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Tax and Exchange Control Proposals: Budget 2008. PCOF: 27 February 2008 National Treasury & SARS. Tax policy objectives for 2008/09. Stimulate economy’s growth potential by reducing the tax rate on business & supporting industrial incentives

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Tax and exchange control proposals budget 2008

Tax and Exchange Control Proposals: Budget 2008

PCOF: 27 February 2008

National Treasury & SARS

Tax policy objectives for 2008 09
Tax policy objectives for 2008/09

  • Stimulate economy’s growth potential by reducing the tax rate on business & supporting industrial incentives

  • New initiatives reduce the cost of doing business by cutting red tape, especially for very small businesses

  • Protect individuals from the effects of inflation by adjusting personal income tax brackets and thresholds

  • Support sustainable development and make a contribution to deal with climate change

  • Complement other demand-side measures to reduce electricity demand

Summary of main tax proposals
Summary of main tax proposals

  • Tax relief for businesses = R7.4 billion

    • CIT headline tax rate reductions

    • Industrial policy: tax incentives

    • STC reforms

    • UDZ

    • Housing for low income workers – enhanced deductions / depreciation allowances

    • Small businesses

      • Simplified turnover tax system

      • Compulsory VAT registration threshold increased

      • Tax incentive for venture capital (also for junior mining exploration companies)

  • Tax relief for individuals = R7.7 billion

    • PIT brackets & rebates increased

    • Medical scheme contributions deductions increased

    • Tax free interest income thresholds increased

    • Employer provided bursaries – fringe benefit tax relief

    • Employer provided housing – fringe benefit tax relief

    • Motor vehicle allowances – adjustment to rates per km

  • Increases in excise duties & fuel levy

  • Introduction of an electricity levy

  • Protecting the environment

  • Relief for Public Benefit Organisations

  • Protecting the tax base – exchange control reforms

  • Various technical amendments

1 tax revenue trends
1. Tax revenue trends

  • The 2007/08 gross tax revenue is expected to be 2.6% higher than budgeted, additional R14,5 bn

  • Higher collections largely from:

    • personal income tax, STC, and corporate income tax

  • VAT receipts are expected to be 5.2% or R8.1 billion below budget

  • Customs duties are revised downwards by R484 million indicating a moderation of consumer imports

  • Number of individual registered taxpayers grew by 280 000 in 2007 to an estimated 5.3 million (excluding SITE only taxpayers)

2 individuals personal income tax
2. Individuals 2007/08Personal income tax

  • Personal Income Tax brackets adjusted to take account of wage inflation

  • Primary and secondary rebates increased to R8 280 and R5 040 respectively

  • Income tax threshold increased from:

    • R43 000 to R46 000 for persons below the age of 65 years and

    • R69 000 to R74 000 for persons aged 65 years and older

  • Monetary caps for tax free medical scheme contributions increased from:

    • R530 to R570 for each of the first two beneficiaries and

    • R320 to R345 for each additional beneficiary, as from 1 March 2008

  • Total relief for persons totals R7.7 billion

  • In addition motor vehicle allowances – kilometer rates adjusted for inflation

  • Tax free interest income increased to R19 000 and R27 500 for individuals aged younger than 65 years and 65 years and older respectively

Disability 2007/08

  • Proposed areas to be reviewed:

    • Replace the word “handicapped persons”

    • Types of tax-deductible expenses

    • Expand the list of disabilities that may qualify for the deduction of all medical expenses

    • Limit the scope of the definition of mental illness that may qualify for the deduction of all medical expenses

    • Limit the deduction of expenses incurred by or on behalf of disabled persons to only expenses directly related to the disability

Retirement reform deductibility of contributions
Retirement Reform – deductibility of contributions 2007/08

  • Consolidated retirement fund contribution regime

    • Simplify taxation of withdrawals prior to retirement, but with the incentive to encourage individuals to preserve most of their benefits until retirement

    • Employee/member contribution

      • Tax deductible percentage contributions and monetary limits reviewed and updated

    • Consider overall monetary limit on contributions, e.g. R100 000 per annum

    • Employer contribution

      • Fully tax deductible for employer

      • Excess taxed in hands of employee (but tax-free upon retirement)

Retirement reform administration
Retirement Reform - administration 2007/08

  • Definitions of different retirement vehicles

    • Pension fund (existing definition)

    • Pension preservation (new definition)

    • Provident fund (existing definition)

    • Provident preservation fund (new definition)

    • Retirement Annuity Fund (existing definition)

  • Existing definitions updated mainly to be more aligned with Pension Funds Act

Retirement reform administration1
Retirement Reform - administration 2007/08

  • Preservation funds:

    • Currently registered as pension or provident fund

    • Proposed new definitions to allow these to be stand-alone funds:

      • More flexibility and transferability between funds to allow members to “vote with their feet”;

      • More eligible members (divorcees) to allow more people to save for retirement.

