Plugging the tax gap – if Sars can identify it

‘Closing the tax gap’ is the theme of Tax Indaba 2021, the latest of the annual conferences presented by the South African Institute of Taxation (Sait).

The three-day event kicked off on Monday and saw Kyle Mandy, partner and director of Tax Technical & Policy at PwC, explain that the difference between the taxes that theoretically should be paid based on the law as it is, and the taxes that are actually collected, is referred to as the compliance tax gap.

Sait CEO Keith Engel said the “policy tax gap” is the difference between the taxes that should be collected if the tax system is efficient (if, for example, there were no incentives or rebates), and the taxes actually collected. He added that this gap would include the avoidance and evasion of tax, as well as the different interpretation of the tax laws between National Treasury and the South African Revenue Service (Sars), and taxpayers and their advisors.

Johnstone Makhubu, chief revenue officer at of Sars, said Sars uses various methods to calculate the tax gap – a top-down macro methodology as well as a bottom-up micro methodology. The largest tax gap is seen in personal income tax, value-added tax (Vat) and corporate tax. After that comes excise tax.

Mandy said recent studies indicate that the tax gap is sitting at some R200 billion, which is 4% of GDP.

Stellenbosch University estimated that the tax gap in personal income tax was R50 billion. Mandy referred to other studies, one carried out by the International Monetary Fund on Vat for the years 2007 to 2012, which estimated the compliance gap at 10% of potential tax revenue. Mandy said these are “frightening numbers”.

Read: 5.8% of the population is paying about 92% of all personal tax

Professor Ada Jansen, associate professor at Stellenbosch University, said they require access to more reliable data to come up with more accurate estimates of the tax gap, and that it is necessary to make comparisons with third party data (such as that held by the South African Reserve Bank). She said the university is also learning from Her Majesty’s Revenue and Customs (HMRC) in the UK, and the different methodologies it is applying. Jansen added that one must look at the reasons for the taxpayer behaviour behind the tax gap.

Estimates, estimates

Jansen emphasised that the database used by Stellenbosch University was the first step, hence not the best estimate of the tax gap.

Makhubu said Sars estimated the tax gap to be between R200 million and R350 million, adding that “there is a need to collaborate between ourselves in terms of data sets”. He also mentioned that calculating the tax gap requires capability within the organisation, as well as the right processes.

“There is much that can be collected by exploiting the tax gap. We must mine from that tax gap,” he added.

Engel asked Tertius Troost, tax manager at Mazars, where he thinks the money is in the tax gap. Troost said they can see that Sars is trying to build its capability in transfer pricing and crypto assets.

Mandy said it is so important that the tax gap is calculated and analysed on a regular basis, so that Sars can see where it must focus its energy and resources.

“There are so many misconceptions, it [the tax gap] doesn’t lie [solely] with large business.”

Mandy said the HMRC had calculated that only 4% of the tax gap is attributable to large business.

Jansen said there is a need for a “coherent policy approach to address compliance” as well as a need to “engage with other tax organisations and build skills”.

Makhubu said there are concerns about certain sectors in large business, and that high-net-worth individuals pose a concern, as do trusts and the tax compliance of those trusts.

Engel said Sait is not seeing that much transfer pricing, and is seeing more compliance. He mentioned that some larger companies are still battling with legacy issues, and that small margins are being protected. He said at times there is an error somewhere in the system, which results in an “unanticipated additional tax cost”. He also cautioned that a tax director who has a “big tax victory” will have to defend this for years to come. He also referred to part of the informal economy that can be taxed.

Are tax practitioners adding to the tax gap?

Mandy said one would like to think that the vast majority of tax practitioners help their clients to comply with the law. He did add that if something is defendable in law, then it is accepted. (This is where there may be a difference in the interpretation of the law between Sars and the taxpayer, where the courts will be the ultimate decider).

Mandy concluded by saying that those tax practitioners who assist their clients in evading tax should be “weeded out”.

Troost said taxpayers want to be compliant.

Among the points raised by participants during the webinar:

• How much of the tax gap can be attributed to the ease (or lack thereof) of paying taxes? The red tape and difficulties small and medium-sized enterprises (SMEs) experience in striving to be compliant due to Sars’s systems contribute to the tax gap.
• Owner-managed companies “always” put pressure on their tax practitioners to pay less. Hence, “defendable positions have to be used but Sars needs to appreciate the lengths to which we go to get our clients to pay what they are supposed to and to stop our clients crossing the line to evasion”.

Read: Taxpayers with outstanding returns summoned to face criminal charges

Calculating the tax gap is nice, so what?

Calculating the tax gap is not the ultimate panacea that will fill the state coffers.

And diverting ‘resources’ to a segment that allegedly has a large tax gap may merely frustrate the few who know how to:

• Identify something that doesn’t exist (tax avoidance structures);
• Collect and analyse all the data necessary for a successful transfer pricing audit; and
• Feed intelligent instructions into the risk engine so that the risk engine can identify non-compliance.

Unfortunately, complex tax avoidance that relies on arbitraging different tax systems, or loopholes in domestic laws, is evolving as I write. This requires complex analysis, and the ability to identify the tax avoidance markers.

Perhaps this will take up too much time for a revenue service desperately looking for ‘now’ money and low hanging fruit.

Chasing the tax evasion criminals will require painstaking ground work, as they are outside the system.

Sars will only be able to plug the tax gap when it can find it.