How SA could collect more tax revenue

JOHANNESBURG – There is considerable scope to collect more revenue by addressing tax leakage due to transfer pricing.

Speaking at a forum event hosted by the Gordon Institute of Business Science (Gibs), Judge Dennis Davis, chair of the Tax Committee that was tasked with a comprehensive review of South Africa’s tax system in 2013, said it is unclear exactly how much money the fiscus loses as a result of these practices, but it is a significant amount.

Davis said during 2012 the South African Revenue Service (Sars) probed about 40 corporations on their transfer pricing practices and collected more than R1 billion in additional tax revenue.

Transfer pricing is a common practice used by multi-subsidiary groups to minimise profits in high tax jurisdictions by selling goods or services within the group.

Davis said it is important that this issue should be dealt with. However it would require a proper transfer pricing unit within Sars with an adequate staff complement.

He said the committee has recommended that more staff should be assigned to the department and that the matter should be dealt with properly.

He believes these measures could add more than R1 billion to the fiscus.

The issue of additional tax revenue sources has been under the spotlight over the last year as government tries to address its budget deficit amidst waning economic growth.

However, South Africa’s narrow tax base has left it with very little room to manoeuvre.

In his February budget, Finance Minister Nhlanhla Nene raised personal income taxes by 1 percentage point for most categories of taxpayers and increased the fuel levy.

But as Eskom struggles to keep the lights on and economic growth falters, the issue of additional revenue sources could become even more pronounced in the coming months.

Commentators have flagged a potential increase in the VAT rate as a solution government will likely consider, but it might want to keep this option open to fund the proposed National Health Insurance (NHI).

Davis said there are likely also some scope for the collection of additional tax revenues where high net worth individuals are concerned.

Earlier this year a whistle-blower told the world that HSBC in Switzerland had directed billions into locations where the owners of the accounts would pay no tax in the jurisdictions where they were tax residents, he said.

It turned out that around R23 billion of these funds were connected to South Africa, Davis said.

He said what he finds curious is that while Sars has indicated that it is investigating the issue, revenue departments from other jurisdictions are much more aggressively pursuing the issue.

Davis said he is not arguing that these individuals have all illegally sidestepped their tax liabilities as they presumably have taken amnesty or moved the money legally.

The question he is curious about however is whether the government will take serious action about the vast sums of money that are outside the country, which are not subject to an amnesty, he said.

In an effort to reduce US offshore tax evasion, the US recently introduced the Foreign Account Tax Compliance Act (Fatca), which requires South African financial institutions to report any account held by US citizens to American authorities.

“Now I’m interested in why we can’t have something similar,” Davis said.