Cape Town – It is important to differentiate between base erosion and profit shifting (BEPS), and illicit financial flows (IFFs), the Davis Tax Committee (DTC) said in its recommendations to Finance Minister Malusi Gigaba.
The report containing the recommendations has been submitted to Gigaba and he has given the DTC permission to release its contents.
The committee highly recommends that specialist tax assessors or auditors be tasked to look at all the companies in a group as a whole, in order to evaluate complex inter-group transactions and structures that large groups are able to implement.
The DTC explains that, due to the fact that the international corporate tax framework has not kept pace with the changing business environment, taxpayers – especially multinational enterprises (MNEs) – are able to artificially reduce their taxable incomes by shifting profits from high tax to low-tax jurisdictions, in which little or no economic activity is performed.
Therefore, one of its mandates was to provide recommendations on how to address BEPS concerns from a South African perspective.
The Tax Administration Act is designed to enable SARS to obtain information to determine the amount of tax a taxpayer should have paid due to the fact that a taxpayer has evaded – rather than avoided – tax.
The DTC explains that the difference between these two concepts is that in tax evasion the taxpayer has set out to deliberately deceive SARS in order to pay less tax. On the other hand, tax avoidance relates to a differing view between SARS and the taxpayer based on how the tax legislation should be applied to a specific situation.
According to SARS and Treasury, corporate income tax contributed 18.1% of total tax revenue collected in 2015/2016.
In the view of the DTC, South African business is vulnerable to global events and global companies’ policies, for instance on transfer pricing. “Transfer pricing” is the term used to describe the price at which goods and services are transferred between cross-border connected parties.
The DTC said it is aware of the loss of personnel within the division of SARS that deals with information technology (IT).
“It is critical to South Africa’s participation in the OECD BEPS initiative that it maintains high standards in this area and the committee recommends that SARS procures suitably trained staff on an ongoing basis,” recommends the DTC.
The committee furthermore emphasises the importance of IT systems and digital capabilities that keep abreast with constantly evolving technology.
The DTC recommends that a detailed investigation be conducted by SARS and Treasury into the nature of transactions taking place within the digital economy and the options available to monitor them and ensure appropriate legislation and compliance.
The committee further recommends that SARS regularly benchmarks itself against other developing countries to ensure that its staff and skills adequately measure up in the area of BEPS.
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