Amidst political uncertainty, the imminent 2019 general elections, and increased expectations of our new President Mr. Cyril Ramaphosa and new Finance Minister Mr. Tito Mboweni, the media has been speculating about the potential of a South African taxpayer revolt. The merits of a taxpayer revolt are easier to respond to in theory than in practice. Theoretically, one would assume (rightfully so) that the tax system should, as far as possible, not be used to achieve political objectives. But even if a taxpayer revolt is assumed to be the right thing to do, the question still remains, how can such a movement be practically carried out. Taxpayers basically have three main options available to revolt against, namely VAT, PIT or CIT.
The VAT system as an instrument of revolt would require one of two avenues. VAT vendors can decide to still charge and collect VAT from consumers but not pay the VAT over to SARS. To play it on the safe side (although this would already be very risky), vendors can opt to keep the VAT revenue so collected aside or in trust for the benefit of SARS until the broader revolt has achieved the desired (political) effect. Vendors would in this case run the very real risk of SARS demanding the VAT not paid over in terms of the Tax Administration Act (TAA). This would be viewed akin to theft and on a guilty finding could result in interest, penalties, and/or imprisonment. It is very unlikely that these compliant vendors would opt for this risky route.
Another theoretical alternative is for a Vendors to choose not to charge and collect VAT on their supplies. This would practically require that vendors adjust their systems and accounting to ensure that no VAT is collected – quite a costly exercise in many cases. Again, SARS would apply the full might of the TAA against these vendors and will most likely impose penalties, interest and it could lead to imprisonment. Vendors that regularly find themselves in VAT refund positions will in either scenario now be unable to obtain their VAT refunds. In either scenario, it is likely that SARS would target the larger taxpayers first, such as the retailers, mining groups and banks, and apply the TAA, which would most likely involve severe legal action. As many of these companies are listed, court action would be detrimental to their shareholders, and would, as a result be something they would want to avoid. There is also the issue of negative impact on brand reputation, despite the argument that one is doing this for the “broader political good”.
The Personal Income Tax (PIT) system could also potentially be used as an instrument of revolt. PIT is largely withheld from employees and paid over to SARS by corporate employers. Again, a potential revolt could take one of two forms. Personal taxpayers can opt not to complete and submit their tax returns to SARS at the end of a tax year (where they owe more to SARS than was deducted by the employer during the tax year). Employers could, alternatively either not deduct Pay-As-You-Earn (PAYE) from their employees, or deduct PAYE but not pay it over to SARS. Either way, SARS will use the TAA against these employees or employers (in certain instances against both), which is something no employee or employer would want to go through.
The last real alternative to revolt is through the Corporate Income Tax (CIT) system. This would require corporates to not pay CIT to SARS. Although this seems relatively simple, most large corporates have firm corporate governance processes and procedures in place, which include obligations towards shareholders and obligations of boards and directors, especially if a company is listed on an exchange. This option therefore also seems highly unlikely.
Against this background and considering South Africa’s sophisticated tax system, going offshore (either by way of a brain drain or capital outflows) is probably one of the only ways to potentially “revolt”. This too is also not an easy alternative since as long as taxpayers remain South African tax residents, they still remain taxable on their worldwide income in South Africa. Although a formal tax revolt seems highly unlikely and very impractical, it is not to say that the current political and consequential economic situation in South Africa will not lead to lower tax morality and compliance. In fact, this is a very likely result.
In the highly unlikely event that taxpayers formally revolt to such an extent that SARS doesn’t receive any tax revenue in the short-term, services would come to a standstill, it may be too expensive for government to borrow more money following the downgrade to junk status and the economy could collapse. Let’s hope that the political and economic landscape in South Africa make a turn for the better. And soon!
Ferdie Schneider, Partner and Head of Tax, BDO in South Africa
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