1 a new local business tax presentation to western cape branch of imfo 4 june 2012

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A NEW LOCAL BUSINESS TAX

Presentation to Western Cape Branch of IMFO4 June 2012

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Programme

BackgroundThe need for the new city revenue streamObjectives of the new city revenue streamDesign issuesProposalsProject processResponses to ProposalCurrent Status

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The long history of the LBT (1) From 2000 - National Treasury indicates a desire to reform RSC levies 2001 - Paper written for national government entitled ‘The Regional

Services Council Levy: Evaluation and Reform Options’, by Roy Bahl and David Solomon, recommended a payroll levy.

2005 - Paper written for NT as part of investigation into Municipal Fiscal Framework entitled ‘Replacing RSC/JSB levies’ by Richard Bird and Philip van Ryneveld recommend a local business tax as a preferred option

December 2005 - National Treasury publishes discussion document on website on options on replacement of RSC levies and indicates significant interest in implementation of a local business tax.

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The long history of the LBT (2) 2007 - SALGA tour of countries implementing some form of LBT,

report compiled recommending LBT, especially for districts, SALGA NEC adopts proposal for LBT among other changes

2008 SALGA letter to Minister of Finance, with faulty proposals for an LBT, Minister rejects the proposals as unconstitutional

2009 - IMFO CFO forum considers and supports proposal for LBT; SALGA workshop considers and supports LBT; SALGA submission to Budget Forum

2010 - Several Metro Councils initiated a project for prepare formal MFPFA applications for a local business tax; SALGA submission to the October Budget Forum

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MFPFA requirementsConstitution S229. (1) (b)

The LBT is not a VAT

Constitution S229. (2) (a)

No material and unreasonable prejudice to national economic policies, economic activities across municipal boundaries, and the national mobility of goods, services, capital and labour

MFPFA S5. (1) (a) The reasons for the imposition of the proposed taxMFPFA S5. (1) (b) The purpose for which the revenue will be utilisedMFPFA S5. (1) (c) Provide details of compliance of the proposed tax with section 229 (2) (a) of the

ConstitutionMFPFA S5. (1) (d) Provide details of compliance of the proposed tax with section 229 (1) (b) of the

ConstitutionMFPFA S5. (1) (e) Identify and describe the tax base, the desired rate, the persons liable for the tax, and any

tax relief measuresMFPFA S5. (1) (f) Specify the tax-collecting authority, the persons responsible for remitting the tax, the

methods and likely cost of enforcing compliance, the compliance burden on taxpayers, and any procedures for taxpayer assistance

MFPFA S5. (1) (g) Give particulars (including estimation methods and assumptions) of the revenue to be collected annually over 3 years; the economic impact on individuals and business, and on economic development.

MFPFA S5. (1) (h) Give particulars and outcomes of any consultations conducted, including with provincial government, organised local government, and municipalities.

MFPFA S5. (1) (i) Give particulars and outcomes of any consultations with SARS or any other collection agent contemplated, regarding the administration of the tax

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Outline of MFPFA application document

1. Introduction2. The need for additional sources of revenue3. The need to improve city fiscal accountability4. Consideration of possible additional sources of revenue5. Proposal: a local business tax for the nine metros6. Constitutional and legal considerations7. Administrative considerations8. Financial and economic implications9. Implications for the municipal fiscal framework and

intergovernmental fiscal relations10. Reactions of organisations and individuals consulted11. Conclusion

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Programme


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Fiscal Gap

City governments face a significant fiscal gap between their expenditure responsibilities and revenue resources the nature of the gap varies: In the cities and some other municipalities much of the

gap relates to the requirement to provide infrastructure and services for economic growth and development; and specifically public transport infrastructure and operations.

for many other municipalities the gap still consists largely of a basic service standards backlog.

“How wonderful it is that nobody need wait a single moment before starting to improve the world.” - Anne Frank

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Weaknesses There is a need for some adjustments to the framework within

which municipalities currently operate. despite significant increases in national grants, funding for

critical investments in economic infrastructure and public transport services remains inadequate

the increasing share of grants in total municipal income implies a weakening in local municipal governance, especially in cities

Municipalities must also cope with significant unfunded mandates.

