- Tax morality and the CA(SA)
- The IT14SD process can be a huge headache for the unsuspecting taxpayer
- Tackling the tax morality challenge
Tax morality and the CA(SA)
Everyone who has studied tax should be familiar with the famous ruling in the Duke of Westminster Case,1 which is often cited in defence of (usually) aggressive tax ‘planning’. In this case Lord Tomlin ruled as follows:
‘Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow tax-payers may be of his ingenuity, he cannot be compelled to pay an increased tax.
More simply stated, the principle espoused is that taxpayers may arrange their affairs in such a way that they will incur the least tax liability, provided this is done within the confines of the law.
Many other court cases have tested this principle and tax legislation has changed to address what tax authorities saw as tax avoidance rather than ‘efficient’ tax planning. The Duke of Westminster principle is therefore becoming less relevant in our changing times, both locally and globally.
TAX PLANNING OR TAX AVOIDANCE?
During the recent global economic crisis, governments were faced with addressing large budget deficits and finding someone to pick up the bill. Who better than the taxpayer – both large corporates and high net worth individuals alike? Now, with ongoing global corporate scandals, to which South Africa is no stranger, the focus is on addressing corporate responsibility and accountability by corporates and individuals. Globally, tax is making headlines with an increasing focus on tax avoidance or aggressive tax planning, to increase the revenue collection by governments.
While specific anti-avoidance rules are already available, general anti-avoidance rules (GAARs) were adopted in South Africa and elsewhere, coupled with a greater focus on addressing base erosion and profit shifting. The application of GAARs, given their general nature, depends on the facts and circumstances of each case, and is considered subjectively by the relevant tax authority. When our GAARs were promulgated, the then Minister of Finance, Trevor Manuel, commented in Parliament that the new anti-avoidance rules empowered SARS to bring to book all the anti-avoidance schemes that had escaped the tax net for a number of years.
From a tax authority perspective, the effectiveness of the GAARs is grounded in their uncertainty, as more cautious taxpayers and their advisors may hesitate to create new structures when their tax implications were uncertain. Alternatively, there are those taxpayers who could be of the view that the uncertainty provides a tax planning opportunity – that is, structuring the facts to fall outside the scope of the ‘general’ law.2
It is therefore contentious whether, in structuring such transactions, decisions should be based on the letter of the law, that is, a strict interpretation of the actual words, or by taking into consideration the spirit of the law. Therefore the question is: does one choose between what is legally correct or what is morally correct?
When addressing blatant tax avoidance, tax authorities are cognisant of the impact that tax policies, tax administration and levels of corruption in a country have on the tax morality of the taxpaying nation. In his 2017 mid-term Budget Speech the then Minister of Finance, Malusi Gigaba, acknowledged that tax morality was declining, given the extensive administrative and tax policy challenges and noting the focus on misspending. Earlier that year, Pravin Gordhan, then Minister of Finance, noted in his Budget Speech that an effective tax system demanded an effective tax administration and a willingness of (corporate) taxpayers to comply.
THE CONCEPT OF TAX MORALITY AND A FAIR SHARE OF TAX
This is where the concept of ethics, or in a tax context, tax morality, comes in – currently a much talked about term globally.
Keeping it local, at his speech at the 2016 Tax Indaba, then SARS Commissioner Tom Moyane called for tax morality. Shortly after that, at the 46th annual International Association of Financial Executives World Congress held in Cape Town, Mr Moyane again raised this concept when addressing business executives he stated that the tax morality of an organisation followed that of its leader and its board.
Just what is tax morality and what does it mean to different people/entities? The concept of morality speaks of behavioural standards of ‘right’ or ‘wrong’. Considering a taxpayer’s tax morality, this is an assessment of the taxpayer’s behaviour as right or wrong in the circumstances.
At the 2017 IFA Congress held in Brazil, one of the panel discussions considered tax morality to some extent. It was submitted that the most common measure for determining whether a taxpayer’s behaviour was right or wrong, was ‘fairness’ – more specifically, whether a taxpayer (individual or corporate) was paying a ‘fair share’ of tax.
Most would say that the answer depends on who is asking, because the problem with this concept is that ‘fairness’ is a subjective measure – and who determines what is fair and in what context? The IFA Congress explored a number of concepts relevant in a South African context, including the following:
- What sort of deficit is the country piling up?
- How much personal tax is each taxpayer paying?
- How dependent is government on personal tax versus other taxes?
