‘Don’t over-complicate tax laws’

Attempt to plug every gap makes the system unworkable – Norton Rose Fulbright.

JOHANNESBURG – A tax expert has warned against over-complicating tax legislation in an attempt to block every loophole or perceived underpayments of tax, as it makes the tax system “unworkable”.

Andrew Wellsted, director at Norton Rose Fulbright, says just adding to old principles and an old act often creates more loopholes and opportunities for tax avoidance.

His comments follow the international outcry against base erosion and profit shifting (Beps) over the last few years as governments both locally and abroad attempt to clamp down on multi-national corporations that are avoiding taxes or not “paying their fair share of taxes”.

Beps includes “tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid”, according to the Organisation for Economic Co-operation and Development (OECD) definition.

Wellsted says instead of analysing the legitimacy of the tax structure, a “gut feel” and political perspectives often inform the public uproar around base erosion.

Governments worldwide have been under pressure to collect more tax following the global financial crisis and tax revenues have increasingly come under the spotlight.

Against this background, the South Africa Revenue Service (Sars) will likely pay close attention to some of the recent developments and anti-avoidance proposals in the UK, says director Dale Cridlan.

This is particularly so as there is a perception amongst certain commentators that certain South African companies have been avoiding taxes.

UK situation

Stuart Gulliver, chief executive of financial services group HSBC, recently issued a public apology to clients, investors and customers about the role it played in Switzerland in assisting clients to avoid tax, Cridlan says.

The move is fairly unprecedented for a large multi-national such as HSBC and is likely to lead to further investigations and penalties for HSBC.

In another development, The House of Commons Committee on Public Accounts released a document that “pointed fingers” at an accountancy firm. This followed after it emerged that the firm was involved in the mass marketing of schemes, which allowed their clients to shift profits from the UK to low tax jurisdictions such as Luxembourg, effectively avoiding tax in the UK, Cridlan says.

He says a proposal to counter this particular tax avoidance measure was released in the UK in December.

The UK has mooted the implementation of a “diverted profits tax” which is defined as a tax of 25% on profits shifted from the UK to a low tax jurisdiction.

This is a fairly punitive proposal when considered in the context of the current UK corporate tax rate of around 20%, he says.

There is also great risk that profits could effectively be taxed twice – both in the UK and in the foreign jurisdiction, he adds.

The proposal is currently being debated and will likely attract considerable pushback from a lot of UK companies, he says.

SA

Cridlan expects National Treasury and Sars to be watching these developments closely and that further general and targeted anti-avoidance provisions may similarly be implemented in South Africa in the near future.

Wellsted says a considerable number of anti-avoidance provisions have been introduced in recent years (less so last year), which have been difficult to manage.

In light of the Davis Committee’s review of the tax system, the current consolidation of anti-avoidance provisions will likely continue this year, although there may be some tweaks and minor new provisions being introduced, he says.

“The tax system is still getting up to speed with a lot of the other anti-avoidance legislation that was introduced previously,” Wellsted says.