1. Revenue Laws Amendment Bill 2008 Submission to the Portfolio Committee on Finance 20 August 2008 EJ Liptak

2. 2 Retrospectivity  Law takes effect prior to its enactment  Budget Speech  Anti-Avoidance Media Alert  Release of the draft Bill  Tabling of the final Bill  Can change direct tax consequences of prior completed transactions or Pending transactions with binding agreements subject only to third-party suspensive conditions

3. 3 Fundamental Concern  Practical impact Economic activity  Uncertainty in the business/investment community  Compounds the problems caused by constant changes  The “Rule of Law” Founding principle in the Constitution Citizens have a right to certainty regarding their obligations under the law

4. 4 International Approaches  Broad constitutional prohibitions Germany Hungary Japan Poland Sweden Tanzania  More flexible limits United States

5. 5 Providing Relief  Major exception – changes needed to relieve a class of taxpayers from an extraordinary and unwarranted tax burden  Does not violate the “rule of law” principle Principle protects citizens from imposition of unfair burdens by the government Does not prevent the government from relieving its citizens of unfair burdens it has inadvertently or unintentionally imposed upon them

6. 6 The Tax Context  Can arise in many different situations  No single rule Genuine technical corrections Changes in general tax rates or rebates Changes reducing or eliminating favourable treatment for existing arrangements Changes countering abusive tax avoidance Changes affecting the direct tax consequences of a prior completed transaction

7. 7 The Current Problem  “Look Back Year” default rule Years of assessment ending on or after 1 January 2009 Sometimes accelerated (e.g. 30 October 2007) Increasing use  Individual taxpayers  28 February 2009 year end  New rules apply to any transaction occurring on or after 1 March 2008  Companies  Fiscal year filers (e.g., 31 March or 30 June)

8. 8 Practical Result  Changes apply retroactively to any transaction occurring during the “look- back” year  No difference if – Fully completed prior to the announcement of proposed changes Binding contracts after months of negotiations Under taken purely for commercial reasons Not subject to the General Anti-Avoidance Rule

9. 9 Impact on Business and Investment  Key commercial provisions of the Act Section 9D – controlled foreign companies Sections 42 to 47 – corporate formations, amalgamations, intra-group transactions, unbundlings, and liquidations Section 64B and 64C – the Secondary Tax on Companies

10. 10 STC Inter-Company Dividend Exemption  Revenue Laws Amendment Bill 2007 Inter-company dividend exemption Anti-abuse measure – minor mischief Over-broad proposal Immediate effective date No prior notice  Commercial impact Pending transactions at risk for millions of Rand in unexpected up-front liabilities Deals on hold for weeks till problem resolved

11. 11 “Group of Companies” Definition  Revenue Laws Amendment Bill 2007 New exclusion applicable to non-resident companies Four different effective dates!  Huge impact on prior transactions under the corporate rules  Transitional relief, but Final Act eliminated that transitional relief Had to be corrected in TLAB 2008

12. 12 Intra-Group Transactions (1)  Part of the Corporate Rules  Roll-over relief  Amendments denied relief in connection with three types of transactions No prior prohibition No prior notice Retroactive to transactions occurring in years of assessment ending on or after 30 October 2007 Calendar year taxpayers potentially at risk for any intra-group transaction completed at any time during the prior ten months

13. 13 Intra-Group Transactions (2)  Draft Taxation Laws Amendment Bill 2008 21 February 2008 Proposed sweeping changes to section 45 Applicable to any disposal on or after that date  No prior notice  No relief for binding agreements  Enormous tax consequences  Major problems eventually resolved, but damage done in terms of time, expense and taxpayer confidence

14. 14 Denial of Retroactive Relief (1)  Domestic Financial Instrument Holding Companies (“DFIHC”) Introduced in 2002 Passive holding company concerns Extremely problematic/impractical Unintended consequences  Active businesses subjected to enormous unintended liabilities

15. 15 Legislative Response  Revenue Laws Amendment Act 2005 Major remedial changes, but only prospective in effect No relief for “unintended victims”  Revenue Laws Amendment Act 2007 DFIHC provisions completely repealed Extremely positive change – but much too late for many taxpayers

16. 16 Denial of Retrospective Relief (2)  “Qualifying interest” threshold  75% requirement for a “group of companies”  Major obstacles for many BEE transactions 25% plus 1 requirements  Revenue Laws Amendment Act 2005 New lower 70% threshold, but only prospective in effect

17. 17 Positive Developments  Recent amendments  Retrospective relief granted Hyperinflationary accounting Certain share-for-share transactions Technical corrections to resolve serious unintended consequences  SARS and National Treasury extremely responsive to problems in recent draft legislation But could these problems have been avoided?

18. 18 A Way Forward? (1)  A “look forward rule” General rule – amendments apply to years of assessment beginning on or after 1 January 2008  Protection for Completed transactions Binding agreements subject only to suspensive conditions beyond the parties’ control

19. 19 A Way Forward? (2)  Exceptions Major abusive avoidance schemes  Recent examples Foreign dividend/STC avoidance crisis (2005) Section 44 schemes (2007) “Funnel Financing Masquerades” (2008)  Date of public notice Relief from extraordinary or unwarranted tax burdens Technical corrections Rates and rebates

20. 20 Conclusion  A culture of compliance  Everyone has an obligation to bear their fair share of the tax burden  But it imposes a reciprocal responsibility on government  It must provide a tax system that is fair and equitable  Retrospective legislation must be measured against that standard