APRIL 2016 ISSUE 199 CONTENTS

Transcription

1 APRIL 2016 ISSUE 199 CONTENTS CARBON TAX Liable entities INTERNATIONAL TAX DTA with Hong Kong TAX ADMINISTRATION VALUE-ADDED TAX Consequences of nonregistration SARS NEWS Interpretation notes, media releases and other documents Onus of proof for understatement penalty CARBON TAX Liable entities The South African National Treasury has published a Draft Carbon Tax Bill (the Bill) for public comment. This article explores the aspects of the carbon tax regime that will feel out-ofthe-ordinary for professional tax practitioners. Like the phenomenon to which it is intended to respond, namely climate change (as much an economic challenge as an environmental one), a comprehensive response to the carbon tax will require tax professionals to look beyond their usual sphere of operations and to 1

2 cooperate with professionals from a range of other disciplines. This is also a function of the tax design which encompasses elements of tax law, carbon markets law, environmental law and financial and operational strategy. This article considers a fundamental connection established by the Bill between tax law and environmental law. The point of departure is to consider the simple question of which entities will be carbon tax liable and to provide a high level/first response to the question. Making this determination is slightly more complex than one would imagine. Section 2 of the Bill provides that there must be levied and collected for the benefit of the National Revenue Fund, a tax to be known as the carbon tax. Section 3 of the Bill is the charging provision and it provides that: A person is (a) a taxpayer for the purposes of this Act; and (b) liable to pay an amount of carbon tax, if that person conducts an activity as set out in Annexure 1 to the Notice issued by the Minister responsible for environmental affairs in respect of the declaration of greenhouse gases as priority air pollutants under section 29(1) read with section 57(1) of the National Environmental Management: Air Quality Act, 2004 (Act No. 39 of 2004) The following elements of section 3 warrant some consideration: Conducts an activity Annexure 1 to the Notice... in respect of the declaration of greenhouse gases as priority air pollutants. Issued by the Minister responsible for environmental affairs. Conducts an activity The suite of discussion documents that has, hitherto, explained Treasury s intentions in relation to the design and application of the carbon tax, provides 2

3 only an indication of the sectors that will be susceptible to carbon taxation. This permitted educated guesses to be made in relation to whether particular entities would be tax liable, especially for major sectoral players, e.g., in the energy generation sector. The Bill is more specific on who will be tax liable and relies upon a legal construction that is fairly typical in South African environmental law, namely the idea of a person who conducts an activity. The conducting of activities that may have detrimental impact on the environment, e.g., infrastructure development activities, emitting activities which have implications for air quality or waste management activities, triggers the obligation for the person conducting the activity to make application for and to obtain a permit or license that authorises the conduct of that activity prior to its commencement. Given that carbon tax is aimed at pricing greenhouse gas emissions in the South African economy and that such emissions have an air quality/environmental impact, the carbon tax design looks to air quality/environmental legislation to determine liability for carbon tax. In short, in order to ascertain carbon tax liability, one must consider annexure 1 to the Notice mentioned in section 3 of the Bill. Annexure 1 to the Notice In terms of section 29 of the National Environmental Management: Air Quality Act 39 of 2004 (NEMAQA), which provides for pollution prevention plans, the Minister of Environmental Affairs (Minister) may declare any substance contributing to air pollution as a priority air pollutant and require persons falling within a category specified in the notice to prepare, submit for approval, and implement pollution prevention plans in respect of a substance declared as a priority air pollutant. On 14 March 2014, the Minister gave notice in the Government Gazette of her intention to declare a basket of six greenhouse gases or, cryptically, any other gases as priority air pollutants and to require any person falling within the specified category to prepare and submit for approval, 3

