University of Durban-Westville (UDW) principal Mapule Ramashala faces a potentially heavy tax bill following the exposure of a questionable offshore tax scheme set up for her by accounting firm Deloitte & Touche.
Ramashala, who earned R1,45-million last year, opted to have a portion of her university remuneration paid via an offshore company established by Deloittes. The company, named Ryebeck, was established in the Isle of Man, a tax haven.
Prior to the introduction of ”residence-based taxation” this year, income earned from an overseas employer was regarded as outside the South African tax net, but only if genuinely sourced from outside the country. If it was deemed to be South African-sourced, it would be liable for South African tax.
While the South African Revenue Services (Sars) will not comment on Ramashala’s tax affairs, it is understood that commissioner Praveen Gordhan was in contact with university council members recently and confirmed the view that the scheme was unacceptable.
Although, according to Deloittes, Sars has not yet presented Ramashala with a tax assessment, she could face an estimated tax bill of close to R500 000 if penalties are included.
University spokesperson Pamela Adams told the Mail & Guardian that Ramashala had received the views of Sars about the method of her remuneration but that these views did ”not amount to a determination”.
”The communication from Sars does not contain any reference to the scheme as being impermissible or illegal.”
She said Ramashala’s advisers would study the Sars communication before deciding how to proceed, but emphasised that the vice-chancellor had acted in good faith on the advice she received.
That being so, the bigger headache may lie with Deloittes, though the accounting firm insists it has done nothing wrong.
The Deloittes ”arrangement”, as the firm likes to describe it, was exposed when a copy of a letter — purporting to be from Deloittes to the university –was leaked to the media.
It showed how the company sold the idea to selected clients, stating: ”Income splitting involves setting up a dual employment contract for an individual who travels overseas frequently on business. This means that a portion of the employee’s remuneration could be paid tax-free or taxed at a more favourable rate.
”Deloitte & Touche have established an Isle of Man company spe- cifically to act as a second employer for such individuals …
”You have indicated that Ramashala travels for approximately two months in aggregate overseas each year. We thus recommend that you consider the creation of a second employment contract as discussed above.”
The offshore company set up by Deloittes, Ryebeck, duly invoiced UDW for ”services rendered” to the tune of $2000 a month.
The Deloittes scheme appears to be designed to disguise the South African origin of earnings, thereby potentially falling foul of Section 104 of the Income Tax Act.
It is understood that Sars has asked Deloittes for an explanation of the scheme with a view to reaching a decision on whether to lay a complaint against the company with the national director of public prosecutions.
Deloittes denies the scheme was contrary to the Act: ”It is our view that the split payroll employment arrangement was, at the time, legitimate and fully compliant with the law.”
The firm has confirmed that there are ”ongoing meetings with the revenue authorities” over this issue.
It appears clear that the Ryebeck facility was offered to numerous taxpayers, although Deloittes has refused to disclose how many took advantage of this scheme or how much money flowed through Ryebeck on an annual basis.
The Reserve Bank declined to comment on whether the bank, too, had launched an investigation of the scheme. However in response to the same question, Deloittes noted that it had ”proactively engaged with the relevant authorities on this issue” and was cooperating fully with them.
The firm expressed concern about the fact that the M&G seemed ”to have been made privy to the confidential affairs of a South African taxpayer, which is in direct contravention of Section 4 of the Income Tax Act”.