MEDIA BRIEFING WITH THE MINISTER OF FINANCE AND THE DIRECTOR GENERAL OF FINANCE
15 September 2000
Documents handed out Media Briefing (Appendix 1)
Briefing Note on Residence Basis of Taxation (Appendix 2) Minister Trevor Manuel gave a summary of his written statement, drawing attention to the proposal to change the tax base from source to residence and the recent report on poverty in South Africa.
Discussion (Q) Thinking as an ordinary person, should one pay one’s home and car interest rates? What about next year for the economy? Should we have confidence?
(A) Minister Manuel: I realise the rapid interest increases in 1998 made a deep impression on ordinary people. The evidence is stronger in the current reduction of house debt, so if interest rates go up, they will not be caught.
The world is now on tenterhooks waiting for the conference in Vienna on Sunday.
The one change variable is the price of oil – there are neither significant changes nor stability here. The price of oil in the UK is coming into line with the price in South Africa. Our tax on fuel is low because it is not percentage-based.
The interest rate response in Japan has been to tighten its rates.
There is volatility between the US dollar the Euro dollar and the yen. This volatility puts pressure on our monetary policy and we don’t want to see too many changes in interest rates.
(Q) What happened with GEAR? Are the GEAR targets to be varied?
(A) Minister Manuel: We have not considered re-modelling. GEAR will not supplant the RDP – this has been confirmed by the National General Council of the ANC. The broad objective of government is to reconstruct and develop. GEAR makes space for both of these.
(Q) If inflation continues to go up, will that justify an overshoot of the inflation target? Because of the continual pressure on the Rand, will there be a second round of inflation?
(A) Ms Ramos (Director General): If the oil prices remain at this level, all economies will have to work through second round effects. The question is whether there will be a long-term impact on the price index or if it can be absorbed. It’s premature to say that the oil price change requires a change in target. We have chosen that price index and we will stick to it.
(Q) Does the government think that they will meet the CPI target by 2002?
(A) Ms Ramos: Yes.
(Q) Are you having differences with Minister Erwin on investment incentives policy?
(A) Minister Manuel: I don’t know where that comes from. We have an on-going debate, but there is no disagreement. Be careful not to confuse process and outcome.
(Q) Does HIV cause AIDS (this was asked jokingly)?
(A) Minister Manuel: In a finance context the connection between AIDS and poverty may be construed in the sense that poverty can cause weaker bodies. Weaker bodies in turn may be more susceptible to the initial infection. In this way vulnerability to the disease can be linked to poverty.
(Q) Are you expecting strong growth this year? Will budget targets be revised?
(A) Minister Manuel: We predict strong growth over the next two to three years. We may have to adjust this year’s budget targets, but we will wait for the numbers from the Federal Reserve Bank.
(Q) In terms of next year’s budget, do you anticipate shifts in emphasis in deficit reduction? And what about the proceeds of privatisation?
(A) Minister Manuel: I can’t answer this until the Medium Term Budget Policy Statement has come to Parliament at the end of October.
(Q) What decision has been taken on individual reparations to victims who have been before the Truth and Reconciliation Committee? Do you want to clarify any of your previous comments on this matter?
(A) Minister Manuel: No, I spoke of development challenges and not of reparations. Allow me to repeat myself. The Apartheid past affected many people through forced removals, "Bantu" education, the Group Areas Act and the problem of statelessness. Therefore, our biggest challenge is development. The work of the TRC is not complete. The key issue is whether this is only about monetary compensation because the struggle is about so much more.
(Q) There has been a shifting of the goalpost on investment. What does this mean for economic growth?
(A) Minister Manuel: The first preference is domestic fixed investment. We want to ensure higher levels of efficiency since no country can develop on the basis of foreign investment only. This is the biggest challenge for South Africa. There is significant growth taking place in sectors of the economy but it is not enough. There is also a demand for higher skills than the economy offers – this is the biggest challenge of all. Another challenge is the low savings level in the economy. Competition exists to attract savings from around the world.
