Section 24JB

Direct Tax Committee
DTLAB & DTALAB 2014 - Presentation to the SCoF
26 August 2014
Leon Coetzee
Tracy Brophy
Mardelle Kelbrick
What is BASA?
■ BASA is the industry representative body of Banks in South Africa
■ The BASA Tax Committees have a proud record of working with
National Treasury:
■ To enable proposed legislation
■ To explain the impact on the economy, financial markets and the
industry when tax changes are announced
■ To lobby for tax changes
■ Where the tax law has not kept up with developments in financial markets
and products
■ Where the proposed tax law results in unintended consequences
■ BASA wants to continue providing input to National Treasury
■ Be a trusted business advisor
■ Assist with better enabling legislation
■ Potentially fewer technical amendments and tax certainty for industry
and investors
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Key themes – 2014 DTLAB & DTALAB
■ 2014 Draft Taxation Laws Amendment Bill (DTLAB)
■ Impact on the SA economy
■ Specific examples
■ 2013 Tax changes not yet actioned
■ 2014 Draft Taxation Administration Laws Amendment Bill (DTALAB)
■ Going forward
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Impact on the SA economy
The key themes in the 2014 DTLAB, which are an issue for BASA are ■ Unnecessary anti-avoidance, which disrupts commercial
transactions, when there are other sections which address the issues
■ Section 23M
■ The tax free savings incentive – does it achieve its objective?
■ Section 12T
■ The application of fair value taxation to insurance groups
■ Section 24JB
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Impact on the SA economy
Issues which have not yet been addressed ■ The taxation of dividends and the resultant asymmetry in the
SA tax system
■ Paragraph (hh) of section 10(1)(k)(i)
■ Potential double taxation of dividends
■ The outright transfer of collateral and the taxation of securities
lending arrangements
■ Various sections of various tax acts require amendment
■ Announced in the 2013 National Budget and not yet addressed during the
2013 or 2014 legislative cycle
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Specific examples – Section 23M
Section 23M
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Effective 1 January 2015 – introduced in the 2013 TLAB
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Limits the deduction of interest paid by a resident to a person who
is not subject to tax, where –
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The creditor and debtor are connected persons;
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The creditor and debtor are not connected but the creditor obtained the
funding from a person who is connected to the debtor;
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The creditor and debtor are not connected but the debt is guaranteed by a
person who is connected to the debtor
Transfer Pricing (TP) and thin capitalisation rules in section 31
already addresses cross border debt funding (where interest may be
seen to be excessive)
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Reducing interest payable may create an offshore TP risk
Interest restriction rules in section 23N already addresses domestic
funding arrangements (where interest may be seen to be excessive)
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Specific examples – Section 23M
Section 23M
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Strong recommendation that it should be deleted in its entirety
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Should be materially amended, especially to exclude local non taxed entities
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Pension funds
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Banks in distress – more hardship for clients with guaranteed loans?
Postpone implementation until 1 January 2016
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Further consultation with industry
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Don’t penalise the domestic economy
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Specific examples – Section 12T
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Section 12T
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We have proposed changes to make the ambit clearer, as it currently stands it
appears that bank products are inadvertently excluded
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BASA trusts that it is an unintentional oversight
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Annual limit of R30 000 – may be too low if compared to annual interest exemption of
R23 800, therefore recommend an increase to R50 000
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‘Penalty’ for over contributing – 40% tax on the capital
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The capital is already funded from after tax money
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‘Penalty’ is too high – recommend the CGT rate of 13.3% rather
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Request clarity that returns on excess contribution will be exempt
Tracking the annual contribution should not fall to the product providers
■
Impossible administrative burden
■
Rather make effective use of the IT12 tax return
DWT on tax free returns – need an exclusion from the requirement to obtain
declarations to ensure no DWT levied
Specific examples – Section 24JB
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■ Section 24JB – “Covered person” to exclude Insurance Groups
■ Insurance Industry was not involved in the s24JB consultations with
National Treasury
■ It was not the intention to include insurance companies
■ Insurance companies hold investments on capital account and are not
engaged
in banking activities
■ Subsidiaries of Insurance company groups of companies should not fall
in the net of S24JB
■ Proposal is to exclude the controlling company as defined in the Long
Term Insurance Act and any company held directly by the controlling
company, from the definition of a covered person
Specific examples – Section 24JB(3)
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■ Section 24JB(3) and the interaction with the rest of the Act
■ The intention was for s24JB to override all other sections of the Act with
regards to financial instruments e.g.
