South Africa has been facing a growing problem with increasingly complex and sophisticated forms of impermissible tax avoidance, particularly by certain corporate taxpayers.
In keeping with international trends, the South African Revenue Service (SARS) and the National Treasury (NT) reviewed the effectiveness of applicable legislation on impermissible tax avoidance contained in Section 103 of the Income Tax Act (Act No. 58 of 1962). As a consequence, SARS and the NT today release a discussion paper on tax avoidance for public comment.
A key question the paper raises is the distinction between tax evasion, impermissible tax avoidance, and tax planning. In brief, tax evasion is based on the non-disclosure of information to the tax authorities to evade tax; impermissible tax avoidance involves contrived arrangements that are designed to exploit perceived loopholes in the tax laws; while tax planning is based on the enjoyment of an attractive option in the tax legislation while suffering both the economic and legal consequences that flow from that option.
Experience both in South Africa and internationally, as outlined in the discussion paper, has shown that the harm caused by impermissible tax avoidance are varied and pervasive. Short-term revenue loss is clearly the most immediate and obvious problem, but it is by no means the only problem. Others include:
Trends in tax avoidance have been driven by several factors including globalisation, deregulation (particularly in the financial markets), rapid advances in computer and telecommunications technology, and a new emphasis by many professional firms on the development and marketing of so-called "tax products".
Unfortunately, Section 103 of the Income Tax Act has not kept pace with the times.
Thus, despite the significant progress SARS has made in combating these schemes on audit and in fostering taxpayer compliance, impermissible tax avoidance continues to threaten the tax base and the integrity and fairness of the system itself.
The 2005 Budget Review announced that a discussion paper would be released this year regarding an overhaul of the general anti-avoidance rule in Section 103.
The discussion paper recognises that any attempt to strengthen the general anti-avoidance rule brings with it legitimate countervailing concerns. Chief among them are increased uncertainty for taxpayers, the inhibition of legitimate and/or innovative transactions, and perhaps, most importantly, what has been described as an "uneasy tension" between the general anti-avoidance rule and the rule of law.
In light of these issues and concerns, the discussion paper proposes five major changes to section 103. These changes would -
Finally, certain textual changes would also be made to simplify and clarify the provisions of the section.
The proposed amendments are intended to create a more effective deterrent to impermissible tax avoidance and to do so as fairly and efficiently as possible. It is this goal, rather than any specific proposal, that is paramount. With these considerations in mind, SARS looks forward to a healthy and constructive dialog on the best way forward. An extended period for comment, running to 31 January 2006, has been provided to facilitate this dialog.
The discussion paper released today for public comment is available from the SARS web site (http://www.sars.gov.za) and in print from selected SARS offices. It provides a conceptual basis and analytic framework to use in approaching changes to section 103, as well as an initial proposal in this regard.
Interested parties are invited to send comments regarding the discussion paper to email@example.com on or before 31 January 2006 or for the attention of:
Discussion Paper on Tax Avoidance
Private Bag X923
For media enquiries please contact Adrian Lackay at (012) 422 4000 or 083 388 2580.
ISSUED BY THE COMMISSIONER FOR THE SOUTH AFRICAN REVENUE SERVICE