Revenue Laws Amendment Bill

SACOB Commentary

1. Introduction

SACOB through its affiliated Chambers, Direct Members and Associate Members
represents some 35 000 businesses throughout South Africa. The majority of these
businesses are small to medium sized enterprises. The Direct Member
constituency represents the majority of South Africa's large corporations. In short,
as the largest organized business body in South Africa, SACOB represents the
entire spectrum of formal business in the country. It is with these credentials that
SACOB claims to speak on issues that affect the interests of the business sector.
In the time afforded for comment (less than 10 working days) it has been
impossible to consult with, and secure comment from, the broad SACOB
constituency. Furthermore, in so far as it follows the 'consultative' pattern adopted
for the Second Revenue Laws Amendment Bill introduced at the same time last
year, it would be deceptive to describe the process as consultative. Constructive
input into a 200-page document of considerable complexity is no exercise
deserving of throw away commentary. The implications of the amendments have
still to be fully understood and the problems that emerge will have to be addressed.
Consider well that it is the business sector that has to work with the proposed
legislative amendments. Let it not be stated that consultation with SACOB has been
a feature of this legislative process. In the light of the forgoing the commentary
offered is by no means a comprehensive or a mandated view from the Chamber.
The commentary is separated into those provisions relating to taxation and those
relating to customs and excise.

Selected Taxation Comments

2.1 Transfer Duty

The proposed amendment intends to tax the change in ownership of shares
where a property is held in a company or Close Corporation. It is a heavy-
handed measure seemingly designed to prevent a perceived abuse.
Unfortunately, it ignores the reality of the legal persona of these entities, and
constitutes an attack on a perfectly legal and commercially justifiable way of
acquiring property. Consider the economic impact on true legal persona of
entities recognised by law. In addition, consider the fact that, increased transfer duties are payable when the property is initially purchased by the
legal persona, and bear in mind that the capital gains tax rate is higher for
those entities.

2.2 Fair Value

By deciding that liabilities are to be ignored in the determination of the fair
value of a company or close corporation, the tax authorities whether
intentionally or not convey the impression that certain types of taxpayers are
to be unfairly prejudiced.

2.3 Exchange Rates

SACOB welcomes the streamlining of the rules regarding the use of
exchange rates for conversion of foreign currency.

Resident Definition

The amendments to the definition of resident are welcomed. They provide a
more sensible approach to persons who regularly have to commute to
South Africa, but do not carry on business in the country,

2.5 Dividend

In terms of the proposed dividend definition, companies in the process of
liquidation will be required to pay Secondary Tax on Companies (STC) on
any capital gains made on the disposal of their assets. Surely the intention
was to impose the tax liability on that portion of the gain that is subject to
Capital Gains Tax (CGT), This measure implies that STC is a tax on
dividends as well as on deferred corporate tax.

2.6 Controlled Foreign Entities (CFC)

The mirroring of the provisions contained in Sections 9D {namely (2A)(c)
and (9) (fA)} are imprecise, to the extent interest, royalties, rent, and other
income from CFC's within the same group of companies are meant to be
not tax deductible in the paying CFC companies' hands and not taxable in
the receiving CFC companies hands. The current position of the foreign
dividend only attracting tax when the dividend is received by a South African
holding company of the group of CFC's has been altered with the removal of
section 9D(9)(f) from the Act. As it stood, it provided exemption for such
intra-CFC foreign dividends. The removal of the section has the effect of
triggering income tax earlier than would currently be the case. The tax
arises the moment a dividend is declared from one CFC to another CFC.
This constitutes a fundamental change for which no clear explanation is
given in the Memorandum. It is a change that requires reconsideration, no

2.7 Group Restructuring

While the sections dealing with financial instruments and their holding
companies have been tidied up, there has been no relaxation of restrictions.
To some extent it reflects the antipathy that exists to permitting the
movement of financial instruments, including share investments, around a
group of companies in a tax neutral manner. There is an underlying
suspicion that tax avoidance is at the root of such activities, and the reaction
is to prevent it by way of Group restructuring provisions. Many would argue
that there are sufficient tax avoidance provisions in the Tax legislation to
ensure that such transactions are not used for tax avoidance purposes.