The understandable priority given to inherited backlogs has until recently meant insufficient attention being paid to economic infrastructure and services.

the share of the fuel levy is merely a general revenue source for cities, without links to transport functions

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Responsibility

Municipalities are responsible for closing some of the fiscal gap, and must do so billing completeness & accuracy collections efficiency debtors minimisation and management tax and tariff increases for existing revenue sources expenditure efficiencies

But there is nevertheless a remaining fiscal gap, which should be filled by a new local revenue source

“The true meaning of life is to plant trees, under whose shade you do not expect to sit.” - Nelson Henderson

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Quantifying the need

GAP

Cost of infrastructure &

services required to

adequately fulfil legal mandate

Tax & tariff increases

EconomicMaintenance & refurbishment

backlog

Ongoing costs of services

Minimum standards backlog

Residential

Expenditure efficiencies

Improved revenue effort

Development charges

Provision for growth

Funding gapUn-fundable share of capex needs: optimistic case

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2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Total

COJ 4.7 5.1 4.9 4.8 3.6 4.1 0.0 0.0 0.0 0.0 27.4

CCT 0.0 0.0 0.0 0.0 0.0 5.5 5.5 5.5 5.5 5.4 27.5

ETH 0.6 4.0 4.0 4.1 4.1 4.1 4.1 4.0 0.4 0.4 29.9

EKU 1.2 1.1 1.1 2.6 2.1 0.9 0.9 0.7 0.7 0.7 12.0

NMB 0.0 0.7 0.9 0.9 0.9 0.9 0.9 0.8 0.8 0.7 7.5

Other 3 2.7 2.7 2.7 2.7 2.7 2.6 2.6 2.6 2.6 3.1 27.1

8 x metros 9.2 13.5 13.5 15.1 13.4 18.1 14.0 13.8 10.1 10.5 131.3

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Local business tax The remaining gap should be closed by a local business tax

Cities have considered 14 potential supplementary revenue sources - surcharges on water an electricity; outdoor advertising; taxes on property transfers; tourism bed-nights; municipal road use, non-residential parking, road tolling, congestion charges; vehicle license fees

Used standard public finance and tax criteria – revenue potential, constitutionality & legality, ease of administration; economic impact; social acceptability; including accountability and localisation, and links to private road use.

LBT is most viable in terms of scale, administration, impact, and acceptability, and can be designed to enhance accountability

Estimated LBT (turnover) revenue yields nominal R b

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2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Total

COJ 2.9 3.2 3.7 4.6 6.0 6.7 7.4 8.2 9.1 10.0 61.9

CCT 1.9 2.1 2.3 2.5 2.8 3.1 3.4 3.8 4.2 4.7 31.0

ETH 2.0 2.2 2.4 2.7 2.9 3.3 3.6 4.0 4.4 4.9 32.4

EKU 1.3 1.4 1.6 1.7 1.9 2.1 2.4 2.6 2.9 3.2 21.3

NMB 0.7 0.7 0.8 0.9 1.0 1.1 1.2 1.3 1.5 1.6 10.8

Other 3 2.3 2.5 2.8 3.0 3.4 3.7 4.1 4.6 5.1 5.6 37.0

8 x metros 11.1 12.2 13.6 15.5 18.1 20.0 22.2 24.5 27.2 30.1 194.4

Rest of SA 7.5 8.2 8.8 9.2 9.3 10.3 11.4 12.6 14.0 15.5 106.8

RSA 18.6 20.4 22.4 24.7 27.3 30.3 33.6 37.2 41.2 45.6 301.2

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Tax room

There is at least some tax room for the LBT

The removal in June 2006 of RSC/JSB levies without replacement by another tax meant an effective reduction in total company taxes

Even if in practise more than this is collected, the net economic impact can be positive if the tax and the way that revenues are spent, is well designed and executed.

