Noth­ing is cer­tain but death and taxes. At least that is how the say­ing goes. And who bet­ter to tell us what tax in­creases are in store for us than the chair­per­son of the South African Tax Com­mis­sion, Judge Dennis Davis?

Finweek English Edition - - FRONT PAGE - BY JININE BOTHA

The South African tax sys­tem has changed sig­nif­i­cantly since the rec­om­men­da­tions of the Katz Com­mis­sion in 1995, shortly af­ter the in­tro­duc­tion of VAT, which, at the time, sig­nalled a fun­da­men­tal shift in the coun­try’s tax­a­tion land­scape.

It was as a re­sult of this that Pravin Gord­han, for­mer fi­nance min­is­ter, felt it was time for a re­view. In 2013, he an­nounced the mem­bers of the Davis Tax Com­mit­tee (DTC) that would as­sess our tax pol­icy frame­work and its role in sup­port­ing the ob­jec­tives of in­clu­sive growth, em­ploy­ment, de­vel­op­ment and fis­cal sus­tain­abil­ity.

Judge Dennis Davis, who st il l per­forms his du­ties as a High Court judge while teach­ing tax law at the Univer­sity of Cape Town, was ap­pointed as the DTC chair­per­son.

If South Africa did not at least have a sta­ble tax sys­tem, the coun­try would not be in a po­si­tion to con­duct busi­ness as it cur­rently does. “The ques­tion now is how to sus­tain this sta­ble sys­tem and grow the tax base,” Davis says.

And this is where the DTC comes in. The com­mit­tee, usu­ally in the voice of Davis at par­lia­ment, has voiced the pros and cons of rais­ing, cre­at­ing or il­lu­mi­nat­ing cer­tain taxes. Davis has been es­pe­cially vo­cal on how cor­rup­tion in the public and pri­vate sphere is nar­row­ing the rev­enue that the South African Rev­enue Ser­vice (Sars) could col­lect.

I f Sars fo­cused on r ecov­er­ing money from trans­fer pric­ing abuses‚ says Davis, fi­nance min­is­ter Nh­lanhla Nene prob­a­bly wouldn’t have had to raise per­sonal in­come taxes by 1% in his bud­get speech.

Trans­fer pric­ing refers to trans­ac­tions for goods or ser­vices be­tween re­lated en­ti­ties within multi­na­tional com­pa­nies. Trans­fers be­come prob­lem­atic when they are ma­nip­u­lated to ben­e­fit the af­fected com­pany, says Davis. So-called “trans­fer mis­pric­ing” re­sults in more le­nient tax regimes for such coun­tries, but erodes the SA tax base.

The cost to the econ­omy of trans­fer mis­pric­ing has been cited as any­thing from R30bn to R200bn.

“We are not sure of the cor­rect fig­ure,” says Davis. “But when we were in­ves­ti­gat­ing how to f ind the R17bn for this year’s bud­get‚ we said if you can find R5bn or R6bn by virtue of trans­fer pric­ing abuses as an ex­am­ple‚ then you prob­a­bly wouldn’t have had to in­crease per­sonal in­come tax by 1%.

“The l aw i s good but it i s not im­ple­mented ef­fec­tively,” he adds.

In this re­gard the DTC rec­om­mended to the Trea­sury that the spe­cial unit in Sars ded­i­cated to base ero­sion and profit shift­ing be strength­ened. The unit con­sists of about 20 mem­bers, in­clud­ing cler­i­cal staff, whereas the UK’s unit has more than 200 peo­ple. “It is ridicu­lous that we have so few peo­ple,” he says.


In July, two re­ports were pub­lished for public com­ment; one on the is­sue of rais­ing VAT and the other on es­tate duty.

In the in­terim re­port on VAT, the DTC con­firms that SA has an ef­fi­cient VAT sys­tem that com­pares well with in­ter­na­tional bench­marks.

The re­port notes that in­creas­ing the VAT rate would ul­ti­mately re­sult in short-term inf la­tion. It also states that the im­pact on the econ­omy would be far less se­vere than that of a rise in per­sonal in­come tax or cor­po­rate in­come tax, and would re­sult in less dis­tor­tion than an in­crease in these taxes.

PwC wel­comed com­ments made in this re­port. “Stud­ies car­ried out by the




OECD in­di­cate that broad­en­ing the VAT base is the best way of in­creas­ing VAT rev­enues as part of a tax shift­ing ex­er­cise as it im­proves ef­fi­ciency and re­duces ad­min­is­tra­tion and com­pli­ance costs,” says Charles de Wet, head of in­di­rect tax at PwC Africa.


An ideal tax sys­tem does not im­pede the econ­omy, while si­mul­ta­ne­ously avoid­ing ex­tra pres­sure on the lower and mid­dle classes. “But a utopian tax sys­tem can’t work in South Africa for a va­ri­ety of rea­sons,” says Davis.

“I know this is­sue is al­ways talked about, but South Africa in­her­ited a skewed dis­tri­bu­tion of wealth. We are top-heavy, which makes it dif­fi­cult to raise huge amounts of per­sonal tax, be­cause our tax base is so small.”

SA has 6.6m in­come taxpayers and 16.4m peo­ple on so­cial wel­fare.

“But you can­not test the ideal by look­ing solely at the tax sys­tem, one also needs to con­sider the re­dis­tri­bu­tion side.”

Com­pared with other coun­tries, SA is do­ing well on the tax and trans­fer side. But there is a limit to the amount of tax and trans­fer that can be brought into an ideal eco­nomic mix, he says.

“What we need is ma­jor growth. We will never suc­ceed at the cur­rent 2% growth rate. It needs to be 5% up­wards so that we can em­ploy more peo­ple, re­verse apartheid ten­den­cies and lift the lower classes. Tax on its own can’t do that.”

Ac­cord­ing to him, if Eskom is taken out of the mix, SA could have grown an ex­tra 1%.

“The gov­ern­ment is un­der im­mense pres­sure to close the deficit gap. If we keep run­ning the deficits that we are, our econ­omy will not grow. And what’s go­ing to hap­pen? We will find our­selves run­ning greater deficits, which will drag down our sta­ble tax and trans­fer sys­tem. That will be dis­as­trous,” Davis says.

“How­ever, the longer Eskom stays in a chaotic state, the less the econ­omy will grow, which will inf lu­ence the amount of tax that can be col­lected.”

There is a need to keep the tax sys­tem sta­ble, “some­thing Sars and Trea­sury have done splen­didly,” Davis says. “But it is not just their job to keep rev­enues grow­ing. If we do not get a sta­ble energy sys­tem soon, we can for­get about higher eco­nomic growth and col­lect­ing more taxes.”

While the DTC pro­vides guid­ance on the pros and cons of re­form­ing cer­tain classes of tax, de­ter­min­ing what SA’s bud­get needs re­main up to the min­is­ter of fi­nance and Trea­sury. Go­ing for­ward, Davis does not see dra­matic in­creases, but “we will need to see how the deficit has been brought down by the time the fi­nance min­is­ter de­liv­ers his medium term bud­get later this year. How­ever, if the Na­tional Health In­sur­ance scheme kicks in, then we will need to talk about sig­nif­i­cant i ncreases i n ta x. Some­thing t hat’s un­af­ford­able now.”

Nh­lanhla Nene

Min­is­ter of fi­nance

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