Current economic conditions and the likely impact on the tax environment
Economists seem at one, that the outlook for the fourth quarter will be worse than expected, given slower domestic growth and a widening budget deficit due to lower tax receipts.
In his Medium Term Policy Statement, Minister Pravin Gordhan revised the tax collections estimate for 2011/12 downwards by R5billion - from R826.4b to R821.4b - largely due to a drop in individual tax collections (estimated to be R3.9billion less than expected) and company tax shortfall of R1.7billion. However he noted that there was still an expectation that tax collections would be a healthy 10% higher than the prior year. Whilst Government committed to restoring orderly labour relations, improving living conditions for miners, investing in infrastructure programmes, strengthening municipal finances, promoting special economic zones, accelerating youth employment opportunities, shifting exports towards emerging markets and providing support to small business - leading economists are not convinced that this will have any significant impact on the budget deficit for 2012/13.
More worrying is that deteriorating economic conditions since and strike action in the agriculture and mining sectors in August/September which has severely impacted the output from these sectors - the consequential impact of which is yet to be felt on dependent industries such as the manufacturing sector - could result in a further sovereign rating downgrade for the country. If this happens, will the country be able to afford the consequential higher borrowing costs and lower foreign direct investment? A declining demand for commodities and a depreciating rand has not helped exports either.
At best, weak growth rates may be experienced.
Cost Containment Strategies/Government Incentives
Against this background, whilst the expectation is that tax cuts may be one strategy to deliver the much needed stimulus to the economy, there is consensus that this will not be possible at this time. Although a case may be made in favour of a government incentive to boost investment in domestic infrastructure, there has been no major tax proposal hinting at a change in tax policy. The pressure is on the South African Revenue Service (SARS) to collect as much tax as possible - indeed, there are only that many cost cutting strategies that can be employed to drive costs down sustainably. Increased tax rates in this environment, will not be popular.
Anti-Avoidance/Africa as a Tax Collection Focus
To fill the ever-widening hole in tax collections, the focus must shift to anti-avoidance. Together with the respective Revenue Authorities in country in Africa, SARS has played a major role in pulling together tax resources on the African continent to enhance trade and stem the tide of capital and tax outflows from key African economies, on the continent. Multi-national companies have recently come under fire for not paying what is due in country by way of taxes. Our transfer pricing rules were recently changed to place the burden of compliance firmly on the taxpayer. We foresee the focus on single and simultaneous tax investigations of multi-national companies not just in South Africa, but between African countries, continuing given the potential for additional tax collections.
Tax Risk Management
As SARS organizes itself to deal with errant multi-national companies that trade cross-border, it is becoming critically important for these companies to shift focus from the cost of tax compliance to effective tax risk management. For those companies that are yet to embed tax compliance into the ‘business as usual’ activities, the cost of a series of reactive responses to tax investigations will far outweigh the benefit of adequate tax systems for monitoring, managing and reporting tax risks. Technology and tax data management will play a pivotal role in managing tax risk in the long term and ultimately reduce the cost of tax compliance. For those in denial, international financial reporting standards effective in 2010, dramatically altered what is out there in the public domain, as regards how business risk in general and tax risk in particular, is identified and managed. It is time that tax management should very much be a part of that process of strategic thinking.
Platform for Dialogue
Sitting on the periphery one can certainly identify the effort on the part of SARS to encourage meaningful dialogue with the business community. In an attempt to establish the rules of the game, a few years ago, SARS encouraged major players in the financial services industry to commit to an ‘accord’ which has seen both sides enter into dialogue with a clear understanding of what weight discussions have. There is the view that this signified the beginnings of a relationship of trust between major players in the financial services industry and SARS, given that the accord has no legal standing. This points to a new wave at SARS – industry specific agreements in principle - which sets the parameters for meaningful dialogue for mutual benefit. The debate seems to be around how much are taxpayers willing to share?
Execution on Tax Policy
As a country, tax reform is the past decade cannot be faulted. It is our execution on tax policy that remains our greatest challenge.