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Experts warn of indirect tax costs

28 July 2011   (0 Comments)
Posted by: SAIT Technical
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Experts warn of indirect tax costs

ETHEL HAZELHURST - Business Report

Multinationals and South African companies setting up operations in Africa are often influenced by the rate of corporate tax in their chosen destination. However, they should consider the impact of indirect taxes as well, according to Ernst & Young indirect tax leader Charl Niemand.

At a press briefing in Johannesburg yesterday, he outlined issues that arose at the Ernst & Young conference on indirect taxes in Africa earlier this month. He noted that managing indirect tax risks was often not a priority for companies. But a failure in risk management could have costly consequences, in terms of money and reputation.

Most at risk were entities with complex corporate structures and not enough in-house resources and specialised knowledge.

In South Africa, apart from VAT and customs duties, companies also face property taxes, excise duties, green taxes such as the environmental plastic bag levies, air passenger tax and a skills development levy. Among the challenges Niemand identified was that VAT rules varied between jurisdictions. He said VAT systems in southern African countries were influenced by New Zealand – a modern VAT system – while those in north Africa were influenced by the traditional European system.

The differences between jurisdictions could cause confusion, Niemand noted. For instance, in many countries, a company would be obliged to register for VAT purposes only if it had a physical presence. In South Africa the requirement to register could be triggered if a foreign entity supplied goods or services to any local subsidiary, holding company or client. And non compliance could attract a big penalty.

The function of monitoring the impact of customs on business is often lost between different divisions in a company, according to Ernst & Young associate director Christina Horckmans, who called it a "lost tax”. She said companies often did not know what their annual duty bill came to and pointed out, if the cost of customs duties was not quantified, no one would be aware of the extent of savings to be achieved by managing the obligations. Moreover closer attention to the issues would enable companies to benefit from concessions. She also noted there were advantages to being compliant and perceived as trustworthy. She spoke of "tax effective supply chain management” – a process developed in Europe and the US, as multinationals changed their structures "mostly from decentralised to a centralised model”. The centralised function would typically be located in a low-income tax jurisdiction. But Horckmans highlighted the danger of moving a business without regard to indirect tax consequences. A move would change the flow of goods and invoices, which could have indirect tax consequences.

And, unlike income tax which was paid at the end of a period, customs duties were paid "in the here and now as trucks arrive at a border”. Niemand urged tax directors to develop an overall tax risk management strategy, taking into account indirect as well as direct taxation. This would require internal controls, centralised indirect tax accounting and reporting and effective outsourcing to tap local knowledge and support.


Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.


The Act requires that a minimum academic and practical requirments be set to register with a controlling body. Click here for the minimum requirements of SAIT.

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