Revenue Laws Amendment B ill, 2003

1. Revenue Laws Amendment Bill, 2003 Representations and comments to the Portfolio Committee on Finance Thursday, 23 October 2003

2. PricewaterhouseCoopers representations Key sections covered; • Corporate Rules; • Foreign and STC aspects; • Increases in Commissioner’s powers; • Reportable transactions; and • VAT.

3. PricewaterhouseCoopers representationsCorporate rules Definition of financial instrument holding company (“FIHC”) • Existence of the actual cost test fundamentally flawed; • Applied on transaction date so what is relevance of a mixed batch of historic figures? • Market value is fundamental and accepted principal locally (below) and internationally (DTAs) • No equivalent cost test applied elsewhere in legislation; transfer pricing, deemed dividends, donations tax, capital gains tax, estate duty, alienation of trading stock all by reference to market value not actual cost

4. PricewaterhouseCoopers representationsCorporate rules Definition of financial instrument holding company (“FIHC”) • Existence of the actual cost test fundamentally flawed; (continued) • Hard to understand why special treatment for this one piece of legislation • Renders corporate reliefs and participation exemption useless for many companies

5. PricewaterhouseCoopers representationsCorporate rules Definition of financial instrument holding company (“FIHC”) – cont. • Existence of the actual cost test fundamentally flawed (continued); Creates anomalies and discrimination as regards • Companies developing vs acquiring intellectual property • Companies leasing vs buying assets • Companies actively managing debtors

6. PricewaterhouseCoopers representationsCorporate rules Definition of financial instrument holding company (“FIHC”) – cont. • Existence of the actual cost test fundamentally flawed (continued); • Treatment of cash as a bad asset is contrary to the stated concern of “loss trafficking” – cash has same accounting and tax basis • Intent of reorganisation rules is to provide relief therefore removal of problems caused by “actual cost” remains a technical correction.

7. PricewaterhouseCoopers representationsCorporate rules Definition of financial instrument holding company (“FIHC”) – cont. • Regulated companies • Extend to cover assets of foreign CISs • Disregarded assets; • Shares in group companies • Loans to group companies

8. PricewaterhouseCoopers representationsCorporate rules Definition of financial instrument holding company (“FIHC”) – cont. • Application in a group context is inappropriate • Global trend is for relaxation of anti-avoidance and increased consideration of the group as a unit

9. PricewaterhouseCoopers representationsCorporate rules Definition of financial instrument holding company (“FIHC”) – cont. • Impact on tier structures of CFCs SA • CFC3 is an operating company • CFC 2 is a group investment company 100% CFC 1 • Sale of CFC 3 is covered by p.exempt • Sale of CFC 2 is not 100% CFC 2 60% CFC 3

10. PricewaterhouseCoopers representationsCorporate rules Application of current rules discourages foreign investment • No tax basis for SA acquirer in key group transactions involving the issue of shares where counter-party is non-resident • contrast to position where counter party is resident • group position is to be taxed on subsequent disposal on full proceeds (negative BEE implications) • no incentive for offshore groups to invest in SA through these mechanisms • reliefs otherwise still desirable as avoid transfer taxes cost

11. PricewaterhouseCoopers representationsForeign and STC aspects • Loss of designated country exemption • Massive increase in compliance burden • Significant adverse impact on costs (global valuations) • Application of s8E anti-avoidance • Currently too wide, covers also listed companies • Can cause double taxation

12. PricewaterhouseCoopers representationsForeign and STC aspects CFC business establishment exemption • CFC with passive income but net loss • Imputation of passive income even if overall net loss • Contrast to position of SA resident company • Trading passive income • Can still exempt rent, insurance, banking activities • No scope for licensing

13. PricewaterhouseCoopers representationsForeign and STC aspects Security lending arrangements • STC credits removed on lending transactions • Specific provisions inserted this year to facilitate increased use of security lending • Credits disappear into ether – no one has access to them • Results in double taxation

14. PricewaterhouseCoopers representationsIncreases in Commissioner’s powers Support for • Extension of s103 equivalent anti-avoidance measures to TD and MST, but why no similar provisions for SD and UST? Cannot support in current form • Restrictions on making objections (s81) • Suspension of interest on tax refunds (s89quat) • Commissioner effectively put above courts (s13A TD) • Transference of tax liability (para. 6A of 4th, s7 UIF)

15. PricewaterhouseCoopers representationsReportable transactions • No comprehensive consultation process • Importation of US concept (controversial there also) • Not in existence anywhere else in world • Anything vaguely similar runs in conjunction with advance ruling process (voluntary) • Scope is breathtaking, extends to employment contracts, endowment policies, standard lease agreements etc • Unnecessary as powers already exist to require information with tax return

16. PricewaterhouseCoopers representationsReportable transactions • Has SARS the resources to deal with this? (sought advice from US IRS as to their dedicated resources?) • Detrimental to economy • Best way to grow tax base and collection is growth of economy as a whole • Healthy structured finance sector is barometer of growing economy • Over regulation limits economic growth

17. PricewaterhouseCoopers representationsReportable transactions • Detrimental to economy (continued) • Coming in same year as loss of ‘designated country’ results in massive increase in compliance burden • Risk of erosion of tax base through migration of capital flows due to overregulation of structured finance industry when benchmarking globally

18. PricewaterhouseCoopers representationsVAT: Government grants Current position • Zero-rating of “transfer payments” specifically introduced in 1991 • Recipient pays no VAT, but may deduct VAT paid on expenses as input tax where used to subsidise taxable supplies • VAT neutral effect • No need to increase grants / subsidies • Problem: disputes as to whether grant is a “transfer payment” or payment for goods or services supplied

19. PricewaterhouseCoopers representationsVAT PricewaterhouseCoopers representationsVAT: Government grants Proposals in Draft Bill • Zero-rating of “transfer payments” to be abolished • Certain public bodies & public private partnerships • Must pay VAT to SARS on grants received • May deduct VAT paid on expenses funded by grants as input tax • Local authorities, educational institutions and other recipients of grants • Will NOT pay VAT to SARS on grants received, but • May NOT deduct VAT paid on expenses funded by grants as input tax

20. PricewaterhouseCoopers representationsVAT PricewaterhouseCoopers representationsVAT: Government grants Effect of proposals in Draft Bill • Public bodies & public private partnerships • Increased VAT cost for other recipients of grants • Amount of grant will effectively be reduced, due to denial of input tax • Definition of “grant” does not clearly distinguish between true grants, and payments made for goods or services

21. PricewaterhouseCoopers representationsVAT • Exported services • Independent branch of SA vendor, which is outside SA, should enjoy same zero-ratings as other non-SA vendors/ residents • VAT now chargeable where use is in SA but non-resident may have qualified for a s11(2)(l) zero rate

22. PricewaterhouseCoopers representationsVAT: Invoices Recipient’s VAT number required on invoices, credit and debit notes • Will create considerable practical difficulties • Will necessitate costly system changes • Recipient’s details now also required where • an abbreviated tax invoice was issued, and • recipient’s (full) details were not included in original tax invoice