Government an obstacle in SARS’ fight against illicit financial flows, base erosion and profit shifting

Government an obstacle in SARS’ fight against illicit financial flows, base erosion and profit shifting

AIDC |Statement | 05 November

South Africa’s debt-to-GDP ratio is expected to spike above eighty percent before the end of 2020. At the same time, expected tax revenue is more than R300 billion lower than anticipated in February 2020. The Treasury has responded with a renewed assault on the majority of South Africans in the form of harsh austerity. This will not only negatively impact the poor, it will also lead to a growing debt problem. What is needed is more spending on social services, infrastructure and the implementation of a basic income grant. In this context, putting an end to profit shifting, tax and wage evasion is essential to harness some of the resources needed.

According to the Financial Intelligence Centre, South Africa loses anywhere between R200bn and R400bn per year to illicit financial flows, largely by transnationals (TNCs) wishing to dodge their tax and wage obligations. The case that the Association of Mineworkers and Construction Union (AMUC) is taking against the directors of a mining giant – Samancor – for alleged profit shifting and other impugned transactions, is seemingly another clear cut example of the deleterious practices of TNC’s.

It is encouraging to see that South African Revenue Services (SARS), prompted by the massive R300bn shortfall in revenue, has started placing these issues at the fore, and we welcome Kieswetter’s recent commitment to tackling profit shifting and “broadening the base and improving compliance”. 

But we cannot sit and applaud more promises, while the state is doing nothing to support SARS in its endeavour to combat illicit financial flows, base erosion and profit shifting. 

According to Kieswetter himself, SARS is critically under-resourced to the tune of R800mn, leaving them with around 800 critical vacancies. This has left SARS not only struggling to rebuild from the damage done by state capture, but also incapable of developing the capacity needed to tackle the full extent of illicit financial flows and profit shifting from the South African economy. 

Government must provide SARS with the necessary financial resources, to ensure that SARS has the capacity needed to more effectively hold these corporations accountable. Providing SARS with the necessary resources will result in even greater levels of revenue in the future.

The fear of Tito Mboweni’s “fiscal crisis” is no excuse for inaction either. There are a number of important interventions the state can make without impacting the budget. In addition to a number of important tax reforms proposed by the Budget Justice Coalition, experts have long argued that transparency is a foundational building block in the fight against profit shifting, tax and wage evasion.  To this end, we call on the state to implement a package of transparency reforms, covering at minimum the “ABCDs” of tax transparency:  

  • Automatic Exchange of Information.  
  • Beneficial ownership disclosure in public registries.  
  • Country-by- country, subsidiary-by-subsidiary public reporting by MNCs. 
  • Disclosure of tax returns of every South African, starting with elected representatives and high-ranked public officers.

These reforms must also include replacing the vague “General Anti-Avoidance Rule”, the set of laws which define and prohibit tax-avoidance, with a purpose-built legal framework that enables the swift prosecution of tax offenders – especially multinationals. We thus call for a “General Anti Tax Avoidance Act” in order to legislate these changes.

Outside of tax reform, the state must look at introducing stronger capital controls – such as the financial transaction tax – in order to reduce the level of financial outflows and alleviate the pressure on the current account of the balance of payments. It is time to accept that the old economic orthodoxy of economic liberalisation and capital mobility has not only failed to bring the benefits promised by its advocates, but also that it has created an enabling environment in which profit shifting and wage evasion thrives. Capital controls will provide the state with the means to discipline domestic capital and wall off channels for illicit financial flows.

These reforms are not even radical – they are common sense, and necessary. If implemented, they will go a long way in support of SARS’ fight against corporate tax (and wage) dodgers.

For more information contact:

Dominic Brown, AIDC economic justice programme manager, 08130949673

Jaco Oelofsen  Alternative Information & Development Centre –  researcher & educator – 0843769019

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