Employer provided bursaries
Employer provided bursaries 2007/08

  • As a rule an employer provided bursary to a relative of an employee triggers a taxable fringe benefit.

  • For employees earning up to R60 000 per year, this fringe benefit, up to R3 000 per year, is tax-free.

  • It is proposed that this tax-free fringe benefit be increased to R10 000 per year for employees earning up to R100 000 per year

Employee broad based share incentive schemes
Employee Broad-Based share incentive schemes 2007/08

  • Shares are granted tax-free, provided the scheme meets a number of stringent criteria

  • Relax qualifying criteria to allow qualifying schemes:

    • Increase maximum value of shares from R9,000 over three years to R30,000

    • Lower the % employee participation requirement from 90% to 80%

Expatriate employees accommodation
Expatriate employees - accommodation 2007/08

  • Long-term stay:

    • Employer provided accommodation tax-free for first two-years

    • A monetary cap of the lower of:

      • 25% of the employee’s salary; or

      • R25,000 per month

  • Short-term stay:

    • Employer provided accommodation tax-free if employee in South Africa for less than 90 days in tax year

    • A monetary cap of the lower of:

      • 25% of the employee’s salary; or

      • R25,000 per month

Employer provided cell phones and laptop computers
Employer provided cell phones and laptop computers 2007/08

  • Taxable fringe benefit if employee uses work cell phone or laptop for private purposes

  • Creates undue administrative burden

  • Proposed that incidental private use of work cellular phones and laptops be tax-free

  • In the case of cell phones monthly monetary caps for business use may be considered

3 businesses corporate income tax rate
3. Businesses Corporate income tax rate 2007/08

  • Headline rate is reduced from 29% to 28% at a cost of R5 billion

  • Over the past 10 years the tax base has been broadened and administration improved

  • This has made it possible to reduce tax rates and even phase-out some tax instruments,

  • The reduced headline CIT rate and reforms to the STC regime should go along way to improve the tax environment for businesses

From stc to a withholding dividend tax
From STC to a withholding dividend tax 2007/08

  • Internationally more common system of taxing distributed profits

  • Withholding dividend tax payable by:

    • Individuals

    • Non-resident companies

  • 10% of the amount paid as dividends

  • Tax will apply to dividends and liquidation distributions

  • Tax treaties might provide for a lower rate e.g. 5%

Exemptions and administration
Exemptions and Administration 2007/08

  • Exemptions

    • Distributions to exempt entities, e.g. pension funds, government entities, public benefit organisations

    • Treaty relief – treaties may limit the withholding rate to 5%

    • Intra-company dividends

  • Administration

    • Final withholding tax

    • Tax payable by the shareholder

    • Tax withheld and payable to the SARS by the company declaring the dividend

Transitional issues
Transitional issues 2007/08

  • STC credits

    • No need for credits as the tax is payable at one level

    • STC credits accumulated before the introduction of the new tax will be forfeited

    • STC credits can be used in the interim

  • Gold mining companies

    • Election for exemption from STC with the option to pay a higher corporate income tax rate (43%) will be discontinued

Passive holding companies 1
Passive holding companies (1) 2007/08

  • The lower corporate tax rate of 28 % creates opportunities for arbitrage – individuals channelling their passive income (dividends, interest income, rent, royalties, etc) via a company. There now is a 12 percentage point difference between the CIT rate and the top marginal rate for individuals (i.e. 28% versus 40%)

  • Anti-avoidance rules are needed to prevent individuals from keeping their passive income in companies mainly to benefit from this difference

  • The new regime imposes a 40% rate on passive company income of this kind

  • A 10% rate will also apply to passive holding company dividends after the new dividend tax is in place

