16 September 2015 Keith Engel (Deputy CEO of SAIT) Taxation Laws Amendment Bills, 2015: Standing Finance Committee Hearings 16 September 2015 Keith Engel (Deputy CEO of SAIT)

Removal of Section 6quin Rebates: Ending Relief for Cross-Border Services OECD Versus African Models OECD countries tax services on a source basis if services are rendered in a country Many African countries impose source basis tax in respect of services if either, The services are rendered locally; or An African taxpayer pays foreign persons for services regardless of where the services are rendered Many African countries override OECD-style treaties to the contrary South African foreign tax rebates (credits) Section 6quat allows credits only for foreign source income based on OECD principles / not African principles Section 6quin was designed to overcome this unintended limit

Scenario 1: 3rd party professional service 6quin No 6quin Fee R10m R10m Costs (R4m) (R4m) Profit R6m R6m SA tax @ 28% R1,68m R1,68m 6quin (R1,68m) - For WHT @ 20% R2m R2m Cash profit R4m R2,32m Overall tax % 33% 61%

Scenario 2: Shared services 6quin No 6quin Fee R10m R10m Costs (R9m) (R9m) Profit R1m 1 SA tax @ 28% R280k R280k 6quin R280k - For WHT @ 20% R2m R2m Cash profit (R1m) (R1,28m) Overall tax % >100% >100%

Should We Be Purer Than the OECD in an African Environment? The problem is that the South African model is purer than the OECD model OECD Model Taxpayers are eligible for 6quat credits regardless of source However, all credits are limited to the ring-fencing limitation for aggregate foreign source income (current section 6quat(1B)) Taxpayers can elect deductions instead regardless of source (in contrast to official SARS interpretation) or the “proved to be payable” concept African Model UN 2014 draft proposal exists to endorse the African payor withholding model African payor withholding model will be increasingly used in the BEPS environment

Restoration of the Section 9D Diversionary Rules The diversionary rules are designed to prevent artificially prices imports and export of goods with low taxed CFCs The rules don’t work because a second CFC can be added to break the rules These rules were dropped but re-added in the Bill, meaning: Planners can still beat the rules; Only unwary taxpayers will be inadvertently hit

Securities Lending: Need for Collateral Risk protection Investors cannot borrow funds to acquire shares (or shares themselves) without collateral in the form of margin account This rule dates back to the 1930s depression Funds in the margin account must generally equally equal or exceed the value of the shares borrowed Types of security Cash (main form) (harder to use in a high-interest environment) High-rated debt securities (e.g. government debt) High-rates shares (e.g. top 40 listed shares)

Securities Lending: Types of Collateral Needed for Margin Accounts Introductory guide by UK savings institutions

Securities Lending: Collateral Time Limits for Margin Accounts Time period for collateral The Bill effectively limits the time periods for the same collateral not to exceed 12 months However, many lending arrangements last as long as 5-to-10 years Why would a lender (e.g. a bank) want to chop-and-change collateral several times over the course of a loan (added risk) Re-hypothecation On the other hand, the Bill allows the lender to freely use/dispose of the collateral Free use of the collateral seemingly creates systemic risk The holder or the collateral should only be allowed to swap forms of collateral with other lenders holding collateral (case be traced via agreements and promotes operational efficiency)

Tax Administration: Extended Prescription Periods Proposal (section 99(3) of the Tax Administration Act) SARS can unilaterally extend the normal 3/5 year prescription period: Taxpayer failure to respond Time taken to resolve an information dispute The complexity of the matter (section 31 and GAAR disputes amongst others) Concern Taxpayers have a right to closure (as they have in all other legal matters); under this proposal, records will have to be kept forever The right to extend is unilateral and open-ended The extension period is open-ended and the right for SARS to assert is open-ended (anytime before prescription) The right also need to have an effective date (e.g. tax years from 2016 onward)

Tax Administration: New Limits on Legal Privilege Proposal (section 42A of the Tax Administration Act) Detailed descriptions will now be required of documents for which taxpayers are claiming privilege (summary descriptions, names involved etc…) Panel review Concern SARS should not be able to obtain access to legal documents associated with the taxpayer positions Taxpayer’s use of counsel should not be allowed to be used against the taxpayer (taxpayer’s should have a right of self-defence)

Non-Deductible Retirement Contributions & Estate Duty Proposed amendment (proposed section 3(bA) of Estate Duty) Non-deductible contributions made to a pension fund are current excluded from the Estate Duty calculation This exclusion will be removed because elderly individuals are making large contributions shortly before death solely to avoid Estate Duty Request for relief Many middle-class individuals make contributions to pension funds on a long-term basis (especially in the case of provident funds) as a form of long-term savings These individuals should not be punished due to the avoidance scheme (which does not create added savings) These individuals should at least receive effective date for prior contributions

Section 8C Equity Instruments and Vesting Trusts: Where Are We Now? Proposal (paragraphs 13(1)(iiA) and 80(1) of the 8th Schedule) The granting/vesting of section 8C equity instruments falls outside of the normal beneficiary vesting rules What does this amendment mean? Gain at the trust level (or as some would argue, no taxable gain all)? If gain does arise, does the result effectively convert ordinary revenue into capital gain or double taxation? Humble request The whole area of section 8C and employee trusts needs to be examined as a whole These piecemeal amendments are confusing, create uncertainty for rank-and-file plus BEE trusts, and consistently misuse ongoing avoidance schemes

Technically Outside Bills . . . But Urgent Nonetheless

Repayment of REIT Loans: Overtaxed Notes on Current REIT Legislation Generally welcome However, tax credit (rebates) for foreign trusts need to be added for foreign taxes falling on trust distributions, NOT underlying trust income Section 25BB(3) Initial purpose: Creates ordinary revenue for all payments in respect of financial instruments to prevent REITs from being used as disguised collective investment schemes in securities Problem: Ordinary revenue applies even to the mere repayment of loan capital (violation of Genn principles) Also potentially creates double tax for deferred rent and other delayed accruals

Tainted Pref shares – dividends subject to 28% tax Section 8EA of Income Tax Act – demonstrating unfair classification of preference shares as “third party backed shares” ProjectCo is a preferred bidder in terms of the Renewable Energy Independent Power Producer Programme and will sell electricity to Eskom 18 months after starting construction of solar plant. BEECo wants to be a shareholder and want to subscribe for 26% shares in ProjectCo. To finance the purchase price, IDC subscribes for preference shares in BEECo who use all of the proceeds to subscribe for ordinary shares in ProjectCo. The preference shares are secured by A (Pty) Ltd by pledge of shares and cession of shareholder loan. The preference shares is “tainted” because ProjectCo was not already selling goods or services for consideration at the time of issue of the preference shares. A (Pty) Ltd B (Pty) Ltd 81% 19% BEECo Tainted Pref shares – dividends subject to 28% tax 26% Equity shares Reason: ProjectCo was not an operating company at time of subscription of the preference shares by IDC in BEECo – only became operational 18 months later. ProjectCo

Tax-Free Government Grants: Taxable Grants May be Better Section 12P Allows certain government to be tax-free However, the price of this tax-free treatment is the loss of tax deductions, tax allowances or CGT base cost The price of the exemption (loss of tax attributes) is sometimes not worth the benefit Proposal: Section 12P should be elective Audit example: Manufacturing employer engages in a training programme for employees. The programme costs R100k and will be covered by a government grant SARS audit claims the costs of the programme are not deductible under section 11(a) because the grant amount received for the training is tax-free; section 12P further requires “another” R100k of deductions to be reduce