Introduction
Ladies and gentlemen, it is a great privilege to be here today to address you as partners in the tax process. I am told that this is the best attended Ernst & Young Africa Tax Conference to date and that we have with us here representatives of Ernst & Young from across the continent and indeed from around the world, along with chief executive officers, tax and finance directors of your clients from South Africa, Africa and internationally including from Canada, China and Australia.
This increase in attendance over the past seven years of this conference’s history, most especially by such senior corporate representatives, is testimony firstly to the growing importance of Africa as a market for economic activity and secondly to the important and increasingly strategic role of tax in any organisation.
I don’t think I need to convince you about the important and strategic role of tax for my organisation, the South African Revenue Service, or indeed for the African Tax Administration Forum which South Africa chairs. Instead, I would like to take the opportunity today to talk to you – as critical role players in the development and execution of tax policies for your organisations – about the role of managing tax risk as part of good corporate governance.
The role of corporate governance in the financial crisis
Ladies and gentlemen, the importance of good corporate governance and greater transparency has been thrown into the spot light more than ever before by the current global financial crisis. The failure of governance – and in particular the excessive risk appetite of foreign financial institutions –plunged economies around the world into the most severe economic crisis in living memory.
For the past two years, analyses of the factors which precipitated the global collapse and proposed measures to prevent its repeat have focused almost exclusively on corporate governance and the mitigation of risk. Just a week ago, global regulators under the auspices of the Basel committee, announced strong new regulations for financial institutions which effectively will triple the reserves global banks will need to hold against losses. The Basel III package is one of a range measures being introduced, or discussed, around the world in an attempt to compel organisations to manage risk better and to improve their corporate governance to prevent shocks which shake the entire global economy.
One can barely open a financial newspaper or magazine these days without reading the words “risk”, “corporate governance” and “economic crisis” together – mostly on the front pages. Yet the word “tax” does not appear nearly as frequently in this regard. Don’t get me wrong. The word “tax” does appear very prominently in our analysis of the global crisis and in particular the responses of governments around the world in using public resources to bail out failing banks and to fiscal stimulus packages to get their economies to grow again and to create jobs.
The future of tax policy in the face of higher fiscal deficits amongst many developed economies is very much under the microscope both here and elsewhere around the world, at the moment. But tax risk from an organisational point of view – and the role of tax in good corporate governance – has not featured as prominently to the extent that government interventions into the financial crisis has.
The importance of tax in good corporate governance
Managing tax risks should be a core aspect of corporate governance for at least two reasons. The first is obvious. Taxes are often one of the biggest items on the income statements of organisations. How they are managed and planned for is a critical component of responsible corporate governance and oversight. But there is further reason for tax to become an important consideration on the radar screens of senior executives and company boards, and this realisation has been growing in significance, especially in the post-recession period. It is public sentiment and its impact on the reputation of organisations. The fact is that everyone – from shareholders to ordinary citizens – is taking an increasing interest in the tax position of organisations from a moral point of view. Choosing to be non-compliant with your tax obligations and evading your tax responsibilities is a huge reputational risk to any company that wants to do business in the right way.
The past week, I attended the sixth meeting of the OECD’s Forum on Tax Administration in Istanbul together with 41 other heads of revenue bodies. It was encouraging to hear from the global heads of tax of the Big 4 auditing firms that there is now heightened interest amongst directors in understanding the tax risks to which their organisations are exposed. Even more encouraging was to hear that many business leaders have now developed a much broader sense of their responsibility to society as opposed to just their shareholders.
Less freedom is also now given to tax managers whom in the past have created unnecessary risk for companies through aggressive tax planning. However, whilst there may indeed be instances where there is greater interest in tax matters by directors, many organisations remain exposed to potential risk to their corporate reputations as a result of overly aggressive tax policies. In particular, with the accelerating pace of globalisation and the shifts in the global economy from developed to developing economies we continue to see aggressive cross border schemes being entered into with little real economic purpose other than the tax benefits they create. Accordingly, large tax disputes and settlements totalling billions of Rand continue to occur.