Passive holding companies 2
Passive holding companies (2) 2007/08

  • Ownership

    • Determinable by holding e.g. if 50% of shares are held by less than X ? individuals

  • Tax event

    • The tax could be triggered by accrual/receipt of income or the lapse of time without distribution

    • Certain amounts could be disregarded, e.g. Amounts reserved to repay loan

  • Exclusion

    • Certain entities could be excluded, e.g. banks, insurance companies, tax exempt entities

  • Amount of passive income

    • Percentage of passive income e.g. 60%

  • Nature of passive income

    • E.g. dividends, rent, royalties, interest

Industrial policy tax incentives
Industrial Policy - tax incentives 2007/08

  • R5 billion tax relief set aside over three years to the industrial policy strategy – labour intensive industries

  • Enhance the capacity of the tradable sectors

  • Unblock binding constraints – such as (a cross cutting issue) skills shortage, and other sector specific bottlenecks

  • Sectors might include:

    • Renewable energy, e.g. wind and solar energy

    • Textile and clothing

    • Agro-processing

    • Pharmaceuticals

    • Automotive components

    • Plastics;

    • Forestry pulp and paper and furniture

    • Capital and transport equipment

    • Mari-culture and aqua-culture

  • Incentives might take the form of an investment allowance, accelerated depreciation and / or a tax rebate / credit

  • Tax incentive regime to be finalised within the next three months in consultation with the dti and other stakeholders

Urban renewal
Urban renewal 2007/08

  • The (UDZ) urban development zone tax incentive introduced in 2004 incentive provides accelerated depreciation for refurbished and new commercial buildings in 15 designated municipalities.

  • There is evidence that this measure has made a difference in the pace of development in especially the major urban areas, e.g. Johannesburg, Durban and Cape Town.

  • It is recommended that the incentive be extended for five years, until March 2014. Municipalities will be given an opportunity to apply for extension of the designated zones, and consideration will be given to expanding the number of participating municipalities

Housing low and middle income workers
Housing: low and middle income workers 2007/08

  • The provision of adequate and affordable low-income housing (owned or rented) remains a challenge.

  • It is proposed that provisions in the Income Tax Act encouraging employers, developers, PBOs and landlords to increase the supply of houses for low-income households be enhanced and that additional incentives be explored.

  • The existing monetary threshold limits for low-cost housing allowances, such as the R6 000 deductible limit per dwelling for employer-provided housing, will be revised.

  • The depreciation allowances for the construction of low-cost houses and associated public infrastructure that employers and developers may claim will be reviewed and enhanced.

  • In the case of employer-provided low-cost housing, further relief with respect to fringe benefit taxation in the hands of the employee will be considered.

Skills development apprenticeships
Skills development – Apprenticeships 2007/08

  • A learnership tax allowances was introduced five years ago as an incentive for businesses to train employees.

  • An employer may claim an additional deduction of R30 000 when a leanership agreement is signed with a new employee and R30 000 when an employee successfully complete the learnership. The duration of a leanership is typically one year. Total benefit over 4 years = R60 000 X 4 = R240 000.

  • The current regime discriminates against long term apprenticeships, with a duration of three or four years Total benefit R30 000 + R30 000 = R60 000.

  • It is proposed to provided a three or four-year apprenticeship with the same accumulated tax benefit that three or four one-year learnships will accrue.

  • The proposal is targeted at technical apprenticeships (electricians, mechanics, welders, plumbers, etc.).

4 small businesses simplified tax system to reduce compliance costs turnover tax
4. Small businesses: Simplified tax system to reduce compliance costs: Turnover tax

  • The proposed regime is aimed at reducing the tax compliance costs for very small businesses and to facilitate the formalization of the informal sector

  • Targeted at very small businesses with an annual turnover of up to R1.0 million

  • Will substitute for normal income tax and VAT liabilities

  • The system will be elective

  • Both incorporated and unincorporated enterprises (sole proprietors) can elect into the proposed regime

Small businesses turnover tax
Small businesses - Turnover tax compliance costs: Turnover tax

  • Small businesses that elect into the proposed regime cannot register for VAT

  • The introduction of the turnover tax will coincide with an increase in the compulsory VAT registration threshold from an annual turnover of R300 000 to R1.0 million

