Good effort. It’s not going to work.

April 5th, 2011

Speaking at the African Tax Administration Forum yesterday, Oupa Magashula, the South African Revenue Service (SARS) Commissioner announced his country intends to collaborate with the rest of the African continent to decrease tax evasion by harmonizing their tax policies.  This, they believe, would make it “harder for companies to exploit the variation in legislation to lower their tax burden.”  The Commissioner told reporters “The main thing is to avoid jurisdiction hopping, where people go shopping around for the lowest tax.”

Magashula is not without his share of successes.  Although SARS had already drastically improved efficiency and compliance before Magashula’s arrival as Commissioner in 2009, the Magashula has proven himself an adept and shrewd tax-collector and his efforts have shown real results.  At the same conference, for example, Magashula announced his SARS team has collected the highest amount of tax revenue in the organization’s history—R674.2 billion, which outstripped the budget target of R672 billion.  Magasula credits these and other improvements with SARS’ “world-class penalty system that acts a deterrent” and its technical expertise.

Despite the country’s recent domestic successes, I believe South Africa’s plan for international collaboration is well-intentioned, but ultimately flawed.

Corporations (and wealthy individuals) are always going to “go shopping” for the lowest tax.  Nhanhla Nene, South Africa’s deputy finance minister, has already told reporters that a continent-wide tax regime is not feasible.  Although the truth is that even if such a regime were possible, it would be unlikely to solve the problem as corporations and individuals would still have secrecy jurisdictions and tax havens outside Africa to use to deposit their tax-evading funds.

This brings me to the first major reason this plan will not succeed.  Broadly speaking, when it comes to tax evasion, the problem in the international tax regime is not a lack of cooperation on policy, but rather a lack of information.  Of course, in Africa where legislation is more fragmented than in other regions of the world, it may have some positive effect.  But overwhelmingly it is information, not policy, that is the key to combating tax evasion.  The OECD’s Tax Information Exchange Agreements (TIEAs) are the model of an effective, although not completely comprehensive, way for countries to battle tax evasion internationally.  African nations, including South Africa, should vigorously pursue TIEAs with secrecy jurisdictions worldwide. In March, the South African government signed its first TIEA with Guernsey and is currently negotiating with the Bahamas, the British Virgin Islands, Cayman Islands, Liechtenstein, and Monaco.  This is a positive step forward.  Other African nations, serious about tax evasion, should follow suit.

But this also brings me to my second and third points.  The worst jurisdictional culprits that are in the business of “attracting” tax evading money are not in Africa.  And furthermore, of all the countries in Africa, there are only a few which exhibit a lack of transparency and are uncooperative on tax information exchange (Seychelles, Liberia, and Mauritius are good examples).  Coordination on tax matters—whether its policy or information—is much more important among some countries than it is among others.  As many have noted, for example, tax information exchange with the Nordic countries is less important than with Andorra and Liechtenstein.  The same goes for African nations.  There are some jurisdictions which are inherently less transparent and less cooperative—and therefore that much more important to negotiate with.

My conclusion here is not that South Africa is making bad policy.  Their trajectory in this area has been positive for the last decade—and it’s yielding rewarding results.  However, to truly combat tax evasion domestically, South Africa must join the swelling ranks of those who understand transparency is the key to improving international finance—and are demanding change.

Written by Ann Hollingshead

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