■ Upfront investment amounts (gross income)
■ 9C
■ Not clear if the wording of s24JB(3) overrides the rest of the Act
■ Compare to wording used in s24I(6)
■ Not clear if s24JB(3) requires an amount to first be included in 24JB(2)
before 24JB(3) can be applied?
■ E.g. Upfront investment amounts are not included in the income statements
only the subsequent FV’s are, therefore will not be in s24JB(2) and then
s24JB(3) cannot apply to override the rest of the act (in this case the day 1
gross income inclusion)
Issues not yet addressed
■ The outright transfer of collateral and the taxation of securities
lending arrangements
■ Announced in 2013 National Budget
■ Impact on the effective functioning of Regulation 28
■ Impact on the effective functioning of the securities lending market
and the need to hold effective security
■ Proviso (hh) to section 10(1)(k)(i)
■ Submissions on both topics in 2013
■ A process of engagement with National Treasury and SARS is
requested in order to discuss these industry specific issues
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Tax Administration Act – Proposed amendments
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■ Serious concerns
■ The TAA and the related Amendment Bills are drafted, implemented
and administered by SARS
■ Previous experience with TAA amendments was that the discussions held
with SARS after comments were submitted were completely disregarded
by SARS
■ Once SARS faces resistance from taxpayers, who also have rights,
SARS unilaterally amends the legislation to further restrict taxpayers’ rights
■ Current draft proposals lean too far in the direction of SARS
by allowing SARS the ability to unilaterally determine what is relevant
and what constitutes non-compliance without due engagement with
taxpayers who are entitled to protect and enforce their rights
Specific examples – “Relevant material”
■ “Relevant material” definition
■ SARS now has the power to unilaterally determine what is ‘relevant’
■ It is relevant, if it is ‘in the opinion of SARS’
■ This overrides the taxpayer’s ability to question the relevance of a
request for information
■ This is a complete abuse of SARS’ powers
■ Plus, a Tax Clearance Certificate can be declined if “relevant material”
is still outstanding, which will prevent a taxpayer from doing business
where a TCC is required as part of the tender application process
■ This proposed amendment should be deleted
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Specific examples – “In the format”
■ “In the format” required by SARS
■ Onerous burden on taxpayers to prepare information in a format
which is different to what they use to keep information
■ Creates a risk of data corruption and errors
■ This should be deleted or qualified, i.e. taxpayers should only
be required to submit data in the format which they have the data
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Specific examples – Spontaneous exchange of information
■ “Spontaneously”
■ The use of this word is inappropriate
■ SARS should only share taxpayer information after due
consideration
■ The ambit of its inclusion needs to be reduced
■ “Voluntarily” is a better term
■ This should apply only to the sharing of information, and not to
the collection of debts and serving of documents
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Specific examples – Tax clearance certificates
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■ TCCs
■ Currently, TCC is not issued if there is –
■ an outstanding debt; or
■ an outstanding return
■ Additional proposed requirement –
■ “no outstanding request from SARS to provide relevant material if, in the opinion of
the SARS official, there is no just cause for delay”
■ So, practically a TCC may be refused where –
■ Extension has been granted to a taxpayer, but SARS’ system doesn’t reflect it yet; or
■ The taxpayer is disputing the relevance of the information requested
■ This gives SARS more power to force the submission of information which a
taxpayer does not believe is relevant
■ Additional concerns with the proposals –
■ SARS may alter the compliance status of a taxpayer – no requirement to inform the
taxpayer & appears to override current process whereby TCC is valid for a year
■ Effective date: Does the amendment apply to new requests for information or existing
requests in existence at date of promulgation?
Going forward
■ BASA is requesting proper consultation with National Treasury –
■ In order for the negative & unclear aspects of the legislation
to be fully explained and discussed;
■ In order for outstanding issues to be considered and ‘actioned’
■ A constructive process of oversight is required for the TAA
■ Proposed new provisions which allow SARS to abuse its powers / gives
them unfettered power should be deleted
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QUESTIONS
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