Budget 2004 Revenue trends and tax proposals

1. Budget 2004Revenue trends and tax proposals 18 February 2004

2. Content • Tax Policy over the last 10 years • 2004/05 tax relief proposals • Direct tax: • Personal income tax rate & bracket adjustments • Income tax payable by individuals below age 65 • Income tax payable by individuals age 65 and over • Transfer duty relief • Incentivising share ownership by employees

3. Content • Direct tax policy reform agenda for 2004/05: • Royalty & mining tax review • Retirement fund tax reform • Motor vehicle allowance review • Indirect tax changes: • Excises on tobacco products • Excises on alcoholic beverages • General fuel levy • Road Accident Fund levy • Ad valorem customs & excise duties • VAT & transfer duty • Enhancement of tax administration

4. Tax policy over the last 10 years

5. Key elements of tax policy over the last 10 years • Significant improvement in efficiency of tax system and broadening of tax base: • Ensured a more equitable tax system by allowing significant relief, particularly for lower income groups • Tax to GDP ratio has remained relatively stable at 24,6% • Fiscal policy reform to broaden tax base: • Introduction of capital gains tax • World wide taxation base • Administrative reforms to improve efficiency: • Enhanced simplicity of the tax system has resulted in increased compliance & improved taxpayer morality • Improved investor sentiments

6. SA’s tax/GDP ratio • Since 1994 it has been Government’s stated policy to limit the taxation to GDP ratio to approx. 25%. • 2003 MTBPS - Total Budget Revenue estimates: • 1999/00 = 24,2% of GDP • 2000/01 = 24,1% of GDP • 2001/02 = 23,6% of GDP • 2002/03 = 24,6% of GDP • 2003/04 = 24,6% of GDP • 2004/05 = 24,6% of GDP • 2005/06 = 24,7% of GDP

7. SA tax mix as % of GDP

8. SA tax mix as % of total tax revenue

9. Tax base broadening • Tax base broadening has allowed reduction of tax rates • Reduction in corporate income tax rates • Total PIT relief close to R63 billion • Accelerated depreciation allowances • Introduction of learnership deductions • Reduction of taxes on property • Reduction in consumption taxes

10. Evolution of tax rates since 1980

11. Tax relief announced since 1994/95

12. Tax to GDP ratio • Tax to GDP ratio has been on an upward path. • Need to stabilize ratio to make taxes a flexible policy tool: • Long run expectations have to remain unaltered • Deficit reduction over the years has ensured flexibility in applying fiscal policy tools – tax relief; increases in real expenditure (fixed investment, health, skills). • Challenge is to ensure the same for tax policy.

13. SA’s tax/GDP ratio • Since 1994 it has been Government’s stated policy to limit the taxation to GDP ratio to approx. 25%. • 2004 BR - Total Budget Revenue estimates: • 1999/00 = 24,2% of GDP • 2000/01 = 24,1% of GDP • 2001/02 = 24,5% of GDP • 2002/03 = 24,8% of GDP • 2003/04 = 24,8% of GDP • 2004/05 = 24,8% of GDP • 2005/06 = 24,8% of GDP • The current tax/GDP ratio indicates a gradual increase from the 21,1 % level in 1984.

14. Tax revenue as a percentage of GDP – 10 years %

15. Distribution of revenue

16. Tax as % of GDP

17. Revenue trends and 2004/05 tax proposals

18. Main budget revenue

19. Summary of tax proposals

20. Personal income tax rate and bracket adjustments

21. Transfer duty

22. Review of share schemes • Current share schemes favour top management. • Tax-free share grant to employees. • Employer issuing shares to employees triggers fringe benefit tax. • Proposed changes will allow a tax-free share transfer to employees (capped amount). • Proposed restrictions to encourage long-term ownership. • Amend current legislation relating to equity-based incentives to prohibit executives from converting ordinary salary into capital gain for tax purposes.

23. Tax treatment of hybrid instruments • Debt and equity are treated differently for tax purposes. • Taxpayers use hybrid instruments that can be treated as either debt or equity to provide optimal tax savings. • Proposed anti-avoidance measures are aimed at treating these instruments according to their “substance” and not their “form”. • These measures will encourage taxpayers to classify debt and equity according to its true form.

