Tax avoidance – “Unlawful” tax evasion and “lawful” tax avoidance

February 26, 2010 By Quintin Leave a Comment

Ernst & Young

In the Duke of Westminster’s case 1(which was endorsed by the Appellate Division of South Africa) it was held that ‘every man is entitled to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be’.

Thus, in the past it was generally accepted that there was a simple distinction between “unlawful” tax evasion and “lawful” tax avoidance. While ‘tax evasion’ was generally regarded as an illegal and dishonest means to escape tax, ‘tax avoidance’ was viewed as a legitimate and legal way of protecting one’s property from unnecessary erosion by taxation.

It seems, however, that the legal way of protecting one’s property from unnecessary erosion by taxation may become a thing of the past. In the 2011 Budget speech the Finance Minister noted that “Government will take further steps to reduce tax avoidance and tax structuring” and the 2011 Budget documentation include, inter-alia, the following tax proposals in this regard:

• Increasing the deemed monthly tax values placed on the use of company cars;

• Reducing the remaining salary structuring options available to employees that have the effect of reducing their monthly tax liability;

• Tightening the anti-avoidance provisions for executive share incentive schemes;

• Amending the Income Tax Act no 58 of 1962 (“the Act”) to address schemes designed to generate income but that are not subject to South African tax through the inappropriate use of foreign tax credits;

• Amending the Act to address schemes which, through the skilful use of foreign tax treaties, manage to avoid South African tax (i.e. treaty shopping);

• Introducing measures to ensure that “unproductive interest” is not incorrectly claimed as a tax deduction;

• Denying an exemption for preference share dividends, guaranteed dividends and any dividends derived directly or indirectly from South Africa; and

• Providing a uniform set of transfer pricing rules to deal with artificial pricing or the misallocation of prices for both onshore and offshore transactions.

The Finance Minister made it clear in the 2011 Budget speech that given the current instability of the economic environment, it plans to make up the apparent revenue shortfall by tightening its belt and ensuring that the use of tax avoidance schemes are kept to a minimum.