SARS ‘already fighting tax erosion’
THE South African Revenue Service (SARS) has already begun to tackle the erosion of the tax base through profit shifting, which was addressed in an interim report of the Davis tax committee that was released last month for public comment.
SA loses billions of rand in revenue annually through the abuse of transfer pricing, harmful tax practices and treaty abuse by multinational companies to shift profits from high-tax to low-tax jurisdictions.
SARS spokeswoman Marika Muller said on Tuesday that the tax authority had made progress in addressing unlawful profit shifting, but she emphasised — as does the Davis committee report — that this was not something SA could do on its own; it required co-ordination with other countries.
The Organisation of Economic Co-operation and Development (OECD) has drawn up an action plan on how tax authorities could address base erosion and profit shifting. The Davis committee closely followed the OECD’s recommendations in making its own proposals.
Commenting on the Davis committee’s interim report, South African Institute of Tax Professionals CEO Stiaan Klue said it would be irresponsible, if not disastrous, for the Treasury to copy international best practice recommendations that might negatively affect SA’s competitiveness in attracting foreign direct investment.
SA had a high unemployment rate, Mr Klue said. An alarming fact was that the country had the third-highest unemployment rate in the world for people between the ages of 15 and 24, according to the World Economic Forum’s Global Risk 2014 report.
“International best practice is not always the silver bullet solution. We need our own solutions,” he said.
SARS’s Ms Muller said the agency had addressed some of the value-added tax (VAT) issues raised in the Davis committee report with regard to the digital economy. VAT was already imposed on business-to-consumer transactions for electronic services coming into SA.
South African Institute of Tax Professionals deputy CEO Keith Engel said the Davis committee report reiterated the overall global statements on base erosion and profit shifting and sought to contextualise concerns within a developing-country paradigm.
The committee considered the protection of the corporate tax base in a developing country to be of greater importance than in a developed country.
“Relative corporate revenues for developing countries are typically more than 25% of total revenue, whereas OECD and other developed countries only rely on corporate revenues to the extent of 3%-10% of the total tax take,” Mr Engel said.
In the 2013-14 tax year the contribution from company tax to total tax revenue in SA declined from 22.9% to 19.9% — in contrast to VAT, which increased its contribution to 26.4% from 25.7%. The biggest contribution to the total tax collections comes from individual taxpayers — 34.5% in 2013-14.
In justifying the differential between developing and developed countries, the Davis committee noted that developing countries could not rely so heavily on VAT, because of the regressive nature of the tax. There is concern that when a developing country relies more on VAT than corporate income tax, capital will be favoured over labour.
The Davis committee noted that the fragmentation of production across borders had become a dominant feature of the global economy.
Increased importance was now being placed on where most of the value of a good or service was typically created, the report said.