It is not surprising that the provisions concerning group restructuring are
complex. The explanatory memorandum notes that the provisions are to be
elective. It is intended that they be tax neutral, though SACOB would argue
that this is not so. Consider the following. The deferral of a single CGT
event creates a double CGT event. Thus in the share-for-share transaction,
the deferral of the CGT event by the seller, potentially creates a double CGT
event in the future, one for the seller and one for the acquirer (if he acquires
from a shareholder which holds greater than 25% of the shares).
Incidentally, the Share-for-Share transaction appears not to be elective.

2.8 Retrospectivity

Retrospective taxation measures are bad measures in the sense that they
generate a high level of uncertainty for both business and taxpayers in
general. It is a legislation device that is and has been strongly opposed by
SACOB. From the cursory examination of the Amendment Bill, two such
instances are revealed.

The proposed dividend definition change treats as a dividend on liquidation
any distribution of capital profits after 1 October 2001. Whilst applicable to
distributions effected after 1 January 2003, retrospectivity is a feature of the
proposed change.

In the case of CFC's, changes to section 9D apply for all years of
assessment ending after promulgation date. In many cases, this means
retrospectivity applicable for year-ends after the promulgation date.

With regard to Group Restructuring, a number of provisions have
retrospective application, due to them having effect for all years of
assessment ending after promulgation date. Thus for a December year-end
company this has retrospective effect to 1 January 2002. Since there is
likely to be a significant negative effect on many companies from the
application of these provisions, SACOB urges that consideration be given to
the adoption of an application date for all future years of assessment.

Proposals relating to Taxation

In respect of any future tax amendments of the magnitude and .complexity
covered in the current Revenue Laws Amendment Bill, SACOB would wish
for an undertaking that a reasonable (ten working days) period be granted to
provide input.

Reconsider the proposals on transfer duty in the light of the points made in

Reconsider the impression given in respect of the 'fair value' definition.

Clarity to be given on dividend definition and the implied intention to
impose STC on dividends.

Reconsideration of the proposals on CFC's

As a broad principle, the rejection of any implied retrospective taxation

Selected Customs and Excise Commentary

4.1 Goods in Bond

Section 18

SACOB is concerned at the potential that this provision will have a negative
impact on small and micro businesses in the transport industry. In terms of
the requirement, truckers/transporters involved in moving goods in bond will
have to be licensed. While the need for licensing is understood, SACOB
points out that the obligation to establish a bond/guarantee to cover the duty
exposure of the goods he is carrying or to negotiate with the
consignee/consignor for this cover would place some small and micro
enterprises under severe financial pressure.

4.2 SACOB recommends that consideration be given to finding an alternative
means of addressing the need to ensure that a bond covering duties
exposure is available.

Section 44 13 (a)(b)

SACOB proposes that this clause be reconsidered. As it stands it has the
potential to cause uncertainty in industry due to substantial delays in getting to the final judgements, SACOB fears that this clause provides a far too
open-ended framework. It provided that an importer/exporter involved in a
dispute with SARS will need to cover the total exposure plus penalties plus
forfeiture in the form of a guarantee/bond. It will not encourage the.
department to bring the matter to any sort of finality speedily;

Conventions/Agreements -Disclosure of Information

Section 5O

SACOB understands that the Commissioner has extended his scope under
which he may disclose information about a person, firm or business to be in
keeping with information that various Customs Authorities pass to each
other to intercept illegal or smuggling activities.

SACOB points out, however, that there is a possible Constitutional
dimension to this information as it may be abused and may result in
defamation of the consignee or consignor without any
recompense by or action against SARS.

Joint land border administration (SADC)

Section 50A

SACOB supports this provision in principle, SACOB understands that the
provision will make it possible for personnel from both countries to operate
at the one stop border post. If this is not the case, and the posts are
manned only by personnel from the country in which the facility is located,
members have expressed the fear that where South Africaís Customs
personnel are more effectively trained, the lack of expertise by other
authorities on South Africa's borders may open the floodgates for
smuggled/grey products. They further fear that rules for country of origin
may also be affected. SACOB would therefore recommend that the modus
operand! of one stop border posts be clearly described, and that a high level
of training is undertaken prior to the establishment of single border posts.

