CLEAN AUDIT - JSE MAGAZINE

CLEAN AUDIT

SA’s tax regime has been undergoing a spring-cleaning. What further changes can be expected, and how will these affect businesses?

CLEAN AUDIT

The Davis Tax Committee, headed by Judge Dennis Davis, was set up in 2013 to review parts of the tax system, some of which had became obsolete in the face of modern and globalised economies and firms.

The committee, which examines the role of SA’s tax system in promoting growth, job creation, sustainable development and fiscal self-reliance, while taking into account the long-term objectives of the NDP, has published two interim reports: one on taxes for SMEs and another on base erosion and profit shifting (BEPS).

The current focus on BEPS is part of a global push by several governments worldwide to keep tabs on corporate monetary flows from countries where their main operations are located to so-called ‘international tax havens’ elsewhere.

Tax administrations and member countries of the Organisation for Economic Co-operation and Development (OECD), of which SA is not a member but serves on its BEPS committee, have developed action plans to better address tax-revenue leakage. These losses result from tax avoidance and evasion, unfair pricing practises and secrecy around company ownership and cross-border revenue flows.

According to the BEPS report, in 2013, BEPS-related outflows from Africa were estimated at some $38 billion a year. However, it is difficult to reach solid conclusions about how much has occurred in SA and what the tax gap is.

It was noted that hot on the heels of the global financial crises, legal, accounting and management consulting services increased by 32.6%. Engineering and technical services surged by 39.5%.

‘Consumption increases during the aftermath of a global financial crises seem odd in the wake of sluggish economic activity, uncertainty and falling commodity prices. Cognisance of the bill for the 2010 [Fifa] World Cup must be considered but the quantum of these monetary flows might not be explained by a singular event,’ the BEPS committee stated in its interim report. Data also showed that since 2008, ‘legal, accounting and management consulting services increased disproportionately in relation to the other non-goods payments’.

The report further states that the magnitude of cross-border, non-goods transactions ‘poses a serious threat to the fiscus insofar as tax revenue is concerned and is an indication that illicit tax base migration through avoidance schemes and practices could be taking place’ in SA.

However, the committee cautioned against legislative changes that could threaten SA’s competitive advantage as an investor destination. It proposed a ‘balanced’ tax environment whereby the country refrains from proceeding too hastily with the OECD action plans while other nations adopt a wait-and-see approach and relax their laws to attract investment and change their policies to remain competitive.

The BEPS interim report contains action plans similar to those of the OECD. However, the committee points out that relative corporate revenues for developing countries such as SA are typically more than 25% of total revenues. Meanwhile the OECD and other developed countries rely on corporate revenues of between only 3% and 10% of total revenues.

Developing countries cannot fully rely on VAT as a source of revenue due to the regressive nature of this form of tax and concerns that a lack of corporate taxation could favour capital over labour. SA is therefore not bound to OECD determinations, according to the committee.

Specific issues were also addressed in the report. These included the digital economy as well as countering harmful tax practises, with an emphasis on transparency and substance. Another area of focus was how to neutralise the effects of hybrid mismatch, as the way entities are treated can differ from country to country. In one, it may be considered a company but a tax-transparent vehicle in another, for example. This often leads to profits not being taxed in either country.

Treaty abuse – whereby a company is inserted in a particular jurisdiction merely to take advantage of a favourable double-tax agreement – was examined, as well as the need for transfer pricing to be in line with value creation and intangibles. This refers to companies in the same group operating in different countries and transacting with each other to justify the prices charged and paid.

Clean  Pull Quote

‘The report suggests that employers pay no tax on the fringe benefit from bursaries or scholarships’

KEITH ENGEL, DEPUTY CHIEF EXECUTIVE, SAIT

The committee also indicated that it favoured a system whereby businesses, with a turnover in excess of R1 billion, must keep, review and update a master and local file and a country-by-country report each year. These businesses must also update database searches for comparables every three years.  