For this reason, Tax Commissioners from around the world agreed last week that it is now time for us to move beyond the current state of mere cooperation between tax administrations. It is time to implement coordinated action by administrations in specifically managing international tax risk through joint audits. In the past 18 months over 500 agreements have been signed allowing for increased exchange of tax information between countries. We will be specifically renewing our focus on improving offshore tax compliance, in particular with regards to identifying the beneficial owners of complex offshore structures. We plan to leave nowhere for non-compliant taxpayers to hide.
The recent developments in moving away from bank secrecy to more scrutiny by revenue authorities is evidence that the pendulum is swinging firmly towards a greater sense of responsibility of citizens – most especially the wealthiest members of society – to meet their tax obligations fully and fairly.
Tax morality is here to stay
However, mentioning the words “tax” and “morality” in the same sentence is not always a popular thing to do. Especially when it’s done by me. In SARS, we have for many years promoted the notion that there is a moral component to tax compliance and this has seen us at odds with some tax advisors and professionals who insist tax is simply a cost to be reduced wherever possible.
I was pleased that Mark Wynberger, the Ernst & Young global head of tax, reported in Istanbul that this is not the stance adopted by Ernst & Young professionals. He further confirmed that E&Y, like the other Big 4 auditing firms, do not support clients that are not willing to be transparent for tax purposes. It was also stated that the Big 4 auditing firms do not want their brands to be associated with aggressive tax planning. This is indeed the level of conduct that I expect from tax professionals, such as yourselves. I will be looking at options for formalising an agreed code of conduct with tax professionals in a similar way to what we have managed to do with the banking industry.
Having said that, I am conscious of the fact that in order to achieve a shift in the way we interact with both taxpayers and their advisers, we will need to collaborate to bring it about. There is a need for regular dialogue to ensure that we understand the difficulties that we each experience in trying to ensure that the spirit of the law is not forgotten when it is being interpreted and applied. Too often, tax advisers are quick to bring to our attention instances when a particular provision of the law creates practical difficulties for their clients. Very few, however, bring it to our attention when they have identified a loophole in the law, choosing rather to exploit it. This, ladies and gentleman, is not how I expect collaborative partners to behave.
The role of tax in a developmental state
We have seen that following the global financial crisis, the concept of social responsibility is gaining ground in the highly developed nations of the first world. That being the case, how much more is this moral imperative required within developing countries especially on the African continent? Africa still has huge inequities which cannot be resolved without state involvement, without proper governance and without governments who have the necessary fiscal capability to address these inequalities. South Africa currently has one of the worst Gini coefficients in the world reflecting the massive discrepancies between rich and poor in our country and our unemployment is also among the highest in the world.
This places enormous pressure on the state for a redistributive and socially conscious budget – while at the same time providing for huge investments in infrastructure and skills development to encourage and facilitate economic growth. Despite these challenges, in South Africa over the past decade tax rates have been reduced by providing substantial tax relief of over R90 billion to individuals and businesses. This relief – while still maintaining and expanding the social and developmental agenda – has been made possible through economic growth, more efficient collection of taxes and growing levels of compliance.
We need a tax system which is fair, does not place an undue burden on the economy, but at the same time provides the necessary means to correct imbalances, build infrastructure and stimulate economic growth - this requires everyone paying their fare share.
None of us operates in a vacuum and we cannot turn a blind eye to the social and economic realities of our environment and expect the other social partners to bear the burden alone. Ensuring compliance cannot and should not be the sole responsibility of revenue authorities. The social compact requires all role players – taxpayers, practitioners, the tax authority and government – to participate in and to share in the creation of the more equal and more prosperous nation envisaged in our Constitution.
The role of tax professionals in promoting good governance
Ladies and gentlemen, one of the ways in which professionals such as you can, and must, fulfil this responsibility is in guiding corporate decision-makers in the development and pursuit of a socially-aware and morally grounded tax policy. I mentioned earlier that corporate governance has been at the forefront of introspection regarding the current global crisis and the spotlight has fallen on company boards and directors for their failure to manage risk effectively. Yet frequently, those tasked with corporate governance were either ill-informed or ill-equipped to perform this function adequately.
This concern over boards which lack the information or expertise to assess risk adequately is particularly prevalent when it comes to tax risk, due in part to the complex nature of tax legislation and interpretation and in part to the relegation of tax matters to accountants and practitioners. As tax directors and professionals, it is your responsibility to ensure that tax matters matter and receive attention and consideration at the highest level. In today’s environment corporate tax departments should not operate in isolation from boards and business units without strategic input or oversight.