4 a pollution prevention plan under section 29(1), read with section 57(1) of NEMAQA (Proposed Declaration). 1 The Proposed Declaration lists the initial six greenhouse gases provided for in the Kyoto Protocol as priority pollutants in respect of which pollution prevention plans must be prepared. The gases are the following: Carbon Dioxide (CO2); Methane (CH4); Nitrous Oxide (N2O); Hydroflurocarbons (HFCs); Perfluorocarbons (PFCs); and Sulphur hexafluoride (SF6). Sub-Regulation 3 of the Proposed Declaration provides that a person conducting an activity set out in Annexure 1 to (the) Notice (in which the Proposed Declaration appears) which involves the emission of greenhouses (sic) declared as (sic) priority air pollutant in excess of 0.1 megatonnes (10 9 ) (Mt) or more annually or (sic) measured as CO2-eq is required to submit a pollution prevention plan. Annexure 1 to the Notice comprises the following table: Emission Sources Activities Fuel combustion (both stationary and mobile) Energy industries Electricity and heat production Petroleum activity (refineries) Manufacturing industries and construction Chemicals Transport sector Civil aviation Road transportation Railways Water-borne navigation Other sectors Commercial / institutional 4

5 Emission Sources Activities Residential Agriculture / forestry / fishing Fugitive emissions from fuels Surface and underground coal mining Industrial processes and other product use Agriculture, forestry and other land use Processing of coal Storage of coal and wastes Processing of sold fuels Mineral production Cement production Lime production Glass production Chemical production Ammonia production Nitric acid production Carbide production Titanium oxide production Metal industry Iron production Steel production Ferroalloys production Aluminium production Lead production Zinc production Livestock Enteric fermentation Manure management Land Forest land Cropland 5

6 Emission Sources Activities Grassland Wetlands Settlements Other land Aggregate sources and non- CO2 emissions on land Biomass burning Liming Urea application Direct N2O emissions from managed soils Indirect N2O emissions from managed soils Indirect N2O emissions from manure management Waste management Solid waste disposal Wastewater treatment and discharge Industrial waste disposal The net result of section 3 of the Bill, is that persons who conduct the activities listed in the abovementioned table will be liable to pay the carbon tax. The actual financial exposure will depend on a variety of factors, particularly the efficiency with which the allowances permitted in the Bill to limit such exposure can be utilised. These factors will be discussed in later articles in this series. It is very important to note that the threshold of 0.1 megatonnes of emissions of greenhouse gas which limits the requirement for the preparation and 6

7 implementation of pollution prevention plans to persons that have emissions in excess of this volume, does not apply to the carbon tax. This is because section 3 of the Bill does not provide that persons required to prepare and implement pollution prevention plans are carbon tax liable, but rather that persons who conduct the activities listed in the Annexure to the Notice declaring greenhouse gases as priority pollutants are liable. This clarifies an uncertainty that had crept into the carbon tax discourse over whether, in addition to the percentage allowances provided for in the Bill which can limit carbon tax exposure, there was also a threshold of absolute emissions (derived from reporting or other legal requirements imposed by the Department of Environmental Affairs) below which no carbon tax would be payable. Instead, the Explanatory Memorandum which accompanies the Bill states that for stationary emissions, reporting thresholds will be determined by source category as stipulated in the National Environmental Air Quality Act of Only entities with a thermal capacity of around 10MW will be subject to the tax in the first phase ( ). This threshold is, according to the Explanatory Memorandum, in line with the proposed Department of Environmental Affairs greenhouse gas emissions reporting regulation requirements and the Department of Energy's energy management plan reporting. The Draft Declaration is expected to be formally promulgated in due course, but for the moment the document remains only in draft. Issued by the Minister responsible for environmental affairs Returning to the theme that the carbon tax will pose unusual challenges to the tax professional by creating connections between the tax legal regime and other legal regimes, such as those for the environment and climate change, the crux of 7

8 the Bill (the determination of who will be carbon tax liable) relies very firmly on a declaration of the Minister of Environmental Affairs made for the specific purpose of dealing with an adverse air quality impact. While the sense of this connection is obvious from the environmental objective of the Bill (to reduce industrial greenhouse gas emissions), the approach is novel in South African taxation law. One other aspect is that the carbon tax will be implemented as an environmental levy under the Customs and Excise Act No. 91 of This connection of the Bill to another legal regime harks back to the Draft Environmental Fiscal Reform Paper (Treasury, April 2006), which is the first comprehensive discussion of the use of financial instruments to deal with environmental challenges in the economy. 1 NEMAQA section 29 empowers the Minister to declare a substance to be a priority pollutant, with the consequent requirement for emitters of priority pollutants to prepare and implement pollution prevention plans, while section 57 provides for a stakeholder process to be undertaken in respect of the declaration of priority pollutants hence the Proposed Declaration having been published for public comment. ENSafrica Draft Carbon Tax Bill, 2015 Explanatory Memorandum on Draft Carbon Tax Bill National Environmental Air Quality Act 39 of 2004 Government Gazette 37421, 14 March 2014 Kyoto Protocol 8

