In a recent edition of the journal Foreign Affairs, Joseph Stiglitz, Todd Tucker and Gabriel Zucman observe:

‘The state requires something simple to perform its multiple roles: revenue. It takes money to build roads and ports , to provide health care for the sick , to finance the basic research that is the wellspring of all progress and to staff bureaucracies that keep societies and economies in motion. No successful market can survive without the underpinnings of a strong functioning state .’ 

It is common cause that South Africa’s collection of revenue has been under severe pressure for some years. The causes are manifold: tepid growth, declining tax morality (at least in part due to the consequences of state capture and widespread corruption), a significant degradation of the capacity of SARS to collect tax (as reported by the Nugent Commission), and more. 

The upshot is that a combination of the looting of state coffers and a declining revenue collection has meant that the key role of the State in performing its key roles, as outlined by Stiglitz et al, has been severely compromised. 

In his 2019 Budget speech, the Minister of Finance Tito Mboweni mandated the Davis Tax Committee to examine the tax gap – that is, the gap between what should be and what is actually collected. As SARS is in rapid process of turnaround, it is now an opportune time to examine this problem. Obviously, a significant growth would escalate the recovery of tax collection, as would have an improved tax morality which would, in turn, be assisted by the significant diminution of corruption. However, there is, even at this early stage of the inquiry, justification for the conclusion that part of the tax gap is caused by significant practices of tax evasion and fraud.

Let’s start with lost customs duty. According to a report issued by Global Financial Integrity in November 2018, South Africa lost, in respect of exports and imports, approximately $3.4-billion in revenue as a result of mis-invoicing just in 2016. A recent tax case is illustrative: suits were imported from China on the basis of an invoice which reflected the cost of a suit at less than R15 a suit. Even at an exponential mark up, readers must be wondering where can they themselves purchase a decent suit for less than R100! While there is no evidence in the instant case of further activity, in many cases off-shore shelf companies are then employed to ensure that the bulk of the profit is diverted from the South African tax base.

Then there is significant VAT fraud: again, shelf companies are employed to ensure that input tax credits are syphoned off to the advantage of undisclosed parties. In similar fashion NGOs with VAT registrations are employed to ensure that fictitious VAT input tax credits are obtained for the benefit of private expenditure.

As the Panama papers revealed, there is a significant group of ‘taxpayers’ who over many years have illegally secreted billions out of the country.  Intricate structures were employed to ensure that there is distance between the real owner and the asset, be it property, shares or bonds (to take but three examples).

Doubtless there are people reading this column who smugly think that there is no reason to disclose tax fully, as either SARS does not have the competence to track them down or they rely on a combination of trusts and companies in tax havens to disguise their identity. For example, absent the new disclosure regime, it might have been possible that companies in tax havens, and trusts where the ostensible beneficiaries may be children who have emigrated but where the de facto control resides with the South African resident, cannot be detected. That is no longer the case: so either disclose or run the risk of a criminal record.

While falling outside the strict ambit of tax evasion, the widespread problem of Base Erosion and Profit Shifting (BEPS) by companies, particularly multinational corporations, is a clear contributor to the tax gap. The diverting of profits from South Africa to lower tax jurisdictions doubtless gathered pace as SARS’ capacity to respond, for example, to transfer pricing, was degraded. One study issued in 2018 estimated a loss of some R7-billion revenue a year, as a result of a series of well known BEPS practices. 

Many of these activities, which have so devastating effect on the  tax revenue, which is much-needed to address the multiple challenges of addressing the legacy of Apartheid, could not take place without high net-worth individuals and companies obtaining expert advice. It is also, I suspect, common cause that some within the auditing, accounting, banking and legal professions did not exactly cover themselves in glory, particularly during the decade of the frenzied state capture. Of course, it is necessary to emphasize that this criticism does not apply to all within these sectors, but it is beyond argument, that an important minority contributed (and in some cases still do) to the pathology. 

As the examination of the tax gap continues, it is clear that SARS is bereft of its own armoury no longer. The exchange of information agreements, which now spans almost 100 countries, provides powerful sources of information to track down the real controllers of the off-shore companies and trusts. Significant work is being done to curb BEPS. The detection of VAT and customs fraud has become a priority and those who have stolen from the country would be well advised to watch this space.

Those tax and financial advisors who are complicit in perpetuating these practices should reconsider their advice or facilitation of the degradation of the country’s tax base.

Over the past few years, I have personally received many complaints regarding SARS, some of which were justified. But there is a new sheriff in the SARS town, Edward Kieswetter, and in the foreseeable future the institution will be restored to its former glory. Still, it needs the fulsome cooperation from the professions who advise on tax strategies.

In the final analysis, the kind of widespread abuse documented in this column is surely equivalent to the corruption that flowed from state capture. We desperately need to fight both forms. If we could as a country collect R50-billion of additional revenue and prevent an equivalent amount of state coffers’ looting, we would even with low growth at present be able to change the lives of millions of our fellow South Africans and help, in small but significant part, their chance of having a better life. DM

Dennis Davis is the chair of the Davis Tax Committee.