A new local business tax
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A NEW LOCAL BUSINESS TAX. Presentation to Western Cape Branch of IMFO 4 June 2012. Programme. Background The need for the new city revenue stream Objectives of the new city revenue stream Design issues Proposals Project process Responses to Proposal Current Status.

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A new local business tax

A NEW LOCAL BUSINESS TAX

Presentation to Western Cape Branch of IMFO

4 June 2012


Programme

Programme

  • Background

  • The need for the new city revenue stream

  • Objectives of the new city revenue stream

  • Design issues

  • Proposals

  • Project process

  • Responses to Proposal

  • Current Status


The long history of the lbt 1

The long history of the LBT (1)

  • From 2000 - National Treasury indicates a desire to reform RSC levies

  • 2001 - Paper written for national government entitled ‘The Regional Services Council Levy: Evaluation and Reform Options’, by Roy Bahl and David Solomon, recommended a payroll levy.

  • 2005 - Paper written for NT as part of investigation into Municipal Fiscal Framework entitled ‘Replacing RSC/JSB levies’ by Richard Bird and Philip van Ryneveld recommend a local business tax as a preferred option

  • December 2005 - National Treasury publishes discussion document on website on options on replacement of RSC levies and indicates significant interest in implementation of a local business tax.


The long history of the lbt 2

The long history of the LBT (2)

  • 2007 - SALGA tour of countries implementing some form of LBT, report compiled recommending LBT, especially for districts, SALGA NEC adopts proposal for LBT among other changes

  • 2008 SALGA letter to Minister of Finance, with faulty proposals for an LBT, Minister rejects the proposals as unconstitutional

  • 2009 - IMFO CFO forum considers and supports proposal for LBT; SALGA workshop considers and supports LBT; SALGA submission to Budget Forum

  • 2010 - Several Metro Councils initiated a project for prepare formal MFPFA applications for a local business tax; SALGA submission to the October Budget Forum


Mfpfa requirements

MFPFA requirements


Outline of mfpfa application document

Outline of MFPFA application document

  • Introduction

  • The need for additional sources of revenue

  • The need to improve city fiscal accountability

  • Consideration of possible additional sources of revenue

  • Proposal: a local business tax for the nine metros

  • Constitutional and legal considerations

  • Administrative considerations

  • Financial and economic implications

  • Implications for the municipal fiscal framework and intergovernmental fiscal relations

  • Reactions of organisations and individuals consulted

  • Conclusion


Programme1

Programme

  • Background

  • The need for the new city revenue stream

  • Objectives of the new city revenue stream

  • Design issues

  • Proposals

  • Project process

  • Responses to Proposal

  • Current Status


Fiscal gap

Fiscal Gap

  • City governments face a significant fiscal gap between their expenditure responsibilities and revenue resources

    • the nature of the gap varies:

    • In the cities and some other municipalities much of the gap relates to the requirement to provide infrastructure and services for economic growth and development; and specifically public transport infrastructure and operations.

    • for many other municipalities the gap still consists largely of a basic service standards backlog.

“How wonderful it is that nobody need wait a single moment before starting to improve the world.” - Anne Frank


Weaknesses

Weaknesses

  • There is a need for some adjustments to the framework within which municipalities currently operate.

    • despite significant increases in national grants, funding for critical investments in economic infrastructure and public transport services remains inadequate

    • the increasing share of grants in total municipal income implies a weakening in local municipal governance, especially in cities

    • Municipalities must also cope with significant unfunded mandates.

    • The understandable priority given to inherited backlogs has until recently meant insufficient attention being paid to economic infrastructure and services.