9 INTERNATIONAL TAX DTA with Hong Kong The Tax Treaty (and Protocol) between Hong Kong and South Africa has been ratified by both countries with the date of entry into force from 20 October In South Africa, it was published in the Government Gazette No on 24 November The provisions of the treaty will apply in Hong Kong for years of assessment beginning on or after 1 April In South Africa, it applies from 1 January 2016 for amounts held at source, and for years of assessment beginning on or after 1 April 2016 in respect of other taxes. In general, the treaty follows the OECD Model Tax Convention. We highlight below some of the departures from the Model and other notable clauses. Taxes covered This treaty does not cover any penalties or interest imposed under domestic law. Presumably, this means that penalties and interest arising from non-or-latecompliance might still be chargeable notwithstanding that the actual tax amount might be nil. Residency Hong Kong Given that Hong Kong is not a sovereign state, the term national is different from the traditional OECD Model definition. An individual will be a resident in Hong Kong if he or she: ordinarily resides there; or 9

10 stays there for more than 180 days during a year of assessment; or stays there for more than 300 days over two consecutive years of assessment. Companies and other persons will be resident in Hong Kong if they are either incorporated or constituted in Hong Kong, or if they are normally managed or controlled in Hong Kong. South Africa The treaty uses the traditional OECD Model concept for the term resident of South Africa. Tie-breaker In the case of individuals, the tie-breaker clause follows the traditional OECD Model, with the exception that Hong Kong instead refers to the individual s national status as the right of abode. In the case of any other person, the primary tie-breaker is the place of effective management. The secondary test, i.e. in case of doubt about where the place of effective management is exercised, is the mutual agreement determination between the competent authorities. If agreement is not reached, most of the treaty benefits will not apply. Permanent Establishment Services PE The permanent establishment (PE) definition is extended beyond the traditional OECD definition to include a services PE. 10

11 Such a PE would arise if an enterprise furnishes services through its employees of an enterprise (or other personnel) within the source state in relation to a project exceeding, in aggregate, 183 days in any twelve month period. Construction PE Building sites or construction, assembly or installation projects (etc.) will be deemed to be a PE if the project or activity lasts for more than six months. Attribution rules In line with the OECD Model, the business profits article (article 7(1)) only allows the source state to tax profits attributable to the local PE. The attribution rules to calculate the business profits only go so far as to specify that expenses can be deducted if they were incurred for the purpose of the PE, which includes executive and general administrative expenses, irrespective of where they were incurred. The treaty is silent as to how to deal with notional income and expenses. It is settled in the treaty that profits will not be attributed to a PE merely because it bought goods or merchandise for the enterprise. Capital Gains on property investments The treaty includes the property rich- company clause in article 13. The source country will have taxing rights on capital gains on the sale of shares in companies that derive more than 50% of their value from immovable property situated in the source state. There are, however, exceptions to this rule, in which case the resident state will have sole taxing rights. These exceptions are shares: listed on the Johannesburg Stock Exchange or Stock Exchange of Hong Kong Ltd (or any other agreed-upon stock exchange); or 11

12 in a company deriving more than 50% of its value from immovable property in which it carries on its business. Tax rate reduction The treaty will offer a number of tax rate reductions which are considered to be favourable compared to the treaties that South Africa has with other countries. Dividends A maximum tax rate of 5% applies if the beneficial owner is a company and holds directly at least 10% of the capital of the payer company - otherwise a maximum of 10% applies. Interest Interest is exempt if it is paid to the following persons: In the case of Hong Kong Government of the Hong Kong Special Administrative Region Hong Kong Monetary Authority Any institution owned by the Government of the Hong Kong Special Administrative Region (as agreed between the competent authorities). In the case of South Africa Government of SA (and any political subdivision / local authority) SA Reserve Bank Any institution owned by the Government of South Africa (as agreed between the competent authorities). In any other case, where the beneficial owner of the interest is a resident of the resident state, the maximum tax rate is 10%. 12

