South Africa’s tax laws inconsistent with the rule of law

The proposed new tax anti-avoidance laws are bad news for the economy and the rule of law. They will add complexity to an already complex area of law.

The rule of law demands that laws must be certain, which means that people are entitled to know their rights and obligations in advance with certainty. SARS should never be in a position to decide that tax is due where that is not unambiguously clear in law.

This leads us to another objection to the anti-avoidance rules, that of the separation of powers. SARS is not a lawmaker. That is the purview of parliament. SARS forms part of the executive and its role is confined to the execution of what parliament legislates.

Under the new anti-avoidance rules, the receiver has enormous arbitrary taxing powers. It can scrutinise all commercial transactions and decide whether or not to tax them.

SARS spokesman Logan Wort said SARS was, “looking at both legal tax avoidance and illegal tax evasion”. Pravin Gordhan said “through elaborate structuring, these deals seek to deliberately avoid the tax consequence that should flow from associated transactions, thereby robbing not only the fiscus of tax revenue, but all South Africans”. This according to him shows a “complete and reckless disregard for tax morality and South African tax law”.

These are strong words coming from officials of the executive arm of the state. The failure to report these transactions to SARS carries heavy penalties. These reporting provisions are called ‘early warning systems’ enacted to help SARS identify potential transactions that could be seen as impermissible tax avoidance. The reporting requirements will be an enormous administrative burden on the taxpayers and constitute more costs draining the economy. .

What SARS ignores is that it is the duty of corporate managers to keep tax to the minimum, like any other business costs. As long as companies act within the law, there can be nothing wrong with minimising the tax liability. On the contrary, it would be morally reprehensible for company management to pay more tax than the minimum required by the law.

Managers who pay more tax than is required by the law will be in breach of their fiduciary and moral duties. They will not be doing justice to the shareholders, investors, employees, consumers and even government. More tax means more operating costs and lower wages for employees.

Business is a fictitious being and does not pay taxes. It is the people associated with it who are the true taxpayers. They pay these taxes in their different capacities such as employees, consumers, or shareholders.

To add to the complexity, it appears that these proposed anti-avoidance rules will be applied retroactively. It means that SARS will decide after the fact that a particular commercial transaction is subject to tax. This will create uncertainty regarding the way business will be conducted. This uncertainty may be found to be unconstitutional because it may well be a transgression of the rule of law, a foundational principle in our Constitution.

SARS cannot want any less or any more tax than is legally due. It is restricted to what the law requires of it. It must be neutral regarding the optimal tax rate, providing a “revenue service” as its name suggests, which includes seeing to it that people do not pay more than is strictly required by parliament. To target commercial transactions that are legal is technically ultra vires.

Section 33 of the Constitution demands that all administrative action must be ‘fair and reasonable’. To require people to pay more tax than is required is unfair and unreasonable.

The proposed tax anti-avoidance rules do not augur well for government’s targeted economic growth rate. SA already has a high tax rate as a proportion of the gross domestic product and one of the highest corporate tax rates in the world at 37.875 per cent including STC.

The complexity of the tax laws and high tax rate make the country unattractive to investors when comparing our tax rate with those of other potential investment destinations such as Ireland 12.5%, Mauritius 22.5%, Czech Republic 24%, South Korea 13/25%, Russia 24%, and Taiwan 25%. Add the uncertainty of not knowing in advance whether or not income is taxable and our tax regime becomes a serious barrier to foreign investment.

What is most disturbing, however, is the uncertainty that hangs over SA’s taxpayers and the excessive administrative discretion incorporated in the tax laws and especially those set out in the proposed anti-avoidance measures.

Author: Langa Bodlani is a legal researcher with the Law Review Project. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author's and are not necessarily shared by the members of the Free Market Foundation.

FMF Feature Article/ 16 January 2007