South Africa compared favourably in the World Bank and PWC’s recently released report titled Paying Taxes 2018, coming in 46th overall. However, in respect of time to complete a company income tax audit (31.6 weeks), the country falls short of regional and global averages (21.8 weeks and 27.3 weeks respectively).
The report assesses tax systems across 190 economies, comparing each by region and globally. It focuses on company taxes with the hope of informing policy decision making and tax reform.
Correlation with the Tax Ombud report
“The World Bank report is an excellent indicator for South African policy makers, especially if year-on-year rankings are considered,” says Ettiene Retief, Chairperson of National Tax and SARS/National Treasury Stakeholders Committees of the South African Institute of Professional Accountants (SAIPA) and Centre of Tax Excellence.
Retief advises that the report should be contemplated in conjunction with the Office of the Tax Ombud’s annual report, which recognises specific problems in the local tax regime and recommends corresponding solutions. “Although the reports are significantly different in purpose and scope,” observes Retief, “it’s encouraging to note that their finding correlate well, providing confidence in the World Bank’s metrics.”
South Africa ranks well in Africa and positions 99th out of the 190 global participants in the study. Retief praises the country’s good performance but notes that the report doesn’t cater to some real-world complexities that could impact the tax cycle significantly. An example is PWC’s case study business used in the report, which doesn’t engage in foreign trade.
“In the digital era, even small companies actively pursue cross-border trading, especially in a poor economy because it’s an obvious way to improve income,” says Retief. “For large concerns, the frequency and complexity of foreign deals, sometimes between several multi-national parties, are likely to increase compliance time substantially and attract additional audits and need for supporting documentation that delays the process.”
The document also doesn’t account for external impediments, like evolving legislation and the newly introduced country-by-country reporting aimed at combatting base erosion and profit shifting. “Although commendable, the initiative will no doubt increase the compliance burden,” says Retief.
A major oversight in the report is that it mainly measures the compliance cost in regards to filing returns and addressing tax audits, but fails to address the additional costs incurred to manage tax risks and compliance. Companies incur costs for systems and services that enable them to meet their reporting and compliance obligations, and the true cost of cash flow is not measured in regards to delayed refunds.
The cash-flow issue in some cases are not caused by SARS, such as the case where a company invoices a government department for work performed, the VAT is payable when the invoice is issued, but the government department delays payment. “The total cost of tax compliance must be taken into account because it’s a vital factor in judging real efficiency,” asserts Retief.
Lastly, Retief says that although a tax authority needs immense power and authority to meet its mandate to collect tax revenues for funding its country’s expenses, it must be held to the same efficiency standards as the taxpayer.
“It’s not unheard of for companies to wait many months for a refund to be processed, many turning to the Tax Court or Tax Ombud for relief. The cost in cash flow is a major hindrance to business.” He highlights calls for SARS to develop a concrete service charter and commends the Office of the Tax Ombud’s initiative to identifying the SARS’ systemic problems. “This would improve our tax efficiencies significantly.”
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