(Q) Some big South African companies have moved their primary listings to other countries, such as England. What does this mean?
(A) Minister Manuel: Competitiveness between countries is not determined by governments, but by firms. Firms with a South African character must grow and have access to capital. The primary listing was occasioned by the requirement of the London Stock Exchange on domicile. This exists for reasons of oversight.
(Q) What about the shift of the tax base from source to residence?
(A) Mr Gordhan (SARS Commissioner): So far revenue collections have been extremely positive. There has been some remarkable performance, for example, with Customs, which used to be problematic. It is now doing very well. We hope to implement the residence basis for taxation on 1 January 2001. One reason for the shift is to ensure that the tax base is broadened. A lot of income is still untaxed. We now have to define "resident" in South Africa by deciding the criteria for the definition.
(The Commissioner referred to the Briefing Note on Residence Basis of Taxation, drawing attention to exclusions and exemptions. There will also be new reporting requirements for individuals and companies)
The Commissioner said he believed that, administratively and legally, they were on course to introduce this legislation on 1 January 2001.
(Q) You have not referred to labour market inflexibility as a challenge to investment. Do you not think the draft labour law amendments in terms of their prognosis for investment is important?
(A) Minister Manuel: Subject to negotiations in NEDLAC, they have some influence, but how much influence is debatable. Conditions are also set up in the collective bargaining agreements. One must take account of these as well. It goes beyond a few amendments.
(Q) What has been the effect of the recent floods in the north on economic growth?
(A) Minister Manuel: The first effect was on agriculture and then on tourism. Roads will have to be re-built and parks put back into operation. It is still too early to tell what the effect will be on tourism. The third effect is on fiscal pressures on reconstruction. This will be reflected in the Adjustments Estimate which will be tabled on 30 October 2000.
(Q) What about the International Monetary Fund and the Board of Governors?
(A) Minister Manuel: The key challenge to the IMF is about restructuring relationships between countries. Regulations between states is about systems and not about debtors and creditors.
Apart from South Africa, Tunisia and Egypt, all other African countries are dependent on multi-lateral sources of finance.
They key question is the re-examination of what it takes to finance development.
(Q) What are the figures for infrastructural repair? What about the deficit?
(A) Minister Manuel: No, I am not talking about that. The Adjustment Estimate each year allows departments to ask for unavoidable expenditures. They try to meet this from the contingency reserve. I don’t know what the figures for flood reconstruction will be, but if the expenditure is unavoidable, then we will come to Parliament to ask if we can appropriate the funds. Parliament decides these things. I have nothing to suggest.
(Q) Will South Africa raise a large loan from the World Bank for reconstruction?
(A) Minister Manuel: We are engaged with the World Bank in the area of technical support. The Department of Health looked at the detail of primary, secondary and tertiary health care facilities. They are in a poor state. The question now is if they should be rehabilitated. If we want to deliver good quality health, we need good facilities. We have started a discussion that is at an initial exploratory stage to determine if there will be merit in upgrading the health facilities or if we will simply continue to finance it on the budget.
Appendix 1: National Treasury
Notes for Press Briefing The National Treasury sees its major goal as being to meet the challenge of economic development in our country. Particularly, it is to combat the legacy of poverty, inequality, and the lack of skills with which we have been burdened.
Our past is still with us, apparent in the unacceptable poverty that is still with us, and the situation that makes our economy the most unequal in the world.
So our central challenge is one of development. But it must be sustainable development.
This has two immediate implications for policymaking. The first is to shift state spending in such a way that it is substantially redistributive. The second is to create the conditions for growth, fiscal stability and investment in our country, so that our economy can create more jobs.
Poverty Report Last week, Stats SA launched its major study on poverty, which gives us critical and detailed information.
The report maps poverty in details: it tells us the poorest district (its Elliotdale in the Eastern Cape); the poorest region (Wild Coast), and the poorest province (the Eastern Cape). There were several surprises in the statistics for one thing, that the second poorest province is the Free State, a fact that tells us volumes about how farmworkers are still treated.