  • Upon joining the system, businesses would be required to remain in the system for at least 3 years, provided their turnover is within the prescribed limit

  • Where businesses opt out of the regime, they can’t migrate back into it for a period of 5 years

  • The rates are steep towards the higher end in order to encourage businesses to graduate into the standard tax system

Turnover tax proposed rate structure
Turnover tax - Proposed rate structure compliance costs: Turnover tax

Turnover Marginal Rates (R)

R0 - R100 000 0%

R100 001 - R300 000 2% of each R1 above 100 000

R300 001 - R500 000 4 000 + 4% of the amount above 300 000

R500 001 - R750 000 12 000 + 5.5% of the amount above 500 000

R750 001 - R1 000 000 25 750 + 7.5% of the amount above 750 000

Access to equity finance venture capital tax incentive
Access to equity finance: compliance costs: Turnover tax Venture Capital Tax Incentive

  • Facilitate greater access to equity finance for small and medium size businesses and junior mining exploration companies

  • Facilitate the supply of venture capital at the lower end; i.e. deal sizes below R5 million;

  • It is aimed at individual investors; corporates and venture capital funds who invest in:

    • High growth potential and technology orientated SMEs with turnover of up to R14 million or

      up to R7 million gross assets (not lifestyle busineeses; and

      - Junior mining exploration companies with gross assets of up to R30 million.

Venture capital tax incentive
Venture Capital Tax Incentive compliance costs: Turnover tax

  • Venture capital investments in non-mining SMEs will qualify for a 30% upfront deduction up to R500 000 for individuals, R750 000 for corporates and R7.5 million for venture capital funds per year

  • Venture capital investments in junior mining exploration companies qualify for a 50% upfront deduction capped at R1.0 million for individuals and R10 million for corporations and venture capital funds per year

  • The possibility to provide a similar incentive for indirect equity investments in targeted businesses via a Venture capital Trust Fund will also be explored

  • The proposal will also replace the flow through share mechanism for junior mining exploration companies that was mooted last year.

5 public benefit activities organizations 1
5. Public Benefit Activities / Organizations (1) compliance costs: Turnover tax

  • Currently PBOs are required to conduct 85% or more of their activities in South Africa. In view of the fact that taxpayers are free to make donations to directly to PBOs operating in a foreign country it is proposed that this 85% limitation be deleted.

  • It is proposed that donations to Multilateral organisations offering development assistance in South Africa that are exempt from income tax in terms of the Diplomatic Immunities and Privileges Act 2001, (Act 37 of 2001), be tax deductible.

  • In order to encourage PBOs that contribute to financing education opportunities, the exempt list will be amended to include PBOs that provide loans, in addition to bursaries, to needy students.

Public benefit activities organizations 2
Public Benefit Activities / Organizations (2) compliance costs: Turnover tax

  • Currently, tax deductible donations are allowed to taxpayers only on assessment. In order to expand the pool of donors and reduce the administrative burden coupled with the refund process, it is proposed that employers be allowed to deduct certain employee donations to PBOs in determining employees’ tax payments.

  • The Income Tax Act makes provision for the tax exemption of PBOs providing housing for the benefit of the poor. In order to qualify for this concession, the legislation prescribes that the intended beneficiaries must have a maximum monthly household income of R3 500. It is proposed that this threshold be increased to R7 000.

6 biodiversity conservation
6. Biodiversity Conservation compliance costs: Turnover tax

  • Conservation efforts of private landowners are needed to complements efforts in this regard by government.

  • Measures to support such conservation initiatives include:

    • Management plans for private land in terms of the National Biodiversity Act (2004) and the Protected Areas Act (2003)

    • Income tax deductions for expenses incurred in respect of such approved management plans

    • Consideration of estate duty, transfer duty and donations tax relief for (protected) properties bequeathed or sold to PBOs.

