‘SA is bleeding billions’

South African has lost R250 billion in the form of service payments over a three-year period, highlighting the significant risk base erosion and profit shifting (BEPS) is posing to the country’s tax base, a South African Revenue Service (Sars) official has said.

Almost R80 billion of this were management fees.

Speaking at a panel discussion hosted by Deloitte Africa, Sunita Manik, group executive at the Large Business Centre at Sars, said the erosion of the tax base creates a false perception that there is very little business activity in South Africa. The reality however is that a lot of value is being created – it might just not be visible.

According to the Organisation for Economic Co-operation and Development (OECD), which published a comprehensive BEPS action package report in October, BEPS “refers to tax planning strategies that exploit gaps and mismatches in tax rules to make profits ‘disappear’ for tax purposes or to shift profits to locations where there is little or no real activity but the taxes are low, resulting in little or no overall corporate tax being paid”.

In an environment where there is constant pressure on government to improve service delivery and to build infrastructure, the erosion of the tax base is a significant concern, especially since economic growth has been under pressure and government is trying to balance its books while also keeping ratings agencies at bay.

Manik said the estimates of national expenditure in the Medium-Term Budget Policy Statement (MTBPS) show that in most government departments salaries represent the biggest chunk of the money spent.

“In many of the departments less than R30 billion is invested in infrastructure. At some point the rubber is going to hit the road and we are going to start to feel it – if not already.

“The reality is we are bleeding billions.”

Even if Sars can bring in 1% or 2% or 5% of this amount, it can make a significant contribution to the country’s coffers and enable a lot of work to be done from a government point of view, she said.

But more importantly, it is also vital to level the playing field for local business.

Manik said multinationals have had great opportunities to be competitive and to lower their margins by utilising South Africa (which is considered a high tax jurisdiction) and parking money offshore, while also competing with local business.

Local businesses do not have access to these opportunities and over time it distorts the economic environment.

“More importantly if you are a taxpayer and you are watching how people are paying taxes and who is paying and who is not paying, it becomes a problem for you because it questions the overall integrity and fairness of the system if you see people around you that are not paying their fair share.”

But the BEPS issue is not just about tax planning and legislative mandates. It is also about understanding the future of the country, nation building and investment.

“As much as we want to collect taxes, we don’t want to raise the burden to such an extent that it actually crowds out and provides a disincentive for people wanting to work and do business. At the back of our minds is constantly the issue of: Are we also encouraging foreign direct investment? And are we helping business to do business? Because let’s be honest, business is what drives the economy,” Manik said.

One of the global challenges around BEPS has been the availability of reliable data. Most countries do not keep data and where they do, it is often not stored in a form that allows for meaningful comparisons or aggregation.

Studies by the OECD, indicate that the distortion on corporate income tax is between 4% and 10% of corporate income tax revenues, which globally translates to almost a $100 billion to $240 billion annually.

Manik said for a developing country, which has a greater reliance on corporate income tax, this is significant and needs to be countered.

Against this background it is important to handle the BEPS issue in a responsible manner. Decisions can’t be driven by perception – it has to be driven by facts.

She said there is an expectation that Sars will have to do a lot more in this regard. There have already been calls to increase resources dedicated to BEPS – including expanding its transfer pricing team.

Manik said it is imperative for Sars to improve the amount of information and relevant tax and revenue statistics about different taxpayer segments and sectors and how they are paying taxes. This includes what type of incentives taxpayers are receiving and whether it is generating the right kind of behaviour.

In this regard, Sars has been working with the South African Reserve Bank (Sarb) to explore the context in which certain trade is taking place. Where multinationals have made applications for foreign direct investment, Sars is considering the intent of the transaction and whether it has materialised.

It has also been engaging with the Department of Trade and Industry as well as the standing committees in parliament (for example mining) to see how the situation can be improved.

Manik said it is important to ensure real abuse is tackled.

“The aim is not to use blunt instruments and to tackle everyone and disrupt your business and make it tough. The aim is to say well let’s deal with the real cases of abuse and let’s deal with it on a principle point of view and if necessary let’s test the legislation.”

Nazrien Kader, tax leader at Deloitte Africa, said there is a need for greater transparency to counter the perception that large business is “getting away with it”.

Kader said navigating the new global tax environment is becoming riskier and more challenging for multi-national enterprises that do not plan properly for all eventualities.

According to Deloitte’s recent Global Multi-National Survey, 52% of organisations cite BEPS and OECD regulations as their biggest area of concern.

During his MTBPS Finance Minister Nhlanhla Nene warned that tax evaders and corporates who participate in aggressive tax planning strategies would soon have nowhere to hide.

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