Coming soon: A tax revolt

It seems government is hellbent on pursuing the income South Africans earn in non- or low-income tax countries. And if it gets attacked by the press or individual tax payers for its plan, it can always say “it’s not our idea: it’s the idea of the much revered former Minister of Finance Pravin Gordhan”.

Brilliant!

Even Gordhan himself cannot attack this idea as he was the one who introduced it into his budget earlier this year, just before he got the boot by President Jacob Zuma on the night of March 31.

It also shows how desperate government has become in searching for any kind of additional revenue to plug the growing deficit on its tax collections already evident in the first two months of the current fiscal year.

Some reports have been published that, based on current trends, Sars could be short of anything between R50 and R70 billion as far as its budgeted numbers for this year are concerned.

Soon you will be forced to count the change in your motor vehicle ashtrays and add that to your taxable income, it seems.

Gordhan’s forecast for expected economic growth has, again, been proven to be way too optimistic, as it has for several years in a row now.

Growth for the current fiscal year was forecast at 1.3%, but this is unlikely to be achieved. Most local economists (Old Mutual, Sanlam) as well as the IMF have already reduced their growth rates to anything between 0.5% and 0.7%.

Other economists are not so sure and forecasts seem to be made with pencils nowadays, in case they need to erase their initial ones. Expect this trend to increase as there are so many variables as far as economic growth is concerned, including a potential downgrade of SA’s local currency rating towards the end of the year, which – if it does happen – will blow all economic forecasts out of the water.

Last week Treasury confirmed that it intends to go ahead with its plan to tax the thousands — if not tens of thousands of South Africans — who over the last 20 years or so have been forced to seek employment opportunities elsewhere.

How large this number is, is difficult to say, but South Africans are now working in places such as Dubai, Kingdom of Saudi Arabia, UAE and even Thailand in ever-increasing numbers.

Many, if not most, of these expats have been forced to find employment outside of their home country due to early retirement brought about by Affirmative Action, a slowing economy and the big demand for the skills and high work-ethic of these South Africans.

The tax arbitrage of working in these low-income countries resulted from the so-called 61/184 day application of the definition of tax residency. Work an aggregate of at least 184 days outside of SA, of which 61 days musts be continuous at least, and you only pay the tax applicable in your host country, which can range from 0% (Dubai) and 15% in say Mauritius.

Now Sars wants to tax these South Africans, as much as a 45% marginal rate, even though the taxpayer has spent, if at all, very little time in South Africa. I come across many such expats who work overseas for 11 months of the year and spend perhaps a months or so visiting family and friends for the rest.

They make enormous personal sacrifices to spend time away from their families and friends, in order to send back money to keep the home fires burning. And the cost of living in many of these mid-east kingdoms and emirates is substantially higher than in SA. Any move to tax these incomes at SA rates will wipe out the advantages of working in another country.

On chat shows and in the comment sections of websites where this issue was discussed, both in February and this week, this issue was a hot topic. Callers, either from Dubai themselves or family members here in SA, were livid with these plans. The consensus was they would do everything in their power to disguise their assets. In short: they will now start cheating and hide their income as best they can.

On the one chat show I listened to someone raised the issue of Common Reporting Standards, in terms of which participating countries in the Organisation for Economic Coordination and Development (OECD) will automatically have to exchange information of assets worldwide in the future.

While this is true and will take some years to be fully implemented, another caller pointed out that responsible financial institutions will only be obliged to report assets in excess of $250 000 and also does not include residential property, for the time being.

This creates a handy loophole for South Africans who intend to fully break the law by (a) not declaring their income and (b) not declaring their assets.

By making use of these existing loopholes, a family can still build up a substantial nest-egg away from the prying eyes of Sars and the CRS.

What is not clear at this stage is whether Sars can force foreign companies in these jurisdictions to report salaries payable to South African taxpayers to the local revenue authorities. It also creates, in my view, the incentive for these affected taxpayers to consider aggressive tax avoidance measures.

Do not underestimate what offshore tax havens will come up with in an effort to create all kinds if loopholes.

Tax morality in South Africa has, by and large and despite the obvious tax evasion revealed by the #Guptaleaks, remained quite acceptable by world standards.

In my little world taxpayers might grumble and moan but they generally pay what is due from them.

But tax morality is under pressure from a variety of sources. Personal taxes in particular, have been creeping up on a wide front. Name it: taxes are much higher than just a couple of years ago, whether it be capital gains taxes, dividend income taxes, taxes paid by trusts and other conduits of income/capital.

Next in line is inheritance taxes and many concessions existing today will be gone in a couple of years, further adding to the pressure on disposable income for high net worth taxpayers.

Even low-income earners are using all kinds of techniques to avoid being caught in the tax net. How often does your plumber/electrician/odd jobber give you two prices: one on invoice and VAT-able and the other cash, which comes with a discount.

Is this the sign of things to come?

*Magnus Heystek is investment strategist at Brenthurst Wealth. He can be reached at magnus@heystek.co.za for ideas and suggestions.

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