7 emission charges and taxes
7. Emission charges and taxes compliance costs: Turnover tax

  • Draft policy paper on Environmental Fiscal Reform released for public comment in April 2006

  • SA is a significant Green House Gas (GHG) emitter

  • Coal combustions account for more than 40 per cent of carbon emissions

  • Recent reports the Economics of Climate Change emphasized the use of appropriate market-based instruments (charges, taxes, tradable permits and incentives) to support and complement regulatory measures to address concerns wrt to emissions in general and climate change in particular

  • The National Treasury will in consultation with DEAT and other stakeholders further investigate specific instruments to address concerns about both climate change local air pollution

  • The electricity levy should be viewed as a first step in this direction

  • Reforms to the ad valorem excise duty on motor vehicles to include environmental criteria such as engine capacity, fuel efficiency and level of emissions will be considered

Electricity levy 1
Electricity levy (1) compliance costs: Turnover tax

  • There is a growing realisation and acceptance that the economy has to take into account the social costs associated with production and consumption

  • Expecting that somebody else should take responsibility to clean the rivers, the polluted air, the solid waste resulting from certain forms of packing and products, the time wasted as result of traffic congestions, etc. is not viable in the long run

  • Attempts to internalize external costs (costs that producers are not incurring directly but pass onto others) has been a topic that has been debated at length in the economic literature

  • We should ensure that prices are not only reflective of private costs but , where feasible, also of social costs and that such costs be passed onto producers and ultimately consumers

Electricity levy 2
Electricity levy (2) compliance costs: Turnover tax

  • The electricity levy is first and foremost an attempt the first step in the long road to begin a process to take into account the emissions associated with the production of electricity from non renewable sources and fossil fuel (e.g. coal) in particular.

  • The challenges associated with both local air pollutants and greenhouse gas emissions will have to be addressed in the years to come

  • In addition, there are concerns that local electricity prices is not even fully reflective of the financial cost to generate and distribute electricity, especially to many of the large energy intensive users

  • The tax is thus intended to ensure correct price signals are send to all consumers, including the energy intensive users that might be protected by long-term electricity price contracts

  • Energy efficiency and moving our economy onto a less energy intensive path should thus be a medium to long-term objective

Estimated tax burden 2006 07 prices
Estimated tax burden: compliance costs: Turnover tax 2006/07 prices

8 fuel levies
8. Fuel levies compliance costs: Turnover tax

  • General fuel levy on petrol and diesel will increase by 6 c/l to 127 c/l and 111 c/l respectively on 2 April 2008

  • Increase in general fuel levy in line (slightly below) expected inflation rate

  • RAF levy increased by 5 c/l to 46.5 c/l

  • Biodiesel fuel tax concession increased from 40 to 50 per cent.

9 excise duties alcohol and tobacco
9. Excise duties: compliance costs: Turnover tax Alcohol and Tobacco

Ad valorem excise duties
Ad valorem compliance costs: Turnover tax excise duties

  • Ad valorem excise duties will be abolished on:

    • Payment operated sound recording or reproducing apparatus.

    • Sound recording or reproducing apparatus using magnetic media.

    • Turntables (record decks).

    • Video games with self-contained screens.

    • Video games with electronic displays.

  • These items are deleted as the technologies are outdated and they generate very little revenue

Duty free shops on arrival at international airports
Duty-free shops on arrival at international airports compliance costs: Turnover tax

  • Duty-free shops at departure are in line with broad indirect tax principles

  • Safety regulations and competition have resulted in air passengers to shifting their purchases of gifts to arrival points

  • Many of the major international airports now operate duty-free shops on arrival.

  • Feasibility of duty-free shops at South Africa’s international airports’ arrivals will be investigated

  • Could be problematic especially with respect to VAT

  • Concerns about possible unfair competition with local retailers will be taken into account

10 vat amendments
10. VAT- amendments compliance costs: Turnover tax

  • The compulsory VAT registration threshold will be increased from R300 000 to R1.0 million to coincide with the introduction of the presumptive turnover tax

  • Monetary thresholds for small agricultural, pastoral or other farming activities (i.e. file VAT returns on a 6 monthly basis) will be increased from R1.2 to R1.5 million p.a.

  • The threshold for small businesses that file VAT returns on a 4 monthly will also be increased from R1.2 to R1.5 million p.a.

