In March the Davis tax committee released its closing report on the work completed over almost five years and at a cost of approximately ZAR12.4 million.
The committee was appointed by the finance minister in 2013 to “inquire into the role of the tax system in the promotion of inclusive economic growth, employment creation, development and fiscal sustainability”.
It operated on the basis of various subcommittees which considered small business, macro analysis, mining, VAT, estate duty, carbon tax, public benefit organisations, funding the National Health Insurance and tertiary education, and tax incentives.
The committee delivered 25 reports to the finance minister. It was advisory in nature and has only made recommendations.
As stated in its terms of reference, “the minister will take into account the report and recommendations and will make any appropriate announcements as part of the normal budget and legislative processes. As with all tax policy proposals, these will be subject to the normal consultative processes and parliamentary oversight once announced by the minister.”
Having regard to the advisory nature and that any recommendations will require legislative amendments, it is possible to evaluate the extent to which any changes to the tax system have been implemented or are likely to be implemented.
One of the first topics that were considered related to base erosion and profit shifting (BEPS). To address international concerns relating to BEPS, the committee considered the international action plans in the context of South Africa's legislation and position within the global economy.
The topics considered in addressing concerns relating to BEPS covered by the committee are extensive and often complex. Potentially tax treaties will be renegotiated to address some of the issued identified by the committee, but this will inevitably take time to implement.
The committee stated that the "costs and challenges of re-negotiating … treaties will be alleviated by signing the multilateral instrument that is recommended under Action 15 which will act as a simultaneous renegotiation of all tax treaties".
As at 20 December 2017, 72 jurisdictions (including South Africa) had signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, which is the product of OECD BEPS Project Action 15.
A further example of an international topic reviewed related to the digital economy and how South African direct and indirect tax legislation caters for electronic transactions where it is not always easy to detect the source of the transaction. In this regard, amendments and regulations have been made to the Value-Added Tax Act to cater for electronic services. The South African Revenue Service has also published its stance relating to the treatment of cryptocurrencies the use of which have become more prevalent since the inception of the committee.
Another international aspect that was considered by the committee in the context of BEPS is that of the controlled foreign company (CFC) regime. One of the issues raised in the report related to consideration of creating CFC where there is an off-shore trust that holds equity in an off-shore company. Interestingly, draft legislation was proposed in 2017 to extend the reach of the CFC regime to include off-shore trusts. This was, however, not implemented but in the 2018 budget speech, reference was again made to the use of off-shore trusts.
The committee’s recommendations for section 6quin of the Income Tax Act to be repealed, and for section 10(1)(o)(ii) of the said act to be reviewed have been implemented. Overall, changes have been made relating to some of the topics examined by the committee and it is likely that there will be future developments having regard to the heightened international imperatives to prevent tax abuse.
In part 2, two additional topics considered by the committee will be discussed – tax administration and corporate income tax.