South Africa is attempting to paddle in a big pond. But with the degree of corruption and lack of capacity to bring its tax criminals to book – not to mention the fiscal hole created by government policies that have hampered trade and had a knock-on impact on excise duties and other taxes collected – how can it discuss tax policy reform in isolation?
It cannot, and the comparative analysis of tax policy reforms in some 40 countries, including South Africa, released by the Organisation for Economic Co-operation and Development (OECD) thus makes for interesting reading.
Titled Tax Policy Reforms 2020: OECD and Selected Partner Economies, it can be viewed here.
Covid-19 landed with a bang, creating a large crater in the fiscal profiles of many countries, necessitating immediate policy responses such as income support to households, and various initiatives to enable companies to survive the liquidity crunch.
The jury is still out as to how effective this has been in South Africa, or the exact degree of corruption involved. The public is unlikely to ever see a list of companies that requested support or the amount of support they received.
Sometimes, respecting the confidentiality of taxpayer information protects the criminals.
The OECD has identified several notable issues:
- The pandemic has exacerbated existing inequalities.
- Raising taxes on labour and consumption in the future will not go down well politically; governments will have to find new avenues for raising taxes.
- No international agreement has been reached on the taxation of digital businesses.
With regards to the latter – South Africa was one of the first countries in the world to make it mandatory for offshore companies carrying on digital businesses in South Africa to register for value-added tax (Vat), and a few years later advertising was added. In other words, Vat should now be payable on the advertising paid to offshore companies.
But if an offshore company does not register for Vat, what will the South African Revenue Service (Sars) do?
Advertising no doubt creates quite a large hole in the fiscus, as it is tax-deductible when paid offshore, even though the income will not be taxed in South Africa.
In my view, South Africa has a parallel reality and is struggling with its own demons.
The pandemic has highlighted serious issues that are ultimately impacting state coffers in SA:
- Covid-19 has intensified the loss of advertising to offshore tech giants such as Google. In South Africa, the first sign was the closure of many magazine titles. Australia is the first country attempting to get Facebook and Google to pay for content created by traditional media companies. France is following.
- Attempting to work at home or within small business premises during a power outage when you have no back-up power is not conducive to productivity – and is further aggravated by the loss of cell phone coverage caused by the theft of batteries from cell phone towers.
- South Africa’s open borders – as evidenced by the flow of illicit tobacco products.
- The glaring inability of the government to make rational business decisions.
- The frightening reality of state capture, and the toxic roots that have spread far and wide.
- The criminal mentality.
- When Covid-19 came to town, South Africa’s pantry was bare. The kitty had been cleaned out.
Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration, stressed the uncertain future and said that tax policies will have to be adaptable.
The OECD divided the tax policy responses to Covid-19 into four phases:
- Liquidity and income support;
- Liquidity, solvency and income support;
- Fiscal stimulus; and
- Raising revenue.
Solvency and income support
Several countries ceased audit and debt recoveries for all but high-risk cases. Others are trying to ease the tax burden on companies, particularly small ones. Some are taking the opportunity to clamp down on companies that are registered in “non-cooperative tax jurisdictions”. Such jurisdictions would, for example, not have signed exchange of information agreements and would therefore not furnish information on beneficial owners.
Some countries have provided preferential tax treatment to stimulate health-related spending and investment.
An interesting paper written by Busi Sibeko and Gilad Isaacs for the Institute for Economic Justice, termed – A Fiscal Stimulus for South Africa – argues that “a fiscal stimulus in the South African context should aim to boost both growth and employment in a sustainable and equitable manner”.
Public finances will have to be restored, and countries will be looking at ways to tax the digital economy (this has been a seven-year project), and new sources of tax revenues.
South Africa will have to find ways of raising new revenue, but will also have to cut wastage. It must rein in its zombie, mismanaged, and corrupt state-owned entities (SOEs). How many billions have the SOEs squandered over the last year?
Sibeko and Isaacs reason that “there is considerable room to increase domestic resource mobilisation in South Africa”.
“Increasing tax revenue would entail raising income tax rates on high-income earners, taxing wealth and income derived from wealth more effectively, reducing tax deductions for the rich, more effectively taxing large corporations, clamping down on tax avoidance and illicit financial flows, and rebuilding capacity within Sars,” they say.
“Other domestic resources include mobilising quasi-state funds, such as those accumulated in the Government Employees Pension Fund, and better utilising Development Finance Institutes.
“Lastly, there is room to improve efficiency, capacity and/or performance of government resources. Addressing quality of spend requires capacity building which also requires additional resources.”
Greener, more resilient economy
The OECD’s Saint-Amans also suggests that when governments shift from crisis management to structural reforms, they should “seize the opportunity to build a greener, more inclusive and more resilient economy … rather than simply returning to business as usual”.
South Africa, unfortunately, has to first rid itself of its criminal element, and stem corruption, before it is too late.
It is unlikely that any tax policy, no matter how well researched and brainstormed, will make an iota of difference at this stage.