If everyone paid their tax, SA would not be in such a dire fiscal situation and would be better equipped to tackle the coronavirus crisis and other pressing social needs.
Reducing the tax gap — the difference between what the SA Revenue Service (Sars) receives in taxes and what it should get — is one of the main objectives of Sars commissioner Edward Kieswetter as he tries to restore the institution to its glory after it was gutted under the leadership of his predecessor, Tom Moyane, former president Jacob Zuma’s ally.
The lifespan of the Davis tax committee has been extended so that it can examine the extent of the tax gap, which committee chair judge Dennis Davis believes is more than R50bn a year. Large amounts are being diverted offshore through base erosion and profit shifting, which involves diverting earnings made in SA, particularly by multinational companies, to lower-tax jurisdictions.
Sars conservatively estimates that it loses tax revenue of at least R100bn annually through a combination of criminal activities and illicit financial flows
Under Kieswetter, Sars has established an illicit economy unit. An inter-agency working group consisting of the Financial Intelligence Centre (FIC), the Reserve Bank, the Hawks, Sars, the Special Investigating Unit and the National Prosecuting Authority (NPA) has also been set up to deal with the problem of illicit financial flows.
Progress has been slow, not only because of the complexity of the cases and their large number, but also because of limited capacity. The NPA is only now beginning to find its feet and is faced with a mountain of cases of corruption arising from state capture, let alone those related to illicit financial flows.
The inter-agency working group told the finance committee recently that nine cases amounting to more than R6.9bn were being investigated and that one case involving R2.7bn had been concluded. But this is just the tip of the iceberg.
The cases under investigation include a Ponzi scheme, exchange-control contraventions, illicit transfer of the proceeds from the transnational movement of rhino horn, cash seizures at ports of entry, and organised crime syndicates transferring money to China.
While important, these cases do not address the main forms of illicit financial flows which take place through base erosion and profit shifting, over and under-invoicing, and the siphoning of wealth abroad by rich individuals. Most of these forms of illicit financial flows fall under the jurisdiction of Sars, whose commissioner has acknowledged that it is merely “scratching the surface” and needs to beef up its investigative and audit capacity.
Sars conservatively estimates that it loses tax revenue of at least R100bn annually through a combination of criminal activities and illicit financial flows. Kieswetter told the finance committee that a preliminary review for 2017 showed that about R93bn left SA in service charges, such as commissions paid by SA-based subsidiaries to offshore companies, management fees and royalties.
Included in this figure was R31bn in interest payments by subsidiaries to parent companies for loans. This form of transfer payment is under the Treasury’s spotlight and a policy review is taking place, looking into situations where debt is raised in an offshore jurisdiction in the name of a local company but where there is no true commercial reason for raising the debt. The real purpose is to transfer money abroad.
Another form of tax evasion and illicit financial flows which Sars is concerned about is trade mis-invoicing, which occurs when importers and exporters deliberately falsify the stated prices on invoices.
Washington-based think-tank Global Financial Integrity has calculated that there was an average annual gap of $20bn in the value of trade between SA and its global trading partners in the period from 2008 to 2017. SA’s $20bn trade gap represented an average of 19.4% of the country’s total trade over the period.
The government’s inter-agency approach in tackling this type of fraud is a step in the right direction, but it is of such a magnitude that it will require a dedicated cadre of highly skilled professionals. It will therefore probably be achieved in tandem with the reinvigoration of the tax authority, as well as through international collaboration.