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Tax practitioners push back against Judge Davis

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By Nicolaas van Wyk and Ciaran Ryan

Judge Dennis Davis, recently appointed as a consultant to SA Revenue Services (Sars), came out firing this week with his comments to the PSG Think Big series that tax evaders should end up in jail.

The Davis Tax Committee – which he chairs – will soon be publishing its final report with recommendations to amend legislation to allow the National Prosecuting Authority (NPA) to launch prosecutions against errant taxpayers.

Davis also mentioned that there were only about 5 000 people in the country disclosing a taxable income of R5 million or more a year, yet the vast number of luxury houses in the country suggests this is a massive under-count.

“There is a huge gap between people who are paying their fair share and those who aren’t,” he said.

Davis recounted a story of a Sars official spotting a newspaper story of an individual posing alongside a Ferrari. When the official looked into the tax affairs of the individual, it was discovered that he was not tax complaint. He was confronted and ended up paying R500 million in back taxes.

Perhaps those with luxury cars (that are not tax complaint) will be hiding those cars in garages and certainly avoid being photographed for newspaper articles – or indeed on social media. As we reported last week, boasting about your latest luxury car acquisition is not a smart idea as it is likely to be monitored by Sars. Gauteng businessman Hamilton Ndlovu discovered to this to his embarrassment.

Davis also bemoaned the exodus of skills from Sars over the years. Former Sars Commissioner Pravin Gordhan had endorsed criminal prosecutions as a way to deter tax evasion, but this had been less successful under Gordhan’s successor, Tom Moyane.

Finance Minister Tito Mboweni recently allocated a budget of R3 billion to help Sars beef up its skills to improve tax collections.

Judge Davis’ comments did not go unnoticed by tax practitioners, some of whom expressed frustration at the apparent presumption that the wealthy are inherently devious. There was some serious pushback on social media.

“Judge Davis has lost the plot,” commented one tax practitioner. “Unfortunately, Sars has far too much power and that is a serious problem. In the old days, Inland Revenue (as Sars was then called) was an organisation independent of government that ensured the tax law was adhered to by both revenue and taxpayers. There were avenues of redress available to taxpayers. Sars does not offer much. They are judge, jury, executioner and lawmaker with no accountability for their actions. Even the IRS in (the US) can be held accountable. Not Sars. The Davis Commission is largely responsible for this.”

“It (would be) better if they set up special tax courts under the National Prosecuting Authority, not being the defendant/complainant and the judge,” said another.

Said Jean du Toit, tech lead at Tax Consulting SA: “If you believe in the rule of law, there is a good argument to make that tax evaders should go to jail. You could make the counter-argument, as many do, that tax receipts are being misgoverned, but that can quickly become a justification for not paying tax. Where do you draw the line? Our tax laws are a way to redistribute wealth. What we want to see is a Sars that operates within its mandate, and within the parameters of the law, and we want a taxpayer base that does the same, and does not evade tax that is rightly due to Sars.”

Tax practitioners have also pointed to the complicated tax codes in SA that are difficult to enforce – something Davis himself conceded – that create wriggle room for interpretation. But when you end up in a dispute with Sars, it has endless financial resources and time in what is generally seen as a completely unequal fight. Hence, the need for fairness and equality in the application of tax laws.

Judge Davis will surely have upset other government departments for apparently insulting their efficiency, as well as slighting the National Prosecuting Authority’s rate of progress in bringing cases to court. Back in 2017 he seems to upset officials at Sars when he challenged their ability to deal with multinational corporations seeking to evade tax.

We have absolutely no doubt his intentions are good and he wants the best for the country and for Sars. But as a judge, he should know that Sars is a collection agency for government. It does not exist to adjudicate taxpayer rights. Others have already noticed that Sars’ new-found enthusiasm for chasing after the wealthy may lead to tax arbitrage – where the wealthy leave for lower tax jurisdictions.

There may be some short-term gains by locking up one or two miscreants, but the longer term impact will be to drive the talented and successful out of the country.

Davis, like Mboweni, concedes that there is little room to increase taxes.

A better solution would be to have a simpler tax code and lower tax rates that encourage job creation and business start-ups. The problem with a progressive tax code is that the goal of wealth redistribution is never achieved, and requires constant amending of laws and closing of loopholes to make it work.

Take Estonia, in contrast. It has what is considered the most competitive tax system in the world.

“Key drivers for Estonia’s high rank are its relatively low corporate tax rate at 21 percent with no double taxation of dividend income, a nearly flat 21 percent income tax rate, a property tax that only taxes the value of land and not the value of building and structures, and a territorial tax system that exempts 100 percent of foreign profits,” according to the Tax Foundation.

Estonia has a relatively flat 21% income tax rate, which is half of the OECD average top marginal tax rate of 42%. Now have a look at Estonia’s economic growth compared to SA’s rate up to 2019.

Source: Focus Economics

We all want to see Sars succeed in its mission, which is to “collect all revenues due, ensure optimal compliance with tax and customs legislation, and provide a customs and excise service that will facilitate legitimate trade as well as protect the economy and society.

“It is Sars’ mission to optimise revenue yield, facilitate trade and enlist new tax contributors by promoting awareness of the obligation to comply with South African tax and customs laws, and to provide quality and responsive service to the public.”

But by adopting a combative tone as the country has emerged from a dreadful lockdown, when tens of thousands of businesses were shut down and millions lost their jobs, Judge Davis seems tone-deaf to the plight the country is going through.

Yes, there are wealthy South Africans that can and should be investigated – but how about going to the luxury car dealerships and asking for a list of who bought what? That’s better than threatening jail time for non-compliance.

It is not Sars’ job to make tax laws or to act as the prosecuting authority. Judge Davis appears to have forgotten that. We must have separation of functions within government departments, and we must recognise that public officials are not our masters. They are our servants.

A little perspective would help here.

*This article was updated to emphasize that the NPA is the prosecuting authority and not SARS.