It tells us, too1 about living standards of our people. For instance, that only half of our people have flush or chemical toilets; that only 44% of households have a tap inside their dwelling; that only 29% of household have telephone connections,. and only half have electricity.
We live in a country where there are probably more poor and unemployed people in the rural areas than in any other country in the world. This is very specifically because of the legacy of apartheid, which locked people into the rural areas.
It makes poverty more expensive and more difficult to deal with. But nevertheless, if we are to deliver on democracy, and also create a more stable environment for investment, this must be a prionty.
Shift in spending In the past six years, our social spending, and in particular our education spending, has been of a redistributive nature. In other words, more money is now spent on the poorest 40% of the population than has ever been the case before.
For instance in 1993, the lowest two quintiles of our population - in other words the poorest 40%-- got just under 46% of the total budget for school education. By 1997, this had increased to a total of 57%. In contrast, we cut spending on the top quintile - the richest fifth of the population, in school education, from 17% in 1993 to 9% in 1997. In 1991, the average black child was likely to be in a classroom with 44 classmates in primary school and 36 in secondary school. By 1997, this had changed to having an average primary school class of 37 in primary and 32 in secondary schools.
This is due to a deliberate policy of enhancing teacher resources for those so gravely disadvantaged by apartheid before.
The same redistributive pattern is evident in expenditure on health, social security, housing and water. In 1993 the lowest two quintiles of the population received about 20% of total expenditure for housing and about 40% of the spending for water. By 1997, housing expenditure on the poorest 40% was 80% of the total housing budget, and on water, for the poorest, it was just over 50%.
In racial terms the patterns are starker. On school education, we've moved from a position when black people got 58% of the public money in 1993, compared with 79% in 1997. In housing it moved from 53% in 1993 in over 80% in 1997, and in water from 71% to nearly 81% in the same period. We have also shifted expenditure slightly from the urban to rural areas, so that rural areas now get the biggest single slice
So in trying to meet the challenge of development, we have had to concentrate on these two aspects: increasing the immediate quality of life through redistribution, but ensuring that it is sustainable in the long term. We have also tried, in our Budgeting process, to increase the "social wage' - to improve the quality of life, by concentrating expenditure on electricity provision, housing and water.
Macro-economic indicators Growth: a range of leading domestic indicators point to a slow but steady pick-up in business activity led by consumer spending. However we've had setbacks to our growth in the first and second quarter of this year, mainly due to the floods, which caused a downturn in agricultural output by more than 17%. However during June, new vehicle sales improved by 25.6% compared with the same month a year earlier. Retail sales grew by 3% in the first four months of the year and wholesale sales grew by 7%. Manufacturing output also increased by 3.8%. We are predicting an upturn in the next fiscal year and a growth of 3.4% in the year 2002 and 3.8% in the year 2003.
Inflation and interest rates; headline inflation was 5.1% in May. Core inflation eased from 8.6% in April to 8.2% in May. Energy prices have put pressure on inflation, as did the floods earlier this year. However, Government is expected to meet its CPIX inflation target by 2002.
Domestic investment: we have seen a drop in domestic investment to 14.9% from 16.5% last year. We have been saying to business repeatedly in the past few months that we are concerned that there is a gap between objective realities and perceptions.
For instance the Africa Competitiveness Report rates us in the top ten for all in terms of all the measurable objective factors, but we do less well when measured by the perceptions of business. This is partly to do with our past, and also partly to do with global economic conditions. However our early indicators show that private sector capital formation is expected to grow strongly in 2001/2001.
IMF and World Bank Meetings On the international front we leave for Prague next week to take part in the IMF and World Bank annual meetings. The Finance Minister chairs the Board of Governors this year, and South Africa chairs the group of African English-speaking countries that is known as Constituency One Our constituency is the poorest group of countries.
One of our quests when we get to Prague will be to carry on for the push for reform and for the IMF board to be more representative of Africa
At the moment, the G7 countries have shareholding (and vote) of just less than half, while 43 African countries have a less than five percent voice in the institution.
