Picture: 123RF/SEREZNLY
Picture: 123RF/SEREZNLY

The government has been urged to focus on the mining sector and the digital economy to tackle illicit financial flows that are causing heavy revenue losses. .

Cape Town-based nongovernmental organisation the Alternative Information and Development Centre (AIDC) says it appears that developing countries are paying a particularly high price. 

Every year, Africa in general and SA in particular  lose massive amounts of capital critical to ensuring their economic development and improving  living conditions for their people.

The centre recently compiled a report on its comprehensive study on the current state of tax and wage evasion in SA. 

Illicit financial flows and profit-shifting are affecting countries across the world, the AIDC points out in its study, warning that the scale of these activities is increasing.

“Not only are illicit financial flows a problem, but they appear more and more to be a national emergency,” it reports.

“This is not only because they deprive our state of extremely precious financial resources, but also because the issue is further leading our economy on a dependency path in relation to foreign capital. This impacts both our national and local budgeting processes by depriving us of precious tax resources and is leading to an unprecedented socioeconomic crisis.”

The AIDC said the question of illicit financial flows cannot be disconnected from the issue of low wages and unemployment.

“Curbing these flows must therefore be a national priority … These two phenomena, better captured by the concept of wage evasion than tax evasion, concretely mean that South Africa economically has had to keep a low-wage regime to make its endless dependence on foreign capital sustainable.”

For practical purposes, it recommended that SA focus fist on two main sectors: mining and the digital economy.

“Mining first, because it has historically been a major source of IFF [illicit financial flows] from South Africa and still represents a very big component of our exports. There are two reasons for focusing on the digital economy: its rapid growth is likely to become a major source of IFF. Then, there is a window of opportunity internationally that is being opened by the European Union’s focus on the tax obligations of the tech giants,” the AIDC said.

Another major point highlighted in the report and also mentioned by the Davis tax committee is the need to make it possible for the South African Revenue Service, the Reserve Bank, the Financial Intelligence Centre and other regulatory bodies to do justice to their role of gatekeepers.

“Unless we equip our tax authorities with the resources they need to pursue aggressively tax avoidance and tax evasion schemes in all their existing forms, we will not be able to combat illicit financial flows efficiently. Hand in hand with our advocated transparency reforms, greater accountability by these institutions and oversight of them will be needed.”

The AIDC called for urgent implementation of a comprehensive package of tax-transparency measures to empower  tax authorities. These include disclosure of tax returns of every South African, starting with elected representatives and high-ranking public officers.

The Tax Justice Network said previously that “secrecy undermines South Africa’s own tax base”. The country’s elite, and SA and foreign multinational companies within its borders, exploit weaknesses in legislation and use other secrecy jurisdictions to reduce their tax obligations in a country with deep inequality.

“If South Africa is not a jurisdiction that facilitates tax evasion and provides a safe haven to foreign illicit financial flows, it is nevertheless suffering heavily from tax and wage evasion,” the AIDC said.

phakathib@businesslive.co.za