Dodgers a risk to revenues globally

There are just more than two million companies on the South African tax register. Only 791000 are liable to submit tax returns and 395000 have no taxable income.

Company tax collections for 2013-14 are budgeted at R170bn out of a total tax collection of R898bn. Companies with taxable income over R1m number 23000 and will pay about 30% of the company tax. And those with taxable income over R100m, numbering just 450, will pay nearly 60%.

High-level tax planning is mostly about effecting a tax deduction in a tax-paying entity and making the income mysteriously reappear in another that, coincidentally, does not pay tax or has a lower tax rate — and also happens to possess the same beneficial owners.

Probably the most effective way to do this is to implement a group funding arrangement and charge tax-deductible interest to taxable entities (deductible) that is received by tax-exempt companies.

It is a problem for the South African Revenue Service to differentiate between the genuine funding arrangements and those that are tax driven.

The general anti-avoidance regulations can sometimes be applied to stamp out the benefit, but not always. This is a major risk to tax revenues worldwide.

SARS recently issued a discussion paper proposing that certain types of debt “hybrid instruments” will have associated interest deductions disqualified.

SARS intends to limit interest deductions where the expense “exceeds 40% of the debtor’s taxable income (disregarding interest received, accrued, paid or incurred); plus interest received or accrued, reduced by interest paid or incurred in respect of debt falling outside the limitation”.

It is likely the new provisions will be in this year’s income tax amendment act.

The act needs to be strengthened to ensure SARS recovers whatever is reasonable from the few companies that can afford high-level tax planning.

But there should be an escape clause allowing the taxpayer to apply for a concession.

Originally published in the Sunday Times: Money & Careers Tax Talk column.

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