Discussion Paper on Tax Avoidance and Section 103 of the Income Tax Act, 1962 (Act No. 58 of 1962)

1. Introduction
Section 103 of the Income Tax Act, 1962 (Act No. 58 of 1962), contains the Act’s
General Anti-Avoidance Rule (GAAR). In its current form, the GAAR has proven to
be an inconsistent and, at times, ineffective deterrent to the increasingly complex and
sophisticated tax “products” that are being marketed by banks, “boutique” structured
finance firms, multinational accounting firms and law firms. These products typically
involve the use of circular or offsetting flows of cash and property, special purpose
entities or other accommodating parties, and complex financial instruments such as
derivatives. The tremendous flexibility of derivatives, together with the ease with
which they may be combined with, or substituted for, other financial instruments or
arrangements, makes it extraordinarily difficult to combat these products through
specific anti-avoidance legislation.

The pernicious effects of aggressive tax avoidance are manifold. They include not
only the obvious short-term revenue loss, but longer term damage to the tax system
and economy as well. These other effects include a corrosive effect upon the taxpayer
compliance, the uneconomic allocation of resources, upward pressure on marginal tax
rates, an unfair redistribution of the tax burden, and a weakening of the ability of
Parliament and National Treasury to set and implement economic policy.
Both SARS and National Treasury firmly believe that the vast majority of South
Africans are honest, hard working and willing to pay their fair share of tax.

Practitioners, too, play a vital role in assisting those taxpayers in meeting their
obligations under our tax laws. Unfortunately, those who engage in impermissible tax
avoidance pose a problem for everyone else. It is the purpose of this Paper to start a
discussion of these issues and of how best to address them on behalf of all South
African taxpayers.


Discussion Paper Tax Avoidance Section 103 of Income Tax Act 1962