We also believe the IMF should not try to micro-manage developing economies as in many instances this undermined democracy. However, we will not support the call for the IMF to be closed down, as is the call of some demonstrators, particularly those in the first world, because we believe that very poor countries have no other way of accessing capital markets.
Legislation Please see attached list for the legislation that is expected to go through parliament this year
ANNEXURE 1
FINANCE LEGISLATION ENACTED IN 2000 (as at 15 September 2000) 1. Preferential Procurement Policy Framework Act [Act No 5 of 2000]
2. South African Airways Unallocatable Debt Act [Act No 7 of 2000]
3. Financial Services Board Amendment Act [Act No 12 of 2000]
4. Division of Revenue Act [Act No 16 of 2000]
5. Appropriation Act [Act No 23 of 2000]
6. Taxation Laws Amendment Act [Act No 30 of 2000]
FINANCE LEGISLATION BEFORE PARLIAMENT (as at 15 September 2000) 1. Banks Amendment Bill, 2000 (referred to the NCOP)
2. Finance Bill, 2000 (referred to the NCOP)
3. Bills of Exchange Amendment Bill (with Portfolio Committee on Finance)
4. Reserve Bank Amendment Bill (with Portfolio Committee on Finance)
5. Council for Medical Schemes Levies Bill (with Portfolio Committee on Health)
6. First Adjustments Appropriation Bill (with Portfolio Committee on Finance)
7. Revenue Laws Amendment Bill (with Portfolio Committee on Finance)
8. Financial Intelligence Centre Bill (with Portfolio Committee on Finance)
FURTHER FINANCE LEGISLATION FOR CONSIDERATION IN 2000 1. Second Adjustments Appropriation Bill, 2000
FURTHER IMPORTANT TABLINGS IN 2000 1. 2000 Medium Term Budget Policy Statement
2. Intergovernmental Fiscal Review
Appendix 2: NATIONAL TREASURY
Briefing Note: Residence Basis of Taxation
1 Existing basis of taxation The South African income tax system is currently primarily based on what is commonly referred to as the source plus basis of taxation. All income which, therefore, originates in the Republic and certain types of income which are deemed to be from a source in South Africa are taxable in terms of the Income Tax Act.
2 Proposed basis of taxation As was announced in the Budget Review, a "residence minus" system will be adopted with effect from years of assessment commencing from 1 January 2001. Residents will be taxed on their world-wide income, but certain categories of income and activities undertaken outside South Africa will be exempt from South African tax. Foreign taxes paid by these residents will, however, be allowed as a credit against the South African tax liability.
3 Reasons for change The most important reasons for changing to the new basis of taxation are
· to place the income tax system on a sounder footing thereby protecting the South African tax base from exploitation;
· to bring the South African tax system more in line with international tax principles;
· the relaxation of exchange control and the greater involvement of South African companies offshore.
· to more effectively cater for the taxation of e-commerce.
4 What are the most important changes?
4.1 Re-defining the tax base To implement the new proposals it is necessary to re-define one of the most important building blocks on which the income tax system is based, namely what income is taxable. The gross income definition will therefore be amended to reflect the world-wide basis of taxation, whereby
· all residents will be taxable on their South African and foreign income
· all non-residents will be taxable on their South African sourced income.
4.2 Defining a resident As a world-wide tax system is based on residency, it is of crucial importance that there is certainty of what the term means.
2000-09-15 Page 1
Individuals As far as individuals are concerned two rules will apply to define what a resident is.
The first rule is based on ordinarily residence and will mean that a person is a resident of South Africa if his or her pefl~anent home, to which he or she will return, is in South Africa.
The second rule is a time based and more objective rule. A person will become a resident if he or she
· was physically present in South Afnca for more than 91 days per tax year for four consecutive tax years; and
· was physically present for an average of 183 days per year during the first three years of the four years in South Africa.
In terms of this rule a person will therefore only become a resident of South Africa in the fourth tax year if he or she complies with the time rules as set out above.
