Draft Response to FFC recommendations for 2004 MTEF

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					Presentation to Portfolio Committee
            on Finance


  Briefing on the Municipal
Fiscal Powers and Functions
         Bill (MFPFB)

 Presentation by National Treasury
            8 May 2007
                                     1
      Outline of presentation
•   Legislative framework
•   Objects of Act
•   Municipal Taxes
•   Link between the permanent replacement of RSC
    levies and the Bill/Act
•   Municipal surcharges
•   Other provisions
•   Amendment/repeal of existing local government
    legislation
•   Financial implications of Bill
•   Consultation process on Bill
•   Conclusion
                                                    2
                Constitutional framework
•   Municipalities may impose property rates, surcharges on municipal
    services and, if authorised by national legislation, other taxes,
    levies and duties to all or a category of local government, but no
    municipality may impose income tax, VAT, general sales tax or
    customs duty (section 229 of Constitution)
•   Section 229(2) stipulates that the power of a municipality to
    impose rates on property, surcharges on fees for services
    provided by or on behalf of the municipality, or other taxes, levies
    or duties-
    –   May not be exercised in a way that materially and unreasonably
        prejudices national economic policies, economic activities across
        municipal boundaries, or the national mobility of goods, services,
        capital or labour
    –   May be regulated by national legislation
•   Current local government legislation regulates
    –   Property valuation and rating through Municipal Property Rates Act
    –   Municipal user-charges/tariffs through MFMA and MSA
•   Municipal Fiscal Powers and Functions Bill (“the Bill”) will deal
    with outstanding section 229 legislation by:
    –   Regulating the process by which the Minister of Finance, or a
        municipality, group of municipalities or organised local government
        (SALG) may initiate a municipal tax or taxes
    –   Defining the manner in which the national government, through the
        Minister of Finance, will exercise its policy oversight role, regulatory
        role and authorisation role in respect of municipal surcharges and
        taxes, other than property rates and municipal user charges          3
                      Aims of Bill/Act
• The Bill is intended to            • The Bill is not intended to
    – Ensure that municipal              – Impede a municipality’s
      taxation powers are pro-             ability to collect own
      actively regulated as                revenues
      provided for in s229 of                • Regulations only to
      Constitution (currently                  ensure that municipal
      intervention done reactively             taxes, levies and
      after macro-economic                     surcharges do not have
      concerns are triggered)                  adverse macro-economic
    – Set a framework for                      implications or adversely
      introducing new municipal                impact on economic
      taxes so as to ensure that               sectors
      any new tax fits within the        – It does not introduce new
      national and LG fiscal and           municipal tax/es
      taxation framework                     • Bill/Act sets the
    – Prescribing norms and                    framework for introducing
      standards for municipal                  new municipal taxes,
      surcharges to ensure that                which requires a detailed
      they are affordable to                   impact analysis to ensure
      ratepayers                               that any new tax fits
                                               within the overall and LG
• Other legislation, such as                   fiscal and taxation
  Municipal Property Rates                     framework
  Act, also makes provision for
  ratios and limits to increases                                       4
   Chapter 1 - Objects of Bill/Act
• The Bill/Act seeks to
   – promote predictability and certainty in respect of
     municipal fiscal powers and functions
   – ensure that municipal fiscal powers and functions are
     exercised in a manner that will not materially and
     unreasonably prejudice national economic policies,
     economic activities across municipal boundaries, or
     the national mobility of goods, services, capital or
     labour (section 229(2) of the Constitution)
   – effectively oversee the exercise of municipal fiscal
     powers and functions by