“Die when I may, I want it said of me by those who knew me best, that I always plucked a thistle and planted a flower where I thought a flower would grow” – Abraham Lincoln

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Programme


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Objectives

A ‘local business tax for economic services’ is intended to improve our system of intergovernmental fiscal relations:To increase local fiscal capacity, because needs

exceed resources availableTo improve local accountability, for economic

services and infrastructureTo improve economic and general urban efficiency,

because ordinary political process tends to de-prioritise core economic infrastructure services

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Beneficiaries & administrationThe LBT should be collected by SARS and distributed to the

recipient municipalities. More efficient - make use of existing tax infrastructure and

data Better control and accountability

LBT revenues should be received by metropolitan municipalities, because of:

the national distribution of the local business tax base (relatively few municipalities have the bulk of the tax base); and

administrative considerations (administrative complexity increases sharply with the number of recipient municipalities)

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Programme


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Spectrum of alternatives

National tax distributed by means of grants to

municipalities Local tax

General formula

based grant

Grant with origin based

formula

National tax allowing local rate variation

Pure local tax

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Three options in tax design1. Change the constitution

to permit a local origin-based VAT (best from a pure public finance and tax perspective)

2. Introduce a national tax with strong local characteristics essentially a national tax distributed as a grant a key for apportionment is developed based on annual tax returns easier to administer but accountability not as direct hard to have a variable rate under this model

3. Define a specific (additive) local tax base as close to the correct logic as possible, ensuring it is not a VAT SARS would administer a revenue fund per recipient municipality in principle allows variable rate between floor and ceiling

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Defining the base (OPTION 1) Impact of company activities are reflected in its use of capital

services (depreciation, rent, and interest) Depreciation represents the `using up’ of capital assets, often

physical assets, which can be associated with the impact upon and use of physical infrastructure supplied by the city.

Rent should be included since some companies lease their productive capital assets rather than own them; and interest should also be included to level the playing fields among the owners of capital assets.

A major determinant of the economic impact of the company on city infrastructure and services is reflected in its use of labour services salaries and wages should therefore be part of the LBT tax

base

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Distributing the base (OPTION 1)

Capital servicesaccording to the location of physical assets

Labour servicesaccording to the normal work location of

employees “It should never be that the anger of the poor should be the finger of accusation pointed at all of us because we failed to respond to the cries of the people for food, for shelter, for the dignity of the individual” – Nelson Mandela

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Definition per field references on IT14 form (OPTION 1) Capital services:

4418 – Rent - leased assets (to avoid double-taxing leased assets, banks must subtract rental payments from their depreciation claim – so the company that uses the asset will pay the tax, rather than the owner of the leased asset)

4421 – Depreciation – special allowance assets (sections 12 (b) and 12 (c))

4494 – Depreciation – fixed assets 4519 – Depreciation – moveable assets 4521 – Interest – financial institutions 4523 – interest – other

Labour services: 4529 – Salaries and wages

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This complies with the constitution (OPTION 1) Not a company income tax base

it excludes important components, notably profit and royalties, and also does not subtract gross investment

Not a value-added or a sales tax base.

Instead is a unique proposed local business tax base which provides a reasonable proxy for the economic footprint of a company operating in a city.

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Defining the base (Option 2)• Use business turnover as the base for calculation

• Gross turnover to be used

• Increase or decrease in turnover is a clear proxy for economic activity

• All businesses submitting IT14 tax returns will be subjected to the tax

• SARS to be appointed as the tax collector through their normal tax collection processes.

• Tax is a value added tax

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Emerging storyline

The cities need additional resources to support economic infrastructure & services

They also need additional accountability mechanisms to ensure that adequate priority is given to spending on economic services

A local business tax for economic services is therefore proposed

“Our ideas, like orange-plants, spread out in proportion to the size of the box which imprisons the roots.” - Edward Bulwer Lytton

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Reconnecting taxation

Hypothecation/assigned tax revenues increase legitimacy and public acceptance

improve formal transparency and reporting,

highlights service provider performance

provides clearer budget constraints

LBT revenues should be assigned to fund economic infrastructure and services

Share of fuel levy should be assigned to public transport infrastructure & operations

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Governance & accountability LBT payments to recipient municipalities by SARS should be

as mechanical as possible.

