Enhancing Tax Revenue May Erode Africa’s Attractiveness
01 October 2013
Posted by: Author: Evan Pickworth
Author: Evan Pickworth (Businessday)
Deputy Finance Minister Nhlanhla Nene said during the budget vote speech in Parliament that South Africa has its fair share of multinational companies that make billions of rand in revenue but pay almost no tax.
This has led to feverish efforts by the tax authorities to extract more money from companies and wealthy individuals, with tax evasion and aggressive tax avoidance schemes increasingly targeted by the authorities.
Low growth forecasts are crimping back the ability to raise enough tax revenue, yet raising tax rates is not seen as politically correct. So, widening the tax base by improving collection methods and limiting "wriggle room" for firms to manipulate pricing and lending structures across borders are becoming the preferred methods to grow tax revenue.
For the 2013-14 fiscal year, the South African Revenue Service (SARS) is required to collect R898bn, nearly 10%, or R84bn, more than the previous year, yet the economy is expected to grow only at 2.7%. "Meeting this target will not be easy," Mr Nene said in Parliament earlier this year.
Keith Engel, a former chief director of legal tax design at the Treasury, is now sitting on the other side of the fence, advising multinationals on how best to avoid the wrath of the receiver. He has been Africa tax policy leader at EY since July amid concern his departure from the Treasury will leave a void that will be difficult to fill — he was a leading light behind many of the recent tax amendments.
Mr Engel, in his new guise as adviser to the private sector, says African governments are largely focused on ways to broaden their tax bases and raise the revenue needed to build infrastructure and fight poverty. "The reality is that they currently rely too heavily on customs duties, mineral and petroleum royalties and donor funding."
The challenge will be to prevent this need for enhanced tax revenues from eroding African countries’ attractiveness as an investment destination, particularly when one considers the global tax environment.
Mr Engel argues that before adopting new amendments aimed at preventing base erosion, African governments should "earnestly consider the context" because if the new rules reduce profits, multinationals could reconsider their investment strategies.
Mr Engel has been outspoken about aggressive tax planning schemes during his time at the Treasury, and has been accused of making too many changes too quickly. The Treasury has had to take a few steps back recently, for example, delaying proposed aggressive reforms to trusts, after numerous industry complaints that they would destroy legitimate uses of trusts too.
"It is important to mitigate their concerns about tax so as to maximise the amounts they invest. At the same time, though, means must also be found to ensure that multinationals provide each African country in which they operate with a fair share of the profits made in that country," Mr Engel says.
EY Africa tax leader James Deiotte says tax affairs are taking up greater focus on boardroom agendas because directors have to balance their traditional concerns with creating vibrant and growing companies with the rising demand of governments and nongovernmental organisations that corporations pay their fair share of taxes.
"Corporate tax departments are under strain," he says.
But Mr Nene argues that many of the practices of companies are not only unjustifiable, but immoral too.
"SARS will continue its work to improve the levels of tax compliance in the country and it will apply the benefits of a modernised and increasingly automated tax system."
According to Mr Engel, Africa’s growing attractiveness as an investment destination is at risk if it fails to strike the right balance between international tax trends and the needs of its varied national economies.
"While the value-added tax is now a common feature of the African landscape, personal and company tax rates remain relatively high in global terms."
Organisation for Economic Co-operation and Development rules recommend closure of perceived cross-border schemes via new domestic legislation, tightened transfer pricing, changes to tax treaties and increased transparency.
"The concern is that many African countries could adopt their own versions of these rules in order to increase their tax revenues. Despite the fact that many … have extensive provisions against base erosion in the form of high withholding taxes with little treaty relief, systems triggering tax for the cross-border payments of cash regardless of traditional notions of tax source as well as nontax regulatory protections (such as exchange control)," Mr Engel says.
But, he says, "means" must also be found to ensure that multinationals provide each African country in which they operate with a fair share of the profits made in that country.
This article was first published on businessdaylive.co.za