Minister of Finance Trevor Manuel says the tax revenue lost through avoidance schemes “clearly runs into billions” of rand and the South African authorities are fine-tuning a mechanism to close existing gaps.
Speaking at the release of a South African Revenue Services (Sars) discussion paper on tax avoidance — which includes tightening the provisions of the relevant Section 103 of the Income Tax Act — at a Cape Town hotel on Thursday, Manuel said a similar change in Australia brought in Aus$4,2-billion in state revenue.
He said proposed changes to the tax legislation will be announced in the Budget of February 15 next year but his colleague, Sars commissioner Pravin Gordhan, noted that there is an extended period for comment on the proposed legislative changes to January 31.
Legislation in the form of the Revenue Laws Amendment Bill will be put to Parliament during the course of next year after Manuel’s Budget announcement of the legislative product.
According to Sars, the proposed amendments are intended to create “a more effective deterrent to impermissible tax avoidance”.
Manuel said the extra revenue in Australia caused political problems for his counterpart, with the Treasury minister finding one of his colleagues suggesting a “flat tax”. He quipped that he hopes he does not find himself “in the same position”.
Hinting, however, that there would be a spin-off for taxpayers from the extra revenue, Manuel said: “As you close the holes within it [the tax system], you might get some [revenue] windfalls. To begin with, we have a commitment to taxpayers in South Africa — as we get better at collection, we will structure that relationship.”
Manuel added that the focus “for a number of years” has been on general reductions rather than tax incentives that become impossible to administer.
While Manuel did not spell out possible tax changes, it is understood that he favours personal income-tax reductions over reductions in corporate tax.
Referring to the tax-avoidance legislative change, he said: “What we can’t accommodate is a rule which is intended to limit avoidance that is so abused and patchy with wear.”
Gordhan said tax avoidance is a key issue worldwide.
“We are talking about large sums of money affecting large parts of the world including South Africa … and if we do have access to those large quantums … it does make a difference to what development a state can achieve.”
He pointed to just one tax-avoidance issue, convertible loan structures, which he said involves about R6-billion in lost tax. These are a hybrid of debt and equity instruments on which tax treatments are different. If one scheme has such potential to dodge tax, “what else is going on which we do not know about?” asked Gordhan.
According to the discussion, Section 103 of the Income Tax Act of 1962 contains the general anti-avoidance rule (GAAR).
“In its current form, the GAAR has proved to be an inconsistent and, at times, ineffective deterrent to the increasingly complex and sophisticated tax products that are being marketed by banks, ’boutique’ structured finance firms, multinational accounting firms and law firms.
“These products typically involved the use of circular or offsetting flows of cash and property, special purpose entities or other accommodating parties, and complex financial instruments such as derivatives,” the document says. — I-Net Bridge