Consider specific additional measures, such as:

the funds should be used only on projects which are able to demonstrate a positive economic internal rate of return;

recipient municipalities should account and report separately on expenditure of these funds

establishing specifically-constituted forums to which such accounting must take place.

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Redistribution

The `rest of SA’ LBT revenues could be assigned to economic development projects outside the metros

“For to be free is not merely to cast off one's chains, but to live in a way that respects and enhances the freedom of others.” – Nelson Mandela

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Programme


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Proposals

Metros should themselves make a full contribution to closing the fiscal gap that they face.

The remaining gap should be closed by a introducing a LBT for metropolitan governments

The LBT should be designed to comply with the existing Constitution, and should be collected by SARS and distributed to the recipient municipalities.

LBT revenues should be spent on economic infrastructure and services, and specific accountability and reporting requirements should be introduced.

The share of fuel levy should be assigned to public transport infrastructure and operations.

The `rest of SA’ LBT revenues should be assigned to district economic development projects.

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Feedback from NT (1) Tax policy unit

more interested in the principles - policy rationale is critical

Design issues are important, but less so - `If we agree, we will ask SARS to administer’

It is hard to earmark a major tax

Agree there is a funding gap

`the unfunded mandates floating around are very irresponsible’

applies more broadly, not to economic services

Must give a social and political rationale – `must crack the politics’

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Feedback from NT (2)Tax policy unit (cont)

Best is an origin-based VAT, so change the constitution - `this is a third best option’

Need to agree on principles first before we go into detail

IGRU Argue that the built environment must be treated differently, so

metros are different

Gap applies more broadly, not to economic services

Originally the MFPFA had had a two-step application process, but those clauses were removed

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Feedback from SARS

Proposals can be worked with

System changes take longer than everyone expects

SARS will charge for the service

“The miracle is not to fly in the air, or to walk on the water, but to walk on the earth.” - Chinese Proverb

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Programme


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Project processes

Formal submission of application

Council approval

processes

Stake holder reaction

The design of the tax

The impact of the tax

The need for the tax

Implement

NT & City MTEF

NT IGFR & rate setting

SARS system changes

Approval

Engagements with NT FFC comment Adjustments Possibly national public consultation

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Programme


Business reaction

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Business Leadership South Africa appreciates some of the logic in terms of the interests of metros business might derive some benefits, if allocation and expenditure

efficiencies improve extreme concern at risk to business costs and environment posed by

many dedicated taxes and levies being motivated (carbon tax, national health insurance, new social security system, SABC)

administered prices (electricity, water, transport, ports, road tolls etc)

Durban Chamber of Commerce and Industry expected to be raised from proposed LBT tax could easily be achieved if

wasteful and extravagant expenditure was curtailed

BUSA

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Presentations to Business Unity meeting in Johannesburg Nelson Mandela Bay Business Chamber Cape Town political committee meeting Proposals much better supported once properly understood

By e-mail from SAICA: “The SAICA NTC supports the submission proposals made by Business

Unity South Africa (“BUSA’) and the Durban Chamber of Commerce & Industry. We are of the view that if a business tax is to be introduced this is better placed with the administration of the South African Revenue Service (‘SARS’). When Regional Service Council (‘RSC’) levies was removed the administration costs of collecting this levy almost equated the revenue collected. The introduction of a business tax will be a mere replacement for the RSC levies”.

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Programme


Project status

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eThekwini Metropolitan Municipality submitted an application in December 2011.

Nelson Mandela Bay Metropolitan Municipality submitted a similar application in January 2012.

The Minister of Finance has consulted the Fiscal and Financial Commission, who has responded positively to the proposals, and recommended that metro municipalities should only be able to access the new revenue source when they have demonstrated improved financial performance.

The response by the Minister of Finance to the eThekwini application is almost due

SALGA is expected to submit an application shortly.

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The End – Thank You

“There is no passion to be found playing small - in settling for a life that is less than the one you are capable of living.” – Nelson Mandela

1 a new local business tax presentation to western cape branch of imfo 4 june 2012

Documents

tax slide

proposed tax mfpfa s5

constitution mfpfa s5

labour mfpfa s5

utilised mfpfa s5

tax relief measures

tax base

taxpayer assistance