The Davis Tax Committee – Where Are We At, and What Lies Ahead?

The Davis Tax Committee

Pictured from left are: Vuyo Jack, Nirupa Padia, Cecil Morden, Finance Minister Pravin Gordhan, Matthew Lester, Judge Dennis Davis, Kosie Louw, Tania Ajam, Nara Monkam, Annet Wanyana Oguttu and Ingrid Woolard. Mr Morden and Mr Louw are ex-officio members of the committee.

It was, in part, this question which lay behind the appointment of a tax review committee in South Africa on 17 July 2013. At a recent dialogue facilitated by professional services firm Deloitte, Judge Dennis Davis, the Chairman of the Davis Tax Committee, for the first time revealed some of the background to the committee’s work and progress to date.

As National Leader for Taxation Services at Deloitte, Nazrien Kader  pointed out, “it has been nearly two decades since the Katz Commission undertook such a review in South Africa and global and local developments since have brought the applicability of our tax system under the spotlight.”

Apart from the nine key primary areas of our tax law that the Davis Tax Committee has been tasked with reviewing (amongst other things), Deloitte engaged with Judge Davis on several matters such as the perception of rampant corruption in the public sector and the lack of tax morality on the parts of taxpayers, in particular, wealthy individuals and large businesses. The key issue put on the table is the extent to which the taxes paid are used for the benefit of society.  In addition, the implementation of e-tolls has seen a widespread and sustained backlash, prompting the question: How far are we away from a tax revolt?

The dialogue between Deloitte and Judge Davis also touched on the issue that there is little empirical evidence which describes the causal relationship between a change in the tax rate and its impact on GDP which, in turn, influences decisions regarding tax policy. Many have argued that the unofficial target of 25% which the Katz Commission recommended was not appropriate. 

“In South Africa, our infrastructure needs remain high and thus our need for a higher tax to GDP ratio,” notes Kader. “We cannot achieve social equity without raising the capital to affect service delivery, so it becomes more a question of ‘what is right for South Africa right now’, rather than a generic ‘what is the ideal ratio’.”

In some quarters, the appointment of a review committee has been viewed as a Trojan horse for higher taxes. Judge Davis explained in no uncertain terms that the committee has been tasked with establishing the best mechanism to achieve economic growth in an equitable fashion which will be undertaken within the framework of South Africa’s socio-economic situation. 

Quoting from the 2010 findings of the UK’s Mirrlees Review (which examined the UK tax system and made recommendations for reform), Davis commented that the South African committee faced essentially the same core issues: “The challenge in this review has been to design a tax system that can raise the revenue that government needs to achieve its spending and distributional ambitions whilst minimising economic and administrative inefficiency, keeping the system as simple and transparent as possible, and avoiding arbitrary tax differentiation across people and forms of economic activity.”

Ideally, taxes should be progressive, especially in such an unequal society as ours. However, there is a case to be made for regressive taxes, such as VAT, to exist, as long as the overall effective tax structure is progressive. 

The Davis Tax Committee has opted to prioritise small and medium enterprises (SMEs) and base erosion and profit shifting (BEPS).  

The first Davis Tax Committee report, covering SMEs, was delivered to the Minister of Finance in December 2013. It is now up to the Minister how the report will be handled – perhaps it will be mentioned in the 2014 Budget Speech.

The detailed report on BEPS is expected to be released in the first quarter of 2014. Commenting on the committee’s BEPS endeavours, Davis drew on the words of New Zealand minister of revenue Todd McClay addressing the Deloitte National Tax Conference in November 2013: “Our rules need to adapt to fit the new reality while still ensuring that New Zealand is attractive to base a business and for businesses to invest and create jobs while ensuring that a fair amount of tax is paid. … The rules for determining where multinational profits are located are becoming less clear as knowledge capital rises in importance relative to physical capital and as enterprises become more global. Ensuring tax is still levied, but at an appropriate level, will require increased international co-operation between tax authorities and increased levels of sophistication by tax authorities.”

Commenting on the Judge Davis engagement, Kader suggested that two aspects stand out:  transfer pricing and tax havens. Also coming under scrutiny will be related-party debt which enable multinationals to shift profits; interest expenses incurred and paid by borrowers which risk being artificially inflated; and hybrid entities and instruments which can be used by MNEs to reduce tax liabilities. There is mounting global pressure for entities to assume a moral obligation to pay tax in addition to the legal obligation. 

The next phases of the committee will see an examination of VAT and mining tax, another critical area for the economy and foreign direct investment. 

Kader commented in closing, “We have welcomed the move to review and improve current tax legislation, to remove ambiguity and to bring the South Africa regime in line with international best practice and we look forward to the first of the committee’s reports.”

Author: Nazrien Kader (Delloite)

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