Strategy& economist recommends strategy to promote tax compliance

04 December 2018 Consultancy.co.za

A comprehensive strategy ranging from deterrence mechanisms to trust-building is essential to solving South Africa’s issues with tax compliance, according to economic analysts at PwC’s Strategy&. The new strategy must be entirely centred around people to be successful, according to the firm.

Tax evasion has been an issue of particular significance in South Africa recently. In July, the South African Revenue Service (SARS) began to clamp down on the problem by publicly shaming defaulters, who had failed to file their returns since the tax hikes introduced in February this year.

A lack of compliance with tax regulations is particularly damaging to South Africa, given that a large portion of its GDP is generated through corporate taxation. Nevertheless, periodic increases in tax levels combined with regular instances of corruption have reduced public faith in the taxation system.

According to Strategy& Economist Maura Feddersen, rebuilding trust in the tax structure is one of five crucial measures required to improve levels of compliance in South Africa. Federsen bases her analysis on information gathered through first hand interactions with corporate tax payers in South Africa.

Strategy& economist recommends strategy to promote tax compliance

The public shaming “deterrence mechanism” currently being employed by SARS is one of these measures, alongside an overall reinforcement of the social normative structure surrounding taxation. In essence, the propensity to pay tax increases if the general social norm is to pay tax.

Another measure recommended by Feddersen is an effort to make the tax structure more understandable and accessible. “Most of our conversations with corporate taxpayers suggested that it takes time to figure out SARS’ tax administration and processes. This shows that there may be complexity involved with the tax system,” she said.

Lastly, Feddersen argues for a system that is more considerate of economic conditions. South Africa has been struggling with slow economic growth for a few years now, and such a challenging environment tends to erode motivation. Paying taxes is an additional burden that most individuals are not willing to bear.

“Insights from behavioural economics can provide the framework for a better understanding of the behaviours of taxpayers and their attitudes towards taxation. Ultimately these insights can drive both voluntary compliance and the efficiency of the tax administration,” argues Feddersen.

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South African companies to be amongst the worst hit by expat tax

16 April 2019 Consultancy.co.za

As the realities of the proposed expat tax gradually come to light, experts at financial consultancy Tax Consulting SA have indicated that the new policy is likely to hit companies and employers harder than it is expats themselves, particularly domestic organisations that send employees abroad. 

So far, the focus has been on the struggles in store for wealthy South African expats, who might be taxed a considerable amount of their income if they earn in excess of R1 million. As a result, South Africans living abroad are losing their competitiveness on the job market, given that they require a larger cushion.

Now, more analysis has revealed that the scenario is equally bad for South Africans working for domestic firms, who are sent abroad on assignments. As per the new proposed policy, if the foreign assignment runs for more than 183 days, then the employee is subject to the heavy expat tax.

South African companies to be amongst the worst hit by expat tax

Calculations have placed this tax as high as 45% of foreign income in some cases. Rather than ensuring compliance, which is the purpose of the policy, the new tax is at risk of deterring South Africans from accepting foreign assignments, which runs against the current goals of the government.

The President has made clear his goals of opening South Africa’s doors to foreign businesses. Nevertheless, trade and collaboration with foreign firms is a challenge if South Africans are not predisposed to working abroad. Analysts at Tax Consulting SA have been watching the developments closely, and have warned of this danger. 

“The reality is that with this amendment, any additional cost would ultimately have to be borne by the employer, as no expat would accept an assignment without these benefits and, to ensure that these assignments remain lucrative, the employer would have to increase the expat's package,” said the firm.

The new tax is also likely to affect other sections of South Africans living abroad, including those who are permanent residents in another country but continue to have assets in South Africa. Others who will be hit include permanent residents abroad who have not yet settled their finances in South Africa.