The world is changing fast and to keep up you need local knowledge with global context.
Unusually, taxation has gotten into the front of the news queue lately. On the one side there is growing taxpayer concern at apparent waste of their contributions through controversial Government spending on things like Gauteng’s eTolls and Nkandla. There is also growing concern, recently articulated by Western Cape Premier Helen Zille, at the hijacking by the Zuma cabal of the tax collector, SA Revenue Services. Few are better positioned to provide perspective on these issues and the sliding tax morality than Keith Engel, deputy CEO of the SA Institute of Tax Practitioners, who during 14 years at the National Treasury was responsible for the legal aspects of SA taxation. Articulate and obviously well connected, he visited with us at the CNBCAfrica studio today to share his insights. There’s a strong warning – he worries that the country is now experiencing “the beginnings of a tax revolt.”- AH
ALEC HOGG: South Africa bleeds billions of Rands in revenue due to tax-based erosion, and at SARS, they’ve tried to focus on this. An issue addressed by the Davis Tax Committee’s interim report last month, looked at all of this and we have a professional in with us – Keith Engel – who joins us in the studio. Keith, just by way of background: you’re well known in the tax industry for the work that you were doing at Treasury. It gives you a useful perspective. How long were you there?
KEITH ENGEL: Fourteen years.
ALEC HOGG: Why did you leave?
KEITH ENGEL: Well, there comes a point where you need to move on. You don’t want to become part of the furniture. There is a point where you have to move on and you have to graduate, but I had a good time. I loved the Treasury. It was a great experience.
ALEC HOGG: But looking at it now, are you concerned with what you see happening in the economy? There’s lots of rumour and speculation, but from someone who’s ‘been there and done that’…
KEITH ENGEL: Look, we’ve been concerned for a number of years. I keep saying ‘we’ because I don’t really feel like I’ve left the Treasury, but the concerns about revenue have been going since 2008/2009. If you remember Pravin Gordhan’s earlier speeches, he was concerned about revenue back then. The hope was, that we would be very careful on revenue and not raise taxes because we were hoping to grow the economy. So there was a real attempt not to raise taxes and stifle economic growth. The problem was we ultimately needed revenue and he mentioned – even, back then – that if we don’t get the revenue, we might find ourselves where we are today. Our problem is we haven’t had the economic growth. He did everything he could to stimulate the growth, and the growth just hasn’t come through. Now to be fair to South Africa, I think the global economy has turned out to be a lot more sluggish than we all thought.
@alechogg I still pay, but I fight even the smallest mistakes on SARS’ part. And I encourage my clients to fight them as well.
— Francois (@franlouw) January 8, 2015
ALEC HOGG: Well, America’s growing at five percent. China’s growing at seven. Why are we only growing at one? I suppose we could carry on, on that line for ages but the issue for taxpayers is that we’re going to have a shortage come Budget time in February, unless something spectacular happens.
KEITH ENGEL: That’s right and I think a number of people wanted to pump the prime. The problem is if we try to pump the prime with more debt, then all of a sudden, the credit ratings are going to…
ALEC HOGG: So no quantitative easing in South Africa.
KEITH ENGEL: Unfortunately, we can’t afford it anymore. We burned that up.
ALEC HOGG: What’s this latest concern that SARS are talking about with tax erosion?
KEITH ENGEL: Well, there’s always a big concern from SARS on tax avoidance. When I was in Treasury, I was always worried about tax avoidance and base erosion is just another word for tax avoidance. There’s nothing more to it, than that. One of the things we’ve tried to do since 2001, was closing loopholes. The theory that Trevor Manuel had (and that’s what Pravin Gordhan was trying to continue) was ‘close the loopholes rather than raise the rates’. We spent many years closing loopholes. I was under quite a bit of criticism for closing loopholes but the difficulty is that at some point, it’s difficult to close the loopholes. There are only so many and you start finding you’re chasing, you close one, and another one reopens. Now, the base erosion is a particular kind of tax avoidance, which we in South Africa identified a few years ago. What is base erosion, essentially? Base erosion is foreigners earning money here and then artificially shifting the money abroad. What I mean is very simple. The economic activity continues here, but the taxable income arises abroad – somewhere in Mauritius, Cyprus, Luxembourg, Switzerland, or something like that.