    • the share of the fuel levy is merely a general revenue source for cities, without links to transport functions


Responsibility

Responsibility

  • Municipalities are responsible for closing some of the fiscal gap, and must do so

    • billing completeness & accuracy

    • collections efficiency

    • debtors minimisation and management

    • tax and tariff increases for existing revenue sources

    • expenditure efficiencies

  • But there is nevertheless a remaining fiscal gap, which should be filled by a new local revenue source

“The true meaning of life is to plant trees, under whose shade you do not expect to sit.” - Nelson Henderson


Quantifying the need

Quantifying the need

Economic

Cost of infrastructure & services required to adequately fulfil legal mandate

GAP

Ongoing costs of services

Tax & tariff increases

Maintenance & refurbishment backlog

Development charges

Provision for growth

Residential

Expenditure efficiencies

Minimum standards backlog

Improved revenue effort


Funding gap un fundable share of capex needs optimistic case

Funding gapUn-fundable share of capex needs: optimistic case


Local business tax

Local business tax

  • The remaining gap should be closed by a local business tax

    • Cities have considered 14 potential supplementary revenue sources - surcharges on water an electricity; outdoor advertising; taxes on property transfers; tourism bed-nights; municipal road use, non-residential parking, road tolling, congestion charges; vehicle license fees

    • Used standard public finance and tax criteria – revenue potential, constitutionality & legality, ease of administration; economic impact; social acceptability; including accountability and localisation, and links to private road use.

    • LBT is most viable in terms of scale, administration, impact, and acceptability, and can be designed to enhance accountability


Estimated lbt turnover revenue yields nominal r b

Estimated LBT (turnover) revenue yields nominal R b


Tax room

Tax room

  • There is at least some tax room for the LBT

  • The removal in June 2006 of RSC/JSB levies without replacement by another tax meant an effective reduction in total company taxes

  • Even if in practise more than this is collected, the net economic impact can be positive if the tax and the way that revenues are spent, is well designed and executed.

“Die when I may, I want it said of me by those who knew me best, that I always plucked a thistle and planted a flower where I thought a flower would grow” – Abraham Lincoln


Programme2

Programme

  • Background

  • The need for the new city revenue stream

  • Objectives of the new city revenue stream

  • Design issues

  • Proposals

  • Project process

  • Responses to Proposal

  • Current Status


Objectives

Objectives

  • A ‘local business tax for economic services’ is intended to improve our system of intergovernmental fiscal relations:

    • To increase local fiscal capacity, because needs exceed resources available

    • To improve local accountability, for economic services and infrastructure

    • To improve economic and general urban efficiency, because ordinary political process tends to de-prioritise core economic infrastructure services


Beneficiaries administration

Beneficiaries & administration

  • The LBT should be collected by SARS and distributed to the recipient municipalities.

    • More efficient - make use of existing tax infrastructure and data

    • Better control and accountability

  • LBT revenues should be received by metropolitan municipalities, because of:

    • the national distribution of the local business tax base (relatively few municipalities have the bulk of the tax base); and

    • administrative considerations (administrative complexity increases sharply with the number of recipient municipalities)


  • Programme3

    Programme

    • Background

    • The need for the new city revenue stream

    • Objectives of the new city revenue stream

    • Design issues

    • Proposals

    • Project process

    • Responses to Proposal

    • Current Status


    Spectrum of alternatives

    Spectrum of alternatives

    Pure local tax

    National tax allowing local rate variation

    Grant with origin based formula

    General formula based grant

    National tax distributed

    by means of grants to

    municipalities

    Local tax


    Three options in tax design

    Three options in tax design

    • Change the constitution

      • to permit a local origin-based VAT (best from a pure public finance and tax perspective)

    • Introduce a national tax with strong local characteristics

      • essentially a national tax distributed as a grant

      • a key for apportionment is developed based on annual tax returns

      • easier to administer but accountability not as direct

      • hard to have a variable rate under this model

    • Define a specific (additive) local tax base

      • as close to the correct logic as possible, ensuring it is not a VAT

      • SARS would administer a revenue fund per recipient municipality

      • in principle allows variable rate between floor and ceiling


    Defining the base option 1

    Defining the base (OPTION 1)

    • Impact of company activities are reflected in its use of capital services (depreciation, rent, and interest)

      • Depreciation represents the `using up’ of capital assets, often physical assets, which can be associated with the impact upon and use of physical infrastructure supplied by the city.

