Davis Tax Committee: update by Judge Dennis Davis

Meeting report

Update on the Davis Tax Committee (DTC)
Judge Dennis Davis, Chairperson, noted that the DTC was introduced on 17 July 2013, by the then Minister of Finance. Two officials, one from National Treasury and one from South African Revenue Service (SARS), were ex-officio members. All members were part-time. The mandate of the DTC covered every aspect of tax policy. Terms of reference were framed against the backdrop of the National Development Plan. It was the first tax enquiry in 20 years, and was preceded by the Katz Commission. It was not clear if the Katz Commission recommendations still had traction. The DTC was a committee, not a commission. That meant that it could not simply release reports. Reports were produced and the Minister was asked to make it public. Eleven subcommittees dealt with various aspects of taxation. Every effort was made to draw suitable people into the subcommittees. People were invited to speak to the DTC, which also met with political parties. Base erosion and profit shifting (BEPS) was a crucial issue. It had to be known how much money was held in other tax jurisdictions. The biggest problem was not with the big multinational companies, but rather one rank below. Further disclosure and revenue information were needed about why companies held money in low tax jurisdictions. Many countries were concerned. Unfair techniques were also employed by high network individuals. The US banks were asking South African banks how much money their people held in SA banks.

Judge Davis commented on the South African tax morality. South Africa risked downgrading by rating agencies. Corruption was a challenge. People were saying that they would more readily pay their fair share of tax if there was less corruption. It was not just about e-tolling. A culture of payment had to be encouraged, and for that there had to be probity about corruption and expenditure. The Macroeconomic subcommittee was looking into where revenue could be raised. Increased VAT had consequences for inflation and growth, which had to be considered. There were limitations on raising tax. South Africa had inherited a legacy of a skewed distribution of wealth. South Africa did not have a wealth tax, but there was estate duty which was close to wealth tax. It was said that people would emigrate because of it, but the fact was that other countries had fiercer tax regimes. Carbon tax had aroused DTC interest. There was no analysis of which tax incentives worked.

Judge Davis pointed out that it was not possible to tax for growth. It could not offset low economic growth, or the electricity crisis. Taxation was complicated and onerous. There had to be simplification. Challenges included the following: The Committee was advisory in nature and could only recommend to the Minister of Finance. Government; it needed labour and business and government to engage with the Committee; there had been requests for expansion of the Terms of Reference but that would lead to a protracted lifespan for the Committee. The DTC hoped to conclude its work by the end of 2016, or early in 2017.

Discussion
Mr D Ross (DA) referred to the shortfall of R15 billion that had to be made up. The DA had made a submission about corruption and wasteful expenditure as contributing factors. There was concern over the 1% increase in personal income tax (PIT). The maximum tax rate for the upper income bracket in SA was 41%. It was higher than other emerging economies. Comparative figures were 13% for Russia; 26% for Malaysia; 27% for Brazil, and 35% for Turkey. There were implications for tax morality. People had to be taxed, but not overtaxed. The figure was higher than for other emerging economies The tax to GDP ratio was 25.5%. Only eight African countries had a higher rate. The figure for Nigeria was 4%, which indicated favourable tax circumstances in Nigeria. Nigeria was overtaking South Africa as the leader in Africa.

Small and medium enterprises (SMMEs) were challenged by the high cost of business. There were low profit margins. Corporate Income Tax (CIT) was only 19%, versus 37% for personal income tax (PIT). The DA had made a submission on transfer pricing. It was not necessarily illegal. Better legislation for tax avoidance and evasion was needed. Businesses could inflate expenses, but could not deflate their gross income. The question was what was to be done about tax havens like Mauritius.

Mr Ross referred to estate duty, which amounted to wealth tax. The wealthy had to be encouraged to invest. Farming prices had doubled in a number of years. Estates could be bankrupted if a person passed away without provisions made. The DA was against estate duty and rather in favour of encouraging entrepreneurship. Wealthy people could create jobs.

Mr Ross suggested that carbon tax was ill-timed. There had to be incentives to the green economy, but not through taxation. It had to be borne in mind that the country was totally dependent on coal.

Mr D Van Rooyen (ANC) was grateful that the difference between a commission and a committee was explained. The two terms were used interchangeably. The preliminary review compared taxation types. There was space to tamper with VAT provision. He asked about the sustainability of the progressive nature of the tax system. There was shrinking space of taxation provision. Taxation was complex and technical. He asked about the difference between South Africa and the global condition. There was space to simplify taxation. He asked if there was any example of a simplified tax system that could serve as a benchmark. The Finance Standing Committee had missed the opportunity to interact with DTC releases made thus far. Releases could be brought to the Finance Committee to be interrogated.

