The South African Revenue Service and the treasury are taking steps to tackle the underpayment of taxes by multinationals and bring offshore online commerce into its tax net.
In recent months, the low taxes paid by technology giants Google, Amazon and Apple have been scrutinised by tax authorities in many developed countries.
South Africa is vulnerable when it comes to tax evasion and trade mispricing because of its relatively open economy. Although focus has traditionally been on tax evasion by the extractive industries, it is now being shifted to include online retailers.
Government is drafting legislation that seeks to ensure the payment of value added tax on digital content and services supplied by foreign entities. It is also trying to patch up holes in existing tax treaties that allow abuse by multinationals. This includes a recently renegotiated agreement with the neighbouring nation of Mauritius.
Multinationals are sitting on cash piles worldwide — in South Africa nonfinancial corporate deposits are estimated to be R580-billion — and governments are feeling an increasing strain on the fiscus.
In his budget speech earlier this year, Finance Minister Pravin Gordhan announced that actual tax revenue is projected to fall short of the 2012-2013 budget by R16.3-billion — 2% of budgeted tax revenue.
Multinationals
Multinationals may well obey the letter of the law but can still exploit gaps in tax law and shift profits to low, or tax-exempt jurisdictions, a practice described as aggressive tax planning. In South Africa, this equates to billions in lost revenue for each year.
Oxfam International estimates that illicit financial outflows from Africa in the form of tax evasion and trade mispricing by extractive industries add up to about $200-billion each year. With South Africa's gross domestic product currently accounting for 17.5% of Africa's total, South Africa's share would be close to $35-billion.
Sars commissioner Oupa Magashula said the revenue service had identified transfer pricing by large corporations as a potential risk to the South African fiscus.
During the 2012-2013 financial year, 16 transfer pricing cases with audit results of slightly more than R3.2-billion were finalised. And other transfer pricing-related cases with potential audit results in excess of R6-billion are now being investigated. But this is just the tip of the iceberg.
But exactly what revenue has been lost through loopholes exploited by online retailers and web-based multinationals is hard to know and therein lies their advantage.
These companies are a growing concern, as pinpointing the jurisdiction in which online transactions take place is difficult. As a result, the booming online retail and services sector continues to bring in enormous profits while paying minimal tax.
VAT problems
Apple, for example, uses subsidiaries in Ireland to funnel billions in income away from the US and out of its tax reach. Google also routes profits through Ireland, as well as Bermuda and the Netherlands. Amazon exploits requirements for a physical presence to avoid paying sales tax in many jurisdictions.
But Franz Tomasek, group executive for legislative research and development at Sars, said plans were afoot to remedy the VAT problems posed by online retailers when it came to electronic goods and services, such as e-books, music and applications.
For example, when buying an e-book from an online retailer "theoretically you are supposed to declare to Sars you have bought the book and want to pay VAT", Tomasek said. But that did not happen.
Now Sars is following international trends and legislation is being drafted to remedy this.
Tomasek said the idea was to enter into an agreement with online retailers to add VAT to each product sold in South Africa and pay it over to Sars. He said such legislation would be very difficult to enforce but, generally speaking, the larger retailers would be expected to comply.
Aggressive tax planning may appear to be a victimless crime but many nongovernmental organisations argue this is not the case. A report by Action Aid International, How Tax Havens Plunder the Poor, found developing countries are in fact most at risk when it comes to this kind of tax avoidance. It said tax havens are depriving some of the world's poorest countries of vital resources to fight poverty.
Loss to developing countries' public revenues
"Some estimates suggest that the concealment in tax havens of financial assets alone may constitute a loss to developing countries' public revenues of some $120- to $160-billion a year. This is nearly three times the estimated cost of the agricultural investment needed to achieve a world free from hunger, and 12 times the cost of ending the global scourge of malnutrition, which each year claims the lives of 2.3-million children."
The report said that, of the 98 FTSE 100 companies in tax havens, 78 also have operations in developing countries.
"While wealthy countries' tax authorities struggle to chase money through these opaque places, their less well-resourced counterparts in developing countries have neither the resources nor the economic or political muscle to obtain the information they need about wealth squirrelled away in tax havens by companies and individuals."
Thembinkosi Mfundo Dlamini, governance manager of Oxfam South Africa, said the organisation believed the main culprits in South Africa to be the extractive industries. "If we look at the tax paid by the extractive industry, it has been falling over the years but their contribution to GDP remains significant."
He said tax from mining enterprises made up just 4% of total tax assessed compared with 10% in 2008. "It is one of the dominant factors of the economy … yet its contribution is so minimal."
Tomasek said the reason extractive industries received so much attention was that they were so big and had a massive impact on the economy.
Thin line between tax evasion and tax avoidance
AJ Jansen van Nieuwenhuizen, head of tax at Grant Thornton, said there was a thin line between tax evasion and tax avoidance but, "in broad tax principles, paying to the letter of the law means you are a moral taxpayer".
"[But] one doesn't automatically advocate aggressive tax planning … and some people do get carried away and get to a point that starts pushing the envelope of what is morally correct and incorrect."
What might be a more relevant argument, he said, was that the laws were potentially inefficient and inadequate, in which case they would be taken advantage of. "No public company wants to embark on something where they can be accused of doing things illegally or at a criminal level."
Tomasek said governments and multinationals should meet each other halfway, where legislation and corporate morality were improved. "You can never draw up a law that covers every eventuality — if you are serious about finding a hole you will find it."
Masters of evasion shtum on net profits
Web-based enterprises such as Google, Amazon and Apple have come under fire for evading tax in many countries and appear to have been unperturbed by accusations that they are not contributing their fair share.
A report by Transparency International, titled Transparency in Corporate Reporting: Assessing the World's Largest Companies, found multinationals have a long way to go to improve transparency.
The report's organisational transparency measure scored Apple and Google at 33% and Amazon at 50%. In their country by country reporting, which details a breakdown of operations in various countries, Amazon scored 6% and Google and Apple scored 0%.
Thembinkosi Mfundo Dlamini, governance manager at Oxfam South Africa, said that when it came to multinationals operating online they had even more room to play around because of the absence of a permanent establishment. "Most of their transactions happen online to the extent that we don't know exactly where the transaction takes place."
He said Oxfam was calling for country by country reporting. "We want them to report some key information in the various countries, for instance, size of turnover related to project, size of investment, size of the workforce and its structure. Then it will be easier for revenue collection agencies to make an assessment whether there is any aggressive tax planning involved."
According to the website Memeburn, Google earns about $80-million in revenue from the South African advertising space.
In response to questions, a spokesperson said the company did not break down revenue by country except in the United States and the United Kingdom, although it complied "fully with the tax rules in South Africa, as in every country in which we operate".
The spokesperson said Google also gave back to South Africa by investing in many initiatives to help more people to access the internet, to create locally relevant and useful products, services and content, and to strengthen the internet ecosystem.
Amazon did not respond to questions, but it launched a customer service centre in Cape Town in 2010 and said at the time it expected to create more than 600 new jobs during the first two years of operation, with an additional 400 seasonal jobs in the fourth-quarter holiday season. Apple also did not respond to questions.