In return, SARS will be required to set up a highly skilled transfer pricing team comprising lawyers, accountants, business analysts and economists. The aim is to ensure a sound understanding of commercial operations.

When gauging businesses’ reaction to the mooted reforms, Deloitte found, in its OECD BEPS September survey, that 600 tax practitioners globally were concerned about possible double taxation where tax regimes were not aligned. Further concerns included the creation of more uncertainty in the international tax arena, the possibility of ever more audits and significant cost increases, as well as heavy administrative burdens.

‘Some jurisdictions are introducing unilateral tax changes that are not co-ordinated with the BEPS initiative – this increases uncertainty for taxpayers. Certain tax administrations are interpreting their tax policy as though tax law changes have occurred, especially in the transfer pricing area,’ reported the Deloitte survey.

‘Taxpayers are experiencing increasing transfer-pricing concerns regarding various cross-border transactions, which will increase the amount of transfer-pricing reporting, examinations, advance pricing arrangements (APAs) and competent authority requests.

‘In addition to an increased workload for taxpayers, there is concern about the increased workload for tax administrations. Changes will require increased tax-payer guidance, training, availability for advance rulings and fast and fair dispute-resolution mechanisms, etc. Will the tax administrations have the necessary budget to timely execute on this increased workload?’

Ernest Mazansky, director and head of tax practice at Werksmans Attorneys, however, says it’s likely to take several years before the recommendations can be put into effect, even if they are adopted without change. ‘Experience from previous tax commissions shows that only a relatively small proportion of recommendations are actually brought into effect,’ he says.

CleanInfographic

In July 2014, the Davis Committee singled out SMEs with the release of yet another interim report relating to taxation issues in this sector. It found that most problems faced by small businesses did not stem from taxation, and that the role that SARS could play in promoting SME growth was limited. The committee recommended that a separate entity be set up within the Receiver of Revenue to deal with SMEs, and that communication between the two parties be improved.

Deputy chief executive of the South African Institute of Tax Professionals (SAIT) Keith Engel welcomed ‘a number of exciting proposals’ by the committee. A key recommendation was lifting the company and individual tax threshold in terms of the turnover tax system – from R150 000 to R335 000 a year. Entities whose taxable turnover does not exceed R335 000 a year need only submit a declaration indicating the tax payers’ details and bank account numbers, as well as a statement of its turnover.

‘In perhaps the most remarkable proposal, the Davis Committee recommended that a training incentive of 150% be offered to encourage SMEs to offer further training for their employees and families. The report suggests that employers pay no tax on the fringe benefit from bursaries or scholarships that they offered to their employees or relatives studying towards a qualification of NQF Level 5 or higher,’ says Engel.

Another proposal SAIT had hoped to see materialise in the 2015 Budget Speech was a bad-debt allowance, which would make it easier for micro businesses to attract ‘angel investors’ and outside capital. According to Engel, it would entitle investors to a full write-off of failed micro-business investments – currently these investors have limited benefits in the form of capital gains tax relief for lost capital only. With regard to the employment tax incentive (ETI), the committee suggested that SARS prioritise cash refunds in cases where the ETI refund exceeds the PAYE liability. This would help small businesses with their cash flow.

Further tax relief for the sector could be made possible by replacing existing incentives to small business corporations (SBCs) with a proposed new refundable compliance rebate. It would reward SBCs that pay their taxes and subsidise part of their compliance costs.

Many SAIT members would like to see a more generous rebate. ‘It can cost a small business up to R53 356 on internal tax compliance and R9 982 to obtain external compliance assistance,’ says Engel. The committee wants SARS to speed up VAT refunds to help small businesses manage their cash flow.

Further reports relating to micro analyses, VAT, mining and estate duty are still due for release by the committee.

By Louise Brougham-Cook
Image: Mr.Xerty © www.nomastaprod.com