Large corporates and their tax advisers in the cross-hairs?
14 May 2012
Posted by: SAIT Technical
By Johan van der Walt (DLA Cliffe Decker Hofmeyr Tax Alert 11 May 2012)
"Above all things, a tax attorney must be an indefatigable sceptic; he must discount everything he hears and reads. The market place abounds with unsound avoidance schemes which will not stand the test of objective analysis and litigation. The escaped tax, a favourite topic of conversation at the best clubs and the most sumptuous pleasure resorts, expands with repetition into fantastic legends. But clients want opinions with happy endings, and he smiles best who smiles last. It is wiser to state misgivings at the beginning than to have to acknowledge them ungracefully at the end. The tax adviser has, therefore, to spend a large part of his time advising against schemes of this character. I sometimes think that the most important word in his vocabulary is 'No'."
Randolp Paul: The Lawyer as Tax Adviser
Looking at press reports over the last couple of months, it would seem that the issue with South African tax practitioners is that they are not saying "NO" often (or loudly) enough according to the Minister of Finance and the SARS Commissioner.
Opening the debate on the Tax Administration Bill in the National Assembly in November 2011, the Minister is reported to have said: "The aggressive undermining of the fiscus that some pursue – obviously at the receipt of a fee, even at a time of extreme fiscal stress – is extremely dangerous." The Minister suggested that tax practitioners and their clients should "... pause for reflection, as we must also, on the damage they can do to the tax system, and South Africa more broadly, as a result of their practices."
In February 2012, the Minister mentioned that 34 000 tax practitioners owed in excess of R260 million in tax and that they had 18 000 tax returns outstanding in their personal capacities. The SARS Commissioner joined the fray by alleging wide-spread unethical practices on their part. Strict tax practitioner regulation was therefore needed. The SA Institute of Tax Practitioners and the SA Institute of Professional Accountants countered and made reference to deficiencies in SARS' own administrative systems.
Come 1 April 2012, SARS announced that it had comfortably exceeded the revenue target by collecting R742,7 billion. Again the tax practitioners were not spared. The Minister's media statement indicated that "SARS will develop a rigorous risk profiling system to identify high risk practitioners." In future, tax practitioners would have to be of "good standing and members of a professional body."
The latest salvo in the direction of tax practitioners and their clients was fired on 8 May 2012. Mr Bob Head (recently appointed from the UK as special adviser to the Commissioner), told Parliament's Finance Committee that "There are some people in the business of trying to help companies not pay tax and they will keep on inventing new schemes."
The above was said in the context of the Commissioner's statement that there had been "an increase in the use of cross-border structuring and transfer pricing manipulations by business to unfairly and illegally reduce their local tax liabilities." According to him, especially African countries were vulnerable to revenue loss because they lacked the capability to detect and prosecute sophisticated tax evasion tactics. (It is noteworthy that at the announcement of the revenue result, it was stated that transfer pricing would come under the spotlight, SARS would up-skill its staff and there would be greater cooperation with other revenue authorities.)
The focus by revenue authorities, and developmental agencies, on the impact that the tax conduct of multi-nationals has on African economies is nothing new. During 2010, the UK development agency ActionAid published a report alleging that SABMiller's subsidiary Accra Brewery in Ghana had made a loss for the last two years and had paid corporate tax in only one of the last four years. That was despite Accra Brewery having produced $45 million worth of beer annually. While ActionAid was careful not to allege that SABMiller was guilty of tax evasion, it questioned the morality of tax avoidance where developing countries were losing more through tax revenue compared to what they received in aid.
Clearly a corporate's tax conduct and tax risk appetite has now become a reputational issue. And revenue authorities (and non-governmental organisations) are keen to exploit any vulnerability. In the recent past multinationals like IHG (hotel group), Unilever (consumer goods), Tui (travel company) and Vodafone (mobile phone group) were all caught up in negative publicity following a campaign by Christian Aid. Hence the Financial Times (9 November 2010) carried a lengthy article titled "Tax claims hit at reputations as well as the coffers."
There you have it. The tax conduct of corporates and the company they keep (read "tax practitioners") is in the cross-hairs. Many South African corporates are branching out into Africa. It appears that they should not only read the tax books but brush up on their morals as well.