Tag Archive | SARS

Parliament approves new Border Management Authority

……article 20 June 2020…….

The road to Africa: six new border facilities….

Department of Home Affairs has briefed Parliament on the final plan for the construction of six new modern facilities at South Africa’s border posts, part of a major continental plan to improve cross border trade in the SADC region.  The focus at present is  on issues involving the movement of goods transported by road.  This is in the absence of common rail networks and the lack of development by Transnet in the region.

This month Minister of Home Affairs, Aaron Motsoaledi and Deputy Minister Njabulo Nzuza accompanied by Jackson McKay, the Home Affairs DG,  posted MPs of the Transport Committee on the latest position on development, a process which has until now been limping through both Parliament and the Department of Home Affairs for the last three years primarily due to changes in Cabinet, the difficulty of defining responsibilities between home affairs, treasury, public works,  defence, police and SARS.

Ideas on paper

However, the enthusiasm of the Department of Home Affairs (DHA) for the project remains undiminished, it seems.  Most in business agree to the concept but providing it improves delivery, eases trade and is as far as possible, corruption proof.   In addition, it is acknowledged by most  that fully computerised customs posts are a logical answer but implementing the work so far in this area by both home affairs and treasury needs careful handling, MPs have said

The co-ordination in external affairs of state between some seven SADC countries have added to the gargantuan task, this being now the  ladder to climb.

Officialdom

The Border Management Authority (BMA) Bill was proposed to Parliament in 2015 by the then Home Affairs minister, Malusi Gigaba, and at the time a strong suspicion was harboured by business and industry that the ulterior motives of the Bill’s tabling had much to do with the illness of state capture revelations at the time being exposed.

Many thoughts were expressed around accusations of “empire building” by DHA and the very thought of combining customs collection with immigration, complemented by adding defence and security, led to raised eyebrows amongst opposition MPs and some sections of industry.

It became apparent also that as early as 2013, MOUs were struck up between SAPS, SADNF and DHA, totally without the knowledge of Parliament on the staffing of a combined function to police borders, primarily with an aim of controlling immigration. These queries continued for the period that Gigaba was promoted to Minister of Finance by Zuma.

Hands of the money

Nevertheless, any idea of a further MOU between National Treasury and DHA was totally rejected by treasury officials. Within weeks of the Bill being first tabled in Parliament under the aegis of the Fifth Parliament, Ismail Momoniat of Treasury expressed the Minister of Finance’s view to MPs that any hopes that  DHA had of their new BMA staff  being involved with tax matters and customs dues would be rejected in its entirety.

At that point the Bill was still particularly loose and unacceptable as far as its wording was concerned  but it was still agreed by Parliament that, in a broader sense, trade corridors had to be improved.   Injected into the discussions during 2017 was Jacob Zuma’s eleventh cabinet change in the home affairs portfolio, past minister Ayanda Dlodlo, and as a person totally unaware of trade issue implications and the whole concept bogged down, beset as it was with refugee and immigration matters.

As time passed the task of opening up diplomatic and trade relationships in Africa seemed to become more evident. The project then fell to the now incumbent Minister Aaron Motsoaledi who has started pushing for better trade relationships and has begun forcing through the mechanics of trade mechanics and infrastructure.    With neighbouring relationships now coming to the fore under President Ramaphosa as African Union chair, to some extent SADC issues are looking up but still manacled by  economic collapse in both Zimbabwe and Mozambique.

Wasted years

The core of  ANC thinking, like so many other radical African movements, focuses but little in economic terms on international trade and relationships and  nowhere  in this area has this been more evident than in the total lacking of debate during parliamentary meetings.  No serious consideration of development on the subject of road and rail links in Southern Africa has arisen at all or any real focus on the development of port authority controls and handling facility development for anything other than domestic reasons.  Most SADC countries complain of Durban Port “bottlenecks”.

In the past, such matters were left to a crumbling Transnet and under Jacob Zuma this position deteriorated to its worst ever in the history of South Africa, but now, in 2019, the Bill was re-tabled in the new Parliament of Cyril Ramaphosa and the ever busy Minister Dr Aaron Motsoaledi seems to have rescued to some extent the situation, coupled with efforts by the Ministry of Tran

sport with the Economic Regulation of Transport Bill, aiming at pricing controls  and transport management, which Bill is being processed by the parliamentary transport committee.