Companies should give consideration to having a board member as their public officer to ensure that board level involvement in tax matters is maintained. To help guide boards in meeting their fiduciary duties regarding tax risk, various tax administrations have shared questions that finance directors and board members should ask themselves to ensure they understand the tax risks facing their organisation. I too am asking these questions of senior executives.
Allow me to highlight some of them:
- Are the amounts of tax your organisation is paying and the pattern of payment in line with current and previous business results?
- Is there anything to indicate that your group’s business results and tax payments are lower than would be suggested by economic conditions and the performance of others in your sector?
- If your group is consistently reporting losses, are these real economic losses?
- Is there a material difference between the losses reported for accounting purposes and the losses claimed for tax purposes?
- If so, can this be satisfactorily explained?
- Are there any areas of major disagreement between your company and the tax authority?
I also like to add the following question related to specific transactions which I believe is critical to help distinguish between legitimate tax planning and overly aggressive avoidance:
- Is the transaction unnecessarily complex and is there an economic benefit to a transaction beyond the tax benefit?
Towards an enhanced relationship with corporate taxpayers
Ladies and gentlemen, there is a direct link between the cost of compliance and the relationship between the taxpayer and the revenue authority. This is a cost we both bear. Quite simply, if we could trust all taxpayers to be 100% honest, accurate and on time with their taxes, there would be little need for complex returns, vast quantities of supporting documents, time-consuming audits or costly litigation. This ideal is not the pipedream. Already in South Africa we introduced substantial simplifications of the tax system in respect of income tax for individuals.
And a key element of the current Customs modernisation programme hinges of the concept of the “trusted trader” in which companies with proven corporate governance frameworks and track records of strong compliance are to be given differential treatment to expedite the movement of goods through our borders. As part of our modernisation programme we are over the coming months turning our attention to the corporate income tax environment with a view towards implementing similar gains in efficiency – without compromising our responsibility to detect and deter non-compliance.
The cornerstone of a voluntary tax system is mutual trust, dialogue and transparency between both parties. There are distinct and tangible benefits for both revenue authorities and tax entities and their advisors in moving to a more consultative and collaborative relationship as noted by the communiqué issued following the meeting of the FTA in Cape Town in January 2008: An enhanced relationship offers benefits for revenue bodies as well as taxpayers taxpayers who behave transparently can expect greater certainty and earlier resolution of tax issues with less extensive audits and lower compliance costs.
So an enhanced relationship between us lowers your costs and ours, lowers your risk and ours and frees up both of us to focus on our core business – for us that means focusing our limited resources on higher risk taxpayers to make sure that everyone is paying their fare share. You benefit from this too by having a level playing field between competitors and from a more evenly spread tax burden. From our perspective, such dialogue and engagement provides an integral insight and understanding into your business and the environment in which it operates giving us greater clarity in the design and administration of tax policy which fosters economic growth and development. We continue to believe that most taxpayers – both corporate and individuals – as well as their tax advisors seek to do the right thing and that positions taken on ambiguous legislation are usually done in good faith. By engaging transparently with revenue authorities around such issues, provides you with greater certainty and clarity about your tax affairs, thereby lowering your own tax risk and potential cost.
Conclusion
Ladies and gentlemen, overcoming mistrust, different ideologies and outlooks, and finding common ground through dialogue is a speciality of South Africans. It’s what has made us famous around the world and, I believe, remains one of our key competitive advantages as a nation. Our fortunes as tax professionals are inextricably intertwined. Fortunately, there is already much common ground between us. Both of us want to reduce risk and increase certainty and clarity. Both of us want to reduce the cost of compliance and administrative burden. Both of us want a tax system in which everyone pays their fair share. Both of us want to see job-creation centred economic growth and prosperity for our country.
But building mutual trust will require culture shift from both of us. We will need to stop seeing each other as adversaries and rivals. Instead we need to see each other as partners in the tax process. This requires each of us understanding the world from the other person’s perspective. And that is only achieved by dialogue, engagement and exchange of ideas. My intent today was to begin that dialogue and that exchange of perspectives. I hope and trust it will be the start of an on-going and mutually beneficial process.
I thank you.
Source: South African Revenue Services
