The Perils of Introducing Tax "Legislation by Press Release"
Earlier this year, the South African Minister of Finance announced in the Budget Speech that the dividends tax rate would be increased from 15% to 20% with effect from the date of the announcement on 22 February 2017. More recently, in the 2017 draft Taxation Laws Amendment Bill published by National Treasury, new tax proposals related inter alia to share subscription and repurchase transactions were announced to come into effect on the date of publication of the TLAB on 19 July 2017. The practice of effecting de facto legal amendments announced by press release, draft legislation or regulations immediately on the announcement or the publication date, despite such amendments not being formally promulgated, is critically referred to as "legislation by press release".
The rationale advanced by National Treasury for this practice in the TLAB and the general premise on which such practice is based is usually to eliminate an "unintended benefit" or "loophole" and to prevent a so-called "announcement effect" where taxpayers take preventative action as soon as they become aware of future changes in legislation. In other circumstances, the justification for this practice may be to correct "technical errors" in legislation or to "clarify" existing legislation to reflect the original intent.
The introduction of "legislation by press release" appears to be a growing practice of National Treasury, and while the legal powers of Parliament extend to giving effect to retrospective tax legislation proposals, as confirmed in the recent Pienaar Brothers case (Pienaar Brothers (Pty) Ltd v Commissioner for the South African Revenue Service and Another), the practice does not fulfil the fundamental tax principle of "certainty". The guiding principles of good tax policy issued by the American Institute of Certified Public Accountants in 2001, articulates this principle well:
"certainty is important to the US tax system because it helps to improve compliance with the rules and to increase respect for the system. Certainty generally comes from care statutes as well as from timely and understandable administrative guidance that is readily available to taxpayers"
"The tax system should not impede or reduce the productive capacity of the economy. The tax system should neither discourage nor hinder national economic goals, such as economic growth, capital formation, international competitiveness. The principle of economic growth and efficiency is achieved by a tax system that is aligned with the economic principles and goals of the jurisdiction imping the tax"
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. However, 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.
The major uncertainty created by this increasing prevalent practice by National Treasury, may however, be a significant deterrent for doing business in the country, as was found in the case concerning Vodafone's acquisition of Hutchinson Telecom operations in India (Vodafone International Holdings B.V. v Union of India and Another). In this case, retrospective amendments made to the Finance Act were described as "clarificatory" by the Indian revenue authorities, seemingly for the removal of doubt but this action resulted in major controversy with substantial repercussions for the country.
A Government Expert Committee set up to examine the controversy noted:
"retrospective application of tax law should occur in exceptional or rarest of rare cases, and with particular objectives: first, to correct apparent mistakes/anomalies in the statutes; second, to apply to matters that are genuinely clarificatory in nature, i.e. to remove technical defects, particularly in procedure, which have vitiated the substantive law; or, third, to "protect" the tax base from highly abusive tax planning schemes that have the main purpose of avoiding tax, without economic substance, but not to "expand" the tax base."
Furthermore, in 2013, the World Bank downgraded India in the index of investment friendliness from 131 in 2011 to 134, falling below countries like Uganda, Ethiopia and Yemen, while its neighbours like Sri Lanka fared much better. Another government committee, established to examine this decline, notably made the following comment on the issue of retrospective taxation:
"retrospective taxation has the undesirable effect of creating major uncertainties in the business environments and constituting a significant disincentive for persons wishing to do business in India. While the legal powers of a Government extend to giving retrospective effect to taxation proposals, it might not pass the test of certainty and continuity. This is a major area where improvements should be attempted sooner rather than later…"
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.
Arnaaz Camay, Senior Executive: Tax, Baker McKenzie Johannesburg