      • regulating the exercise by municipalities of their power to
        impose surcharges on fees for services under section
        229(1)(a) of the Constitution
      • authorising the taxes, levies and duties that municipalities
        may impose under section 229(1)(b) of the Constitution
      • Regulating the exercise by municipalities of their power to
        impose taxes, levies and duties, if authorised
                                                               5
    Chapter 2 – Municipal Taxes (1)
• Authorisation of a municipal tax
   – The Minister, or on application by a municipality or group
     of municipalities or organised LG, may authorise a
     municipal tax
   – Prior to authorising a municipal tax, the Minister
      • Must consult the Minister responsible for LG, organised LG
        and the Financial and Fiscal Commission
      • May consult any other interested organ or persons
   – The Minister authorises a municipal tax through regulations
• Application for authorisation
   – Application must be made to the Minister
      • Reasons for tax, purpose/s for which it will be utilised,
        persons liable for tax, estimated revenues from source,
        economic impact of tax, tax collection authority, tax base
        and rate and relief measures, consultations undertaken
   – Minister must notify municipality/ies, SALGA, Minister for
     LG whether municipal tax is approved/not approved within
     6 months of application
                                                                6
     Chapter 2 – Municipal Taxes (2)
• Regulations authorising and regulating the imposition and
  admin of municipal tax
   – Authorise a municipality, group or kind of municipalities to
     impose the municipal tax
   – Must determine
      • Date from which the municipal tax may be imposed (MFY)
      • Tax base and any exclusions
          – A tax may be for a specific purpose or non-specific
      • Tax rate (% or R value)
      • Basis upon and intervals at which rate may be increased
   – May limit the period during which the municipal tax may be
     imposed
   – May limit the purpose/s for which revenue derived from a
     specific purpose municipal tax may be utilised
   – Any other matter necessary for the proper imposition and
     admin of tax
• Collection of municipal taxes by municipality authorised,
  unless the Minister has designated another
  person/institution for that purpose                   7
    Link between RSC levies replacement & Bill/Act
•    Due to various deficiencies, RSC levies were abolished from
     1 July 2006
•    As interim measure, RSC levies replacement allocations are made
     available to metropolitan and district municipalities while
     permanent options are being explored
    –   R7b in 06/07, R8b in 07/08, R9b in 08/09 and R10b in 09/10
    –   Majority of these funds allocated to metros and a few districts
    –   Some larger municipalities with large-scale economic activity have
        indicated that replacement grant allocations may not be growing at
        same rate as RSC levies
•    Key principles to underpin choice of alternative replacements are
    –   Endeavour to maintain local government fiscal autonomy
    –   Meet criteria of a good local tax
    –   Closely approximate the same incidence
    –   Protect municipalities from fiscal shocks
•    Various replacement options were listed in a National Treasury
     discussion document
    –   VAT zero-rating of property rates introduced from 1 July 2006 (partial
        RSC levies replacement)
    –   Surcharges on user charges
    –   Tax sharing of national tax instruments (e.g. transfer duty and fuel
        levy)
    –   Local business tax
    –   Business license fees
                                                                       8
   Chapter 3: Municipal surcharge (1)
• Although surcharges currently form part of municipal tariffs, for
  regulatory purposes, a distinction needs to be made between
  the “core” components of a tariff and a “surcharge”
• “Municipal base tariff” means the fees necessary to cover
  the actual cost associated with rendering a municipal service
  and includes –
   – Bulk purchasing costs in respect of water and electricity
     reticulation services
   – Overhead, operation and maintenance costs
   – Capital costs
   – A reasonable rate of return, if authorised by a regulator of or the
     Minister responsible for that municipal service
   – Administration and regulatory costs
• “Municipal surcharge” means a charge in excess of the
  municipal base tariff that a municipality may impose on fees for
  a municipal service provided by or on behalf of a municipality,
  in terms of section 229(1)(a) of the Constitution

