Billions of rands leave SA under the radar

South Africa has lost out on billions in tax revenue in the past decade as large corporations, wealthy individuals and criminal syndicates slipped nearly R1-trillion out of the country.

A Washington DC research and advocacy group, Global Financial Integrity, believes South Africa suffered “illicit financial flows” totalling more than $122-billion between 2003 and the end of 2012.

Though not all of this money would have found its way into the state’s coffers, some of it should have benefited the fiscus.

In 2012 alone $29.1-billion left the country under the radar.

Only nine other developing countries bled more capital than South Africa that year.

As a proportion of the size of the economy, South Africa’s illicit financial flows came to 7.6%, nearly twice the average for developing countries.

Illicit financial flows are a form of capital flight, according to Dev Kar and Joseph Spanjers, the authors of the Global Financial Integrity report. The capital is, by nature, unrecorded and cannot be used as public funds or private investment capital in the country of origin, meaning that tax-paying citizens forgo infrastructure projects or fork out more because of the “user-pay principle”.

The biggest problem is “trade misinvoicing”, which in South Africa accounted for nearly 99% of these outflows in 2012.

“Trade misinvoicing is possible due to the fact that trading partners write their own trade documents,” say Kar and Spanjers.

“Usually, through export under-invoicing and import over-invoicing, corrupt government officials, other criminals, and commercial tax evaders are able to move assets easily out of countries and into tax havens, anonymous companies, and secret bank accounts.”

Though the government is trying to tighten the noose around multinational entities and super-rich individuals that shift their profits illicitly to tax-friendlier jurisdictions, it is unlikely to stop Finance Minister Nhlanhla Nene from announcing income tax increases next month.

The SA Revenue Service told parliament’s standing committee on finance late last year that the global financial crisis had put the spotlight on declining tax revenues which would place an “increasing burden on ordinary citizens to cover [the] tax shortfall”.

The Davis Tax Committee was established by Nene’s predecessor, Pravin Gordhan, in 2013 to close the loopholes that allow multinational companies to shift their profits to countries other than those in which they were earned.

The committee released its report on the matter for public comment on December 23 last year, when most South Africans were on holiday.

SARS claims to have had some success in auditing the abuses.

It has established a specialist unit to tackle transfer pricing.

“Over the last three years the transfer-pricing unit has audited more than 30 cases and has made transfer-pricing adjustments of just over R20-billion, at a conservative estimate, with an income tax impact of more than R5-billion,” the revenue service said.

SARS claims that the auditing of a similar number of cases is in progress and others are in the process of being risk assessed.

But transfer-pricing audits do not yield quick and certain results are complex, and require much time and resources.

“There is no easy solution and SARS has to work within the confines of both domestic and international law.”

South Africa is not alone. China, Russia, India, Brazil, Mexico, Indonesia and Nigeria have all experienced larger illicit capital flows.

“The $991.2-billion that flowed illicitly out of developing countries in 2012 was greater than the combined total of foreign direct investment and net official development assistance, which these economies received that year,” according to Global Financial Integrity.