  • Imported goods destroyed under customs supervision are eligible for full customs rebate. Comparable VAT relief will be provided for

  • VAT levied on the importation of goods into the Republic is exempted where goods are temporarily imported for inter alia, processing, manufacturing, equipping or packing in SA for re-exports

    • The implementation of this provision has resulted in some practical difficulties and is not fully aligned with the Customs and Excise Act. Attempts will be made to correct any anomalies

  • The VAT treatment of business re-organisations will be evaluated to ensure its alignment with the provisions of the Income Tax Act;

    • Consideration will be given to ease the complex VAT adjustments when re-organisations as well as intra-group transactions take place

11 principles behind exchange control reforms
11. Principles behind exchange control reforms compliance costs: Turnover tax

  • Remove red tape

  • Continue to support foreign diversification through domestic channels

  • Reforms should reflect fundamental shift from exchange controls

  • Promote global expansion from a domestic base

  • Deepen SA’s financial markets

Reforms announced in 2008 budget
Reforms announced in 2008 Budget compliance costs: Turnover tax

  • Institutional investors

    • Complete removal of exchange controls

    • No more pre-application and approval process

    • Only quarterly reporting and notification

    • Limits increased to 20% (prudential business) and 30% (non-prudential business)

    • Additional 5% still available for Africa

    • Limits to be finalised during course of 2008

Banks compliance costs: Turnover tax

  • Initial reform announced in MTBPS 2005

  • Two limits then announced; for Africa (maxi 40%) and outside of Africa (maxi 20%) investments

  • Reference also made to regulatory capital

  • Reference now to bank’s liabilities as base, with single macro-prudential limit of 40%

Corporates compliance costs: Turnover tax

  • Corporates (including banks, trusts and partnerships) are now allowed to invest in Rand currency futures on the JSE and inward listed (foreign) instruments on the JSE and BESA, without restriction

  • Application process removed for FDI totalling less than R50 million per annum

  • Outward FDI shareholding threshold reduced from 25% to 10%

  • Current reporting to SARB maintained

Other reforms
Other Reforms compliance costs: Turnover tax

  • Individuals

    • New single discretionary allowance of R500 000 per annum introduced

    • This is additional to the R2 million investment allowance

  • New institutionalstructure

    • Exchange controls effectively abolished on institutional investors and banks

    • Major implication for Excon Dpt of SARB

      • Focus on surveillance of foreign exposures and flows

      • Name change to Financial Surveillance Department

What is left of exchange controls
What is left of exchange controls? compliance costs: Turnover tax

  • Remaining measures in line with comparable developing countries

  • Corporates

    • Application required for FDI above R50 million

    • No direct outward FPI using domestic capital

    • Note national interest items (eg redomicile) common internationally

  • Individuals

    • No restriction if foreign diversification undertaken through domestic channels!

    • R2 million investment allowance

      • Majority individuals not constrained by the limit

Impact of exchange control reforms on the tax system
Impact of exchange control reforms on the tax system compliance costs: Turnover tax

  • The South African tax system was initially enacted when South African investment was largely restricted to domestic activities

  • As Exchange Controls have eased, tax reforms are required to protect the fiscus against artificial outflows

  • With the further easing announced in 2008, more protective tax measures are required, possibly including:

    • Reduction in the CFC ownership requirements below the “more than 50%” threshold;

    • Termination of intermediary trust schemes that artificially break CFC status; and

    • Tightening of the exit charge for direct and indirect company redomiciling transactions

12 tax administration 1
12. Tax Administration (1) compliance costs: Turnover tax

  • Phenomenal uptake in use of e-filing

  • Further simplification of classes of individual income tax returns

  • Review rules for charging and paying interest

    • Proposal that individual taxpayers be charged or paid interest from 1 October to date of assessment or refund of overpaid taxes (interest already charged on late payment of assessed taxes)

    • Voluntary payment may be made before this date to avoid interest being charged on shortfalls

  • Enhanced role for employers building on existing legislative framework

    • Consultations have already begun with payroll software authors

12 tax administration 2
12. Tax Administration (2) compliance costs: Turnover tax

  • Customs enforcement to match increased trade

    • Customs Border Control Unit expanded by 121 staff, currently undergoing training for a pilot deployment at ORTIA and at Durban scanner

    • First new-generation scanner being tested in Durban

    • Pilot of real-time electronic exchange of information with major trading partners

  • Additional amendments for successful implementation of Revised Kyoto Convention on Simplification and Harmonization of Customs Procedures may be required

13 annexure c
13. Annexure C compliance costs: Turnover tax

  • Annexure C contains:

    • Listed miscellaneous amendments to cater for minor changes, eliminate isolated avoidance loopholes or correct unintended anomalies working against taxpayers, and

    • Technical corrections