13 Royalties The treaty applies a maximum tax rate of 5% on royalties where the beneficial owner of the income stream is a resident of the other state. Below is a summary of the domestic withholding tax rates and the reduced rates under the treaty: Hong Kong % SA% Treaty Rates for SA% Royalties Interest Dividends /10 Main purpose test Critically, however, the dividends, interest and royalties clauses include a main purpose test as a specific anti-treaty-abuse mechanism. Treaty relief will not be available if the main purpose (or one of the main purposes) of the arrangement - i.e. equity holding, financing, or intellectual property rights - was to take advantage of these clauses. Conclusion The treaty applies from 2016 and generally follows the OECD Model. It offers several beneficial reliefs, but also has a clear anti-abuse inclination noted in the tie-breaker for corporate residence, the taxation of indirect interests in immovable property, and the main purpose test for passive income flows. PwC South Africa Hong Kong Double Tax Agreement Double Tax Agreement Hong- 13

14 TAX ADMINISTRATION Onus of proof for understatement penalty As a basic principle, under section 102(1) of the Tax Administration Act 28 of 2011 (the TAA), the onus of proof that an amount is not taxable or that an amount is deductible, rests on the taxpayer, whereas under section 102(2) of the TAA, the onus of proof pertaining to the facts upon which an understatement penalty is imposed, is upon the South African Revenue Service (SARS). Too often, upon the conclusion of investigations or reviews, SARS threatens exorbitant understatement penalties for seemingly innocuous and easily resolvable queries. A good example is the classic turnover/expenditure reconciliation process which could produce, in certain instances, horrendous results for a taxpayer where the calculations are devoid of commercial logic. By its very nature, a turnover/expenditure reconciliation is a first-level enquiry and only serves the purpose of testing reasonability between amounts declared by a taxpayer in its VAT201 returns and the amounts reflected in that same taxpayer s annual financial statements. Un-reconciled differences are often taken as gospel, resulting in either income tax or value-added tax (VAT) assessments, coupled with the imposition of understatement penalties (in some cases, as far as accusing a taxpayer of intentional tax evasion). In examining the onus of proof requirement, section 102(1) of the TAA has the effect of placing the onus to deal with and explain the un-reconciled differences upon the taxpayer, no matter how ridiculous the result of the first-level enquiry from SARS side might be. Explaining the un-reconciled differences would generally not be of concern, as SARS may not have taken account of various factors, such as overlapping tax periods or the adoption of certain accounting policies for recognising revenue and expenditure. To the extent that un-reconciled differences do, however, remain in SARS favour, the issue of 14

15 severe understatement penalties still remains. But should understatement penalties even feature in a scenario such as this? A not too common scenario arises in SARS findings letters, to the effect that un-reconciled differences are regarded as intentional tax evasion, which brings with it potential understatement penalties of 150% for a standard case, under section 223 of the TAA. Taxpayers are then essentially forced to provide reasons to SARS so as to avoid the imposition of the 150% understatement penalty, without SARS having first provided any shred of evidence that intentional tax evasion actually exists. This results in a serious misapplication of the TAA and a reversal of the onus from SARS back to the taxpayer. Proving intentional tax evasion in a simple turnover/expenditure reconciliation context would be extremely difficult for SARS, to say the least. As stated above, a turnover/expenditure reconciliation exercise is a first level enquiry, without having regard to any actual source documentation (such as tax invoices) making up the various transactions of a taxpayer. A first level enquiry, forming the basis of a findings letter (for example), should provide the taxpayer an opportunity to review the stated findings and provide evidence to SARS to the extent that an error has been made in the calculations. A first level enquiry cannot constitute a basis for accusing a taxpayer of intentional tax evasion where SARS has failed to discharge its onus of proof under section 102(2) of the TAA. In understanding the behaviour of intentional tax evasion as contemplated in section 223 of the TAA, regard must be had to SARS Short Guide to the Tax Administration Act (Guide), which clearly states, at page 81, to evade tax includes actions that are intended to reduce or extinguish the amount that should be paid, or which inflate the amount of a refund that is correctly refundable to 15

