A mansion in Clifton, Cape Town. Picture: SUPPLIED
A mansion in Clifton, Cape Town. Picture: SUPPLIED

A viable tax system must  meet the requirement of legitimacy. In a society riven by the profound inequalities of SA, there can be no legitimacy when a cohort of wealthy people continue to evade their obligations to pay a fair share of tax.

Note the use of the word “evasion” as opposed to “avoidance”. If the wealthy can afford skilled tax advice to structure their affairs so as to reduce their liability for tax within the parameters of the law, that may prompt a debate about the morality of such conduct, but it is legal.

By contrast, impermissibly illegal conduct such as not declaring income in a tax return; employing trusts and companies, whether located in SA or in tax havens or low tax jurisdictions including Mauritius, the Channel Islands and the British Virgin Islands, in circumstances where the control of the assets is clearly in an SA taxpayer’s hands; or over-invoicing and a multitude of other techniques to defraud customs duty; are legally and morally unconscionable. Of course, this distinction raises another question for further investigation — the role of tax advisers in all of these practices.

There is a further part to the legitimacy of a tax system, which concerns the use to which public money is put. That corruption is a notorious fact in this country is reflective of a rent-seeking culture that also finds its implementation in tax evasion. Widespread  corruption has eroded tax morality and doubtless contributed to even greater levels of evasion. Within the short scope of a single column it is not possible to deal with both issues; hence corruption, as important as it is, must await another occasion.

A truly pernicious form of tax evasion is that practised by a  segment of the wealthy. If the official figures of taxpayers are examined, it appears from the 2020 Budget Review that there were only 125,000 taxpayers who returned a taxable annual income of over R1.5m, of whom about 40,000 earned more than R2m and 6,000 more than R5m. A simple examination of the houses in Camps Bay, Clifton and Bishopscourt in Cape Town, or Sandton and Bryanston in Gauteng, or the garages full of Ferraris, Maseratis, Lamborghinis and Porsches that are driven on our roads, is a luminous illustration of the underreporting of taxable income that is taking place in SA on a large scale. 

Moving to the swathe of assets, much of which are controlled by structures that can be exposed as SA-controlled by way of sophisticated forensic accounting, there are significant amounts of income tax and capital gains tax that are due to the fiscus. There are now forms of international co-operation that can assist any revenue service.

As the report of the Financial Transparency and Integrity Commission noted in September 2020: “States commonly use three methods of tax information exchange: exchange of information on request, which takes place when a tax authority makes a specific request for information to another tax authority in a foreign country; automatic exchange of information, carried out among the tax authorities of two or more countries on an ongoing basis in accordance with predetermined categories; and spontaneous exchange of information, which occurs when a tax authority considers tax information in its jurisdiction to be of interest to another tax authority in a foreign country and sends it without prior solicitation.”

It is thus possible for revenue services to deal with this ongoing problem by way of increased capacitation. Indeed, it is clear that under the leadership of SA Revenue Service (Sars) commissioner Edward Kieswetter Sars has turned a decisive corner in this journey to close the tax gap. The task is both vital and urgent.

Expressed in terms ordinary South Africans will doubtless understand, assume a successful Sars campaign ensures a cohort of recalcitrant taxpayers are brought to book and R20bn is collected (not an unrealistic figure) — that would probably allow for the Covid-19 vaccine to be paid for without any strain on the fiscus.

By engaging in evasion this group of taxpayers is presumably happy to abuse their obligations as citizens at the expense of millions who live on the margins. To return to the theme of corruption: as the Al Capone saga illustrates, an aggressive campaign to deal with rent capturers will ensure a level of accountability that no other legal option is likely to produce.

• Davis, a former judge president of the Competition Appeal Court, chairs the Davis tax committee. 

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