24. Deferred payment schemes • In the basic deferred payment scheme the selling price is fixed but payment is over several years. • CGT is immediately triggered on all gains before the seller has received all the payments. • In more complex situations, the selling price is variable with payment over several years i.e.: • a basic fixed sum including a percentage of future profits, or • based on future profits alone • The selling price is not readily determinable, no gain can easily be calculated. • It is proposed to accommodate these issues.

25. Tax exempt interest for CMA residents • South African sourced interest paid to foreign residents normally tax exempt. • This exemption does not apply to CMA residents. • This provision became obsolete with introduction of worldwide tax system. • It is proposed that South African sourced interest paid to CMA residents be tax-free subject to possible exchange of information rules.

26. Government grants and exempt entities • In 2003 Government grants for infrastructure development on Government-owned property became tax-exempt for certain PPPs. • This preferential treatment may be extended to select group of public entities & related capital expenditure. • It has come to Government’s attention that some unresolved issues require consideration. These are: • Tax depreciation allowances on money expended by the private party on infrastructure • Clarifying the VAT treatment of these transfers.

27. Stamp duty • Stamp duty on mortgage loans abolished to encourage first-time home ownership. • Closing arbitrage opportunities between Stamp Duties and Transfer Duty: • Stamp duty on long-term leases vastly lower amounts than transfer duty on actual transfer of real property. • Hence, stamp duty increased for LT leases if nature of transaction is similar to property transfer. • Enhancing enforcement measures: • Penalty for late stamping of lease documents will no longer be limited to R4000 • Late stamping for leasing documents will no longer be allowed retrospectively • Alignment of penalties structure with other Acts.

28. 2004/05 agenda for reviewing some key tax instruments

29. Mineral royalty bill • Refinement of bill after extensive consultation with stakeholders. • Refinement includes: • Delay of introduction of royalty by five years - 2009 • Removal of fiscal stabilisation clause to ensure certainty regarding royalty rates • Marginal mines and potential double royalties need to be addressed. • Issue of marginal mines potentially overstated • Nature of marginality matters • Procedures to accommodate communities for potential loss of royalty income over time • Unequal distribution of mineral deposits and fiscal devolution

30. Impact of royalty – stories versus substance • Econometric model suggests that • Royalty will have limited impact on employment and output • Different royalty rates will have to apply to various mining sectors due to different tax incidences • Rate differentiation informed by diverse economic and distributional impacts. • Revenue-based royalty remains: • Royalty is nothing but a marginal change in commodity prices • Econometric work suggest that economic consequences are limited • Time series analysis shows that severity of revenue based tax versus profit tax is overstated for most sectors

31. Mining tax review • Mineral Royalty Bill necessitates a holistic reassessment of current fiscal regime for mining sectors, including additional allowance; ring-fencing provision; rate differentiation for diverse mineral sectors; gold mining tax formula; STC exemption, etc. • Gold mining tax formula provides for: • Income tax exemption and • STC relief • Relief for marginal mines more appropriate for a royalty regime than the corporate profit tax. • Propose review of 40 per cent surcharge rate for oil extracting companies. • Review aimed at attracting investment in oil and gas industry.

32. Pension fund reform • Completion expected during 2004/05. • Holistic approach requires modeling of all saving and tax instruments. • International literature suggest limited impact of tax policy on aggregate saving: • Primary impact lies with saving portfolio • Need to assess interaction between compulsory saving and tax policy • In light of complex dynamics between different savings instruments and entities, apparent obvious solutions become questionable.

33. Pension fund reform - it’s not that simple • Do contractual savings increase aggregate savings? • Can saving be enforced in the presence of financial liberalization? • Do higher returns on savings increase savings? • Income and substitution effects (international evidence does not indicate that higher returns on S do indeed increase S) • Are savings for retirement purposes really statistically that low in SA? • Not so – stats ignore returns by pension funds, capital gains on property and overestimate impact of durable consumption • Is the saver aware of the different returns on his/her saving portfolio? • Need to improve information flow to promote optimal choices (see Sunday Times of 22 February)

34. Pension fund reform - it’s not that simple • Does tax policy discriminate against pension funds? • Propensity to save differs for different savings instruments; e.g. income earned from house price appreciation could have higher propensity to save than income from wages • To increase aggregate savings there may be need for certain trade-offs in respect of tax neutrality principle for different savings instruments • International evidence suggests limited impact of tax policy changes on savings dynamics • Further complications: • If returns have positive impact on level of savings, then increasing returns on contractual savings would improve households position. But no transparency in respect of returns, high commissions – hence, is there income security post retirement?