16 the taxpayer and goes on further to state that the most important factor is that the taxpayer must have acted with intent to evade tax. Intention is a wilful act, that exists when a person s conduct is meant to disobey or wholly disregard a known legal obligation, and knowledge of illegality is crucial. A first level turnover/expenditure reconciliation enquiry by SARS can never, it is submitted, establish any intent to evade tax as it is merely a test of reasonability. Once the test of reasonability is complete, it is only actual source documentation, coupled with a host of other factors that could remotely bring into play intentional tax evasion. Taxpayers should not merely provide reasons to defend an intentional tax evasion allegation where no credible evidence has been put forward by SARS to discharge its (frankly difficult) onus pertaining to the imposition of understatement penalties under section 102(2) of the TAA. Cliffe Dekker Hofmeyr TAA: sections 102 and 223 SARS Short Guide to the Tax Administration Act VALUE ADDED TAX Consequences of non-registration The Value Added Tax Act 89 of 1991 (the VAT Act) requires VAT to be levied by a vendor on the supply of goods or services in the course or furtherance of an enterprise carried on by the vendor. A vendor is any person who is or is required to be registered in terms of the VAT Act. The fact that a vendor includes any person that is required to be registered makes it clear that a person's liability for VAT is not dependent on whether the person is in fact registered as a vendor but rather whether the person is required to be registered as a vendor. 16

17 The VAT Act requires registration as a vendor on either a prospective or retrospective basis. On a prospective basis, a person would be required to register as a vendor on the first day of the month in which the total value of the vendor's taxable supplies in terms of a contractual obligation would exceed R1 million (excluding VAT) during the following 12 months. On a retrospective basis, a person would be required to register as a vendor on the last day of the month during which the total value of the vendor's taxable supplies exceeded R1 million (excluding VAT) during the previous 12 months. Therefore, should a person's taxable supplies (which excludes exempt supplies) exceed the R1 million threshold, that person would be regarded as a vendor from the beginning of the particular month (on a prospective basis) or from the end of the particular month (on a retrospective basis) and would have to levy output tax from that point in time, irrespective of the fact that the person may not be registered as a vendor at that point in time. Should the vendor fail to register, the VAT Act would deem all of the prices charged by the vendor after his liability for registration came into existence, to include VAT at 14%. This would be the case irrespective of whether VAT was in fact charged by the vendor. SARS would therefore be entitled to recover 14% from all prices charged by the person from the date the person should have been registered as a vendor. The 14% retrospective recovery of VAT from the prices charged by the vendor may eliminate all of the vendor's profits even before considering the penalties and interest that the vendor could be subject to. These penalties include inter alia: A 10% penalty of the amount of the VAT that was not paid. Interest at the prescribed rate on the amount of VAT that was not paid. The potential imposition of the understatement penalty. 17

18 Legal persona making taxable supplies who are not registered as vendors should exercise great caution when determining whether registration is required. In the event of a default, the Voluntary Disclosure Programme (VDP) may be an avenue worth exploring. The VDP in its current form would provide relief from the understatement penalty (the extent of the relief depends on whether the default has been disclosed before or after the notification of an audit by SARS). There would, however, not be any relief for the 10% penalty of the outstanding VAT as it is levied for the late payment of a tax which is excluded from VDP relief. The interest levied on the outstanding VAT would not fall within the ambit of the VDP and the VAT Act would in very limited circumstances allow the waiver of the interest. The Tax Administration Laws Amendment Act (23 of 2015) increases the relief provided through the VDP to also provide relief for penalties resulting from the late payment of a tax. This has the effect that the 10% penalty would also qualify to be waived in case of a successful VDP application. This added relief may greatly assist non-compliant vendors wishing to come clean. BDO VAT Act: section 23 TAA: sections 225 to 233 SARS NEWS Interpretation notes, media releases and other documents Readers are reminded that the latest developments at SARS can be accessed on their website Editor: Ms S Khaki 18

19 Editorial Panel: Mr KG Karro (Chairman), Dr BJ Croome, Mr MA Khan, Prof KI Mitchell, Prof JJ Roeleveld, Prof PG Surtees, Mr Z Mabhoza, Ms MC Foster The Integritax Newsletter is published as a service to members and associates of The South African Institute of Chartered Accountants (SAICA) and includes items selected from the newsletters of firms in public practice and commerce and industry, as well as other contributors. The information contained herein is for general guidance only and should not be used as a basis for action without further research or specialist advice. The views of the authors are not necessarily the views of SAICA. 19