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Anxiety over tax policy as Engel leaves the Treasury

Tuesday, 18 June 2013   (0 Comments)
Posted by: Author: Ruan Jooste
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Author: Ruan Jooste (Business Day,

THE apparent vacuum that will be left by the departure of Keith Engel, chief director of legal tax design at the Treasury, at the end of the month has caused much uncertainty among South African businesses and investors.

Mr Engel, who drove significant amendments to local tax laws over the past few years, is supposed to join Ernst & Young’s Africa tax practice on July 1. His right-hand man Greg Smith, responsible for drafting tax policy, left the Treasury to join PwC at the beginning of the year.

Business Day could not confirm on Friday whether the Treasury was in the process of appointing a replacement or whether Mr Engel would extend his contract temporarily.

Andrew Wellsted, tax director at the recently formed Norton Rose Fulbright SA, said that it remained unclear who — or which department — would be responsible for amending and implementing tax policy when Mr Engel left. The South African Revenue Service (SARS) was responsible for drafting policy historically.

He said the extent of changes meant taxpayers were struggling to keep pace with amendments to laws and to interpret many of them, and the exact scope of application and timing of the provisions, as many changes had been introduced retroactively.

"Overly complicated legislation not only discourages taxpayers from attempting to keep abreast of their obligations, but can encourage sophisticated taxpayers into complex schemes to circumvent laws which appear to be unfair or unintelligible to them."

The annual tax proposals announced in the budget are given effect by a series of bills tabled during the year, including this year the 2013 Taxation Laws Amendment Bill, and the Rates and Monetary Amounts and Amendment of Revenue Laws Bill. The draft version of the former is to be released in the next week or so for comment. The Treasury released a media statement at the end of April to elicit public comment on the contentious proposal of limiting excessive interest tax deductions.

In order to curb such deductions, a four-part proposal is being considered for inclusion in the forthcoming draft bill, which is an outgrowth of the section45 of the Income Tax Act debate arising in 2011 and was partially outlined in this year’s budget review. These include a broader set of hybrid debt instrument rules, limiting interest deductions between entities within the same group, adding a safe harbour rule to transfer pricing regulations, and the termination of discretionary limitations for taxpayers seeking debt-financing when attempting to acquire control of companies.

Mr Engel has been outspoken over aggressive tax schemes that erode the tax base. His concerns were first raised with regard to section 45 of the Income tax Act. That section had been enacted to provide relief from capital gains tax when assets were transferred between companies in the same group. It allows group companies to sell assets to each other without triggering any tax. SARS suspended the operation of section 45 in June 2011 without warning.

Mr Engel said then that the common use of the section involved "debt push-down structures" — the trigger for connecting excessive debt and funnel schemes. At the time, some high-profile deals, including Palabora Mining’s black economic empowerment deal and Mustek’s management buyout, were placed in doubt. The Mustek deal was eventually called off.

Over the years, industry players have criticised Mr Engel for making too many changes too quickly, "but he is a smart, competent guy who understands broad tax policy", Mr Wellsted said. Now that there is an apparent vacuum, taxpayers are becoming uncomfortable, he says.



Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.

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