- How graduated are a country’s personal tax rates?
What are the average tax rates for the top 1% (contributing the bulk of personal income tax) versus the 99% and how do these compare?
How do average rates compare to the highest marginal rate?
In South Africa, taxpayers in the top 1% will argue that they pay more than their fair share of tax, yet from a government perspective even more should be demanded of them to achieve equity or fairness amongst all citizens.
Possibly a more important question is how are the taxes used? This leads to the question of the tax morality of those charged with distributing the taxes collected for the benefit of society at large. And the question becomes: what is a fair share in relation to the benefit enjoyed as a result of the taxes paid?
When tax authorities refer to tax morality, they mean taxpayers must pay their taxes responsibly and ‘morally’, even if it resulted in paying more taxes than legally required. That is, if there is an unintended ‘loophole’, it should not be used!
TAX MORALITY AND THE CA(SA)
All of this being said, what does it mean for the CA(SA)?
Well, as was the case at the inception of the profession more than 100 years ago, integrity remains the cornerstone of the CA(SA) profession. Integrity equates to ethics and morality.
The opening lines of the SAICA Code of Conduct state: ‘A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest.’ That is, CAs(SA) have a duty to protect the public interest and not only the interest of an individual client or employer.
It is these qualities and characteristics that sets the CA(SA) apart. These qualities must always be considered when determining whether a transaction or structure, and related disclosure in the tax return, is legally and morally correct.
Given the number of recent media reports that have drawn public attention to individual CAs(SA) who allegedly conducted themselves in a manner not reflecting the characteristics of what a CA(SA) should stand for, there are many who question the level of integrity and ethics of CAs(SA), based on the alleged actions of a handful. On the other hand, the rest of the CAs(SA) are asking what is SAICA doing to address these allegations? (This is being addressed by the SAICA leadership and while it is not the focus of this article, it obviously cannot be ignored.)
However, the bigger question is what are the rest of our 42 000+ members doing to demonstrate the true qualities of the CA(SA)? Because ultimately, each and every CA(SA) has the power to bring about the positive changes that we want to see in our society and in the reputation attached to our brand.
AUTHOR l Somaya Khaki CA(SA) is Project Director: Tax at SAICA
The IT14SD process can be a huge headache for the unsuspecting taxpayer
SARS may randomly select taxpayers for risk profiling, and a useful tool for SARS over the past few years has been the IT14SD reconciliation which is in effect a supplementary declaration for companies to reconcile income tax, VAT, PAYE and customs declarations after a corporate income tax return has been submitted. While the reasoning behind requiring these reconciliations is accepted, what is of concern is that SARS officials can easily draw the wrong conclusions about the reasons for discrepancies and that they have even issued assessments based on these discrepancies.
It is important to understand that the Tax Administration Act 2011 (TAA) does not currently make provision for the IT14SD process, which means that it is arguably not a return (that is, not something on which a self-assessment or liability for tax is based). Nor is it a record or relevant information (that is, it is not something held by the taxpayer but is created under instruction from SARS). The concern is the manner in which this process and its outcomes are applied by SARS officials, as there are instances where this has been inconsistent and to the prejudice of taxpayers, leading to significant tax disputes that are costly and ineffective for both SARS and the taxpayer.
The critical issue is that where a discrepancy appears in the reconciliation in terms of the IT14SD, this does not mean that there is prejudice to the fiscus. The discrepancy may be caused by a number of underlying reasons and may be as simple as inadvertently omitting an expenditure or income item from the tax calculation. It is therefore important that, once a discrepancy is identified in the disclosure to SARS, the cause of the specific discrepancy is explored and that SARS is mindful of the fact that it may potentially be resolved with ease.
Of concern is cases where the SARS officials simply assume that a discrepancy in the IT14SD reconciliation is a basis for issuing an assessment. By way of example, the taxpayer would submit an IT14SD showing a VAT reconciling item of say R14 million. The SARS official would, without further ado, issue a letter of audit findings to the taxpayer indicating that an assessment will be issued for the ‘grossed up’ income tax amount of R114 million, unless proof of the discrepancy is provided. On the basis that there is no statutory prescribed process governing the IT14SD process, the taxpayer is given very little time to respond and the assessment is issued.
The only manner in which the taxpayer can properly deal with the matter to protect his/her rights as a taxpayer, is to initiate a dispute process by lodging an objection and subsequently noting an appeal. Needless to say this is a costly and time-consuming process, in circumstances where there is clearly no proper legal basis for the assessment.