      • Rent should be included since some companies lease their productive capital assets rather than own them; and interest should also be included to level the playing fields among the owners of capital assets.

    • A major determinant of the economic impact of the company on city infrastructure and services is reflected in its use of labour services

      • salaries and wages should therefore be part of the LBT tax base


    Distributing the base option 1

    Distributing the base (OPTION 1)

    • Capital services

      • according to the location of physical assets

    • Labour services

      • according to the normal work location of employees

    “It should never be that the anger of the poor should be the finger of accusation pointed at all of us because we failed to respond to the cries of the people for food, for shelter, for the dignity of the individual” – Nelson Mandela


    Definition per field references on it14 form option 1

    Definition per field references on

    IT14 form (OPTION 1)

    • Capital services:

      • 4418 – Rent - leased assets (to avoid double-taxing leased assets, banks must subtract rental payments from their depreciation claim – so the company that uses the asset will pay the tax, rather than the owner of the leased asset)

      • 4421 – Depreciation – special allowance assets (sections 12 (b) and 12 (c))

      • 4494 – Depreciation – fixed assets

      • 4519 – Depreciation – moveable assets

      • 4521 – Interest – financial institutions

      • 4523 – interest – other

    • Labour services:

      • 4529 – Salaries and wages


    This complies with the constitution option 1

    This complies with the

    constitution (OPTION 1)

    • Not a company income tax base

      • it excludes important components, notably profit and royalties, and also does not subtract gross investment

    • Not a value-added or a sales tax base.

    • Instead is a unique proposed local business tax base which provides a reasonable proxy for the economic footprint of a company operating in a city.


    Defining the base option 2

    Defining the base (Option 2)

    • Use business turnover as the base for calculation

      • Gross turnover to be used

  • Increase or decrease in turnover is a clear proxy for economic activity

  • All businesses submitting IT14 tax returns will be subjected to the tax

  • SARS to be appointed as the tax collector through their normal tax collection processes.

  • Tax is a value added tax


  • Emerging storyline

    Emerging storyline

    • The cities need additional resources to support economic infrastructure & services

    • They also need additional accountability mechanisms to ensure that adequate priority is given to spending on economic services

    • A local business tax for economic services is therefore proposed

    “Our ideas, like orange-plants, spread out in proportion to the size of the box which imprisons the roots.” - Edward Bulwer Lytton


    Reconnecting taxation

    Reconnecting taxation

    • Hypothecation/assigned tax revenues

      • increase legitimacy and public acceptance

      • improve formal transparency and reporting,

      • highlights service provider performance

      • provides clearer budget constraints

    • LBT revenues should be assigned to fund economic infrastructure and services

    • Share of fuel levy should be assigned to public transport infrastructure & operations


    Governance accountability

    Governance & accountability

    • LBT payments to recipient municipalities by SARS should be as mechanical as possible.

    • Consider specific additional measures, such as:

      • the funds should be used only on projects which are able to demonstrate a positive economic internal rate of return;

      • recipient municipalities should account and report separately on expenditure of these funds

      • establishing specifically-constituted forums to which such accounting must take place.


    Redistribution

    Redistribution

    • The `rest of SA’ LBT revenues could be assigned to economic development projects outside the metros

    “For to be free is not merely to cast off one's chains, but to live in a way that respects and enhances the freedom of others.” – Nelson Mandela


    Programme4

    Programme

    • Background

    • The need for the new city revenue stream

    • Objectives of the new city revenue stream

    • Design issues

    • Proposals

    • Project process

    • Responses to Proposal

    • Current Status


    Proposals

    Proposals

    • Metros should themselves make a full contribution to closing the fiscal gap that they face.

    • The remaining gap should be closed by a introducing a LBT for metropolitan governments

    • The LBT should be designed to comply with the existing Constitution, and should be collected by SARS and distributed to the recipient municipalities.