Companies A company is a resident if it is incorporated or effectively managed in South Africa.
4.3 Tax credits in respect of foreign tax paid
To avoid the impact of double taxation where foreign income was taxed in the hands of a resident, the foreign tax paid will be allowed as a credit against the South African tax liability.
4.4 Specific exclusions Foreign pensions It is proposed that foreign pensions should not be taxed at this stage. however, only an interim measure. The whole issue of foreign pensions reviewed over the next three years when the final decision in this regard made.
Foreign employment income In terms of the world-wide basis of taxation residents will now also become taxable on their remuneration earned outside South Africa, irrespective of whether they work for a local or foreign employer. To alleviate the impact of the proposed system on foreign employment income the following exemption is proposed. Where a resident has rendered services outside South Africa for a continuous period of 183 days or longer in a tax year, the income earned from the services so rendered will be exempt from tax.
4.4 How will the income from foreign branch operations be taxed? The foreign income of any branch of a resident company will generally be subject to tax. However, branch income will be exempt if such income was subject to tax at a
statutory rate of at least 27 per cent and the basis of taxation in that country is similar to that of South Africa and the country has been designated by the Minister of
Finance. Any other income which was not taxed at that rate or which was taxed at a
similar or higher rate in a non-designated country will be taxable in the Republic and a credit will be granted in respect of any foreign taxes which are proved to be
payable in respect of such income.
4.5 How will the income of a controlled foreign entity (C FE) be taxed? A CFE in essence means a foreign entity which is controlled by South African residents. Control in this sense means where South African residents hold more than 50 percent of the participation rights or votes in the entity or control the entity.
Where such a situation applies, the income, whether active or passive, will be imputed under the new residence system and taxed in the hands of the residents controlling the CFE.
The following exceptions to the above rule will, however, apply- (a) Income taxed at a statutory rate of 27 per cent or higher
Where the CFE is located in a country which has a tax system similar to that of South
Africa and taxes the income of the CFE at a statutory rate of at least 27 per cent, the
CFE's income will not be imputed. In addition dividends declared from these profits
will not be taxed.
(b) Income taxed at a rate below 27 per cent If the CFE's activities constitute those of a proper business establishment, the income will not be imputed. In these circumstances taxation in South Africa will be deferred until a dividend is distributed by the CFE. This is generally referred to as the deferral approach. A proper business establishment will generally be a place of business which is suitably equipped, properly staffed and which has its place of effective management in the country whem the CFE is located.
If the business does not constitute such a proper business establishment, the income of the CFE will be imputed as it arises.
(c) Diversionary transactions Circumstances may arise where, even though the CFE has a proper business establishment, the income of the CFE will be imputed as it arises. This will be so in the case of transactions which are generally referred to as diversionary transactions and which are aimed at exploiting the South African tax base. These transactions may include transactions in respect of both goods and services where the income which should otherwise have been taxable in South Africa is reduced or otherwise diverted to a low tax jurisdiction or a tax haven country. A transaction whereby an abnormally high or low price for a purchase or sale is used to divert profits from South Africa is an example in this regard.
(d) Passive income Most passive income of a CFE will be immediately imputed.
4.6 How will foreign losses be treated? Losses of foreign branches of a resident company will not be set off against the income of the South African resident. Foreign losses and foreign income of different
branches may, however, be pooled. The reason for not allowing the net loss to be set off against the South African income of the resident is to protect the South African tax base.
Foreign losses of a CFE will also be ring-fenced in the CFE and not taken into consideration in determining the tax liability of the South African resident controlling the CFE.
4.7 What are the reporting requirements for foreign income? A number of reporting requirements have been introduced in order to enable SARS to monitor the foreign activities carried on by South African residents.
Where residents hold interests in a CFE the resident who holds the greatest percentage of participation rights in a CFE has to provide information such as:
· the name, address and country of the CFE;
· the classes of participation rights;
· participation rights held by residents holding more than 10%;
· the foreign income statement and balance sheet;
· the income imputed or exempt; and the foreign tax paid.