MFPFA application for a local business tax

1. MFPFA application for a local business tax 12 August 2012

2. Programme • Background • The need for the new city revenue stream • Objectives of the new city revenue stream • Design issues • Proposals • Conclusion: project process

3. The long history of the LBT (1) • FFrom 2000 - National Treasury indicates a desire to reform RSC levies • 2001 - Paper written for national government entitled ‘The Regional Services Council Levy: Evaluation and Reform Options’, by Roy Bahl and David Solomon, recommended a payroll levy. • 22005 - Paper written for NT as part of investigation into Municipal Fiscal Framework entitled ‘Replacing RSC/JSB levies’ by Richard Bird and Philip van Ryneveld recommend a local business tax as a preferred option • December 2005 - National Treasury publishes discussion document on website on options on replacement of RSC levies and indicates significant interest in implementation of a local business tax.

4. The long history of the LBT (2) • 22007 - SALGA tour of countries implementing some form of LBT, report compiled recommending LBT, especially for districts, SALGA NEC adopts proposal for LBT among other changes • 22008 SALGA letter to Minister of Finance, with faulty proposals for an LBT, Minister rejects the proposals as unconstitutional • 22009 - IMFO CFO forum considers and supports proposal for LBT; SALGA workshop considers and supports LBT; SALGA submission to Budget Forum • 22010 - Several Metro Councils initiated a project for prepare formal MFPFA applications for a local business tax; SALGA submission to the October Budget Forum

5. MFPFA requirements

6. Outline of MFPFA application document • Introduction • The need for additional sources of revenue • The need to improve city fiscal accountability • Consideration of possible additional sources of revenue • Proposal: a local business tax for the nine metros • Constitutional and legal considerations • Administrative considerations • Financial and economic implications • Implications for the municipal fiscal framework and intergovernmental fiscal relations • Reactions of organisations and individuals consulted • Conclusion

7. Programme • Background • The need for the new city revenue stream • Objectives of the new city revenue stream • Design issues • Proposals • Conclusion: project process

8. Fiscal Gap • City governments face a significant fiscal gap between their expenditure responsibilities and revenue resources • the nature of the gap varies: • In the cities and some other municipalities much of the gap relates to the requirement to provide infrastructure and services for economic growth and development; and specifically public transport infrastructure and operations. • for many other municipalities the gap still consists largely of a basic service standards backlog.

9. Weaknesses • There is a need for some adjustments to the framework within which municipalities currently operate. • despite significant increases in national grants, funding for critical investments in economic infrastructure and public transport services remains inadequate • the increasing share of grants in total municipal income implies a weakening in local municipal governance, especially in cities • Municipalities must also cope with significant unfunded mandates. • The understandable priority given to inherited backlogs has until recently meant insufficient attention being paid to economic infrastructure and services. • the share of the fuel levy is merely a general revenue source for cities, without links to transport functions

10. Responsibility • Municipalities are responsible for closing some of the fiscal gap, and must do so • billing completeness & accuracy • collections efficiency • debtors minimisation and management • tax and tariff increases for existing revenue sources • expenditure efficiencies • But there is nevertheless a remaining fiscal gap, which should be filled by a new local revenue source

11. Quantifying the need Economic Cost of infrastructure & services required to adequately fulfil legal mandate GAP Ongoing costs of services Tax & tariff increases Maintenance & refurbishment backlog Development charges Provision for growth Residential Expenditure efficiencies Minimum standards backlog Improved revenue effort

12. Local business tax • The remaining gap should be closed by a local business tax • Cities have considered 14 potential supplementary revenue sources - surcharges on water an electricity; outdoor advertising; taxes on property transfers; tourism bed-nights; municipal road use, non-residential parking, road tolling, congestion charges; vehicle license fees • Used standard public finance and tax criteria – revenue potential, constitutionality & legality, ease of administration; economic impact; social acceptability; including accountability and localisation, and links to private road use. • LBT is most viable in terms of scale, administration, impact, and acceptability, and can be designed to enhance accountability

13. Tax room • There is at least some tax room for the LBT • The removal in June 2006 of RSC/JSB levies without replacement by another tax meant an effective reduction in total company taxes • Even if in practise more than this is collected, the net economic impact can be positive if the tax and the way that revenues are spent, is well designed and executed.

14. Programme • Background • The need for the new city revenue stream • Objectives of the new city revenue stream • Design issues • Proposals • Conclusion: project process

15. Objectives • A `local business tax for economic services’ is intended to improve our system of intergovernmental fiscal relations: • To increase local fiscal capacity, because needs exceed resources available • To improve local accountability, for economic services and infrastructure • To improve economic and general urban efficiency, because ordinary political process tends to de-prioritise core economic infrastructure services

16. Beneficiaries & administration • The LBT should be collected by SARS and distributed to the recipient municipalities. • More efficient - make use of existing tax infrastructure and data • Better control and accountability • LBT revenues should be received by metropolitan municipalities, because of: • the national distribution of the local business tax base (relatively few municipalities have the bulk of the tax base); and • administrative considerations (administrative complexity increases sharply with the number of recipient municipalities)

17. Programme • Background • The need for the new city revenue stream • Objectives of the new city revenue stream • Design issues • Proposals • Conclusion: project process

