Time for South Africa to Enter the Borderless Tax Arena
14 October 2013
Posted by: Author: Nazrien Kader
Author: Nazrien Kader (Deloitte)
The Income Tax Act in South Africa, which has been amended on an ad hoc basis over the years, dates back to 1962. With the dramatic evolution of the business environment since then, the country’s tax laws certainly need to be examined and assessed in a coherent manner as well as to ensure that they are relevant to the modern era.
With this in mind, Deloitte welcomes the appointment of a tax review committee and we are happy that the scope of the Terms of Reference is sufficiently broad to encompass all relevant issues. Indeed, the mandate allows the committee to "study any further tax issues” which it deems necessary, although the underlying theme to the committee’s endeavours is that of base erosion and profit shifting (BEPS). In addition, early indications are that the committee has an aggressive time frame in which to achieve its aims – dates by which the findings and recommendations must be presented are yet to be released.
It has been nearly two decades since the Katz Commission undertook a review of tax policy in South Africa. The key difference in our environment today is that we now operate in a borderless world. Our tax regime must be able to be applied across borders and boundaries, in a single, unified globe.
Globally, tax regimes have undergone significant change and I believe that the most effective tactic for South Africa to adopt for updating its tax regime would be the "fast follower” route: to establish which globally implemented tax laws have yielded the best collections statistics and adopt these locally. South Africa does not have the luxury of time or resources to be an innovator or to experiment with amendments (in other words, implement laws and then plug holes as we go along). Our current circumstances are not conducive for South Africa to be a leader in the adoption of new taxes.
It would be more productive for South Africa to adopt and adapt proven, successfully implemented global tax legislation than to engage in experimentation or to indulge in time-consuming development of new taxes. The proposed new carbon tax would be a classic example of South Africa seeking to be a trail-blazer, but this comes at the expense of time and effort in debating the issues and formulating the taxes. There are countries that have deep insight and experience with modern tax law and we would do well to leverage off the work already undertaken.
While the committee’s objective is to assess South African tax policy and its role in supporting the country’s economic objectives of "inclusive growth, development and fiscal sustainability”, a primary thrust of its undertakings will be to assess ways to improve tax compliance and to counter the problems of BEPS. The international trend of transferring profits to more favourable tax jurisdictions has come under a global spotlight, with governments taking steps to ensure that global multi-national enterprises pay their "fair share” of taxes.
Two industries have been singled out for specific attention by the tax review committee: the mining industry and financial services industry. The former finds itself in an unenviable position of waning global demand, squeezed margins and unsettled labour relations. It is essential that tax on this industry recognises its key role in the SA economy and as a generator of employment opportunities. The profit-based royalty rate is not currently viable and requires re-assessment and a possible change to ensure the sustainability of the industry and we welcome the focus placed on this industry.
Financial services is one industry which can effectively operate in a paperless, borderless environment making the industry one which can (with relative ease, through the use of derivatives and other financial instruments) switch profits between tax jurisdictions. With some of the country’s most sophisticated minds in the financial sector, the capacity to create complex financial structures and deals which minimise total taxation is enabled. But tax is an important consideration in putting together financial transactions. In determining the cost of a loan, for example, the tax elements must be seriously considered as they can make a material difference to the viability of a project. It should be recognised that without the ability to structure a deal in a tax-efficient manner, many would not take place, to the ultimate detriment of the economy.
The review committee has been tasked with "An analysis of the sustainability in the long-run of the overall tax-to-GDP ratio, and the tax-to-GDP ratio for each of the three major tax instruments, personal income tax (PIT), corporate income tax (CIT) and VAT should be undertaken.” Unofficially, South Africa targets a tax-to-GDP ratio in the ballpark of 25% but, in reality, this ratio is not particularly relevant. Far more important is the extent to which citizens benefit from the taxes paid.
In South Africa, our infrastructure needs remain high and thus our need for a higher ratio. We cannot achieve social equity without raising the capital to effect service delivery, so it becomes more a question of "what is right for South Africa right now”, rather than a generic "what is the ideal ratio”.
Regarding the tax mix – the relative contributions of PIT, CIT and VAT – our former Minister of Finance had targeted a roughly equal contribution from each, being a 30:30:30 percentage split, with the remaining 10% sourced from other taxes. However, economic and other external variables can distort this ratio. For example, during a recession, company profits decline leading to a sharp reduction in the contribution to the fiscus from CIT. I believe that setting targets is good practice, but it is important to recognise the extraneous factors which will affect the mix from time to time and to allow for those in maintaining the targets – rather than overhauling legislation to achieve the desired outcome.
Tax debate often focuses on moral issues ("paying tax is the right thing to do”) as opposed to legal bases ("paying tax is a legal requirement”). As a responsible tax practitioner, I believe that we need to apply the law fairly and consistently. Tax matters should be dealt with in a purely factual way rather than emotively: the moral issues are more of a red herring than reality. Overall, I welcome the move to review and improve current tax legislation, to remove ambiguity and to bring the South Africa regime in line with international best practice.
This article first appeared in the September/October 2013 edition of TaxTalk