Business / Business News

Inge Lamprecht
3 minute read
30 Aug 2017
7:39 am

Concern about introduction of tax legislation ‘by press release’

Inge Lamprecht

Creates uncertainty and could deter investment, practitioner warns.

A seemingly growing practice to introduce new tax legislation with effect from the date of announcement, but before final promulgation, creates significant uncertainty for taxpayers, and could deter investors from doing business in the country at a time when South Africa desperately needs to encourage investment, a tax practitioner has warned.

The practice, referred to as “legislation by press release”, is an effort by National Treasury to stop taxpayers from taking preventative action as soon as they become aware of changes in tax legislation scheduled for a future date, Arnaaz Camay, senior executive for tax at Baker McKenzie, explains.

It is also used to correct technical errors or to clarify present legislation to show the initial intention, she adds.

Camay cites two recent examples – the announcement in the Budget Speech in February that government was hiking the dividend withholdings tax rate from 15% to 20% as well as proposals regarding share subscription and repurchase transactions in the Draft Taxation Laws Amendment Bill published in July. Both amendments came into effect on the date it was issued.

Although government wants to protect the tax base with this practice, these efforts have to be weighed against the uncertainty it creates. Taxpayers have no guarantee that there won’t be significant changes to the legislation prior to formal promulgation, which effectively leaves them in limbo, she argues.

“Introducing ‘legislation by press release’ places taxpayers in an impossible position as they [are] expected to proceed on the basis that these changes will become law, effective as of the announcement date, yet taxpayers do not know if they can rely, with certainty, on the introduction of the proposed amendments nor do they know what final form such amendments will take, as generally, the draft legislation undergoes various changes before being finally promulgated by parliament.”

Camay says for someone who wants to invest in South Africa, or who already has a company in South Africa and who wants to sell shares or conclude other transactions, this creates a predicament.

She expects the practice to be used increasingly, especially since the recent Pienaar Brothers court case confirmed that parliament has the legal power to introduce changes to tax legislation retrospectively.

Yet, the practice is not in line with the fundamental tax principle of certainty and may be a meaningful deterrent from doing business in the country, she adds.

Against this background, a similar practice used in India – another emerging market – may be a cautionary tale.

Camay says when Vodafone acquired Hutchison Telecom’s Indian business retrospective amendments caused an upheaval.

A government committee appointed to investigate the matter recommended that the retrospective introduction of tax legislation should only be done in exceptional circumstances and to correct mistakes, relate to matters that truly need clarification and to protect the tax base from extremely abusive tax planning structures. It argued that it should not be used to grow the tax base.

Similarly, when the World Bank downgraded India in the index of investment friendliness from 131 to 134 in 2013, another government committee who examined the regression warned that retrospective amendments created significant uncertainty for business.

“The experience in India, clearly demonstrates the wide-reaching risks of introducing retrospective tax legislation for developing economies who are dependent on maintaining investor confidence.

“Being in a similar position, National Treasury should be mindful that this practice does not become so predominant so as to affect investor confidence but instead should assist government by providing for certainty in its future tax policies to assist in attracting investors and developing national economic goals,” Camay says.

Brought to you by Moneyweb