Refugees under focus  

During the recent passage of the BMA Bill, DG of Home Affairs, Jackson Mackay,  gave it his  best in a presentation on the subject to MPs and one had to admire what has been achieved in such a negative environment.     As a result of this portfolio committee meeting, the concept is now officially approved by Parliament, with MPs now calling for regular updates on the new “one stop border posts”, or OSBs, which will be at Beitbridge, Lebombo, Maseru Bridge, Kopfontein, Ficksburg and Oshoek.

Jackson Mackay’s presentation was supported by the 2017173-page report developed by the Cross-Border Road Transport Agency (C-BRTA) which had provided a bench-marking exercise along the highly trafficked road transport corridors in the west and east Central African regions, all with a view of finding solutions to opening up trade movement to and from South Africa.

Essentially, the “challenges” established, Mackay said, were congestion, delays at borders, and long journey turnaround times, all of which reduced safety and high cost of doing business, such factors impeding inter-regional trade.    Also, trade between the partnering countries stands at only 12% of the economic potential of the region.  Urgent intervention was called for by the report, Mackay said, especially given the fact that cross-border road transport carries over 80% of the total goods that are traded in the region.

Conclusion

The report concluded that the status-quo cannot be left to perpetuate if SADC was to achieve its set socio-economic and developmental objectives without implementing the multilateral cross-border road transport arrangements.  This has now been achieved, MacKay said, in the form of the Border Management Authority, already partially staffed. Essential now is the transformation of  prioritised border posts into “One Stop Border Posts” (OSBs)  to address “the hard and soft infrastructure challenges experienced at commercial border posts along strategic regional corridors”.

DG MacKay said that South Africa currently had an extraordinary number of border points at 72 in all.   Fifty-three of these were on land, eleven airports and eight seaports. Six of these had been officially selected as OSBs and were all road border crossing.The idea is at these crossings transport of goods is no longer stopped twice as previously, once for each country, but only once by the BMA on behalf of both nations. A speedy and consolidated service is to be installed.

Public/private partnerships

MacKay closed with the news that the project had been was registered with National Treasury (NT) as a private-public sector partnership and five consortia had pre-qualified in 2018 tenders to construct the OSBs, Treasury having granted approval to commence the request for proposals.

Budgets are to be submitted to Treasury in the 2020/21 financial year, MacKay said, and that the developers of each port of entry would be appointed by the end of the financial year. The key principle in all planning was “traffic segmentation, where the plans would have separate lanes for cargo, freight, general cars and for vehicles that needed to have goods declared, all only once”.

SA and Zimbabwe had already started preparing an OSB procedure manual for operations on their mutual border, MacKay said, and agreement had been reached with Botswana.  Construction is to start 2022-2024 on all six ports of entry and “the concessionary period” of start-up operations would be in the years 2024-2044, he concluded.

 

 

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Treasury details illicit cash flows

.…Finance Standing Committee gets update

May 2020….In a recent meeting of the Finance Standing Committee, the Inter-Agency Working Group (IAWG) on Illicit Financial Flows told MPs and chair Joe Maswanganyi that from 2108 until the present that investigations had resulted in the recovery of R400m. SARS also told parliamentarians at the same meeting that in terms of illicit flows outwards in 2017 alone, an estimated R93bn had left the country.The Committee had called upon IAWG for a briefing and update and as result, has called for a full report on the whole issue at the end of May which will be made available to the public.  IAWG coordinates the work of several agencies involved in combating IFFs. These are the Financial Intelligence Centre (FIC); SA Reserve Bank (SARB); Directorate for Priority Crime Investigation (DPCI) commonly known as the Hawks;  SA Revenue Service (SARS);   Financial Sector Conduct Authority (FSCA);    SA Police Service (SAPS);   the Special Investigating Unit (SIU);   and the National Prosecuting Authority (NPA).

Adv. Xolisile Khanyile, FIC Director, told Parliament that a definition of IFFs was “Funds that were illegally earned that were transferred or managed in a fashion that the money crossed borders”.  This, she said, could be deemed to include included transfers accumulated as a result of tax evasion and amounts earned from corrupt practices trade in contraband goods.  To this had to be added drug trafficking and counterfeiting activities.

Khanyile said that in taking a broader view on the effect IFFs had on the SA economy, there was no doubt such criminal activity drained its foreign exchange reserves, reduced tax collection, cancelled out investment flows and in an overall sense, worsened poverty.

