Standing Committee on Finance Submissions : (Draft) Taxation Laws Amendment Bills 24 June 2009 PwC...

Standing Committee on Finance

Submissions :(Draft) Taxation Laws Amendment Bills

24 June 2009

PwC Tax Services*, South Africa

*connectedthinking

Submissions on the (draft) Taxation Laws Amendment Bills 2009PricewaterhouseCoopers

June 2009

Contents

I. Consultation Period

II. 2nd Provisional Tax Estimate

III. Trading Stock – Mining stock-piles

IV. CERs

V. CFCs

VI. Research & Development

VII. Dividends Tax & Deemed Dividends

VIII. Dividends Tax on Capitalisation Shares

IX. Cross-issue of shares

X. Employer-provided post retirement medical aid

XI. Foreign Portfolio Shares


June 2009

I. Consultation Period

• Very short consultation period – AGAIN

• Complexity and volume– Seasoned tax practitioners require more time. What about average

taxpayers

• No chance of further debate after today– Further submissions to NT/SARS – but not to Standing Committee– Need for rebuttal acknowledged previously – but?


June 2009

II. 2nd Provisional Tax Estimate

• Unfair proposal−No benefit for taxpayers not part of “designated class”−Substantial hardship also for larger “sophisticated” taxpayers

• Inappropriate for relief to be left to Commissioner’s discretion.−Removes contentious and problematic issue from public debate.

• International precedent does not support the combination of−High accuracy requirement (80%)

together with−Harsh penalty (20%)


June 2009

2nd Provisional Tax Estimate

Irish Preliminary Tax:

• 90% accuracy requirement−Interest (not penalty) upon under-estimate

• Safe harbour for individuals−100% of previous year’s tax liability−105% of tax liability from year before last

SA taxpayers get the worst of both worlds?


June 2009

III. Trading Stock – Mining Stockpiles

• Inclusion of stockpiles - undue burden on mining industry (esp in current economic climate)

• Valuation complexities• Sudden increase in Taxable Income

• Definition extended too wide –Will include property not intended to be trading stock


June 2009

IV. Certified Emission Reductions

• Proposals welcomed & applauded- Although time frame may be too short to incentivise new CDM projects

• Confirm full deductibility of expenditure- Especially “mixed purpose” expenditure

• Ensure exclusion of CERs from “trading stock”

• CERs distributed in return for capital contribution- Exempt in-specie distribution of CERs from STC & Dividends Tax

• VAT: Provide specific Zero-rating provision


June 2009

V. Controlled Foreign Companies (CFC’s)

• Exemptions (s9D(9)) should be elective

• SA cannot be gatekeeper for foreign tax- SA multinationals disadvantaged- Remove requirement that choice of FBE

not motivated by foreign tax


June 2009

Controlled Foreign Companies (CFC’s)

• Inappropriate emphasis on “incorporation” inappropriate

(for both “foreign business establishment & “high tax” exemptions)- Consider tax residence –or ignore residence/incorporation altogether- Focus is on substance (“establishment”) or actual tax paid (“high tax”)

• High tax exemption : Confirm ability to use loss carry-backs and “group” losses as allowed under foreign tax laws- Do not limit loss-utilisation to SA concept of “assessed losses”

• Tax paid @20% will not reach 75%-of-SA-Tax threshold- Apply 2/3 or 70% test


June 2009

VI. Research & Development

• Applaud initiative to incentivise R&D activities in SA- Including foreign-funded R&D

• But recoupment provisions negate incentive – Unintended?- Re-confirm ability of SA contract-researchers to receive

tax benefits from foreign-funded R&D


June 2009

VII. Dividends Tax & Deemed Dividends

• Deem actual shareholder to be deemed recipient

• Double Taxation when Deemed Dividend followed by actual dividend- Deemed dividend should increase “contributed tax capital”

• Exit charge should be reduced by “contributed tax capital”

• Financial assistance refinements required- Capital amount should not be deemed dividend if transfer pricing

adjustment to interest- Interest rate exemption: Dual test should be simplified- Exemption for loans to share incentive trusts (etc.)


June 2009

VIII. Dividends Tax on Capitalisation Shares

• Departure from “ability to pay” principle

• Will skew market towards preferring cash over shares

• Enhancements of preferences or rights – vague and uncertain- Double tax potential where also value shifting arrangement for CGT- Valuation of enhancements difficult


June 2009

IX. Employer-provided Post Retirement Medical Aid

• Allow deduction also in respect of current employees• Difficult to separate contributions between current and former employees

• Allow deduction even if employer still has some obligations to employee• If risk substantially transferred to insurer• Economic effect same as case of former employees.

• Confirm exemption for employees

• Allow deduction for all post-retirement obligations


June 2009

X. Cross Issue of Shares Anomaly

A

Target

B

A BTargeted cross-issue :

• A issues shares to B, in return for B issuing shares to A

• s24B(2): A’s cost of B shares = Nil,; & B’s cost of A shares = Nil

Unintended Anomaly :

• A buys B-shares, then B buys Target-shares

• s24B(2): A’s cost of B shares = NIL; & B’s cost of Target shares = NIL


June 2009

X. Cross Issue of Shares Anomaly

Proposed amendment does not rectify anomaly

• Relief only to “groups” limits protection unfairly – e.g. most BEE transactions are not “group” transactions

• Only corrects one element of the anomaly- (Covers B’s cost in Target, but what about A’s cost in B)

• Does not clearly cover cash transactions

A

Target

B


June 2009

X. Foreign Portfolio Shares

• Foreign (listed) dividends should not be taxed when paid to SA companies or CISs

• Confirm retention of Normal Tax exemption (s10(1)(k)(ii)(bb))

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