigate these adverse consequences in certain circumstances, the limitation of 80% is once again too formalistic and fails to take cognizance of the fact that a substantial portion of a director's income could consist of non-fixed monthly payments, such as bonuses and other incentive payments Directors of private companies, like all other taxpayers, should be subject to tax on the income that accrues to them - nothing more, nor nothing less.
Much can, and no doubt has been said about the ring fencing of assessed losses in respect of certain trades. As a general comment it would seem that the "facts and circumstances" tests are reasonable and unlikely to prejudice genuine second trade arrangements. However, we would draw your attention to the provisions of section 20A(2)(a), read with subsection (1). It would seem that the effect of these provisions is to bring within the ambit of the limitation all trades. That is, should any natural person, for example, carry on a manufacturing business and incurs losses as contemplated in subsection (2)(a), the provisions of section 20A(1) will apply. This could not have been intended. It is also unclear why there are numerous references to activities of "relatives". One would have thought that where a relative carries on a trade he/she would be taxed in their own hands, subject to the same rules.
Foreign Income Why the long delay in introducing the exemption in respect of foreign dividends? While it is accepted that taxpayers may need time to arrange their affairs, the Minister clearly indicated that the exemption would be adopted in the near future. For certain companies the implementation will only be effected in their 2006 tax years, the very long delay in implementation is unacceptable.
It is unclear why there is a difference in the criteria for qualification for the election in terms of the proposed new section 9D(1A) and the participation exemption that will apply in respect of foreign dividends in terms of the proposed section 10(1)(k)(ii)(aa). That is, the shareholding of a connected person in relation to the resident is taken into account in the determination of the qualifying threshold for purposes of the election provided for in terms of the proposed new section 9D(1A) - clause 28(1)(f) of the Bill, while the proposed participation exemption (clause 32(1)(h) of the Bill) in respect of foreign dividends only applies in respect of the shareholding held directly by a natural person, or the combined shareholding of a company and any other company in the same group of companies. It would seem to us that both provisions should recognize a connected person relationship in relation to the taxpayer concerned.
While the proposed exclusion (clause 28(1)(o) of the Bill) in respect of income that is subject to tax in a foreign country from the ambit of the "connected sale/service" exclusions that apply in relation to the business establishment provisions of section 9D are to be welcomed, the proposed provision is too restrictive. The exclusion will only apply where the income 'was taxed in the other country at an effective rate.. .which is equal to or exceeds the rate of tax in terms of(the Income Tax Act)". The exclusion should apply where the income has been taxed or will be subject to tax (this formulation already appears in section 9D(9)(a) of the Income Tax Act). In addition, the reference to effective rate is unclear, and whether this effective rate must be compared to the effective or statutory rate that would have applied in South Africa on that income. We recommend that the income be subject to tax in the foreign country at a rate of tax at least equal to the "qualifying statutory rate" as defined in section 9E.
The proposed amendments to the anti-avoidance provisions provided for in section 9D (clause 28(1)(r) of the Bill) is too broadly stated and retention of the existing formulation is recommended. The anti-avoidance provision will apply if "any person" is entitled to a deduction but is not subject to tax on any income relating to that expenditure.
The effective replacement of a "foreign financial instrument holding company" with a "domestic financial instrument holding company" in the exclusion in relation to the existing participation exemption in section 9D(9)(h) - clause 28(1)(t) of the Bill - is inexplicable. The effect of this proposed amendment would be that the disposal of shares in a group company could fall outside the participation exemption if the relevant company does not constitute a controlled group company, while at present it would not. As recommended above, the two definitions should provide for the same criteria or be amalgamated so that the exclusions have the same logical basis. In the alternative, the participation exemption should apply to the disposal of shares in a group company, and not merely a controlled group company.
We note that the promised amendment to section 24I(11) has not been included in these amendments. In essence, the seemingly unintended denial of an exchange gain or loss where assets acquired in a foreign currency are used by the taxpayer or are disposed of locally should be withdrawn.
Reportable Transactions Much has been said and written about the proposed new Part 1A, which introduces a reporting regime. We do not wish to repeat everything that has already been conveyed to the Committee, except to support those representations that question the need and efficacy of the proposed new regime. We would strongly recommend that the proposal be held in abeyance until all interested parties have had an opportunity to consider the matter and engage SARS in discussion. As a general comment we would note that the definition of "reportable transaction" would in all probability include many unintended transactions in its ambit.
Value-Added Tax The proposed amendment (clause 170(1)(c) of the Bill) in relation to services rendered by a branch or main business in South Africa to a branch or main business outside South Africa should be modified. In terms of the proposed amendment to section 11(2)(o) of the Value-Added Tax Act, only services rendered by the branch that will be used outside South Africa will qualify for zero-rating. By contrast a subsidiary carrying out the same services in South Africa could qualify for zero rating in certain circumstances. The effect of the proposed amendment would therefore be to place subsidiary companies who render similar services to related foreign parties in a far better position than a branch operation carrying out the same services. At the least, the zero-rating applicable to branch operations should be similar to that applicable to subsidiary companies.
The proposed requirement that the VAT registration number of a purchaser be included on a tax invoice introduces an additional administrative burden for business. This additional requirement also increases the possibility for error that could result in the disqualification of the tax invoice.
Administrative Provisions It is not clear whether the proposed limitation in respect of the extension of time in which to object in relation to the 30-day limit is subject to the "exceptional circumstances" requirement referred to in the proposed new proviso (a) - clause 76 of the Bill.
The proposed new provision in relation to refunds (clause 80 of the Bill) will no doubt give rise to disputes as it is unclear as to when a taxpayer will be "in default or fails to comply". What if an extension is requested for submission of the requested information but there is no response form SARS?