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Tax net can be widened without introducing new taxes

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Tax net can be widened without introducing new taxes

While Finance Minister, Pravin Gordhan’s, 2013/2014 budget speech presentation held no real surprises from a tax perspective, Zweli Mabhoza, Head of Tax Services at SizweNtsalubaGobodo, South Africa’s largest black-owned audit firm, believes it did reveal some interesting developments around how Tax Authorities intend to deal with corruption and tax avoidance transactions. “In addressing these areas of concerns Tax Authorities will be able to increase collections without having to introduce any major changes in the tax legislation,” he says.


Mabhoza says that the announcement by the Minister that National Treasury intends announcing the name of a Chief Procurement Officer is informed by the need for the government to increase the value on the money it spends.  “The Minister reported that National Treasury is scrutinising 76 business entities with contracts worth R8,4 billion which are likely to have infringed the procurement rules. 


“The South African Revenue Services (SARS) is also performing an audit of over 300 entities and scrutinising additional 700 entities.  SARS has managed to raise tax of R480 million on 216 cases concluded.  If one takes a simplistic view and extrapolates this R480 million to 1 000 potential cases, it seems SARS can collect approximately R2,2 billion by simply working on government’s procurement processes,” he comments. 


Also notable for Mabhoza is the announcement that SARS, following several years of work to trace transactions through multiple jurisdictions and entities, is currently pursuing several schemes identified under the revised general anti-avoidance rules. “This announcement interestingly comes within weeks of a local listed company reporting via its SENS document that SARS has raised an assessment of more R1 billion in respect of its funding transaction using general anti-avoidance rules.  It is certainly an interesting development as Tax Authorities have in the past been reluctant to invoke general anti-avoidance rules, instead opting to introduce additional specific provisions in the Income Tax Act, 1962, further complicating tax legislation,” he says. 


Mabhoza believes the Minister is of the view that the benefits of some of these schemes accrue to advisors and pre-existing shareholders rather than new shareholders who were introduced as the ostensible beneficiaries of the transactions.  “The point made by the Minister is, to some extent, true in particular where BEE partners are introduced using corporate rules.  These transactions often result in BEE partners carrying a deferred tax liability that may have not been factored in their purchase price,” he explains.


Encouraging for Mabhoza is the introduction of the permanent voluntary disclosure programme as from 1 October 2012. “Following the success of the initial voluntary disclosure programme in 2010 which has now been reported to have generated more than R3 billion in undeclared taxes, it makes sense to have introduced a permanent voluntary disclosure programme. The programme included in the Tax Administration Act, 2011, has already generated more than R200 million in taxes to date. Another positive is SARS’ intention to introduce a link between tax clearance certificates issued and tax revenue collected from people who tendered for work from the state. This is certainly long overdue,” he comments.


Mabhoza regards the Minister’s proposal in favour of discretionary trusts no longer acting as flow-through vehicles as pertinent. “Instead of discretionary trusts only paying tax on amounts not distributed, the income received by these trusts will be taxed at a trust level with beneficiaries receiving a tax free distribution.  This prevents beneficiaries of these discretionary trusts off-setting income against tax losses while avoiding tax in the hands of the trust,” he explains.


Although the Minister announced his intention for the Tax Authorities to work with the Department of Home Affairs and other agencies in registering small and micro businesses (including those operated by foreigners), Mabhoza believes this will be a challenge.  “Although this will also work towards widening the tax net, the challenge here is that some of the small businesses that SARS is targeting operate in remote rural areas. These locations are without SARS offices. This raises the question as to where these taxpayers will go if they need guidance,” he concludes. 

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