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Key themes – 2013 DTLAB & DTALAB

Direct Tax Committee DTLAB & DTALAB 2013 - Presentation to the SCoF 20 August 2013 Leon Coetzee Tracy Brophy Mardelle Kelbrick. Key themes – 2013 DTLAB & DTALAB. 2013 Draft Taxation Laws Amendment Bill (DTLAB) Impact on the SA economy Retrospective legislative changes Specific examples

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Key themes – 2013 DTLAB & DTALAB

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  1. Direct Tax CommitteeDTLAB & DTALAB 2013 - Presentation to the SCoF20 August 2013Leon CoetzeeTracy BrophyMardelle Kelbrick

  2. Key themes – 2013 DTLAB & DTALAB • 2013 Draft Taxation Laws Amendment Bill (DTLAB) • Impact on the SA economy • Retrospective legislative changes • Specific examples • 2013 Draft Taxation Administration Laws Amendment Bill (DTALAB) • Going forward

  3. Impact on the SA economy The key themes in the 2013 DTLAB, which are an issue for BASA are - • The denial of interest deductions, which will increase the cost of funding in SA and be a disincentive for foreign investment • Section 8F & 8FA • Section 23K • Section 23N • The taxation of dividends and the resultant asymmetry in theSA tax system • Paragraph (hh) of section 10(1)(k)(i) • Section 8C local dividends • Section 10B foreign dividends

  4. Retrospective legislative changes • Taxpayers base commercial decisions on legislation effective at that time • Creates regulatory uncertainty - dissuades foreign investors & decreases competitiveness of SA as an investment jurisdiction • Increases complexity of applying the ITA • Counteracts legitimate tax planning • Retrospective legislation should have safe harbours / “exit routes” • Unfortunately becoming common feature of SA tax legislation • R&D (1 October 2012) • Hybrid equity and debt provisions (where costly restructuring costs could apply)(1 July 2013)

  5. Specific examples – Section 8F & 8FA • Sections 8F & 8FA • Interest paid on hybrid debt instruments will be denied from 1 January 2014 & interest received is a dividend in specie • Listed debt is included – beneficial owners cannot be identified, so how is DWT administratively achieved? • A 5% limit for Banks in relation to listed instruments from connected persons • Reduces flexibility & ability to back-to-back with Holding Co. • Administrative burden in tracking holders • Policy issue regarding foreign subscribers – only connectedholders are disallowed/limited • Exclude listed debt and delete the 5% anti-avoidance provision

  6. Specific examples – Section 23K • Section 23K • Section 23N was effective on 1 July 2013 • Need for transitional rules for transactions between 1 July 2013and date of promulgation – taxpayers should be allowed to choosewhether to apply an existing approval or the provisions of section 23N

  7. Specific examples – Sections 23N & 23O • Sections 23N & 23O • In the context of section 24O transactions, section 23N(4)(b) requires the acquired company’s “adjusted taxable income” to be used for purposes of the 40% of profits calculation • In many cases, however, the acquired company – as a stand-alone legal entity – will simply be an investment holding company with no trading income at all, with the operations of the acquired group being housed in separate subsidiary companies • This is particularly prevalent in listed entities. For example, over 60% of the top 40 listed companies on the JSE are investment holding companies, with operations predominantly owned in one or more subsidiary companies

  8. Specific examples – Sections 23N & 23O • Consequently, although the acquisition debt raised to purchase the acquired company will be based on, inter alia, the consolidated equity valuation of the acquired group, the excessive interest test contemplated in section 23N will be measured solely against the income statement of the acquired company as a stand alone entity • In the case of share acquisitions, lenders will analyse, inter alia, both the borrower and the target group’s earnings and free cash flow • Consequently, we recommend that, in the case of section 24O transactions, the “adjusted taxable income” of both the acquiring company, and the acquired “group of companies” (as defined in section 41) be used for measurement purposes, with the 40% excessive interest test being calculated on a “greater of” basis

  9. Specific examples – Section 23N • Section 23N • Numerous issues identified and we urge NT to review BASA’s proposals indetail and meet to discuss with a view to resolving these issues

  10. Specific examples – Paragraph (hh) • Section 10(1)(k)(i) • Paragraph (hh) has the potential to severely prejudice vanilla transactions in the SA financial, equity & equity derivatives markets, SAFEX, the OTCequity derivatives market & the ETF market • There is no loss to the fiscus unless the payment is to a non-residentshareholder • The proposal will favour international players at the expenseof local banks • Please review BASA’s proposals carefully

  11. Specific examples – Section 10B • Section 10B • Section 10B(2) – the foreign dividend exemption will no longerapply to non-equity shares from 1 January 2014 • Equity funding has additional administration and regulatoryrequirements • Group companies often fund each other via non-equity shares • Group companies need flexibility to fund each other in Africa ifSA wants to become “ Gateway to Africa” • Exemption should be allowed for dividends on non-equity shareswhere issuer forms part of same group of companies as the holder