Proposals have been submitted to National Treasury and SARS for the TAA to specifically include a legislative provision aimed at governing the IT14SD process and setting out specific timelines and the duties and obligations of the SARS officials responsible for this process. However, this must be tabled for inclusion in the budget proposals and after that could take a significant amount of time to be legislated.
In the meantime, taxpayers should continue to avail themselves of the objection and appeal process and make sure that the procedural time frames are carefully observed.
A word of caution
Taxpayers should also remember to manage the outstanding tax debt and therefore submit a suspension of payment request. This will avoid surprises where SARS may legally enforce the tax debt in terms of the pay-now-argue-later principle. A possible alternative would of course be to rely on the specific provision in the TAA, which allows SARS to overturn a decision in certain specific circumstances.
AUTHOR l Christel van Wyk is a Project Director: Tax at SAICA
Tackling the tax morality challenge
The issue of ‘tax morality’ has become quite topical in South Africa. However, it is not a topic which is open for debate, since paying your tax is not debatable; it is mandatory
I have found myself having to make this point far too often lately. At least, the then Minister of Finance has acknowledged that ‘tax morality is a crucial component of a healthy democracy’. He added: ‘In recent years, corruption and wasteful expenditure in the public sector have eroded taxpayer morality.’
However, simply acknowledging a problem is insufficient; it takes specific remedial action targeted at the root cause to eradicate it. It is encouraging to note that two causes were openly admitted in the 2018 national budget speech, the first being potential avoidance in response to personal income tax (PIT) increases coupled with poor public governance, both in the tax administration system itself, and the second being wasteful expenditure by government and state-owned entities. The question is whether government has offered any meaningful remedial action?
First, there has been a halt in further PIT rate hikes, which may go some way toward addressing the potential avoidance issue. However, the dampened inflationary adjustments to the bottom three tax brackets, together with the suspension of any inflationary tax relief for the top four brackets, will mean that the PIT taxpayers will not benefit from inflationary salary increases since they will end up handing over their hard-earned salary increases to SARS in the form of increased tax payments.
Even though many potential disadvantageous tax rate increases were predicted across various tax types for PIT taxpayers, apart from income tax, the only ones which materialised were increases in estate duty to 25% on estates above R30 million, as well as an increase in donations tax to 25% (but only for donations exceeding R30 million in a tax year). While we are all immensely grateful that the top PIT rate of 45% and the inclusion rate for CGT were not increased (and the estate duty and donations tax increases are quite progressive, since they hit only the top end of PIT taxpayers), the amount of tax already payable by PIT taxpayers, across all tax types, is still quite staggering.
This means that the measures to be implemented by government to address poor governance need to be implemented effectively and without delay, otherwise the disillusionment potentially felt by PIT taxpayers may not be quelled. The specific measures in relation to SARS’s governance and improved administration include a commission of enquiry into the functioning and governance of SARS, implementing measures to strengthen the operational independence of the Tax Ombud, the introduction of a supervisory board, and making SARS accountable to the Minister of Finance, all of which are welcomed. The measures targeted at tackling governance issues within government and state-owned entities, such as denying a tax deduction for fruitless and wasteful expenditure, are in line with the President’s remarks in his inaugural State of the Nation address last week.
There are numerous other initiatives, such as the continued focus on replacing ineffective boards and executive managers at various state-owned entities with appropriately skilled teams, provision for contingencies related to the commission into state capture (which may also require funding for critical Chapter 9 institutions such as the Auditor-General and prosecuting authorities), strengthening the controls within the Office of the Chief Procurement Officer (so that deviations from normal procurement processes will only be allowed in rare, well-justified cases) and the containment of baseline spending across the public sector with a specific focus on capital investment via infrastructure spending (which may require the assistance of development finance institutions and the private sector in the longer term).
In the final analysis, the budget was described as ‘tough, but hopeful’. One can only agree that an increase in the VAT rate to 15%, together with an increase in the fuel levy of 52 cents per litre, will be tough on all South Africans. However, we have cause to be hopeful that the measured selection of PIT taxpayer rate hikes, together with government’s commitment to combating wasteful expenditure and corruption, will be sufficient to eradicate the tax morality debate – because then real change will be achieved resulting in PIT taxpayers receiving value for the immense contribution they make to the fiscus.
AUTHOR l Tracy Brophy CA(SA) is Chairperson: SAICA National Tax Committee