Sars swoops on multinational tax dodgers to counter base erosion

The SA Revenue Service (Sars) has set its sights on multinational companies that facilitate base erosion by shifting profits to tax havens to avoid paying higher taxes.

It is also targeting ultra-rich tax dodgers, as the government seeks more money from the revenue service to make up for aid cuts from the US and Europe.

Sars commissioner Edward Kieswetter said some importers figured out ways to bring in more goods without paying full customs duties.

“A good worth $20 [R342.66] is manufactured and exported from China [for example], and it goes through the logistics; between the time it leaves and the time it arrives, a new invoice has been manufactured that declares the good at $1, whereas the cost is $10,” he said. “It does that to arbitrage the customs duties. When a good flows out of our country, people increase the value of the goods because they can then arbitrage the VAT claim that they have. That’s called trade-based money laundering.”

Kieswetter said the global minimum tax model was being adopted to help South Africa clamp down on multinationals that have their main operation in the country but register their businesses in foreign tax havens to avoid paying full corporate taxes in South Africa. This means the nexus that determines a taxing right will have to shift from physical presence to market presence, meaning that if a company is present in a market, that company owes a tax to the market where it is present, regardless of whether it has an office there.

Wealthy people can mask the true measure of their wealth through trusts, special purpose vehicles and family offices. And so what we have done in South Africa now [is] we are making it mandatory to disclose beneficial ownership

—  Edward Kieswetter, Sars commissioner

“Some of the big policy issues are how tax policy keeps up with the digitalisation of economies. In the good old days, [there was] the principle that determined a taxing right. Now, taxing rights are sovereign rights. Taxing rights are deeply sovereign. But the way that taxing rights were determined was by physical presence.

“But that was in the days when a factory was a physical place, [or] a shop was a physical place. Now with the proliferation of e-commerce, of digital services, if you’re buying a book from Kindle, it’s not a physical book… Netflix [and] Google are services that are provided within a jurisdiction but manufactured in another, where the head office is.

“In the meantime, [a] global minimum tax is… a blunt instrument, at this stage, to deal with the abuse of tax jurisdiction. So [the] global minimum tax basically says any company that is present in South Africa, regardless of how they organise their affairs, will pay a minimum tax of 15%, and any company that is outside of South Africa but has a market presence will allocate, based on certain principles, a part of their income profit tax back to the market where they are present.”

Regarding taxes on the ultra-wealthy, Kieswetter said many jurisdictions had a differentiated tax code where salary earners are taxed on their wages, while a capital earner gets taxed at a fixed 28%, “whether they have a R20bn company or a R100,000 company”.

“Wealthy people can mask the true measure of their wealth through trusts, special purpose vehicles and family offices. And so what we have done in South Africa now [is] we are making it mandatory to disclose beneficial ownership.”

Deputy finance minister Ashor Sarupen said in January 2024, the government passed into law a threshold for firms whose income equals or exceeds €750m (R14.90bn), which aligned South Africa with the Organisation for Economic Cooperation and Development (OECD) and G20 taxing standards for companies active in but not domiciled in a particular country.

“It’s one of the anti-base erosion measures [we have]. But if you pass [a global minimum tax] yourself and nobody else does it, then it’s not a global minimum. Multiple countries have passed it. So, it’s built on the OECD and G20 framework that was designed in 2021.”

This meant that if the domestic entity of an international firm is in a low-tax jurisdiction, they’re taxed domestically in accordance with the global minimum tax.

Meanwhile, finance minister Enoch Godongwana said in a written reply in parliament that over the past three years, 105 cases involving politically exposed persons were flagged by the Sars risk engine for potential non-compliance. He said of these:

• 29 cases were subjected to audit, resulting in additional assessments totalling R107m and followed by debt collection interventions;
• 24 cases are currently under audit pending finalisation after consideration of necessary supporting documentation; and
• 52 cases remain in the risk profiling stage, pending further analysis and potential selection audit.

He said these figures demonstrated Sars’ commitment to evidence-based, risk-driven compliance interventions, ensuring that all taxpayers, regardless of their public standing, are held to the same standards of accountability.