Africa overview

She added that that the UN Economic Commission for Africa had estimated that current illicit flows from Africa probably amounted to some US$50bn per annum which was the amount that the continent received in developmental assistance.  Khanyile noted that the IAWG concentrated only on complex cases involving amounts of more than R100m.

Dr Mike Masiapato, who is FIC’s executive handling its monitoring and analysis processes, said to handle cases successfully, such had to involve at least three of the agencies within IAWG to make an investigation workable.   Eight cases were now under investigation.

Financial gangsters

These included a Ponzi scheme involving R126m taken out of the country, suspects appearing in court in May 2019.  R71.6m at this point, Dr Masiapato said, had been secured was and a process started to recover US$5m held in the USA.

In another case, mis-invoicing to the tune of R700m was involved where Reserve Bank had frozen R72m and processes start to forfeit the sums involved.  Exchange control contraventions amounting to R397m leaving SA were involved with DPCI and SARS involved in the follow up.  At this stage R9.3m had been surrendered to SARB.

 Brotherhood

A problem existed with hawala transactions (*Refer end note), Masiapato said, where a case involved a total of around R150m. The parties, similar to brokers, were being investigated in various countries and intelligence gathering started on the underground systems involved.    So far, SARB had managed to block R73.7m in transactions. This had damaged considerably the parties trading in this manner.

On the subject of illegal imports of cash, MPs were told that a major issue had always been “cash mules” at SA ports of entry and Dr Masiapato gave a figure of R67m recovered, but he did not elaborate on the period or the circumstances.

Old tacky

Exchange control contraventions, similar to customs matters, were always an ongoing issue and would continue always to be so, it was explained by Dr Masiapato.  One case currently involved R100m with the case now being closed and the culprit receiving an 8-year imprisonment imposed.

A major problem also was transfer of monies to China by organised crime syndicates. Recently, a transfer of R2.7bn was involved with a now well-known Chinese syndicate.  Reserve Bank successfully intervened by disrupting exchanges which at the time involved 175 bank accounts andR2.9m was recovered, Masiapato said.  Another current follow-up by SARB involving exchange control offences had involved a travel agent to the extent of R2.5bn, R78m of this so far being blocked. The case is ongoing.

Want to talk

Pieter Alberts, a senior manager from FIC , said the organisation was to explore new ways of improving the financial intelligence reports it provided to law enforcement agencies in terms of the FIC Act.  FIC would be creating considerably more private sector partnerships to access financial information needed on specific cases, he said, and would seek improved access to government databases.

South African Reserve Bank (SARB) told parliamentarians that for 2019/20, the year under review, R3.8bn involving 148 cases had been blocked involving 275 bank accounts.  Of this, R112m had been forfeited in 50 of the cases.    Thys Basson said that SARB was receiving an increasing number of cases from banks in South Africa.

 Bits and pieces

Interesting was the fact that R15m in the accounts of individuals involved in the regular illegal transfer of crypto currency. Such funds when blocked are held in an interest bearing accounts, usually originators bank account.  This is in terms of SARB instructions whilst investigations by any member of the IAWG grouping continue. Basson described the blocking of funds as a “very powerful regulation”.

Gumming up systems

The act of a blocking funds had a serious effect upon the long and short-term trading ability of both parties to the transfer locally and abroad.   This was even if the full amount suspected had been over a long period and therefore only current trading in the account was found when frozen, Basson said.

Blocking funds was a most effective deterrent in both halting any further movements, throwing arrangements between parties into confusion and providing evidence for criminal prosecution on both present and past behaviour.     It was a feared instrument, he said.

Private business sectors consistently subject to money laundering investigations, Basson told MPs, were estate agents, banks, attorneys, the gambling sector, motor vehicle dealers and foreign exchange dealers.   Dealers that built up crypto asset holdings would soon be added to the SARB focus list.

Number counts

SARB had received 43 referrals of cases from the FIC, Basson concluded.  It had referred three cases to the FIC and received 142 enquiries from SARS, SAPS, NPA and the Asset Forfeiture Unit.  Also SARB had referred 24 entities or persons to SARS for investigation of tax non-compliance.

As a result of questioning from MPs on the subject of performance of police investigations, Thys Basson gave facts and figures supporting a poor record by SAPS in this area. After lengthy debate, it was decided by Chair Maswanganyi, that all matters and the lack of public awareness of all issues involving IFFs, had to escalated.

