SA tax laws are better than most, but enforcement is lacking
While much has been written about the failures at the SA Revenue Service (Sars) over the last few years, the high quality of the country’s tax law is often overlooked. Many so-called developed countries have overly complex tax laws, while many developing countries rely on overly simple and old-fashioned tax systems that are open to exploitation. In SA our income tax legislation is comprehensive without being too complex or incapable of enforcement.
For example, much has been written about the tax evils of offshore trusts. However, in terms of SA tax law any offshore trust that is actually managed from SA will be taxed as an SA-resident taxpayer. In addition, any SA funder of an offshore trust, depending on how the trust is funded, will be potentially subject to donations tax as well as being taxed on the income or capital gains of the trust. Any distributions by the offshore trust to SA-resident beneficiaries may also be subject to SA tax.
In addition, we have transfer pricing rules that require all cross-border transactions between related parties to be at arm’s length. If this is not the case the taxable income of the relevant taxpayer will be recalculated as if the transaction had been entered into on arm’s-length terms and conditions. Our tax law also taxes amounts calculated with reference to the income of foreign companies that are directly or indirectly controlled from SA. In circumstances where there is noncompliance with these rules, various penalties are imposed.
So, when commentators refer to billions of rand being lost annually to base erosion and profit shifting, they are generally talking about taxpayers who operate outside the ambit of the law. However, SA tax law caters for this group. For example, anyone who deliberately fails to disclose material facts that should have been disclosed to Sars commits a criminal offence. Prescription rules prevent Sars from issuing a further assessment more than three years after the original assessment. However, these rules do not apply in circumstances where the taxpayer has, for example, not disclosed material facts, resulting in the full amount of tax not being imposed in terms of the original assessment. This means such taxpayers may be pursued by Sars for the relevant taxes at any time in the future.
In terms of our tax legislative process, unlike the UK where tax rules can be amended with no advance warning or consultation, SA follows a transparent process. This generally starts with the annual budget speech in February, when proposed tax amendments for the year are outlined. Then, around June draft legislation setting out the proposed amendments is published for public comment. After a detailed consultation process, the final legislation is passed towards the end of that year.
However, if some tax mischief is discovered during the year the tax authorities have the power to amend the law with immediate effect. We also have a very functional advance tax ruling unit that gives rulings on difficult areas of tax law as well as on most large, public transactions. This provides certainty to taxpayers in respect of proposed transactions.
Capacity is easier to fix than inadequate tax law, poor or no precedents, or tax laws that simply do not work. In the US President Donald Trump’s 2017 tax law changes have, according to a recent New York Times report, ended up ensuring that companies in effect have been let off the hook for tens, if not hundreds, of billions of dollars in taxes.
Of course, like the rest of the world, our tax legislation does not adequately deal with the digital economy and other aspects of our rapidly changing global interconnectedness. However, SA tax legislation is more than adequate when compared to many other jurisdictions. What is missing is the capacity to police and enforce this system to ensure tax laws are followed, to expedite tax disputes and to ensure tax cheats are subject to the relevant criminal sanctions.
The need for this capacity building is urgent and requires people with tax expertise across a range of specialised tax areas. However, once this capacity has been rebuilt our tax legislation provides many of the tools required to increase SA’s tax collections.
• Dachs is head of ENSafrica’s tax department. He writes in his personal capacity.