On the opening day of Tax Indaba 2020 on Monday, Keith Engel, CEO of the SA Institute of Tax Professionals, raised many important points in the continuing tax policy debate between government, the private sector, taxpayers and institutions.
The Tax Indaba brings together representation from government, National Treasury and the South African Revenue Service (Sars) as well as international bodies such as the Organisation for Economic Co-operation and Development (OECD), and creates a platform where “we can grow and learn together” and connect and engage.
Engel says engagement on tax legislation, customs legislation, Department of Trade, Industry and Competition (dtic) incentives, and the role of the OECD, is important.
The South African economy started the year in a recession. Engel referred to the “Zuma malaise” and said “we were struggling economically … and then the coronavirus came like a tidal wave”.
South Africa’s massive debt deficit has to be funded, which necessitates various options, making cuts, or raising taxes, or growth. But growth requires capital. Government will have to raise enough money to pay off the interest and fund growth, said Engel.
The economic background affects tax quite a lot. “One can talk about theory all day long, but the bottom line is, theory is driven by practicality … when people are in trouble economically, they start feeling more envious about the wealth …
“When [the need for] money becomes desperate, government theories become more desperate.”
This will impact tax policy. Some economists say the real recession will come when the country has to face up to all its debt. “Recessions are shock events … they typically happen every 10 years, we need to plan that there will be seven lean years and three hard years,” said Engel.
Many overseas countries live with much higher deficits, but rating agencies believe that these countries can handle the deficit.
It will be difficult to raise taxes. Finance Minister Tito Mboweni in the February budget said that raising tax rates won’t work. Raising tax rates will negatively impact growth.
Engel mentioned the strong drive to tax the rich, mentioning as an example the solidarity tax – an additional tax levied on residents to fund social projects and which could be levied on assets instead of on income. However this is still a tax on the rich.
It is an international phenomenon that the gap between the rich and the poor is growing. Covid-19 accelerated the gap.
When the economy is down this creates a strong drive for socialism, yet “when the economy is up everyone believes in the free market”.
Talk of taxing the rich creates capital flight. Many people are leaving. Engel said that this is also seen in the US, where the number of emigrants is the highest ever.
There is also talk of raising small taxes, such as fuel taxes and hotel taxes.
Sars is pushing ‘friendly compliance’, by, for example, increasing the efficiency of its systems and third-party reporting to ease the burden of tax compliance. More data systems will be cross-checked to make the system efficient.
Sars is, however, facing many challenges, such as the ability to audit. Sars should go after the ‘right things’, where entities have two sets of books, transfer pricing, or tax avoidance.
The broken social contract
Tax evasion is a big issue. One of the issues to be faced is the ‘social contract’. This is not only the obligation to pay taxes, but also to collect all taxes. Outright tax evasion undermines the whole system.
Engel said one can see that Sars is trying hard. But Sars cannot do this alone, government is part of that social contract.
“Corruption is undermining our society, and why pay tax if this is just to feed some bureaucrat? Or to feed someone who is out there to steal?”
Engel also referred to tender corruption, and the fact that tenders are awarded to families and friends. ‘Jobs for pals’ enables people to get jobs for the wrong reasons, and this results in an unskilled workforce in government. The unskilled are then driving the system.
The implementation of civil service exams will ensure that one cannot join the civil service unless one has the competency.
Government-owned companies are not independent of government, have no accountability, pay bloated salaries, and offer jobs for pals.
Engel questioned how government can increase salaries when the private sector is cutting salaries.
South Africa needs an accountable democracy, he said.
New sources of raising taxes
Engel mentioned new sources of raising tax, such as:
- The tenderpreneurs;
- Taxing those businesses that operate outside the economy, such as the cash economy;
- The illicit economy, such as non-payment of excise taxes (cigarette smuggling, alcohol), and illegal substances;
- The semi-legal economy, for example, where a business keeps two sets of books, or does not report income, or undeclared offshore funds.