Presented by COENRAAD BEZUIDENHOUT Executive Director: Economic Policy PARLIAMENT 21 June 2011

BOT Membership Categories SME TRADE POL ECON POL SOC POL TRANS POL Policy Committees MANDATING

BUSA welcomes the opportunity: Tax Bills informed by 2011/2012 Opportunity for business to reinforce key earlier submissions On-going engagement until 4 July Full submission will be provided to Committee Message in support of competitiveness to promote investment, economic growth and job creation

JOBS ?? COMPETITIVENESS INVESTMENT CERTAINTY PREDICTABILITY FAIR RETURNS SUSTAINABILITYSUSTAINABILITY SUSTAINABILITYSUSTAINABILITY TARGET: IMPROVED COMPETITIVENESS GROWTH

Welcome developments: personal income tax relief; transfer duty relief; monetary threshold adjustments, including increases in capital gains exclusion mounts; measures to enhance the learnership and industrial incentive programmes; increases in the turnover tax exemption threshold for micro-businesses; and, measures to build on South Africa’s role as a regional gateway regime

Review opportunities…  skills development levy;  donations tax;  estate duty;  securities transfer tax;  transfer duties;  taxes on petroleum products; …for simpler, better tax  air departure tax;  the electricity levy;  the incandescent bulb levy;  CO2 tax on motor vehicles;  Customs duties; and,  Stamp duties and fees.

National Health Insurance  Frankness & commitment to phased & consultative approach appreciated  Firm financial foundation required Carbon Tax  One-dimensional focus on generating revenue should be avoided  Mature debate on merits of different policy instruments needed

Section 3.22 Anti-avoidance: suspension of intra- group rollovers (Key provision: section 45) Explanatory memorandum says: “Section 45 allows for rollover relief… [Postponement of capital gains tax allowed to a business that reinvests the proceeds from a profitable sale of an asset, as an incentive for replacing older capital assets with new or better ones] …

Section 3.22 Anti-avoidance: suspension of intra- group rollovers (Key provision: section 45) Explanatory memorandum says: “Section 45 allows for rollover relief when assets are transferred between members of the same group of companies in exchange for the issue of intra-group shares or of intra-group debt. Unlike other reorganisations, this form of relief creates a market value tax cost in the newly issued shares or debt (as opposed to a rollover tax cost).”

BUSA advises AGAINST suspension of section 45: Why?  Negative impact on transactions for which s45 envisaged: lack of a tax neutral environment within group of co’s will particularly complicate restructuring.  Causes uncertainty: negative impact on investment decision.  20% - 26% BEE transactions especially conducted using S45 to ensure commercial result.  Arm’s length transactions difficult to justify otherwise would prove problematic without s45.

Treasury’s apparent concern:- When potential Purchaser acquires the shares in a TargetCo, followed by a sale of the business of TargetCo using s45 to a NewCo held by the Purchaser AND where NewCo fund the purchase price with interest-bearing debt; that tax base is eroded by “excessive” debt gearing of the Purchaser, through:  “excessive” interest bearing debt resulting in “excessive” interest deductions in the Purchasing Company’s hands; and/or  the debt provider (i.e. the recipient of the interest income on such interest bearing debt) not being subject to South African income tax, either where such debt provider (in the case of a South African resident entity) is exempt from income tax or not subject to tax (in the case of a non-South African entity).

BUSA solution 1: Make better use of existing mechanisms!  “GAAR” in section 80A: SARS entitled to challenge a transactions if so-called “impermissible tax avoidance arrangement” occurs.  Specific Anti-Avoidance Rules in s45: NB “de-grouping measure”.  Withholding Tax on Interest: Effective 1/1/2013, withholding tax on interest of 10% will become effective.  Transfer pricing and thin capitalisation provisions: If debt provider is non-SA resident AND connected to NewCo, the interest-bearing debt would be subject to SA transfer pricing (i.e. the interest rate has a cap) and thin capitalisation (i.e. the debt is subject to a minimum debt to equity ratio). Where the interest rate is excessive (transfer pricing) and/or the debt in relation to equity is excessive, the interest is disallowed as a deduction AND deemed to be a dividend attracting STC at 10%.

BUSA solution 2: Legislate for easier options:  The effective date of the amendment of section 45 of the Act should be some reasonable future date to enable taxpayers whose transactions that are substantially been completed to conclude and implement their transactions; and/or,  The provisions of section 45 should merely be amended to exclude the specific transactions which are of concern i.e. transactions where any associated debt will be in excess of a specific percentage or any associated debt gives rise to interest payable to a non-resident or exempt entity.