MFPFA application for a local business tax

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MFPFA application for a local business tax

12 August 2012

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Programme

BackgroundThe need for the new city revenue streamObjectives of the new city revenue streamDesign issuesProposalsConclusion: project process

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The long history of the LBT (1) FFrom 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.

22005 - 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) 22007 - 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

22008 SALGA letter to Minister of Finance, with faulty proposals for an LBT, Minister rejects the proposals as unconstitutional

22009 - IMFO CFO forum considers and supports proposal for LBT; SALGA workshop considers and supports LBT; SALGA submission to Budget Forum

22010 - 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 Constitution

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

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

MFPFA 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

BackgroundThe need for the new city revenue streamObjectives of the new city revenue streamDesign issuesProposalsConclusion: project process

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Fiscal GapCity 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.

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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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ResponsibilityMunicipalities 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

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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

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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

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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.

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Programme

BackgroundThe need for the new city revenue streamObjectives of the new city revenue streamDesign issuesProposalsConclusion: project process

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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

available To improve local accountability, for economic services and

infrastructure To 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

BackgroundThe need for the new city revenue streamObjectives of the new city revenue streamDesign issuesProposalsConclusion: project process

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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

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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

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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

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Programme

BackgroundThe need for the new city revenue streamObjectives of the new city revenue streamDesign issuesProposalsConclusion: project process

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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 detailIGRU

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 withSystem changes take longer than everyone

expectsSARS will charge for the service

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Programme

BackgroundThe need for the new city revenue streamObjectives of the new city revenue streamDesign issuesProposalsConclusion: project process

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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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Process forward

Local business engagement DATECompletion of document + 2 WEEKSSection 79 COMMITTEE DATEMayoral Committee DATECouncil DATEMayoral signature DATESubmission of application DATE (Oct – Dec)

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The End – Any Questions ????