PwC Partner argues against evidence of profit-sharing tactics in South Africa

16 January 2019 2 min. read
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New research has revealed that the shifting of revenues from South Africa to tax havens is causing an 80% dent in overall revenue flow in the market, leading to widespread public outcry. Kyle Mandy, a Tax Partner at PwC has advised against taking these numbers too seriously, arguing against their utility as concrete evidence.

South Africa’s struggle with tax compliance has been the subject of intense public debate over the last year. Taxes were hiked in the annual budget announced last year, following which default rates rose correspondingly, forcing the South African Revenue Service (SARS) to initiate strong measures against defaulters.

According to new research conducted in relation to the Southern Africa – Towards Inclusive Economic Development (SA-TIED) programme, reluctance to pay tax extends to the corporation level in South Africa, in light of information that several firms in the country are currently operating out of tax havens.

Regulatory restrictions prevent the SARS from investigating whether these strategies for tax evasion are strictly legal. One thing that is apparent, however, is that the strategy substantially reduces the profits generated by a firm in the South African market, in some cases by as much as 80%.

PwC Partner argues against evidence of profit-sharing tactics in South Africa

PwC has been monitoring the tax scenario in South Africa closely, having recommended the tax hikes and subsequently provided detailed and nuanced strategies to inspire confidence in the taxation system and regenerate tax compliance. Now, a Tax Partner at the firm has offered his opinion on the “profit-shifting” phenomenon.

“At best, this study is indicative of possible profit shifting and the possible extent thereof and is not evidence in its own right,” says Kyle Mandy, arguing that “the population used to calculate the profit gap is hopelessly understated and therefore susceptible to producing distorted results.”

Profit-shifting is a common practice across the globe, which forms the basis on Mandy’s argument that the study was bound to find some evidence of the same. He points out that most of the deficits in the profit levels was the result of shifting tactics by only 10% of South African firms.

“This finding is actually suggestive that large scale profit shifting is not pervasive among multinationals but is limited to just a few of the largest firms,” says Mandy. Moreover, Mandy argues that the low profits reported by these firms might simply be the result of poor performance in a struggling economy rather than shifting tactics per say.