ALEC HOGG: But that reflects a lack of confidence, a concern perhaps, generally speaking.
KEITH ENGEL: No, there are two different instances.
ALEC HOGG: If I didn’t think South Africa was going to be a winning nation in future, I would certainly be considering making sure that I had significant earnings outside.
KEITH ENGEL: It’s not quite the same thing.
ALEC HOGG: Not on this point?
KEITH ENGEL: It’s not the same point. There’s a question of divestment. Divestment is a bigger issue and there are some signs of divestment, and that means your income is going to go down, and your growth is going to go down but those are going to go down together. What you’re worried about is they’re still operating here. They’re still earning income here, but they’re saying that for the taxman, their income is earned elsewhere.
ALEC HOGG: A bit like what happened to Google in the Irish situation.
KEITH ENGEL: Typical. Google is the obvious and easiest example.
ALEC HOGG: From a broader perspective though Keith, you talk to people in this economy. When you see the President spending $20m on his own home, there becomes almost, a perception that ‘no. I’m not going to pay the taxes as willingly as I did in the past’. Isn’t this a big issue that the country faces?
KEITH ENGEL: It is an issue and it was actually, identified by our ex-ministers and probably, the new ministers as well, that tax morale has to go both ways. For example, ‘I’m willing to pay tax if I know it’s going to be properly used’ and that came up on a number of interviews and other things. I don’t think I’m an expert in that one in a sense, any more than anyone else is.
ALEC HOGG: Where are we on that, though? Given that during the Apartheid regime, there was a very low tax morality, Pravin fixed it (we believe) and in this regime, it does appear to be perhaps going in the wrong direction.
KEITH ENGEL: I think the attitude is changing.
What you see is the beginnings of a tax revolt.
When you’re talking about a tax revolt that usually begins in several places. People become more resistant to paying taxes. They complain (like the toll roads). The fight against taxes increase, as you say, in misusing the revenue. Unfortunately, you are in an environment where the economy is down, revenue is constrained, and there is a growing hostility to taxation. That’s why you like to focus on loophole closing because those are a small group of people rather than a large group of people.
ALEC HOGG: But there’s a bigger problem?
KEITH ENGEL: There is a bigger problem.
— Dries Cronje (@dries139) January 8, 2015
ALEC HOGG: How do you address that?
KEITH ENGEL: Well, from a tax point of view, that’s not where you address it. I think one of the big issues that’s being discussed is that you can’t talk about tax and isolation expenditure. The real issue in South Africa is not a tax problem. It’s an expenditure problem and we’re trying to simply, do too much with too little resources. That’s my own personal view, but that’s more of an economic view. I know that we say the U.S. is now picking up. China is beginning to slow down. A lot of the world economy is still, quite sluggish. Look at Europe. Really, you have to fix the underlying core of the economy though, and that is outside the power of the Minister of Finance.
ALEC HOGG: Being a tax expert, there’s also been a lot of focus on what’s happening at SARS with some highly respected executives being sidelined and suspended. What do you make of all that?
KEITH ENGEL: I’m not sure because I’m not part of the core of it. Let me say that I know Ivan Pillay. I’ve always liked the guy and I’m a little surprised at all of this, but what you’re seeing – what’s written on paper – is a concern. The prior Minister didn’t suffer fools lightly and if you are the next scandal, then it’s a problem but I don’t know enough about the details of the case. There is a bunch of rumours as to why it’s gone on and I don’t know which one is more than the others are. Look, whenever you have a new Commissioner, he’s going to want to clean with his own broom so maybe there’s some element of that. There might be issues. Some people are saying that Zuma’s behind it. I’m not really sure but the bottom line is that the report that’s there is a problem, and you can’t just sit there and be quiet about it. Who’s responsible? I’m not sure.
ALEC HOGG: Keith, thank you for your insights. He’s fantastically positioned. He’s SAIT’s Deputy Chief Executive – Keith Engel – who spent 14 years at the Treasury, looking after the way we pay tax and the legalities of how we pay tax in South Africa.
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