Dr B Khoza (ANC) remarked that the DTC was not granting itself enough time to deal with the issues it had raised. She agreed with Mr Ross about tax morality. Perceptions of corruption were not conducive to tax morality. The terms of reference of the DTC could be made broader. Digital economic space, colonial history and South African challenges had to be taken into account. The tax regime had to be demystified and simplified. A policy position paper on tax was needed.

Dr Khoza said that her taxation experience was based on her work as a municipal functionary. A history of tax fragmentation had to be understood. There were property tax divisions at the municipal level, and at the same time a whole range of other taxes at the national level. PIT in South Africa was not sustainable and the pinch was being felt. There was the need for a rethink of the entire taxation system. Taxation had to be addressed as a whole.

Dr Khoza noted that the ANC was often seen as synonymous with corruption. According to the ANC constitution, corruption was contrary to the ANC. Tax corruption had to be linked to devastating consequences. There had to be punitive measures, and people exposed as corrupt had to be hit where it hurt. The African middle class was feeling the squeeze of a tax regime that was unfair to them. Extended family structures were not taken into account. The African middle class had to start from a zero base. The middle class were not to be seen as black diamonds and squeezed. African merchants were squeezed and squashed. There was no space to grow businesses. In the townships, insurance premiums on cars were higher. People were penalised for being African merchants. They were considered to be a risk. She would have liked the DTC to be broader, but even so, she thanked the DTC for doing a fantastic job. It was a truthful presentation. She took her hat off to the DTC.

Ms T Tobias (ANC) said that she was a politician, and regarded tax according to her political intuitions. She was taught economics by Kenny McEwan, who taught her algebra for the first time in her life. She learned that nobody was stupid, people just perceived things differently. There was nothing complex about taxation. Macroeconomic policy followed political and ideological outlooks. A developmental state would set up a tax policy tailored to its needs. A liberal ideology would lead to a liberal tax system. Tax policies and frameworks had to be spoken to, to see what would work best. All countries reviewed their tax systems. PIT and CIT depended on the conditions of the time. Issues could be looked into when the final report came in. There had to be a scientific approach that compared different systems. She appreciated that the DTC engage a wide variety of interested parties. It did not seek a homogenic opinion.

Ms Tobias noted that the Tax Administration Act created challenges. The question was how those were to be dealt with. She hoped that there would be proposals in the report. BEPS could be looked into at more depth. A DTC opinion was required. There were illicit operations worldwide. Statistics were needed. Statistics were difficult and laborious to compile.

Ms Tobias remarked that it was difficult to establish the contribution of SMMEs. Informal vendor gains could not be captured. Sex workers were highly organised and could contribute to taxation.

The Chairperson advised that what was being said had to be seen as an exchange of views.

Ms Tobias said that the African continent had entered the economic space at a later stage. Business might well not like the DTC, but the Finance Standing Committee would support it. The DTC had to educate the Finance Committee about tax matters.

The Chairperson asked how significant work done on taxation could be for restructuring. There had been no fundamental restructuring of the tax system since the 1920s. He was not familiar with the work of the Katz Commission. He asked how fundamental and far-reaching it had been. There had been sweeping changes in the financial sector.

The Chairperson noted that only 139 submissions had been made to the DTC. He asked about latitude for the Judge to answer, considering the sensitivity of his position and his role. The question was how progressive the tax regime was, compared to social democratic countries, and whether South Africa was indeed that different. He asked if the World Bank considered the South African tax system to be equitable and redistributive. It had been said that SA was the most distributive, but it would perhaps be more correct to say one of the most.

The Chairperson referred to taxation and retirement.

The Chairperson said that SMMEs became an emerging African lobby in 2003/04. It would not do to have a tax system that impeded business. The African middle class were buying houses for the first time, and had property rates slapped on them. It was not fair. An entrepreneurial culture had to be developed, but there also had to be a tax culture. There had to be balance. Frustrations of especially African entrepreneurs were understood. But small business had to be encouraged to pay tax, even if it was minimal. 

The Chairperson referred to the remarks of Ms Tobias that sex work was highly organised, and could be taxed if made legal. The ANC had a position on that. His own view was that this was acceptable. When he was deployed in the Justice Committee he had spoken on the matter on the radio, and was afterwards told by a number of people that he had been very good, which actually meant that people agreed with him. It had to be recognised that people were human.

The Chairperson said that he was skeptical about the notion that if there was less corruption people would more readily pay the tax they were supposed to pay. The fact was that people were not willing to share. It could be said that corruption was endemic to capitalism. The free market encouraged individualism. The super rich avoided the paying of tax. The propensity not to pay tax value was hidden in the free market. A social democratic regime was more likely to get people to pay tax.

