Tackling illicit financial flows could be the answer to SA’s tax revenue woes

Ruaan van Eeden

South Africa finds itself severely cash-strapped in terms of State revenue needed to meet the expenditure laid out in the National Budget.  At least R50 billion is needed this financial year to allow the country to cover the expected costs of running State projects – and more funds would make a dent in the numerous developmental needs of the country: housing, education, poverty-alleviation programmes, health, etc.

“It is against this backdrop that we are pleased to hear that the Standing Committee on Finance in Parliament recently called on the relevant bodies to tackle the problem of Illicit Financial Flows (IFF) with greater vigour,” comments Ruaan Van Eeden, Managing Director, Tax and Exchange Control, at the ‎Geneva Management Group. “If the efforts of the law enforcement agencies both within South Africa and those in other countries can make even a small impact to reduce the losses to the country arising from this, our revenue needs could be addressed.”

IFF occur when funds due to a country flow out of it through illegal means.  The funds may have been acquired illegally, such as when bribery or other corrupt activities have taken place, or they may be kept from the state as a result of tax evasion. A big part of this is trade mispricing, such as presenting imported goods to the authorities at a lower value than they really are, so that customs duties can be lowered. According to the South African Revenue Service (SARS), while IFF are a worldwide problem, our country is particularly vulnerable to it because of “…our world-class financial systems, along with the large extractive industry of mining and resources, the presence of large multinational corporations, and our open economy and tradable currency.”

While putting exact figures to the amounts lost to the country is not possible, we know that South Africa loses billions of rand each year to the problem.

Van Eeden welcomes the news of renewed calls for action because of his concern that the State has tended to look to the wealthier in our society to make up the shortfall in revenue.  “In recent years, high net-worth individuals have begun to feel that they are being targeted for more and more tax revenue, and it is one of the reasons many such individuals choose to immigrate.” The harm to the country of the immigration of wealthy people cannot be overstated: skills are lost, businesses close down, and the pool of taxpayers becomes smaller, which just exacerbates the existing problem of a limited taxpayer base.  So, finding other means by which to bring in revenue is certainly a good move.

While the call by the Chair of the Parliamentary Committee is to be welcomed, Van Eeden believes that the issues go beyond an appeal to the various organs of the State to do more.  “It’s a complex area,” he says, “and bodies like SARS and the Financial Intelligence Centre (FIC) are just one part of the picture.  Effectively combatting IFF means that we need to do a great deal more – and that other countries should also be looking at the issue in similar ways.”

Van Eeden is hopeful that the problem may be tackled with greater vigour under the Ramaphosa Presidency than in the recent past.  “President Ramaphosa has set the right tone by taking action against corruption,” he explains.  “This sends the right message to enforcement agencies, which seem to have been hamstrung under the previous Presidency.” Better skills and greater will to take action against both corrupt officials and against illegal activities in the private sector are needed, as is more of a drive to work together with neighbouring countries whose officials may also not be working as effectively as they should be.

“South Africa really should not have to be in the current fix we find ourselves in.  With state policies that would promote more employment, and with a far stronger approach to dealing with illegal outflows of capital and of potential tax revenue, we can meet the country’s expenditure needs – and allow for the development of the country in a far more meaningful way,” Van Eeden says.

 

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