4.6 Licensing of certain Fuel Distributors

Section 64F

SACOB notes this new introduction into the proposed legislation, designed
to license distributors of fuel products and will be called licensed distributor.
SACOB believes that the level of the bond/guarantee should be such that it does not discourage new entrants from entering the market, and that it will
not prejudice existing small and micro enterprises in the industry.

Duty Refunds

Section 75 (11 A)

SACOB is concerned at the discretionary powers this gives the
Commissioner to determine, based on circumstances, whether or not
evidence is reasonably sufficient to allow a duty refund. SACOB is also, in principle, opposed to retroactive implementation of legislation. It is stated that that this amendment will be effective from 1 October 2002. SACOB regards this as unacceptable
as It leads to a perception that the principles entrenched in the consultative Parliamentary process, which is upheld as international best practice, are not important and that lip service is being paid to it. SACOB also fears a repetition of the
experience of South African Breweries where Duty at Source principles
were established some years back and the refund of excise duty has never
been allowed. Currently should an organization wish to challenge the
Commissioner on the basis of this provision only being effective from the
1October 2002 it would need to be directed to the Commissionerís
Legal Office. Presently Duty of Source provides any refunds are only
applicable to the licensed manufacturing warehouse and only it can rebate
the duty on his excise account. It does not allow for the sale of excisable
goods sans excise duty to the distributor for export or the sale of excisable
goods with exports excise duty and the provision for the distributor to refund
that duty on exportation. SACOB views this as inequitable.

Liability of Agents

Section 99

SACOB points out that this proposed amendment covers an issue that is
presently under dispute. It is a moot point whether the clearing and
forwarding agent has the knowledge or ability to make absolutely sure of the
contents and details of each import consignment on behalf of an importer.
Information via the clearing instruction and discussions with client or
principal culminates in a declaration made on behalf of the principal. The
clearing and forwarding agent in all instances acts as agent only and never
as principal. It therefore seems unreasonable that the element of proof that
all reasonable steps were taken and that the agent exercised reasonable
care should be a burden on the agent in these instances. Bearing in mind
that the onus to pay duty on imported manufactured goods always remains
the obligation of the principal, it seems unreasonable that Section 99
demands the agent be held fully responsible for all obligations including the payment of duty and charges imposed on such an importer/'manufacturer.

The abolition of paragraph 5 indicates that the restriction of liability by
prescription shall cease after the expiration of a period of two years from the
date at which it was incurred; in terms of such sub section clearly gives this
an element of a sunset clause where an agent may have terminated his
relationship with the principal, which is a cause for concern. The paragraph
proposing that for the purposes hereof reasonable care or steps shall not
include, reliance "solely on information supplied by the principal" leaves the
agent in an invidious position in that site bill of entries or pre shipment
inspections supposedly at the agents cost would need to be carried out to
be absolutely sure of information. This could result in undue delays and
costs that would be detrimental to South Africa's international reputation as
a reliable and cost efficient trading partner.

4.9 Interest

Section 105

SACOB points out that interest rates fixed by the Minister may be
percentage points above prime. SACOB would therefore recommend that
parameters be described within which the interest rate may be set.

Debt to the State

Section 114

SACOB recognizes that this provision is included as a result of the findings
of the Constitutional Court that certain provisions of Section 114 are
invalid. There is, however, no clarity that the lien extends to the credit
balance of the value of the leased goods. This needs clarification.

Proposals relating to Customs and Excise

5.1 Consideration must focus on the affect that Section 18 will
have on small and micro businesses in the transportation

The open-ended time frame granted creates uncertainty. There is a need to
set limits in respect of reaching a conclusion to any dispute.

Whilst supporting the principle of Joint Border Post Administration, the
complexity of administrative operations, different interpretations to tariff
classifications and values requires that a detailed Practice Note be prepared
in order to provide clarity in such interpretations.

In respect of the licensing of special fuel distributors, a special refund
provision must be made in the sixth schedule.

In respect of liability, it is unreasonable for the agent to bear the burden of
proof as to the accuracy of the principal's declarations;

Johannesburg 23 October 2002