It was adopted across party lines that rather than go any deeper into such matters for the moment that Adv. Xolisile Khanyile should compile a full and detailed report for Parliament on IAWG concerns and needs, the reports for tabling by the end of April 2020 and then released for general interest.

 Pay up time

Well-known Commissioner of Taxes, Edward Kieswetter, then closed the meeting with a report from SARS on illicit flows of money from the perspective of the losses of tax to the fiscus.   He said that SARS had recently established an integrated enforcement capability to deal with the illicit economy which unit had some 760 active investigations into cases involving R30.8bn. Cases involving 350 entities were under SARS investigation

To date, R1.4 billion had been recovered by way of cash collected, preservation orders and proven claims against liquidated assets. Twenty cases at this stage for major sums over R5m had been referred by SARS to law enforcement agencies.  Kieswetter said SARS had received some 200 requests this year alone for information from parties such as the PIC investigation, the Zondo Commission  and regular enquiries from DPCI and the SIU. The requests involved 1 385 taxpayers linked to 2 984 entities.

 Tax games

Of concern to SARS, Kieswetter said was that assessed losses carried forward by large corporates surged from R130bn in 2015 to R280 bn in 2017. Also, base erosion and profit shifting were seriously eroding the current and future tax base of South Africa currently, since profits actually earned though locally generated activity in key industries and commerce were ending up in tax favourable jurisdictions. He quoted Switzerland as an example.

Summing up

In conclusion the Standing Committee on Finance repeated its call for a report to be escalated to a national level.    Chair Joe Maswanganyi told Adv. Xolisile Khanyile that it was essential for the public to be informed on the levels of illicit money transfers and for the public to understand the effect on the economy. She said she would do this.

The IAWG report, he said, should be produced in collaboration other experts in the grouping and would be debated, any findings being then agreed to be adopted by Parliament.

*Note on hawala transactions.

Hawala originated in South Asia during the 8th century and is used throughout the world today, particularly in the Islamic community, as an alternative means of conducting funds transfers.

 A handler in one country accepts cash from a customer then contacts a handler in another country who hands hand out the equivalent amount minus commission.   In an overall sense, each handler ensures that all transactions between them are more or less balanced, once commission considered. 

  The process, obviously illegal, cuts out any bank transfer fees since hawala as an informal agreement, based on trust between the handlers, obviates any need for a bank account. Thus, money never “crosses borders” and no “follow the money” track is apparent.

 

 

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Tax Avoidance Bill: NPA and Hawks on illicit flows

Treasury, FIC, Hawks, NPA give Parly update…

report to clients end of April …

It now seems inevitable that the Minister of Finance will be tabling a General Anti Tax-avoidance (GATA) Bill by July 2019 as part of National Treasury’s plan to protect the tax base primarily aimed, as one MP put it, at “knocking profit shifting on the head”.   Changes to the Companies Act are also to be introduced.

A high-powered meeting, chaired jointly by Yunus Carrim of the Standing Committee on Finance and Joan Fubbs of the Portfolio Committee on Trade and Industry, listened  a few days before Parliament closed in April, to report-backs which came from National Treasury, the Hawks, National Prosecuting Authority (NPA) and others combiningg to stem the flow of illicit funds.

Read more…Tax avoidance Bill

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Gigaba pushes for control of border posts

Treasury, Home Affairs at odds on customs issues

Parliament will be debating in the new session in August the Border Management Authority Bill.   What the Bill proposes is a single state entity known as the Border Management Authority (BMA) to oversee all aspects of the movement in the import/export of goods and to control movement of all persons either leaving or entering the country.

The idea is that all border law enforcement functions along South Africa’s fragmented 5,000 kilometres of border will be the responsibility of the BMA.   Read More……    Border Management Bill July 2018 PDF

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Border Management Authority around the corner

SARS role at border posts being clarified ….

In adopting the Border Management Authority (BMA) Bill, Parliament’s Portfolio Committee on Home Affairs agreed with a wording that at all future one-stop border posts, managed and administered by the envisaged agency and reporting to Department of Home Affairs (DHA), were to “facilitate” the collection of customs revenue and fines by SARS staff present.

However, on voting at the time of the meeting, Opposition members would not join in on the adoption of the Bill until the word “facilitate” was more clearly defined and the matter of how SARS would collect and staff a border post was resolved.

