A global crackdown on tax avoidance has begun and South Africa is forging ahead in a bid to tackle wealthy individuals and corporates who practise this tactic.
The initiative is better poised to succeed than in the past because G20 countries have pledged to set up a system of automatic information exchange by 2015, limiting the ability of tax avoiders to escape this global net.
Some domestic actions are in force and others are in the pipeline. They could go some way towards closing the tax gap and, consequently, the budget deficit.
The tax gap is estimated by the South African Revenue Service (Sars) to be between 15% and 30% of tax revenues. With tax revenues expected to be around R1-trillion this year, this could mean as much as an additional R300-billion in additional collections, more than enough to plug the R140-billion budget deficit.
In his mini budget Finance Minister Nhlanhla Nene indicated that government needed to improve the fiscal position by R30-billion in 2016-2017, with help from the expenditure ceiling being lowered by R15-billion in the same year.
According to Judge Dennis Davis, chair of the Davis tax committee: “I would be surprised if it was as high as R15-billion, but I’m sure you would find it a meaningful contribution to the R15-billion.
Discussions took place at the G20 summit in Brisbane at the weekend, centring on how each country could add two percentage points to growth over the next five years. President Jacob Zuma reiterated the country’s commitment to tackling tax avoidance. He said South Africa had implemented measures to prevent multinationals from reducing their tax liabilities through illicit measures.
The global initiative has gained traction since July last year with the release of an action plan by the Organisation for Economic Co-operation and Development (OECD) to tackle base erosion and profit shifting (BEPS).
BEPS are tax planning strategies that multinational corporations often use to exploit gaps and mismatches in tax rules to lower their tax liability.
A final BEPS draft, completed in September, outlined 15 measures – one key measure being a review of transfer pricing documentation and a template for country-by-country reporting of income, taxes and economic activity for tax administrations.
According to the OECD, a transfer price is a price adopted for book-keeping purposes and used to value transactions between affiliated enterprises at artificially high or low levels and is a common tool for lowering or avoiding tax liabilities.
An urgent issue locally
The Davis tax committee, a review committee appointed by former finance minister Pravin Gordhan to assess South Africa’s tax policy framework and its role in supporting national objectives, is expected to make recommendations to the treasury before the budget is tabled in February.
A global advocacy organisation, the Tax Justice Network, estimated in 2011 that tax avoidance costs governments around the world more than $3.1-trillion each year.
Action on tax avoidance has been criticised as slow in some jurisdictions but in South Africa, with the economy limping along and growth forecasts consistently revised downwards, there is some urgency for the government to decide how it will raise more revenue.
In a statement after the summit, Zuma said South Africa had already implemented measures in its domestic tax legislation in relation to BEPS, and would resolve outstanding technical and policy issues, finalising these by the end of next year.
Honing in on tax avoidance by multinationals would seem a good place to start.
“I don’t know if there is or isn’t, but let’s assume R5-billion [of unseen corporate tax liability] in the pot and we want to cut our [budget] deficit,” said Davis. “Is it preferable to move aggressively against tax avoidance or to raise VAT? It’s a no-brainer. This will be part of our recommendation.”
Davis said tax regulation should not deter investors, “but if you have a 28% rate of tax you should have that. The last tax review, the Katz commission of inquiry, found the financial sector was paying a 4% effective rate 20 years ago. Now they are paying pretty close to effective rate of tax … All we are asking is, if corporates can only be here because they flout our tax law, then they must go elsewhere. But they won’t be able to go elsewhere because all those [OECD and G20] countries will be doing the same. The game is global.”
Profit-shifting and transfer pricing
A report released in October by the Alternative Information and Development Centre claimed that, through two profit-shifting arrangements, platinum miner Lonmin avoided paying R400-million in taxes. Lonmin said it paid taxes fully in all operational jurisdictions.
“I don’t know if it’s true,” said Davis. “But if you simply took that as a figure for one corporation, then you start to realise this is an order of significant magnitude.”
Treasury director general Lungisa Fuzile said initiatives around fighting BEPS and transfer pricing are as important for South Africa as they are in many parts of the globe, “if not more important for us because we have got big multinationals in different sectors of our country … so they have options as to how they move around, how they score their revenues, their profits, to minimise their tax liability”.
“I’m not saying that I know this to be prevailing, but to the extent that it is very tempting when you think that the risk of being caught is very low. There is a chance that it is happening here on some scale.”
A study by Global Financial Integrity, titled Illicit Financial Flows from Africa: Hidden Resource for Development, which examined data for a 39-year period, found that South Africa had the fifth highest outflows, estimated as $24.9-billion.
According to Sars, over the past three years its transfer pricing unit has audited more than 30 cases, and has made transfer pricing of just over R20-billion – at a conservative measure – with an income tax impact of more than R5-billion. A similar number of cases are in progress and others are in the process of being risk-assessed.
Presenting to Parliament this week, Ismail Momoniat, the deputy director general of tax and financial sector policy in the treasury, noted that South Africa already had measures in its domestic tax law in relation to BEPS, some even before the launch of the OECD Action Plan.
These include amendments to South African transfer pricing legislation that came into force in 2012; legislative changes to curb excessive interest deductions; changes to controlled foreign corporation rules; tax avoidance rules with respect to hybrid instruments and entities; a focus on the digital economy including VAT on e-commerce products; and exchange of tax information.
In addition to country-by-country reporting, Zuma said South Africa was among 51 countries that had signed the Agreement on Automatic Exchange to Financial Information last month, and would in 2017 begin exchanging information pertaining to individuals and corporate entities.
Fuzile said exchange of information was significant in improving revenue collection.
“Having access to records of companies that are domiciled here or listed on our stock exchange, but also have operations abroad, is a very important development to close that gap. And it could just, without any policy changes, lead to changes in our tax take from such companies.”
The OECD’s Action Plan also seeks to eradicate the abuse of tax treaties. South Africa is already making moves in this regard. Tax treaties were put in place to avoid double taxation for a company operating in more than one jurisdiction, but have often offered loopholes for income not to be taxed in any country.
Of the 76 treaties for the avoidance of double taxation, according to information on the Sars website, 27 are in the processes of negotiation and include low-tax jurisdictions such Switzerland and the Netherlands (a known tax haven conduit).
South Africa needn’t go it alone ‐ there is a global move to tighten up outdated tax regulations.
“Everybody is aware that globalisation has done something horrible to tax structures that were for companies presumed to be brick and mortar and domiciled in one country and easy to tax,” said Davis.
Momoniat agreed, noting that the 2008 global financial crisis has changed the paradigm, not only on light-touch regulation, but also on action on tax havens and tax-shifting and the need for more revenue after 2008 has nudged G7 countries to act.
News items on issues of tax have made headlines of late. This week Reuters reported on the findings of a study that seven major US corporations paid more money to their chief executives last year than they paid in federal income taxes. This included General Motors, which received a $50-billion state bailout.
Momoniat noted that, internationally, headline corporate income tax rates have been on the decline, fuelling concerns about a “race to the bottom” in offering low tax rates and numerous incentives to attract investment.
Deterring investment remains a concern. “The corporate income tax space is one of the delicate spaces because it is very important in determining international competitiveness and attractiveness to investors,” said Fuzile. – Mail & Guardian