‘Closing the tax gap’ is the theme of Tax Indaba 2021, the latest of the annual conferences presented by the South African Tax Institute (Sait).
The three-day event kicked off on Monday and saw Kyle Mandy, Partner and Head of Tax Policy and Technique at PwC, explain that the difference between taxes that should theoretically be paid based on the law as it is, and taxes that are actually collected, it is known as the compliance tax gap.
Sait CEO Keith Engel said the “policy tax gap” is the difference between taxes that should be collected if the tax system is efficient (if, for example, there were no incentives or refunds) and taxes actually collected. He added that this gap would include tax avoidance and evasion, as well as the different interpretation of tax laws between the National Treasury and the South African Revenue Service (Sars), and taxpayers and their advisers.
Johnstone Makhubu, Sars chief revenue officer, said Sars uses several methods to calculate the tax gap: a top-down macro methodology and a bottom-up micro methodology. The largest tax gap is observed in personal income tax, value added tax (VAT) and corporation tax. After that comes the special tax.
Mandy said that recent studies indicate that the tax gap is around 200 billion rand, which is 4% of GDP.
Stellenbosch University estimated the tax gap in personal income tax to be 50 billion rand. Mandy referred to other studies, one conducted by the International Monetary Fund on VAT for the years 2007 to 2012, which estimated the compliance gap at 10% of potential tax revenue. Mandy said these are “ghastly numbers.”
Read: 5.8% of the population pays about 92% of all personal taxes
Professor Ada Jansen, associate professor at Stellenbosch University, said that they require access to more reliable data to obtain more accurate estimates of the tax gap, and that comparisons need to be made with third-party data (such as South African Reserve Bank ). He said the university is also learning about Her Majesty’s Tax and Customs (HMRC) in the UK and the different methodologies it is applying. Jansen added that it is necessary to analyze the reasons for the behavior of the taxpayers behind the tax gap.
Jansen emphasized that the database used by Stellenbosch University was the first step, and therefore not the best estimate of the tax gap.
Makhubu said that Sars estimated the tax gap to be between R200 million and R350 million, adding that “there is a need to collaborate with each other in terms of data sets.” He also mentioned that calculating the tax gap requires capacity within the organization, as well as the appropriate processes.
“There is a lot that can be raised by taking advantage of the tax gap. We must extract from that fiscal gap, “he added.
Engel asked Tertius Troost, Mazars tax manager, where he thinks the money is in the tax gap. Troost said that you can see that Sars is trying to build its capacity in transfer pricing and crypto assets.
Mandy said it’s so important that the tax gap is calculated and analyzed on a regular basis, so Sars can see where to focus its energy and resources.
“There are so many misconceptions that [the tax gap] does not lie [solely] with big companies “.
Mandy said the HMRC had calculated that only 4% of the tax gap is attributable to large companies.
Jansen said there is a need for a “coherent policy approach to address compliance,” as well as a need to “engage with other tax organizations and develop skills.”
Makhubu said there are concerns about certain sectors in large companies, and that wealthy individuals are a concern, as are trusts and the tax compliance of those trusts.
Engel said Sait is not seeing a lot of transfer pricing and is seeing more compliance. He mentioned that some larger companies are still struggling with legacy issues and small margins are being protected. He said that sometimes there is a bug somewhere in the system, resulting in an “unanticipated additional fiscal cost.” He also warned that a tax director who has a “big tax victory” will have to defend this for years to come. He also referred to a part of the informal economy that can be taxed.
Do Tax Professionals Increase The Tax Gap?
Mandy said you’d like to think that the vast majority of tax professionals help their clients comply with the law. He added that if something is defensible before the law, then it is accepted. (This is where there may be a difference in the interpretation of the law between the Sars and the taxpayer, where the courts will ultimately decide.)
Mandy concluded by saying that tax professionals who help their clients evade taxes should be “eliminated.”
Troost said taxpayers want to comply.
Among the points raised by the participants during the webinar:
- How much of the tax gap can be attributed to the ease (or lack thereof) of paying taxes? Red tape and the difficulties small and medium-sized enterprises (SMEs) experience in striving to comply due to Sars systems contribute to the tax gap.
- Owner-managed businesses “always” pressure their tax professionals to pay less. So “you have to use defensible positions, but Sars needs to appreciate the lengths we go to to get our clients to pay what they are supposed to pay and to prevent our clients from crossing the line of evasion.”
Read: Taxpayers with pending returns summoned to face criminal charges
Calculating the tax gap is good, so what?
Calculating the tax gap is not the ultimate panacea that will fill the state coffers.
And diverting ‘resources’ to a segment that supposedly has a large tax gap can simply frustrate the few who know how:
- Identify something that does not exist (tax evasion structures);
- Collect and analyze all the data necessary for a successful transfer pricing audit; and
- Enter smart instructions into the risk engine so the risk engine can identify non-compliance.
Unfortunately, complex tax avoidance that relies on arbitration of different tax systems, or loopholes in national laws, is evolving as I write. This requires complex analysis and the ability to identify markers of tax avoidance.
This may take too long for an income service desperately looking for money “now” and low payoff.
Pursuing tax evasion criminals will require painstaking fieldwork, as they are outside the system.
Sars will only be able to fill the tax gap when it finds it.