Haniff Hoosen, the DA’s Shadow Minister of Economic Development said that whilst they supported the Bill in general and its intentions, they also supported the view of National Treasury that the SARS value chain could not be put at risk until Treasury was satisfied on all points regarding their ability to collect duty on goods and how.

Keeping track

Most customs duty on goods arriving at border controls had already been paid in advance, parliamentarians were told; only 10% being physically collected at SA borders when goods were cleared.

However, with revenue targets very tight under current circumstances both SARS and Treasury have been adamant that it must be a SARS employee who collects any funds at border controls and the same to ensure that advance funds have indeed been paid into the SARS system.

The Bill, which enables the formation of the border authority itself, originally stated that it allowed for the “transfer, assignment and designation of law enforcement functions on the country’s borders and at points of entry to this agency.”

Long road

It was the broad nature of transferring the responsibility customs of collection from SARS to the agency that caused Treasury to block any further progress of the Bill through Parliament, much to the frustration of past Home Affairs Minister, Malusi Gigaba.   It has been two years since the Bill was first published for comment.

DHA have maintained throughout that their objective is to gain tighter control on immigration and improve trading and movement of goods internationally but Treasury has constantly insisted that customs monies and payments fall under their aegis. The relationships between custom duty paid on goods before arrival at a border to Reserve Bank and that which must be paid in passage, or from a bonded warehouse was not a typical DHA task, they said.

Breakthrough

It was eventually agreed by DHA that SARS officials must be taken aboard into the proposed structure and any duties or fines would go direct to SARS and not via the new agency to be created or DHA.

This was considered a major concession on the part of DHA in the light of their 5-year plan to create “one stop” border posts with common warehouses shared by any two countries at control points and run by one single agency. More efficient immigration and better policing at borders with improving passage of goods was their stated aim.

Already one pilot “one stop border post”, or OSBP, has been established by DHA at the main Mozambique border post by mixing SAPS, DHA and SARS functions, as previously reported.

To enable the current Bill, an MOU has been established with SAPS has allowed for the agency to run policing of SA borders in the future but Treasury subsequently baulked at the idea of a similar MOU with SARS regarding collection of customs dues and the ability to levy fines.
Bill adopted

At the last meeting of the relevant committee, Chairperson of the PC Committee on Home Affairs, Lemias Mashile (ANC) noted that in adopting the Bill by majority vote and not by total consensus, this meant the issue could be raised again in the National Council of Provinces when the Bill went for consensus by the NCOP.

Objectives

The Agency’s objectives stated in the Bill include the management of the movement of people crossing South African borders and putting in place “an enabling environment to boost legitimate trade.”

The Agency would also be empowered to co-ordinate activities with other relevant state bodies and will also set up an inter-ministerial committee to handle departmental cross-cutting issues, a border technical committee and an advisory committee, it was said.

Mozambique border

As far as the OSBP established at the Mozambique border was concerned, an original document of intention was signed in September 2007 by both countries. Consensus on all issues was reached between the two covering all the departments affected by cross-border matters.

Parliament was told at the time that the benefit of an OSBP was that goods would be inspected and cleared by the authorities of both countries with only one stop, which would encourage trade. In any country, he explained, there had to be two warehouses established, both bonded and state warehouses.

Bonded and State warehouses

Bonded warehouses which were privately managed and licensed subject to certain conditions, were to allow imported goods to be stored temporarily to defer the payment of customs duties.

Duties and taxes were suspended for an approved period – generally two years but these had to be paid before the goods entered the market or were exported, MPs were told. The licensee bore full responsibility for the duty and taxes payable on the goods.

State warehouses on the other hand, SARS said at the time, were managed by SARS for the safekeeping of uncleared, seized or abandoned goods. They provided a secure environment for the storage of goods in which the State had an interest. Counterfeit and dangerous or hazardous goods were moved to specialised warehouses.

Slow process

MPs noted that it had taken over six years for the Mozambique OSBP to be finalised. SARS said there were many ramifications at international law but added two discussions with Zimbabwe for the same idea had now taken place. It was hoped it would take less time to reach an agreement as lessons had been learnt with the Mozambican experience.

On evasion of and tax, SARS said in answer to a question that losses obviously occurred through customs avoidance and evasion, so it was consequently it was difficult to provide an overall figure on customs duty not being paid, as evasion was evasion. Smuggling of goods such as narcotics, or copper, which could only be quantified based on what had been seized.

The same applied to the Beit Bridge border with Zimbabwe where cigarette smuggling was of serious concern and through Botswana.

