Tax Trends 2011
The taxation services environment in South Africa continues to be dynamic. As the economy recovers, South African multinationals continue to seek expansion opportunities in regions such as Africa, India and China. Deloitte Taxation Services is well-placed to support our clients as they streamline their businesses to take advantage of opportunities presented in these regions. Our recent experience is that multinationals are re-looking at existing intermediary holding company structures to take advantage of synergies and economies of scale. The financial services industry (dominated by banks and insurance companies in South Africa) continues to evolve at a rapid pace as the regulatory environment in SA develops in line with international trends. We foresee exciting times ahead.
Three themes which have almost become a cliché:
Regulation and tax compliance in South Africa has been a focus for the past decade during which time significant changes were announced (for example, NCA, FICA, etc). Our recent tightening of fiscal regulation is driven by global developments.
For example, Solvency II (SII), the new solvency and liquidity regime for European insurers (due for implementation in 2012) has been tailored for South African insurers in the form of the introduction of Solvency Assessment Management (SAM) applicable to both long term and short term insurers (from 2014 but with targeted milestones applicable from 2010). Internal models now need to be robust and produce realistic estimates, including those for tax charges and tax balances. Tax efficiency is indeed an integral part of evaluating capital efficiency. Even where tax considerations point in a different direction, they remain important to decisions such as: the location of the business and its capital; the use of reinsurance; and the corporate structure (branches vs. companies, within or outside the country/region in which the business operates). It is critical that in-house tax departments contribute to their SAM/SII projects. They need to determine the best outcome for their company both in terms of modelling capability and aligning the efficient use of capital with tax efficiency.
The changes to current returns and to disclosure in the annual financial statements, prompted by the implementation of SAM in South Africa may well prompt the government to again review the basis of tax for life companies.
As South Africans expand businesses into foreign jurisdictions, in addition to local fiscal regulation, those charged with governance in an organisation need to be aware of the plethora of foreign regulatory and legal challenges. The Foreign Account Tax Compliance Act (FATCA) is a case in point. To accelerate the ongoing crack down on US persons thought to be hiding assets overseas, the FATCA imposes a 30% withholding tax on income and capital payments from the US, unless financial institutions enter into an agreement with the IRS to disclose certain information.
One example of the growing demand for transparency from corporates in South Africa, is the recent call from SARS for a view from major corporates on their earnings potential for the year ahead. Needless to say, SARS too is focussed on the bottom line. Presumably, SARS too wishes to assess the assumptions on the basis of which projections are made for the year ahead. Unconventional? Perhaps.
It is now a common view that because the product development processes in the financial services industry had been so robust – to maintain competitive advantage – tax authorities always lagged in their understanding of the products themselves. The perception is that this impairs the ability of tax authorities worldwide to timeously distinguish those carrying ‘unacceptable’ levels of tax risks. A recent OECD tax forum culminated in a report that sought to make recommendations to tax authorities to improve staff capabilities and their commercial understanding of financial markets and banking.
The rapid increase in the cross border flow of funds associated with the globalisation of the financial system has allowed taxpayers greater freedom to move income and assets across national borders. Tax authorities have also pursued the free and accurate exchange of information as a means to ensure the proper application of tax laws, in particular transfer pricing legislation. In fact, the philosophy is that governments around the world have a right to information about its own taxpayers. Tax havens, the need for transparency and the implementation of exchange of information agreements are high on the political agenda. Clearly the political pressure arises from the well publicised scandals that have affected a number of countries, as well as a focus on offshore financial centres, as a result of the global economic downturn.Platform for Dialogue
One can certainly identify the effort on the part of SARS to encourage meaningful dialogue with the business community. There are several examples of this, the earliest being the constitution of the Large Business Centre at SARS. These are welcome but only to the extent that there is reasonable prospect of getting a hearing.
SARS have made great progress in modernising the tax system (the e-filing system is a great example) and improving the compliance culture in SA.
As a society we have some way to go before the relationship of trust with SARS develops to the point that there is open dialogue with SARS on, for example, all transactions involving large amounts. Notwithstanding the ‘Advance Tax Ruling’ regime, taxpayers still take the view, where there is any doubt as to the tax consequences of a transaction, that certainty should be left to a potential SARS audit some years down the line.
We are certainly at a point where the assessment of tax risk now takes on greater importance on a Board agenda. The issue is that there is little independent assessment and sign off on these reports, usually produced and presented by the Group Tax Manager. One global trend that is likely to take off in South Africa is a shift to policing tax risk assessment and management through the internal audit department of large organisations.
In principle, ‘data analytics’ is the capability that is going to become essential for any company interested in making smarter decisions. No doubt, regulators too use this capability to identify taxpayers who are, for example, paying too little tax (or even too much).
Whilst large organisations use this capability to stratify their customer base and markets, etc, there is certainly scope to use this tool more effectively in the area of tax planning/forecasts.
Tax is generally the highest cost item on the income statement and tax managers should be using their data analytics capability to manage their tax strategies more efficiently. The process of tax risk management is becoming transparent. What will differentiate taxpayers - and SARS perception of them - is the rigorous manner in which this process is implemented to meet governance, regulatory and good management standards. Good tax risk management allows a business to more effectively focus its resources and ensures that corporate governance standards and obligations to tax authorities are met. With an increasing emphasis on regulation and corporate governance, combined with the frequency and integrated nature of SARS’ risk-based tax audits as well as the high penalties for non-compliance, the inherent risks for South African corporate taxpayers have increased enormously. There is no sin in engaging in proactive tax planning on a much more scientific basis, supported by trend analyses, using the analysis of existing data to benchmark oneself using, for example, tax ratios: against other countries, against specific industries, etc.
We are indeed operating in a borderless world. The United Kingdom has asked 16 countries, including South Africa, to conclude a multilateral treaty to exchange information. As new multi-lateral treaties take effect, this will allow tax authorities to carry out joint, simultaneous audits on transactions with further complex obligations imposed upon taxpayers (particularly those in the financial services industry), typically more onerous systems and operational demands, to meet information reporting, disclosure and withholding obligations.
Although South African fiscal policy encourages foreign companies to use South Africa as a base from which to expand into Africa, stronger differentiators need to be created in terms of our regulatory environment if we hope to see any significant improvement in our FDI levels. A fusion of increasing economic prosperity, favorable demographics and increasing consumer awareness has led to the emerging markets of Asia exerting ever greater influence on, for example, the global insurance industry. The similarities between, for example, India and Africa are many, including the size of their populations (India – approximately 1.2 billion, Africa – approximately 1 billion), a high number of unbanked people, a low proportion of insured people, many families reliant on one source of income, a burgeoning middle class with disposable income and growing urbanisation.
Our levels of compliance and our tax concessions are important features of our business landscape, and it is imperative that our regulations do not make us uncompetitive.