Crafty financial officers of multinational companies were using “increasingly sophisticated” financial schemes, including transfer pricing, to evade domestic tax liabilities, Sars commissioner Oupa Magashula has warned MPs.
Individuals are also to blame, however, with some running a host of companies and accumulating assets while paying minimal tax through double accounting and fictitiously changing the nature of income to liabilities.
Briefing the finance standing committee this week, Magashula said his service had detected an increase in the use of “cross-border structuring” and transfer pricing manipulations to unfairly and illegally reduce the tax liabilities of big companies. Multinational companies had the expertise to carry out this task.
Emerging economies, especially Africa, were at a higher risk of this phenomenon.
Buanews, the state news agency, reported that these economies often lacked the knowledge and skill to detect and prosecute such crimes, which implied that Magashula was issuing a warning to multinationals operating in the Southern African Development Community region that they should be aware that South Africa had the personnel to crack down on such tax crimes.
Pressed on why big businesses were nevertheless pursing tax evasion, he argued that in the current economic climate, businesses were under greater than usual pressure to maintain profit margins. Thus, they were effectively robbing Peter, the taxman, to pay Paul, the company investor.
Questioned by DA finance spokesman Tim Harris about the potential for people to avoid tax because there was an increasing perception that there was a misuse of the tax revenue by the government and its agencies, Sars did acknowledge that there was a wariness among some smaller businesses to hold back on required VAT payments.
Harris noted that about R30 billion a year was reported as wasteful or fruitless expenditure by auditor general Terence Nombembe in the last financial year.
However, Sars reported an improvement in its debt book. It had been expanding at a rate of 8 percent at least a year over a long period, but in the 2011/12 financial year the debt book rose by only 1.3 percent. This was the consequence of “hard work” by Sars officials, MPs were told.
Pressed for comment on the size of the corporate tax evasion, Sars spokesman Adrian Lackay said: “It is difficult for Sars to have a quantifiable figure. What we do know is that Sars has raised more than R5 billion over the last two to three financial years through audits and additional assessment on large corporations.”
It reported that strengthened border control and intergovernmental co-ordination at border posts – of which there are 14 – would increase customs compliance. A new VAT risk engine instituted in May last year had raised assessments in the fiscus’s favour by R11bn.
Tax compliance for individuals had been massively strengthened by the e-filing process, which meant that tax refunds could be done extremely efficiently. In the past it could take up to a year for refunds to occur.
Magashula pointed to the construction industry as being a major culprit in tax evasion, which was particularly concerning in the context of the country’s R3 trillion capital investment over the next decade.
Companies benefiting from public sector tenders would need to be tax compliant throughout their contracts. A tax clearance certificate would not only be needed at the start of the contract.
Willem Oberholzer, tax partner at BDOSA, said Sars was able to gain much more information on potential evaders and “combined with the grossly negligent ways in which some taxpayers file their returns, will come back to haunt non-compliant companies and individuals in future”.