35. Pension fund reform - it’s not that simple • Poor households face budget constraints since their contractual saving commitments cannot be countered by borrowings – hence, contractual savings are very limiting. It is here that tax policy changes may be needed against the revenue neutrality requirement. • Tax policy must change dynamics of savings instruments to provide poor households with more choices to earn optimal returns with low risk (e.g. retail bond); lowering RFT may be inefficient way unless pension funds can prove strong relationship between returns and additional savings. • In case of higher income households contractual savings are less limiting as they face fewer limits on credit. However, they face risk as they face interest rate risk on their borrowings to counter long run savings commitments – the greater the degree of financial liberalisation, the weaker policymakers’ ability to increase saving rate

36. Car allowance • Use of deemed motor expense schedule has escalated significantly: • Concern over revenue losses • Need to reconcile actual with deemed expenses • Income versus consumption tax: • In an environment of limited room for tax relief, trade-offs become inevitable • Intended changes not only aimed at revenue collection but primarily at changing behaviour • Government intends to continue its support for income tax relief

37. Indirect Tax Proposal 2004 • Increases in general fuel levy and Road Accident Fund fuel levy. • Increase excise duties on alcoholic beverages. • Increase excise duties on tobacco products. • Abolish ad valorem customs and excise duties on certain cosmetic products, computer printers, recorded music, clocks, and photographic film rolls. • Increase diesel fuel concession / refund to Agriculture, Forestry and Mining.

38. Fuel taxes • 10 c/litre increase in general fuel levy on petrol and diesel to R1,11 and R0,95 respectively. • 5 c/litre increase in Road Accident Fund levy on petrol and diesel to 26,5 c/litre. • Total fuel taxes as percentage of pump price increase from 35% on petrol and diesel in 2003/04 to approximately 37,4% and 36,4% respectively for 2004/05.

39. Diesel fuel tax concession / refund • Increase in refund of general fuel levy on diesel for primary producers (agriculture, forestry, mining) from 31,6% to 38,8% (or from 26.86 c/l to 36.86 c/l). • Nominal increase of 15 c/litre in total diesel refund for primary producers: • General Fuel levy refund increased by 10 c/litre • RAF levy refund increased by 5 c/litre • Refunds for all other beneficiaries increased by nominal increase in fuel taxes to maintain current levels of benefit.

40. Taxes as % of fuel price –1999 = 40%

41. Excise duties on tobacco products • Tax incidence (excise duties + VAT as a % of retail selling prices) on tobacco products increased from 50% to 52%. • This increase translates into the following excise duty increases for 2004/05: • Cigarettes 16.55% to R4,53 per 20 • Cigarette Tobacco 11.7% to R139,03 per kg • Pipe Tobacco 17.3% to R68,31 per kg • Cigars 15.67% to R1 233,04 per kg

42. Excise duties on alcoholic beverages • Proposed total tax incidence of 23, 33 and 43 per cent for wine, beer and spirits respectively. • Tax burden benchmark will be phased in over three years. • Excise duty increases for 2004/05: • Natural wine 30,7% to R0.88 per 750 ml • Sparkling wine 28,0% to R2.43 per 750 ml • Fortified Wine 16,0% to R1.75 per 750 ml • Clear Beer 9,0% to R1.15 per 750 ml • AFBs & Ciders 7,1% to R1.15 per 750 ml • Spirits 13,51% to R14.78 per 750 ml • No increases in excise duties on sorghum beer / Traditional African beer

43. Ad valorem customs and excise duties • Abolish ad valorem customs and excise duties on the following products: • Some cosmetic products: preparations used for hair, shampoos, deodorants, bath preparations, etc. • Recorder and unrecorded music (CDs & magnetic tapes) • Computer printing machines and photo copying machines • Clocks • Photographic film rolls