The Chairperson said that the Finance Standing Committee had a demanding programme, but a subcommittee led by Mr van Rooyen could engage with the DTC. He asked Mr Dumisani Jantjies of the Parliamentary Budget Office (PBO) to draw things together, so that questions could be sent to the DTC within seven days. He congratulated the DTC on good work being done. He referred to a book written by Judge Davis with Bob Fine. He asked how the Judge currently felt about the position adopted in that work. Those interested could read the last chapter of the book and ask if he was still the same Judge. (The Chairperson was laughing when he said that).

Judge Davis replied that the book was written during his Trotskyite phase. He was not sure that he had entirely given up on that position. There was no magic formula to determine correct tax ratios. There had been a submission from business a long time ago which suggested that the tax to GDP ratio had to be less than 20%. Many people called themselves economists. He himself considered an economist to be a person with a doctorate in economics. He had talked to the IMF and the World Bank. Everything depended on the kind of state desired, and the political philosophy adhered to. He agreed with Ms Tobias about political philosophy and taxation. He had often expressed the view that South Africa in fact had a social democratic Constitution. More depended on what was being done with the money collected. If it was spent on capital structure and investment rather than salaries, the figure could be higher. There was a problem if too much was spent on consumption. At the time of the Katz Commission, a magic number was decided upon, but there was no empirical basis to it. The maximum tax figure for Australia is 49%; for Chili 40%; for China 40%; for Austria 50%; for Croatia 40%, and for the USA 55%. Compared to those, the South African 41% was not high. The South African economic structure was a serious problem. Estate duty deterred greed, as it prevented massive amounts from remaining exclusively in families. Entrepreneurs were not created through the estate of their parents. More likely the estate created trustafarians. A properly structured estate duty did not deter entrepreneurship.

Judge Davis noted that tax avoidance was an attempt to minimise tax payment within the bounds of legality. Tax evasion was based on non-disclosure, which made it criminal. There was a blurring between the two categories, which was evident in some recent court cases. BEPS dealt with both. The Marikana Commission revealed that Lonmin had saved R280 million, which might have been legal. It was legal in the sense that it had been disclosed and charged in royalties. Yet SARS could very well say that it was an excessive charge. It was up to SARS to use the tax avoidance sections of the Tax Act to stop it from happening in the future. Tax evasion happened when there was a secretion of profits without disclosure. Wealthy people placed money in off-shore trusts in other tax jurisdictions. With regard to tax and tax policy, Judge Davis remarked that inequality was a major world issue. Sir Anthony Atkinson argued in his book that inequality had to be dealt with through taxation, by instituting heavy taxes but to rebate through education, for instance. The myth was exploded that there could be economic growth through taxation. The point was taken that there was a tax burden on Africans who had only begun to develop capital. There was a sense of unfairness. But there was a huge number of people in the country who earned barely anything, most of them black. They also needed to be helped through taxation. It was a class question.

Judge Davis remarked that taxing of SMMEs was not an immediate solution. The object was to bring them into the system so that they could be taxed in the future. The aim was to get them into the tax system at low administrative cost. Red tape had to be cut down for SMMEs in the townships. The question with SMMEs was how to create incentives. Tax was not a panacea. There were tax administration challenges. Tax administration was complex. Powers were granted for revenue collection. There were things that had not been litigated upon, people did not know their rights. People had to negotiate their way through new legislation, and tensions arose. Matters had to be simplified, with a holistic approach adopted. The Governor of the Reserve Bank had called for thinking out of the box, to develop an optimal tax system. Out of one trillion rand tax collected, a hundred billion had to go to interest costs. The current aim was to be as prudent as possible. When he was in the Katz Commission, it turned out that taxing could not be dealt with in plain language. South Africa had an overcomplicated tax system. Rolls Royce legislation had been created for a country that did not have the capacity of the USA or Sweden. Complexity had to be minimised.

The Judge continued that huge deficits and interest costs were a challenge to sustainability of the South African tax system. There had to be a balance between indirect (VAT) and direct tax. Most countries worked with a mix of direct and indirect tax. The country could not persist with taxing at the lower end. Corruption was not the only reason why tax was not paid. There was tax evasion all over the world, also in the social democracies. There could be a better tax morality if people were convinced that money was being spent well. He had attended a business breakfast where very well-fed people complained that the 2015 budget only gave them more taxes. Prudence in taxing and expenditure could create a better tax morality.

Judge Davis said that he welcomed liaison with the Finance Committee. He welcomed the opportunity to work with a subcommittee of the Finance Committee. DTC reports were coming through.

