An issue that taxes us all

Hot on the heels of last year’s Panama Papers come the new Paradise Papers, a data leak of 13.4-million documents mainly from a leading offshore law firm as well as from the company registers of 19 tax havens.

The queen of England makes an appearance, with investments worth about £10m in Channel Island-based funds. So do rock stars and multinational giants such as Apple that have used tax havens and efficient structures to minimise their tax liabilities in their home countries. This time, SA is up there with the names of more than 500 individuals or South African-registered companies emerging in the papers, which provide details of tax structures in jurisdictions such as Mauritius and the Channel Islands.

South African names include high-profile individuals along with pharmaceutical giant Aspen, which has set up shop successfully in Mauritius, as did Spar, which chose to house its Swiss business there.

No doubt some of the tax structures are illegal, and their beneficiaries have housed them in tax havens in part because of the secrecy they offer. Crucially, however, many of these schemes break no laws and are not even especially secret — they simply take advantage of the different tax dispensations that different countries offer to ensure they earn their profits where they will pay the least tax, maximising the returns to their shareholders (or themselves , if they are individuals). In some of the South African cases too, there are other reasons for the choice of Mauritius — with Spar, for example, citing the volatility of the rand as reason to avoid housing its offshore businesses at home.

Revenue authorities everywhere will and should be taking a careful look at the names in the Paradise Papers to see whether they are evading tax. Developing countries that have experienced hundreds of billions of dollars of illicit outflows will surely be taking a particularly keen interest, given the way in which corrupt leaders and venal multinationals have used tax structures and tax havens to strip many poor countries of resources. For SA, where tens of billions of dollars that have not been declared to the tax or foreign exchange authorities are still believed to be sitting outside the country, leaks such as Paradise could be especially pertinent.

Globally, however, the Paradise Papers will serve to highlight crucial and contested questions about the fine line between tax avoidance (which is legal) and tax evasion (which is not) – and about what policy makers and tax authorities should do about it.

Some would argue that shifting your profit to tax havens to avoid paying tax at home is immoral, even when it is not illegal. South African companies and individuals who live and work here should be paying their taxes here. That enables the cash to be used to pay for the public goods that the country needs — and from which those companies and individuals benefit.

Against this, it could be argued that companies that use legal tax-efficient schemes to maximise profits for their shareholders are simply doing what they should be doing. And if Mauritius chooses to have a low-tax regime in order to attract more foreign investment — good for them.

De Vere founder Nigel Green has criticised the sensationalism around the Paradise Papers for being misinformed, arguing that much offshore finance is legitimate and beneficial — and the furore may divert attention from the issue of tax evasion.

The clear lesson from Paradise for taxpayers, however, is that nothing is secret now, and that they should come clean to the authorities and declare if they haven’t already.

And the clear lesson for policy makers, especially SA’s, is that we need astute, fair and competent tax authorities to tackle the complexities of global tax shopping effectively and ensure the public purse receives what is due to it. Finance Minister Malusi Gigaba’s call this week for an urgent inquiry into tax administration suggests even he thinks that our revenue service may not have what it takes.

THE PARADISE PAPERS HIGHLIGHT QUESTIONS ON THE FINE LINE BETWEEN TAX AVOIDANCE AND TAX EVASION