‘Dirty word’ that could stimulate growth
Consider this: the panacea for South Africa’s growth woes is establishing the country as a tax haven and so bolstering our status as the gateway to Africa.
The idea rolled off the tongue of an attorney this week, who admitted that the notion of a tax haven was regarded as “a dirty word in some circles”. But he argued there were benefits to the economy that the government had perhaps not fully considered.
International tax havens have been criticised for the opportunity they give to wealthy individuals and companies to pay less tax than in their home countries. Tax havens can also offer secrecy from tax authorities, one reason they have such a bad reputation. Another reason is that criminal enterprises can use these havens to launder money.
The Paradise Papers leaks late last year — the largest since the Panama Papers exposé in 2016 — added to the disdain for the practice. About 13.4 million documents from 19 jurisdictions including Mauritius, the Isle of Man and the British Virgin Islands found their way into the open. The Panama Papers leaks revealed about 11.5 million files on people and corporations that had stashed riches offshore.
Last year, Corruption Watch CEO David Lewis told sister publication Business Day that moving money offshore was not illegal, but the abuse of the privilege was a problem when transfer pricing and evading tax was the motive.
Tax havens are a sticky issue. A study published by the Tax Justice Network last year showed that countries lost $500-billion (about R6.348-trillion) a year due to profit-shifting by multinationals. The Netherlands, for example, provides tax discounts of up to 80% for multinational firms.
South Africa’s corporate tax rate of 28% is said to be high in comparison to its trading partners. The global average is 24.29%.
In 2011, South Africa introduced the headquarter company regime on tax and exchange control to attract foreign firms. It planned to make the tax system friendly to companies, which could then use South Africa as a regional hub for investment elsewhere in Africa.
But Kevin Cron, a director at Norton Rose Fulbright, said the scheme fell flat as tax and exchange control requirements were at odds with each other. An overhaul that was mooted to streamline the programme did not materialise, he said.
Such a regime, along with South Africa’s sophisticated banking system, transportation links and cheap labour (even with the new national minimum wage) when wages elsewhere are rising, may have made the country more attractive to foreign companies.
A benefit of becoming tax competitive is potentially higher employment and a need for services and offices. And companies might base manufacturing and other operations here instead of looking to import, Cron said.
While a tax haven may be a “dirty word” it could help the radical economic transformation South Africa needs.
A benefit of becoming tax competitive is potentially higher employment