Budget 2016: Tax Parliamentary Hearings (Standing Committee on Finance)

1. Budget 2016: TaxParliamentary Hearings(Standing Committee on Finance) 2 March 2016 [Post-Meeting] Keith Engel (CEO)

2. Recognition of the Social Compact • Government recognition of the link between taxes and government obligations to the public is an important step • The overall sharing of the budget burden between tax increases and spending cuts is reasonable • Government’s restraint in terms of taxes recognises the constrained conditions within the private sector

3. Offshore Amnesty (VDP) • We support the offshore amnesty given the timing • The overall nature of the relief is reasonable and measured • Query whether the timing should extend beyond 6 months? • Initial private sector concerns: • The relief does not appear to cover all taxes (e.g. Estate Duty) • The income tax relief requires tracing and a partial look-back approach; why not simply reuse the old Amnesty with higher rates (given that the “bugs” have been cleaned)? • Note: If successful, the new amnesty will require significant resources (like the old amnesty)

4. Earmarked Taxes • The UIF, Road Accident Fund and the Skills Development Levy represent the most significant earmarked taxes • Question: • Is earmarking working? • What happens with excessive build-ups? • What happens if the connected programme is unsuccessful? • Does earmarking matter as long as the obligations of the programme are kept? • There is a lot to be said for reducing taxes (either permanently or temporarily) when excess funds are accumulating (last year’s proposal). • Does the skills development levy really make sense given that the levy is an additional charge on employment and the funds?

5. Retirement Reform • We largely support the new technical amendments • Rollover of excess deductions • Use of contributions deductions against passive income • Refinements to the defined benefit system • Annuitisation • We opposed the concession to the Unions in terms of annuitisation • The Unions abused the process and refused to properly engage

6. Closure of Loan/Trust Schemes • The use of trusts with zero interest rate loans is a very common method to reduce Estate Duty • If the proposal is to proceed, we think that the initial transfer to the trust in exchange for the interest-free loan should be treated as a Donations Tax event • The proposed inclusion of trust assets into the Estate will be complex and unfair (applying retroactively to pre-existing schemes) • Query whether the Estate Duty is really worth preserving3? TRUST

7. Share Incentive Schemes • We applaud Treasury’s decision to remedy the current problems associated with share schemes— • Unintended anomalies associated with BEE and rank-and-file employees should be removed • High executive schemes seeking to convert taxable salaried income into exempt dividends should be closed • Anti-avoidance: • Section 8C share should treat buybacks (as well as self-liquidating dividends) as ordinary salary revenue • Removal of double tax: • Share schemes should be taxed solely as ordinary salary revenue without any additional capital gains tax on the same gain

8. R&D + Other Depreciation Incentives (Little Success) Research and Development • While the October conference with DS&T created hope for improvement, the proposed guidelines appear more restrictive in terms of outcomes and processes • The detailed objective of the incentive remains unclear (e.g. what actual projects are we trying to incentivise) • We suggest that the prior section 11B be restored so that taxpayers can at least receive the normal deduction if taxpayers do not pursue the incentive (now R&D often receives no deductions at all). Incentive Policy • Treasury appears to view accelerated or excess depreciation allowances as a panacea for all ills • Note: • Many businesses do not achieve profit until 3-to-5 years have passed • Some start-ups never receive any profits at all (preferring to sell the shares of highly successful start-ups) • Many businesses have only small profit margins • Cash incentives appear to be more effective but the DTI has become very restrictive (probably due to a lack of cash)

9. Mining Community Infrastructure • We fully support the proposal to provide mining companies with deductions for community expenditure (these expenditures are a real economic expense in terms of cash and IFRS) • Query whether this relief should be extended to other industries (e.g. farming) • Note: Environmental rehabilitation during the life of mine should also be deductible

10. Not Much for Small Business • The proposal provides little for small business outside SARS operations (small business desks, mobile app registration and single registration) • We note the ongoing need for small businesses to operate on a cash basis for VAT and income tax purposes • Query whether anomalies should be removed (such as the rules against personal liability companies)? • Query whether there is a better alternative to the turnover tax in respect of micro-businesses?

11. Share Buyback Avoidance Schemes • History • Abusive share buyback schemes have been in the market for several years • The schemes have become increasingly aggressive (many no longer having a viable business purpose) • Large amounts of revenue have been lost (some estimate the losses to the fiscus could be in the billions) • Mechanism • The basic scheme is the conversion of taxable (CGT) share sales into tax-free buybacks • Buybacks before sales must be treated as CGT events • Corporate Capital Gains • The corporate capital gains tax is too high when share sales of controlled subsidiaries are involved • The rate in these instances should match to standard dividends (15%) • Advanced reporting • The advanced reporting mechanism seems to have done little to slow or prevent these deals

12. Base Erosion Noise AGREE • Cross-border hybrids can be closed by: • Denying deductions within South Africa for payments that are exempt abroad • Removing the participation exemption for amounts received in South Africa is deductible abroad • Treaty shopping can be curbed but should be done within the context of global treaty practice (several Africa countries are imposing unilateral overrides, thereby undermining their investment credibility) • The treaty interest article with certain countries should be reconsidered CONCERN • The statements by the NGO and the OECD in terms of “illicit flows” are inflated and create false / unfair perception • The over-emphasis on reporting is creating a huge and unrealistic compliance burden on companies (with little benefit in terms of audit) • The Budget Proposal seems to indicate that “excessive” interest remains a concern, forgetting the existence of recent changes (e.g.): • Section 23M • Section 23N • Thin Capitalisation • Interest withholding • Anti-hybrid rules

13. Cross-Border Legislation Should Not Make SA Companies Uncompetitive • While the OECD is pushing hard on CFC legislation in terms of theory, little action is happening on the ground • The US is retaining the check-the-box regulations that undermine much of their CFC legislation • The UK has softened itsCFC legislation and lowered its overall rates • The Netherlands is maintaining itsgateway benefits • In South Africa, we are: • Tightening our CFC legislation in terms of activity • Cutting our multi-group relief • Uncertainty exists about Gateway status after the cross-border credit for services has been dropped • Care must be taken not to enhance double taxation in Africa, which is a high-tax region

14. Cross-Border Services • The policy around taxing local services by foreign entities needs to be revisited • The withdrawal of cross-border withholding is welcome given the confusion. However, the special advanced reporting rules cause an excessive compliance burden • The proposed focus should be narrowed solely to cover: • South African payment for services by foreign residents • South African payments to foreign group companies as indirect compensation for foreign services

15. Taxpayer Administrative Responses Times • Proposal • It is proposed that the 30 day response time be extended for certain complex matters • View • We support the extension but wonder whether the 30-day period should be extended more generally • The press of business makes rapid response very hard as a practical matter, especially for small business • We suggest that the objection time be extended to a period of between 60 and 90 days. • Thanks from last year • The amendments require 10-day notification before the imposition of a bank lien is strongly supported.