The failings of the South African Revenue Service (Sars) have again been laid bare following the release of the annual tax statistics, which show that, for the first time since the 2008 global financial crisis, tax revenue growth did not exceed GDP growth.

In most instances when GDP increases, tax revenue is expected to follow suit. The National Treasury usually assumes that tax revenue rises by 1.5% for every 1% in GDP growth.

According to the tax statistics released on Thursday by the National Treasury, in 2017-2018, tax revenue collected amounted to just more than R1.2-trillion, growing year-on-year by R72.4bn (6.3%), mainly supported by personal income tax, which grew by R37bn (8.7%). In nominal terms, which excludes adjustment for inflation, the economy grew 7%.

The statistics show that personal income tax at 38.1%, corporate income tax at 18.1%, and VAT at 24.5%, in aggregate, remain the largest sources of revenue and comprise about 80.7% of total tax revenue collections.

According to the Treasury, the tax-to-GDP ratio decreased marginally from 25.9% in 2016-2017 to 25.8% in 2017-2018.

Another report published on Thursday shows that SA loses about R7bn annually due to profit shifting by multinational corporations. This amounts to about 4% of total current corporate income tax receipts.

Tightening tax laws

The government has been hamstrung by lower tax revenues and rising debt in recent years. It has consequently moved to tighten tax laws and policies to tackle illicit financial flows. In 2017, SA joined more than 70 other countries in signing the base erosion and profit shifting (BEPS) convention. The treaty seeks, among other goals, to prevent multinationals using BEPS to avoid taxes.

According to the published research, which is a part of the Southern Africa — Towards Inclusive Economic Development (SA-TIED) programme, the key finding suggests that 98% of the tax loss is associated with profit shifting by the biggest 10% of multinational corporations.

Profit shifting is when multinational firms move profits from a higher tax-rate country to company affiliates (a parent company, sister company or subsidiary) in a lower tax-rate country to reduce their overall tax bill. The research concludes that half of all profits shifted out of SA are moved to Switzerland. The corporate income tax rate in Switzerland is 8.5%, while that of SA is 28%.

According to the study, some forms of profit shifting are legitimate, but the practice is increasingly recognised as a challenge for tax authorities and governments worldwide. It is a key challenge for developing countries because they rely relatively more on corporate tax revenues. In SA, just 19% of all tax receipts come from corporate income tax.

The SA-TIED programme’s official partners include the UN  University World Institute for Economic Development; the National Treasury; the International Food Policy Research Institute; Sars; the department of planning, monitoring and evaluation; and the department of trade and industry.

The study uses information from a completely anonymised Sars tax database located at the National Treasury. According to the researchers, the anonymisation of the data is a part of global best practice in data security and privacy.