25 November 2011

At the cross-roads of tax and economics

Wall Street has been "occupied", Greece and Italy got "technocrat" governments overnight, Nouriel Roubini (he who foresaw the 2008 Global Financial Crisis) indicates "... the endgame for the euro zone has begun" and predicts its eventual "disintegration".

Locally the Minister of Finance in his Medium Term Budget Policy Speech (MTBPS) of 25 October 2011 lamented that turbulence originating elsewhere in the world was impacting South Africa (SA) and that "our tax revenue collections have not yet recovered fully from the effects of recession".

There is clearly a lot of turmoil at the cross-roads of tax and economics.

In his MTBPS, the Minister also announced that for the current year he expected tax revenue to be R729bn, ie R13bn below the February 2011 budget estimate. This was largely due to a downward revision in net VAT receipts owing to an underestimation of VAT refunds.

But it was pointed out that "... for the next three years, the aim is to moderate spending growth, combined with a recovery in tax revenue, so that national debt will be stabilised as a percentage of GDP." [Government debt is set to rise to approximately 40% of GDP by 2015, after which it is expected to stabilise and decline.]

MTBPS estimates for coming years are as follows:

  2011 2012  2013 2014
Real GDP growth % 3.1 3.4 4.1 4.3
CPI inflation % 5.0 5.4 5.6 5.4

The forecasts depend on the world economy lifting its head: "Over the next three years, growth is expected to increase gradually in tandem with the improved global outlook, rising above 4 per cent in the outer years of the forecast. This assumes an orderly resolution of the European debt crisis, the avoidance of a US recession and continued growth in emerging markets, particularly China."

What happens next in the euro zone will be pivotal. SA is the European Union's biggest trading partner in Africa. Ms Gill Marcus, Governor of the SA Reserve Bank (SARB), thus warned in mid-November that "although [the SARB's] assumption for European growth has been lowered, it does not contain the worst-case scenario of a melt-down in the euro zone..."

According to the MTBPS the following tax revenues are to be extracted from the SA economy:

  2010/11 2011/12 2012/13 2013/14
Tax revenue estimate R758bn R814bn R890bn  R994bn
Tax revenue as % GDP 27.6  27.3 27.0 27.3

The expectation is that "... as the business cycle turns in the outer years, the fiscal framework envisages improved revenue performance."

The Minister and Treasury clearly bargain on a fairly benign economic outlook going forward, both globally and locally. That, in turn, should enable the SA economy and taxpayers to deliver the tax revenues already penciled in. Bill Clinton's election slogan comes to mind: "It's the economy, stupid".

What if the economy comes up short? Don't be surprised to see significant policy interventions, far-reaching fiscal legislative amendments and heftier compliance measures from the side of the South African Revenue Service (SARS).

The Minister's foreshadowed exactly that when he tabled the Taxation Laws Amendment Bills, 2011, during November 2011.

The Minister put it bluntly: "One fundamental principle of taxation is that members of society should pay tax according to their economic means. Everyone must pay their fair share." Some issues were referred to by name. The Minister warned:

"... the tax leakage caused by section 45 and other sophisticated forms of financial engineering are no small matter for our citizens at large ... [w]e must remain vigilant and confront sophisticated tax evasion in South Africa";

"... these Bills also take aim at aggressive tax practices ... that seek to shift large amounts of revenues indirectly from the fiscus for the benefit of a few members of the corporate elite."

"Tax leakage" caused by "sophisticated financial engineering" is seen to equate to "sophisticated tax evasion". Therefore expect strong compliance actions from SARS in this space.

It is in this context that SA taxpayers should take cognisance of the recent signing of the "Convention on Mutual Administrative Assistance in Tax Matters".

SA signed the Convention on 3 November 2011. Other signatories include Argentina, Australia, Brazil, Canada, China, Germany, India, Indonesia, Japan, the Russian Federation, Saudi Arabia and Turkey.

The accompanying media statement pointed out that the Convention "... seeks to promote international co-operation between revenue administrations in the assessment and collection of taxes. It will also encourage administrative co-operation in combating tax avoidance and evasion."

Among signatory parties the Convention enables and promotes:

  • Information exchanges;
  • Simultaneous tax examinations (audits) between revenue administrations of different countries;
  • Recovery and conservancy measures (eg to prevent the dissipation of assets); and
  • Service of documents.

The signing of the Convention is seen as an important step by G20 leaders that will enable signatories to better address revenue losses in an exceptionally challenging environment.

Tax revenues are under pressure (and might come under further pressure). The Minister has tax leakage due to "aggressive tax practices" and "sophisticated financial engineering" in his sights. The Convention adds to SARS' already formidable arsenal.

Caution is advised when it comes to intricate blocks and arrows that conjure up tax advantages. Where such a structure transcends borders, revenue authorities might consider a joint audit to try and prise open the perceived Pandora's box.

Johan van der Walt

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