M M KATZ – SUBMISSIONS TO THE PARLIAMENTIARY COMMITTEE ON FINANCE ON TAX POLICY ARISING AFROM THE BUDGET 2006/7
INTRODUCTION
On a proper evaluation of the budget, taking into account the revenue and expenditure provisions and the inter-action between them, its overwhelming thrust is redistribution and in my view it seeks to achieve this objective in a sensible and appropriate manner.
The performance of the South African Revenue Service has been outstanding. In making this observation I am not only referring to the significant cash collections but also to the many other benefits that arise from its structure, conduct, efficiency and activities, including :-
the creation of confidence in the minds of domestic and foreign investors that the South African Tax Administration is efficient, certain and predictable;
its development of capacity enables tax policy to be formulated and implemented without any concerns of limitations arising from tax administration;
it promotes a competitive environment between business operating in the same industry, or put in the converse it eliminates inefficiencies which might favour a business in its competitive activities with its competitors.
In the remainder of these submissions I deal both with issues :-
that appear in the budget; or
that don’t appear in the budget and whose absence has been the subject of some comment.
FUNDAMENTAL OBJECTIVES OF TAX POLICY
As I have repeatedly submitted before this Committee and its predecessors a healthy tax policy promotes :-
a broadening of the tax base;
a lowering of general rates; and
an efficient tax administration.
The aforegoing objectives must take cognisance of the realities of the society in which it operates. In this context a particular reality of South African society is the huge gaps in assets and income of the wealthy and poor. Thus an over-reliance on regressive taxes, which impacts most harshly on the poor, must be avoided.
Specific tax incentives should in general terms be avoided since :-
they impact adversely on the more sensible policy objective of general rate reduction;
they make tax administration and tax compliance more costly; and
they distort resource allocation.
CORPORATE TAX RATES
I support the decision not to reduce the basic corporate rate.
A further reduction of corporate rates unaccompanied by a reduction in the maximum marginal rate of individual tax would result in unhealthy tax arbitrage. It is not an appropriate time to reduce maximum marginal rates of individual tax.
The business sector has benefited in this budget from the decision to eliminate regional services council tax and not to replace it with another tax. This is a more sensible tax relief to the business sector than reducing corporate tax rates.
REGIONAL SERVICE COUNCIL TAX
I support the decision to abolish the regional service council tax. Apart from being complex it also suffered from a number of other legal objections.
The decision not to replace it with another tax is appropriate – this provides the business sector with appropriate tax relief.
SECONDARY TAX ON COMPANIES
I agree with the decision to retain the secondary tax on companies ("STC").
Any decision to abolish STC would almost certainly give rise to a tax on dividends.
STC is in many respects "equivalent" to a final withholding tax on dividends.
It’s attributes include :-
it is easy to administer;
it assists small and medium enterprise which generally plough-back profits to finance the business.
From a rate point of view, the rate of STC bears a sensible relationship to current corporate rates.
VAT
Since VAT, although a very efficient tax, is particularly regressive, and thus harsh on the poor, I support the decision not to increase the rate of VAT.
A reduction in VAT rates would represent a disproportionate benefit to the wealthy.
Multiple VAT rates should be avoided since compliance and administration becomes costly and difficult.
RETIRMENT FUND TAXATION
The retirement fund tax proposals relate simply to rates. They do not deal with structure.
It is highly desirable that the process initiated by the Treasury on the holistic reform of retirement fund taxation be completed as soon as possible in order to end uncertainty in this important area of taxation.
Apart from any other consideration the existing structure for taxing retirement funds is inconsistent in a number of respects , as for example :-
rent is taxed on a gross basis;
interest is taxed on a net basis;
other income not taxed.
The tax treatment as between pension and provident funds also differs.
TAX ADMINISTRATION
I support the various steps announced in the context of enhanced tax administration :-
advance tax rulings;
well-defined rules relating to penalties;
electronic filing;
small business amnesty;
move to self-assessment;
STC dividend cycle to be reviewed.
Adjusting various allowances for inflation is appropriate, e.g transfer duty on residential property, estate duty exemptions, donations tax thresholds, capital gains tax thresholds on residential property.
I am strongly opposed to the proposal to give a deduction of 150% for R&D expenditure. It encourages wasteful expenditure and can lead to abuse.
As regards the proposals relating to anti-avoidance legislation those are still the subject of a discussion process which SARS has initiated and it is therefore more appropriate to deal with this issue as part of those discussions.
An important issue is the treatment of minority shareholders in terms of certain corporate restructurings. SARS has indicated that this is being considered. I support this initiative.
SMALL BUSINESS
I support, in principle, the thrust to promote small business primarily by easing the burden of compliance.
CAPITAL vs REVENUE
Many of the disputes between SARS and taxpayers relate to the question whether the surplus on the disposal of an asset is capital or revenue.
The criteria for resolving this question are often very difficult to apply. In recognition of this difficulty section 9B was introduced into the Income Tax Act as a safe harbour.
Unfortunately the safe harbour has two limitations, namely :-
it applies solely to listed shares; and
the shares must be held by the taxpayer for a continuous period of not less than 5 years.
Consideration should be given to reducing these limitations particularly the period of 5 years.
The benefit of extending the safe harbour is that it will considerably reduce the number of disputes between taxpayers and SARS. This will free up resources.
POLICY COHERENCE : REMOVAL OF ANOMALIES
SARS has given notice that there are a number of changes which ware being considered to remove anomalies. It is indeed desirable that consideration be given to the removal of these identified anomalies.
MISCELLANEOUS AMENDMENTS
SARS has given notice that in addition to the proposals in the budget the 2006 legislation will contain miscellaneous amendments to the various income tax acts. The subject matter of these proposed amendments have been identified by SARS in the brochure released by SARS with the budget documentation.
It is more appropriate to deal with such changes when the draft legislation is published for comment.