                                                                  9
   Municipal base tariff and surcharge
• Current process                •   Future process
  – Cost of providing                – Cost of providing
    service                 xx          service             xx
  – Refurbishment and                – Refurbishment and
    maintenance, etc        xx          maintenance, etc    xx
  – Surcharge (hidden)      xx       – Reasonable rate of
  – Tariff payable by       xx          return             xx
                                     – Base tariff to be
    consumer as
    approved by                        regulated by
                                       regulator/Minister  xx
     • Municipality
                                     – Maximum surcharge
     • Regulator/Minister
                                        rate (explicit)    xx
                                     – Tariff approved by
                                         municipal council  xx

                                                           10
   Chapter 3 – Municipal surcharges (3)
• The Minister may prescribe compulsory national norms
  and standards for imposing municipal surcharges
   – Maximum surcharges
      • Ratio, percentage of base tariff or R value
      • Bands or ranges within which municipal surcharges may be
        imposed
   – Differentiate between
      •   Different kinds of municipalities (category, type, budget size)
      •   Municipal services (e.g. water, sanitation, electricity)
      •   Levels of municipal services
      •   Categories of users, debtors and customers
      •   Consumption levels
      •   Geographic areas
   – Determine the basis upon and intervals for increasing
     municipal surcharges
   – Determine matters that must be assessed and considered
     by municipalities in imposing surcharges
                                                                   11
   Chapter 3 – Municipal surcharges (4)
• Obligations of municipality i.r.o. municipal
  surcharge
   – Municipalities to comply with prescribed norms and
     standards
   – If authorised by notice in Government Gazette,
     exemptions may be granted to
      • Municipalities generally
      • Particular municipality or kind of municipality
   – A municipality must disclose any municipal
     surcharges when complying with section 75A of the
     MSA
   – A municipality must annually review municipal
     surcharges as part of its budget preparation process

                                                          12
          Chapter 4 – General (1)
• The Minister may issue regulations
   – Any matter that must or may be prescribed i.t.o this Act
   – An appropriate division of fiscal powers and functions where
     two municipalities have the same fiscal powers and functions
     to the same area
   – Any ancillary or incidental admin matter for the proper
     implementation of this Act
• The Minister must at least every five years review the
  regulations made under this Act
• Before any regulations are made under this section,
  the Minister must
   – Consult the Minister for LG, relevant cabinet members and/or
     MEC on any matter affecting their executive authority, the
     Financial and Fiscal Commission, and organised LG
   – Publish draft regulations in Government Gazette for public
     comment
   – Submit draft regulations to Parliament at least one month
     before their promulgation
                                                             13
            Chapter 4 – General (2)
• Transitional provisions
   – A municipality must within 2 years of the date on which the Act
     commences, apply to the Minister for the continued authorisation of a
     tax, other than RSC and JSB levies
   – A tax will lapse 2 years after the date on which this Act commences, if
     a municipality fails to apply for authorisation
   – A tax will lapse 6 months after the Minister has notified the municipality
     that an application for the continuation of a tax has not been approved
     by Minister
• Amendment of legislation and savings
   – Repeal of paragraph (d) of sub-section (1) of section 86A of Municipal
     Systems Act (to avoid dual regulation of municipal surcharges)
   – Amendments to Municipal Finance Management Act
       • Repeal of subsection (2) of section 20 (reference to a municipality
         exercising its fiscal powers i.t.o. s229 of Constitution removed)
       • Repeal of subsection (6) of 28 (reference to increases to municipal
         taxes and tariffs mid-year removed)
       • Sub-section (4) added to section 43 (so that MFMA will only apply to
         tariff capping, not tax capping)
       • Substitution of paragraph (c) of section 168 (so that MFMA will only
         apply to tariff capping, not tax capping)

                                                                        14
           Financial implications
• Bill will not have financial implications for national or
  provincial government
• The implementation of municipal surcharges by
  municipalities will not have any additional financial
  implications for municipalities as procedures and
  systems already in place to collect fees for the
  services on which surcharges will be imposed
• Some existing surcharges may be beyond what could
  be considered reasonable for the sector/country
• Limited costs associated with making an application
  for authorisation of a municipal tax and start up costs
  associated with the initial implementation of a
  municipal tax, but this is considered necessary and
  good practice anyway

                                                        15
    Consultation process on Bill

• Prior to submission into parliamentary
  process, NT consulted dplg, SALGA and FFC
  on Bill
• Most of the comments of dplg, SALGA and
  FFC were incorporated into Bill that was
  submitted to Cabinet
• Public consultation process was also provided
  for




                                            16
                    In conclusion
• This Bill/Act will ensure that all local government finance
  matters as contained in section 229 of the Constitution are
  appropriately regulated
• This Bill/Act is not intended to infringe on the rights of local
  government to optimise the collection of its own revenues,
  but to ensure that municipal taxes
   – Fit within the national and local government fiscal and taxation
     framework
   – Do not have adverse macro-economic implications
     (taxpayers/affected sectors/etc. must be able to afford the
     taxes, tariffs and surcharges levied by municipalities)
• Prior to the introduction of any new municipal tax, a detailed
  evaluation process as prescribed in the Act will be
  undertaken so as to ensure that an appropriate balance is
  struck between
   – enhancing local government fiscal autonomy and
     accountability (this is achieved where municipalities collect
     revenues directly from ratepayers)
   – implications of such new tax for taxpayers
                                                                     17
The end!!!




        Thank you ….
                       18

				
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