Prof Ingrid Woolard, DTC Committee Member, noted that a World Bank report of the previous year had indicated that redistribution in South Africa was good. But redistribution was mostly through expenditure, not much occurred through the tax system. The South African tax system was not as progressive as those elsewhere. Most people were spending all they earned. Tax affected everybody who paid VAT. Indirect tax was regressive. The poor spent relatively more of their income on alcohol and tobacco. Tax on alcohol and tobacco was not revenue raising. A challenge to progressive corporate taxing was that employees had more to fear from that than shareholders. To shift the tax burden to consumers was not progressive. Currently only PIT could be progressive. 97% of PIT tax was paid by 20% of the population. To push further would be to hamstring people. PIT could not be made substantially more progressive. Growth and jobs were needed to broaden the tax base. SMMEs were already taxed through VAT. They were in the VAT system, even if not registered. A way had to be found around red tape for them. Small business had to be encouraged to come in, but through incentives, not through being punitive.

Mr Ismail Momoniat, National Treasury Deputy Director General: Tax and Financial Sector Policy, said that he was surprised that the DTC had not engaged with the Finance Standing Committee before. When the DTC started off there was a lack of independent figures on taxation. The challenge to taxation was that everyone had vested interests. He differed from the Judge about time needed for the DTC to complete its work. Two years was too optimistic. The DTC would still have to review comments on its final report. The tax process had to be consultative. Judge Davis had extended consultation. The problem was that everyone dealt with represented a lobby. There was asymmetry. Unions also had to present their view. The DTC terms of reference were vast. There were elements of the financial sector that the Treasury wanted studied. It had to be decided whether the bank levy was good or bad. It had to be asked which financial reforms were possible. Taxation was stuck in a certain process. The legislation was hard to understand. The question was how to break the vicious cycle. There was a good process, but it had to be simplified. There were too many amendments. The Treasury wanted the Finance Committee to look into the matter. It was necessary to have a tax review every 30 years. It was not advisable to change too much, but things could not remain static. There had to be an exchange of views. He had asked the Finance Standing Committee and the Judge to speak their minds freely, as matters of public interest were being dealt with.

Dr Khoza referred to the current approach to taxing gold mine producers. There were contradictions in that sector. Gold was becoming more expensive to mine, as the gold had to be dug at ever greater depth. South Africa was also declining as a gold mine producer. The decline in gold production had a negative impact, as many were absorbed, only to be shed later on. She asked how the loss of jobs was to be dealt with.

Dr Khoza noted that South Africa was the twelfth largest exporter of illicit money, according to a global financial report. The implications for sustainability was frightening. The National Development Plan (NDP) could not be implemented without sufficient money. She asked what was to be done in the short term about load-shedding. In Hillcrest, where she was from, load shedding led to a complete business shutdown. There would be a further decline in CIT in the year to come. Companies would claim that their profits were impacted on by load-shedding. Taxation was skewed towards PIT.

Dr Khoza referred to the OXFAM report. There were startling figures in it, and she wondered if it were true. It was claimed that multinationals had failed to pay 500 billion, mostly in Africa. The figure was 150 billion in 2010 alone. She said that she wanted to read the book by Judge Davis and Bob Fine, that had been referred to earlier in the meeting.

At this juncture Mr Van Rooyen took over as Chairperson, as Mr Carrim had to leave.

Prof Woolard replied that she could not pronounce on mining. Mining was complicated, as it was a large employer, and a massive earner of foreign revenue. The DTC mining subcommittee could return to the Finance Committee. The Minister would be signing off a report in the following week. She asked Mr Momoniat to comment on the OXFAM figures, and the claim that South Africa was the twelfth largest exporter of illicit money.

Mr Momoniat said that speculative numbers were being considered. It was difficult to say with certainty. It could be that SA was simply more transparent than some other countries. SARS had to look at companies with regard to transfer pricing. Money laundering was being investigated by the Financial Intelligence Centre (FIC) and SARS. Mistakes were made. To cite the entire taxable income figure made it look big. There had to be a technical process to establish sources. It was necessary to go to the data source to check for reliability.

Mr Dumisani Jantjies, Parliamentary Budget Office Financial Analyst, added that the PBO had engaged institutions, when it was preparing the Finance Committee for the joint meeting on BEPS. It was clear that there was a lack of coordination between institutions. It was unfortunate to use figures when it could not be ascertained where they came from. Figures were used to quantify and state the extent of a problem. There had to be better coordination between SARS and other institutions. There had to be a better process.

The Chairperson concluded with the hope that robust engagement could be sustained with the Davis Tax Committee. He adjourned the meeting.