18. Spectrum of alternatives Pure local tax National tax allowing local rate variation Grant with origin based formula General formula based grant National tax distributed by means of grants to municipalities Local tax

19. Three options in tax design • Change the constitution • to permit a local origin-based VAT (best from a pure public finance and tax perspective) • Introduce a national tax with strong local characteristics • essentially a national tax distributed as a grant • a key for apportionment is developed based on annual tax returns • easier to administer but accountability not as direct • hard to have a variable rate under this model • Define a specific (additive) local tax base • as close to the correct logic as possible, ensuring it is not a VAT • SARS would administer a revenue fund per recipient municipality • in principle allows variable rate between floor and ceiling

20. Defining the base (OPTION 1) • Impact of company activities are reflected in its use of capital services (depreciation, rent, and interest) • Depreciation represents the `using up’ of capital assets, often physical assets, which can be associated with the impact upon and use of physical infrastructure supplied by the city. • Rent should be included since some companies lease their productive capital assets rather than own them; and interest should also be included to level the playing fields among the owners of capital assets. • A major determinant of the economic impact of the company on city infrastructure and services is reflected in its use of labour services • salaries and wages should therefore be part of the LBT tax base

21. Distributing the base (OPTION 1) • Capital services • according to the location of physical assets • Labour services • according to the normal work location of employees

22. Definition per field references on IT14 form (OPTION 1) • Capital services: • 4418 – Rent - leased assets (to avoid double-taxing leased assets, banks must subtract rental payments from their depreciation claim – so the company that uses the asset will pay the tax, rather than the owner of the leased asset) • 4421 – Depreciation – special allowance assets (sections 12 (b) and 12 (c)) • 4494 – Depreciation – fixed assets • 4519 – Depreciation – moveable assets • 4521 – Interest – financial institutions • 4523 – interest – other • Labour services: • 4529 – Salaries and wages

23. This complies with the constitution (OPTION 1) • Not a company income tax base • it excludes important components, notably profit and royalties, and also does not subtract gross investment • Not a value-added or a sales tax base. • Instead is a unique proposed local business tax base which provides a reasonable proxy for the economic footprint of a company operating in a city.

24. Defining the base (Option 2) • Use business turnover as the base for calculation • Gross turnover to be used • Increase or decrease in turnover is a clear proxy for economic activity • All businesses submitting IT14 tax returns will be subjected to the tax • SARS to be appointed as the tax collector through their normal tax collection processes. • Tax is a value added tax

25. Emerging storyline • The cities need additional resources to support economic infrastructure & services • They also need additional accountability mechanisms to ensure that adequate priority is given to spending on economic services • A local business tax for economic services is therefore proposed

26. Reconnecting taxation • Hypothecation/assigned tax revenues • increase legitimacy and public acceptance • improve formal transparency and reporting, • highlights service provider performance • provides clearer budget constraints • LBT revenues should be assigned to fund economic infrastructure and services • Share of fuel levy should be assigned to public transport infrastructure & operations

27. Governance & accountability • LBT payments to recipient municipalities by SARS should be as mechanical as possible. • Consider specific additional measures, such as: • the funds should be used only on projects which are able to demonstrate a positive economic internal rate of return; • recipient municipalities should account and report separately on expenditure of these funds • establishing specifically-constituted forums to which such accounting must take place.

28. Redistribution • The `rest of SA’ LBT revenues could be assigned to economic development projects outside the metros

29. Programme • Background • The need for the new city revenue stream • Objectives of the new city revenue stream • Design issues • Proposals • Conclusion: project process

30. Proposals • Metros should themselves make a full contribution to closing the fiscal gap that they face. • The remaining gap should be closed by a introducing a LBT for metropolitan governments • The LBT should be designed to comply with the existing Constitution, and should be collected by SARS and distributed to the recipient municipalities. • LBT revenues should be spent on economic infrastructure and services, and specific accountability and reporting requirements should be introduced. • The share of fuel levy should be assigned to public transport infrastructure and operations. • The `rest of SA’ LBT revenues should be assigned to district economic development projects.

31. Feedback from NT (1) • Tax policy unit • more interested in the principles - policy rationale is critical • Design issues are important, but less so - `If we agree, we will ask SARS to administer’ • It is hard to earmark a major tax • Agree there is a funding gap • `the unfunded mandates floating around are very irresponsible’ • applies more broadly, not to economic services • Must give a social and political rationale – `must crack the politics’

32. Feedback from NT (2) • Tax policy unit (cont) • Best is an origin-based VAT, so change the constitution - `this is a third best option’ • Need to agree on principles first before we go into detail • IGRU • Argue that the built environment must be treated differently, so metros are different • Gap applies more broadly, not to economic services • Originally the MFPFA had had a two-step application process, but those clauses were removed

33. Feedback from SARS • Proposals can be worked with • System changes take longer than everyone expects • SARS will charge for the service

34. Programme • Background • The need for the new city revenue stream • Objectives of the new city revenue stream • Design issues • Proposals • Conclusion: project process

35. Project processes

36. Process forward • Local business engagement DATE • Completion of document + 2 WEEKS • Section 79 COMMITTEE DATE • Mayoral Committee DATE • Council DATE • Mayoral signature DATE • Submission of application DATE (Oct – Dec)

37. The End – Any Questions ????