Tax Morality and how it is affecting the way we do business
The global economic crisis has led to many of the world’s governments suffering diminished income from taxes. The public in many of these countries face so-called 'austerity measures', in terms of which government spending must be curbed to fit more appropriately into budgets and to enable the repayment of debt. This has resulted in a new attitude to taxation. Governments and some citizens now consider that some taxpayers are not contributing their fair share to the public purse. This perception has been fuelled by the media which, in some instances, has pointed fingers at businesses that operate in those countries, but allegedly do not pay sufficient taxes. A case in point is the Google/Starbucks/Amazon controversy in the UK. South Africa is similarly affected by these changing attitudes, and businesses need to be aware of the impact this can have on them and how they need to react. We have even seen recent case law which appears to find in the favour of the South African Revenue Service (SARS) based more on what the answer should be from a moral perspective (ie the taxpayer saved “too much tax”) than on what the law actually says. In addition, the advent of e-filing and the fact that SARS is constantly restructuring to become more efficient, together with the increased 'muscle' that SARS is given by the Tax Administration Act ('TAA', which was promulgated in October last year (2012)), has enabled this collection agency to enforce 'compliance' extremely aggressively. This has been done with the blessing of many citizens on the grounds of tax 'morality'. Business thus needs to be aware of how to deal with these changing times. Simultaneously, though, Government also needs to be aware of the extent to which such tactics can act as a disincentive to growth (particularly in the case of small businesses), job creation and, ultimately, the capacity for businesses to generate a bigger tax contribution. So, what must businesses do? They need to be 'squeaky clean', so that SARS audits (which are inevitable and frequent, particularly where SARS considers the risk factor that the taxpayer may have underpaid its fair share of tax to be high) will find a business that is compliant both in its tax return submissions and the tax positions it has taken. Probably, the best way to determine how tax compliant a business is, is to procure a 'friendly' audit by the tax department of an independent auditor. In this way the business can find out where its risks lie and establish how to manage them. If problems are found, the TAA contains voluntary disclosure provisions that may eliminate penalties if businesses “come clean”. Companies doing business across borders need to be particularly vigilant with their supporting paperwork. So, for example, if crossborder transactions are being entered into with connected parties, the preparation of a transfer pricing policy document (i.e. which compares the prices of those transactions with those of third parties) is essential to help defend the prices charged, not only from an income tax point of view, but also from exchange control and customs/VAT perspectives. The incidence of transfer pricing audits has increased significantly throughout the world. In Africa, the tax authorities are being trained, collectively, through the Africa Tax Administration Forum ("ATAF") on how to perform transfer pricing audits effectively. In some instances, these tax authorities even audit in collaboration with each other. The preparation of transfer pricing policy documents requires knowledge of the methodologies and, often, access to approved databases. Controlled foreign company legislation, double tax treaties and effective management considerations also need to be borne in mind by businesses that are multi-national groups. A discussion of these, in detail, is beyond the scope of this article. Aside from transfer pricing policy documents, another risk-mitigating tactic is to obtain a tax opinion from a registered tax practitioner on tax positions taken, especially prior to entering into a business transaction that is not part of the business’s every day activities and, if the tax opinion is favourable, to ensure that the proper disclosure is made in the tax return. This will also mitigate any penalties, if SARS is ultimately successful in treating the transaction in a manner that results in more tax. All of these risk-mitigating options take time and cost money. This creates a trade-off that government needs to consider. Studies have shown (and this was recently acknowledged in an ATAF newsletter), that there is a point at which the perception of value received for tax paid diminishes and, therefore, the incentive for citizens to earn more (be it an individual or a business) reduces. The economic repercussions of such a position in terms of a country's growth and employment are clear. We can only hope South Africa is keeping an eye on this disturbing trend in order to ensure that, long-term, tax collection is not detrimented. In summary, although tax morality may be a seemingly honourable road to follow, tax authorities need to be careful to ensure that it does not lead to such uncertainty and disincentive to grow, that the overall tax take, in fact, ultimately reduces.