    • LBT revenues should be spent on economic infrastructure and services, and specific accountability and reporting requirements should be introduced.

    • The share of fuel levy should be assigned to public transport infrastructure and operations.

    • The `rest of SA’ LBT revenues should be assigned to district economic development projects.


    Feedback from nt 1

    Feedback from NT (1)

    • Tax policy unit

      • more interested in the principles - policy rationale is critical

      • Design issues are important, but less so - `If we agree, we will ask SARS to administer’

      • It is hard to earmark a major tax

      • Agree there is a funding gap

        • `the unfunded mandates floating around are very irresponsible’

        • applies more broadly, not to economic services

      • Must give a social and political rationale – `must crack the politics’


    Feedback from nt 2

    Feedback from NT (2)

    • Tax policy unit (cont)

      • Best is an origin-based VAT, so change the constitution - `this is a third best option’

      • Need to agree on principles first before we go into detail

    • IGRU

      • Argue that the built environment must be treated differently, so metros are different

      • Gap applies more broadly, not to economic services

      • Originally the MFPFA had had a two-step application process, but those clauses were removed


    Feedback from sars

    Feedback from SARS

    • Proposals can be worked with

    • System changes take longer than everyone expects

    • SARS will charge for the service

    “The miracle is not to fly in the air, or to walk on the water, but to walk on the earth.” - Chinese Proverb


    Programme5

    Programme

    • Background

    • The need for the new city revenue stream

    • Objectives of the new city revenue stream

    • Design issues

    • Proposals

    • Project process

    • Responses to Proposal

    • Current Status


    Project processes

    Project processes


    Programme6

    Programme

    • Background

    • The need for the new city revenue stream

    • Objectives of the new city revenue stream

    • Design issues

    • Proposals

    • Project process

    • Responses to Proposal

    • Current Status


    Business reaction

    Business reaction

    • Business Leadership South Africa

    • appreciates some of the logic in terms of the interests of metros

    • business might derive some benefits, if allocation and expenditure efficiencies improve

    • extreme concern at risk to business costs and environment posed by

      • many dedicated taxes and levies being motivated (carbon tax, national health insurance, new social security system, SABC)

      • administered prices (electricity, water, transport, ports, road tolls etc)

    • Durban Chamber of Commerce and Industry

    • expected to be raised from proposed LBT tax could easily be achieved if wasteful and extravagant expenditure was curtailed


    A new local business tax

    BUSA

    • Presentations to

      • Business Unity meeting in Johannesburg

      • Nelson Mandela Bay Business Chamber

      • Cape Town political committee meeting

      • Proposals much better supported once properly understood

    • By e-mail from SAICA:

      • “The SAICA NTC supports the submission proposals made by Business Unity South Africa (“BUSA’) and the Durban Chamber of Commerce & Industry. We are of the view that if a business tax is to be introduced this is better placed with the administration of the South African Revenue Service (‘SARS’). When Regional Service Council (‘RSC’) levies was removed the administration costs of collecting this levy almost equated the revenue collected. The introduction of a business tax will be a mere replacement for the RSC levies”.


    Programme7

    Programme

    • Background

    • The need for the new city revenue stream

    • Objectives of the new city revenue stream

    • Design issues

    • Proposals

    • Project process

    • Responses to Proposal

    • Current Status


    Project status

    Project status

    • eThekwini Metropolitan Municipality submitted an application in December 2011.

    • Nelson Mandela Bay Metropolitan Municipality submitted a similar application in January 2012.

    • The Minister of Finance has consulted the Fiscal and Financial Commission, who has responded positively to the proposals, and recommended that metro municipalities should only be able to access the new revenue source when they have demonstrated improved financial performance.

    • The response by the Minister of Finance to the eThekwini application is almost due

    • SALGA is expected to submit an application shortly.


    The end thank you

    The End – Thank You

    “There is no passion to be found playing small - in settling for a life that is less than the one you are capable of living.” – Nelson Mandela


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