In general, it now seems that Home Affairs is to adopt an overall principle of what was referred to as having one set of common warehouses for one-stop declaration, search, VAT payment and vehicle movement with a SARS presence involving one common process for both countries subject to a final wording on the SARS issue before the Bill is submitted for signature.

Previous articles on category subject
Border Authority to get grip on immigration – ParlyReportSA
Mozambique One Stop Border Post almost there – ParlyReportSA

Posted in Finance, economic, Fuel,oil,renewables, Justice, constitutional, Mining, beneficiation, Public utilities, Security,police,defence, Trade & Industry, Transport0 Comments

SARS understaffed to deal with transfer pricing

Davis report on transfer pricing confirms …

NB: This article updated after two recent meetings of committee on transfer pricing. Report with clients.

JudgeDennisDavisSouth African Revenue Service (SARS) was completely lacking in sufficient staff to deal effectively with transfer pricing in order to spot illegal transactions, said Judge Dennis Davis in his capacity as chairperson of the Tax Review Committee when addressing the Parliamentary Portfolio Committee on Mineral Resources.

He also pointed out that SARS, in any case, was also not provided with sufficient information by declaring companies, particularly multinationals as legislation stood at present, to further probe cross-border transactions to determine whether the movements involved the illicit transfer of profits from high-tax to low-tax regimes.

He told parliamentarians that whilst about three years ago SARS had conducted a very specific and targeted investigation, and had raised in one financial year alone some R1.1bn, this only illustrated the far larger amount of “haemorrhaging” that was taking place.

Not transfers but manipulation…

The Judge had to explain to MPs time and time again that transfer pricing in itself was not illegal, only any manipulative tax behaviour usually involving non-declaration or undervaluation.

Judge Dennis Davis referred to the recent highly publicised case involving HSBC where some R23bn directly involved the SA fiscus “and which was under review by SARS”.  He also drew attention to the fact that as a result of disclosures during the Marikana inquiry, Lonmin appeared to have profited by some R280m in saved taxes by transfers.

railfreight“Fictitious transfer pricing declarations were the problem”, he said, where multinationals managed to declare profits which appeared lower in countries with higher tax rates and higher in countries with lower tax rates. This occurred where the culprits identified transfers of intangibles for less than full value; showed over capitalisation of tax group companies and declared contractual arrangements with low risk tax environments.

Digging deeper

The Davis Tax Committee had recommended to National Treasury Department that the current unit in SARS, dedicated to base erosion and profit shifting be strengthened. At present this constituted only twenty personnel. “Building up this team would enable SARS to dig deeper into companies’ affairs”, he said.

Billy JoubertBilly Joubert, Tax Director, Deloittes, pointed to the fact that transfer pricing was in fact a “neutral” instrument in terms of its intention to promote industrialisation because its purpose was in fact to achieve arm’s length profits across the value chain.

Transfer pricing rules based on international best practice provided investors with certainty and it also protected the tax base of the relevant country, he said.   It was therefore an essential part of any tax system, providing taxpayers did not manipulate prices by shifting profits to lower tax jurisdictions. He condemned the practice.

Arm’s length reporting in question

Joubert said South Africa was an observer and an active contributor to the OECD and their transfer pricing guidelines was a resultant consensus document. It was critical for SA to align with the tax policies adopted by their trading partners where they could, endorse “the arm’s length principle” adopting the guidelines in their own domestic environment and follow global standards.

He said that SARS had achieved the collection of approximately R5bn over the last three years from some 30 audits and adjustments of R20bn.

He concluded that SARS’s new rules “were now more closely aligned to the global standard and possibly ahead of many other countries”, noting, however, there was a lack of certainty in terms of outdated practice notes; limited guidance on implementation of “secondary adjustment mechanisms”; and also a lack of interaction with double tax agreements which were closely allied to the process.

Back to understaffing…

Prof Johann Hattingh of UCT pointed to the fact that the Davis Tax Committee recommended full compulsory OECD style taxpayer information disclosure and there “was more than enough in the legislative armoury of SARS to effectively combat intercompany mispricing or tax abusive behaviour”.

However, he also pointed to the fact that SARS was understaffed and simply outnumbered by input of declarations to effectively implement transfer pricing legislation across a broad spectrum.

