“In this world, nothing is certain except death and taxes.”
Benjamin Franklin wrote that famous line in 1789 and it’s still true more than two hundred years later. We might be dealing with global uncertainty in almost every sphere of life – politics, health, climate, financial markets – but like it or not, you still have to pay tax.
The question, then, is how much you should be paying? There has been a rise in aggressive tax structuring in recent years, especially among South Africans who hold substantial business interests in the country. Our corporate tax rate of 28% is one of the highest in the world, and paying so much tax is almost always a grudge expense considering our government’s dismal track record of mismanagement and corruption.
These aggressive structures exploit loopholes in local legislation and remove the businesses in question from the South African tax base without breaching the exchange control rules and without having to pay capital gains tax. These structures walk a fine line between legal and illegal, and they often come with astronomical fees for the client, which sometimes negate any potential tax savings.
If you are a business owner and you are investigating this route, what you decide to do comes down to your personal tax morality: Is it right? Will I be able to sleep at night? Or, more importantly, will I be able to sleep when I am older, knowing that at some point questions will be raised around my tax affairs? The last thing you want is for your financial legacy to be muddied by a potential dispute.
Avoidance vs evasion
Every individual is entitled by law to arrange their affairs in such a manner as to minimise tax exposure. Importantly, there must always be genuine reasons to substantiate your deductions. Offsetting expenses, saving for retirement, making donations – these are all relatively simple ways of not paying unnecessary tax.
Tax evasion, on the other hand, is when you deliberately conduct activities that result in purposely not paying tax when there is a clear tax liability. An example is a Vat vendor not paying Vat to Sars when sales are made, but rather using the cash for other purposes.
Explained in simple terms like that, it seems as if there is a clear line between avoidance and evasion, but the reality is far more complex, especially in South Africa where tax morality should be the subject of a doctoral thesis. These are the big questions: Is the manner fair in which tax is raised? How does one country’s tax policy differ from another? Are countries really independent in this regard?
And the more SA-specific questions: Why should we pay so much tax to a clearly inefficient and corrupt government? And the flip side: Just because the system is broken, does it justify withholding tax? Surely doing so is just a white-collar version of vigilantism, taking the law into your own hands?
Indeed, paying corporate tax in South Africa in 2020 is not for the faint of heart! Financial decisions are wrapped up in thorny social issues and a broken justice system, all of which is compounded by easier access to global alternatives than ever before. Sometimes it’s worth remembering that borders are man-made and that all of humankind is actually in it together. South Africa’s problems don’t just affect South Africa – just as a sore foot affects the whole body – and fleeing to other jurisdictions might have implications that are not immediately clear.
So, what’s the answer?
At Sentinel, we allow for creative and bold tax planning within the boundaries of South African and international laws. If there is a business case that legally supports a particular structure, we are happy to pursue the most efficient path for the client.
However, we walk away from structures that require us to go too close to the line or to cross it. This is in our best interest as professionals, and it’s in the best interest of the client – even if they don’t like it at the time.
We have a fiduciary obligation to preserve a client’s legacy, and no fee is worth crossing a line from where there is no comeback.