  12. Specific examples – Section 9CA & Hedge funds • The taxation of hedge funds • There are proposed definitions of a ‘portfolio of a CIS in a restricted hedge fund’ and a ‘portfolio of a CIS in a retail hedge fund’ • Taxation of the proceeds of restricted hedge funds as ordinary revenue because they will typically hold derivatives is flawed – any fund may hold derivatives in the risk management of its portfolios • The intention of the investor has not been taken into account • The CIS legislation has not yet defined these hedge funds, nor the investment criteria and any other requirements • CIS in securities, CIS in a retail hedge fund & CIS in a restricted hedge fund should be taxed the same – the intention of the investor should determine the capital vs revenue nature of proceeds • Extend section 9C to CIS in retail hedge funds & delete section 9CA; or • Defer all of this proposed legislation until the CISCA legislation has been finalisedand there has been consultation with the industry

  13. Specific examples – Section 24JB • Section 24JB

  14. Specific examples - Income Protection Policies • Effect of proposed changes • A significant portion of these policies are employer-owned and participation is therefore a condition of employment. The proposed changes will impact on employees’ net pay and make the continued provision of these policies by employers untenable • Employers generally have a moral obligation to ensure that their employees will be able to receive support should severe illness or disability occur, but employers will not be able to force the participation of the employee to such plans anymore due to the above cost implications • The proposed changes on the taxability of the pay-outs may have the unintended consequence of “incentivising” employees to delay returning to work due to the tax free nature of the annuity payments • The proposal • It is proposed that the change be removed and further investigation undertaken on the effects to the Industry before implementing any changes to the tax treatment

  15. Specific examples Retirement Reform – Contribution Incentives • Effect of proposed changes • The annual limit of R350 000 on the deduction of contributions will discourage employees from increasing their contributions and depositing their savings into their retirement benefits • The proposal • The annual deduction limit to increase from R350 000 to R500 000 and to still maintain the provision of enabling excess deductions to be rolled over for each tax year and/or be deductible on the pay-out of proceeds

  16. Specific examplesRetirement Reform – Defined Benefit Funds • Effect of proposed changes • National Treasury has attempted make the calculation of the fringe benefit as simplistic as possible. However the underlying concept of a defined benefit fund is a highly complex one. Factors such as volatility of markets, individual circumstances (categories of fund participants), fluctuating asset values, contribution holidays and “guaranteed shortfall payments” mean that the result of the proposed formula could bear no relation to the true “benefit” to the employee. • The proposal • Further discussions with appropriate Industry bodies should take place to determine a workable and relevant calculation that can be easily applied before the existing amendments are effected

  17. Specific examples - Section 8C and Dividends • Effect of proposed changes • The proposed amendments to the definition of “gross income” significantly change the tax landscape in which we operate in that the nature of a dividend paid to shareholders is being changed from an exempt income to remuneration and taxable at marginal rates • The unforeseen complications of such an amendment are significant including inter alia administration of the dividend flows through CSDPs, a lack of cohesion with existing dividends tax legislation, payroll administration complications, restricted deductibility of the expense and the impact on BEE schemes • The proposal • A whole scale review of section 8C and share scheme legislation is recommended as opposed to piecemeal amendments • Anti-avoidance provisions can then be incorporated into the revised legislation as opposed to interfering with the established principles surrounding “gross income”

  18. Tax Administration Act – Proposed amendments • General concerns • The TAA and the related Amendment Bills are drafted, implemented and administered by SARS. No industry discussions or workshops have been held to discuss any of the proposed amendments and the collective impact of such changes within the Industry (as has been the case in the past with the DTLABs) • SARS has proposed to incorporate certain provisions which extend its powers beyond its primary legislation, being the tax acts, which it is mandated to administer. • With a number of the proposed amendments SARS is extending its own powers beyond “administration of Tax acts” and attempting to pull other legislation within its control (for example the Criminal Procedure Act) • The proposal • The existing legislative process has been robust in the past and collaborative where a degree of oversight is present in Industry workshops and discussions. This is evidenced by a separation of roles between legislator and administrator, a necessary divide in a fair and democratic society • This is not the case under the TAA and its related Amendment Bills. It creates an unsavoury situation where the administrator is creating its own legal framework within to operate without oversight or independent review. This should be curtailed.

  19. Going forward • The volume of draft anti-avoidance legislation is, once again, overwhelming • BASA is requesting proper consultation with NT in order forthe negative aspects of the legislation to be fully explainedand discussed • The SA economy is at stake in numerous instances, so where such consultation does not take place, then the draft legislation should be deleted or deferred • Retrospective legislation should be avoided • A constructive process of oversight is required for the TAA

  20. QUESTIONS

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