Prof Hattingh explained that insofar as tax interpretation was concerned it was a complex and ultimately subjective evaluation because of the difficulty in identifying intangibles and services which were transferred or provided and the arm’s length price at which they were valued. Even the whole definition of an “arms length transaction” was subject to difficult legal, accounting and tax interpretation, he pointed out.

OECD the genisis

He said all BRICS countries, except Brazil, took the OECD guidelines as a starting point, Brazil using fixed international commodity prices which provided more certainty but which conflicted in many cases with double tax agreements, since double tax could arise in one of the countries involved in transfers.

EFF member Freddie Shivambu said that in terms of SARS, staffing with skilled personnel was not the only problem as far as could see but there was a lack of clarity on the way forward.  Judge Davis replied that there were indeed criminal elements involved, such as illegal siphoning of money and under-declaration of assets, but his committee had established “empirical evidence” that the amount lost to the fiscus was not always as high as it was reported to be.

But the way forward, he re-empahsised, involved updating wording of legislation; the ability to follow up on “arms length transactions” and more staff to do this. His Committee’s report was with the President.

ANC says transfer pricing is manipulation

Some ANC members pointed to the fact that some multinationals were making “massive profits and not contributing to the country’s agenda to address poverty, inequality and unemployment and transformation” and that transfer pricing should be banned. Others called for it to be declared “illegal”.

They were corrected again by Judge Davis who explained that transfer pricing was a legitimate necessary process for companies doing legitimate transactions and as such it could not and would not be “banned” or illegalised.

D Macpherson DAMr D Macpherson (DA) joined the debate to say that the issue of illicit transfer pricing should not become a political matter but that it was a national concern for all, pointing to the fact that whilst transfer pricing was one issue, the country was losing some R6bn through other forms of corruption.

It was all part of the same problem, he said, and the country had to take a stand against all illicit activities that deliberately robbed the government of revenue.

Not just mining worldwide

Meanwhile Judge Davis agreed with ANC members that “additional revenue was needed to redress historical injustices” but the World Bank had reported that South Africa had addressed this challenge better than most countries, including Brazil. There was no evidence to suggest that transfer pricing affected the mining industry notably.

He was joined by Billy Joubert of Deloittes who stated that such a transaction should not be criminalised because they were cross-border transactions, which was essentially transfer pricing, and re-emphasised that they were “neutral” until  assessed and found to be illicit or not.

National Union of Mineworkers said transfer prices should in principle match either what the seller would charge an independent, arm’s length customer, or what the buyer would pay an independent, arm’s length supplier. He claimed that transfer pricing defeated the objectives of the Minerals and Petroleum Resources Development Act.

“All it meant”, said the NUM spokesperson, “was retrenchment of employees; low and unequal salaries: inadequate investment on skills development; poor implementation of social and labour plans and less investment on health and safety standards, resulting in injuries and fatalities.”

brigette radebeBridgette Radebe of South African Mining Development Association (SAMDA) said her records showed that “out of 151 countries, South Africa lost, on average, the twelfth highest amount of money through illicit financial outflows”. She disagreed with Joubert of Deloittes on the ‘neutrality’ of transfer pricing and the effects and that the statement that the mining industry was a “small player” was incorrect.

She said the mining industry contributed 17% of GDP and 38% of exports, plus 19% of private investment with R78 billion spent in wages and salaries. “These figures were totally eroded and made misleading by transfer pricing”, she said.  She provided the parliamentarians with a series of figures explaining how transfer pricing in the mining industry took place and claimed that manipulation was often the practice.

SAMDA suggested the immediate alignment of the mining charter with the B-BBEE Codes of Good Practice with transfer pricing and to address the issue of penalties contained in the charter for non-compliance.  Much agreement from ANC members took place.

Multinationals under attack

One ANC member stated that “the bulk of South Africa’s mineral resources were in the hands of foreign nationals and it was good that SAMDA and organised labour came together and addressed the issue of transfer pricing in terms of the South Africa’s economy.”

A department of mineral resources (DMR) staff member attending was called upon by the chair to respond, who stated that all the issues raised would be discussed by his department and in the light of success with penalties under the Mine and Safety Act, increased penalties for breeches in declarations might be considered.

Cooperation possible

DMR and SARS had been working together, the spokesperson said, on the whole issue of transfer pricing, a memorandum of understanding between the two departments having been established.

SAMDA said that some multinational companies often wished to “manipulate prices to such an extent that there was no income for beneficiation or share distribution and consequently loans on shares could not be repaid.”

Other articles in this category or as background
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