Residence-based taxation


BROADCAST TRANSCRIPT: Professor Matthew Lester: Rhodes University. Residence-based taxation has been introduced to South Africa and what it means is that you now need to declare your global assets and pay tax for them here. Thousands of South African have assets offshore. Some of them legally, no doubt many of them illegally as well. Professor Matthew Lester, he’s a tax professor at Rhodes University in Grahamstown. It does just about sum up the principle of residence-based taxation, doesn’t it?

MATTHEW LESTER: Yes, well up to now we’ve been living in isolation. Part of the whole game of regenerating the South African tax system is to bring us in line with worldwide systems which tax you on your worldwide assets. There’s nothing new about this. It’s just something that South Africa’s had to catch up on. There are major developments, however, in it. We’ve got all this legislation, but effectively this legislation doesn’t work unless the taxpayer owns up to doing it.

MONEYWEB: That is an issue that we can get onto in just a moment … you do have a great description for people who over the years have smuggled cash out as travel allowances or in their shoes or in their suitcases. You call it EVKOM.

MATTHEW LESTER: Yes, well in the old South Africa that used to stand for the Elektrisiteits Versending Komitee. In South Africa, now, today, it stands for Ek Vat Kontant Oorsee Meneer. I’m taking my money overseas.

MONEYWEB: People have been doing this for years. A lot of South Africans may very well have cash in offshore tax havens, but those offshore tax havens, following the events of the past week or so, probably aren’t as secure as they once were?

MATTHEW LESTER: Yes, this is also nothing new. In recent years tax havens have come under considerable pressure. Because of international crime syndicates and drug trafficking. But what we’ve got is suddenly a situation that the World Trade Centre gets blown up last week, and if you’re going to stop international terrorism with this new campaign of operation Infinite Justice, it’s not only about firing missiles into Afghanistan. It’s also about locating the funding devices used by international terrorism.

MONEYWEB: And they could very well be using offshore tax havens to keep …

MATTHEW LESTER: They probably are. What the offshore haven offers, is both a low tax rate and a complete client confidentiality. In other words, a nominee arrangement. And what they’re going to have to do to break into this and international terrorism … they’re going to have to bring in new regulations which could lead to the disclosure of the ultimate beneficiary of these funds.

MONEYWEB: And that in turn could mean that Trevor Manuel may very well be able to find out exactly how much money South Africans have stashed in these places?

MATTHEW LESTER: Yes, not far behind the guys looking for international terrorists, will be the guys looking for international tax evaders. They’ll be benefiting from the same system. Now there’s been a worldwide call for this for many years because about a third of the world’s wealth is held through the tax havens. And the OECD, that’s basically the association for paying high tax rates, is saying, well, there’s not much we can do while a third of the world’s wealth is hidden in tax havens, and we need to access this wealth.

MONEYWEB: And for South Africans a lot of alarm bells will be ringing. You’ll have a lot of people sitting at home in cold sweats right now. A couple of people have probably driven into trees, concerned about the impact on their taxes. Is there any chance that the South African government, under these circumstances, could consider some kind of amnesty?

MATTHEW LESTER: I’ve been calling for amnesty or some sort of an arrangement whereby people can come clean for some time. This is the obvious way. I think people need a lot of that wealth back here today because it’s become a very expensive place to live, here in South Africa. So there are a lot of people who would like to bring quite a lot of it home, but they don’t know how to come clean, because there isn’t a procedure to come clean. There is nothing contained in the Income Tax Act. It’s still recognised as widespread tax evasion. So if you can’t tell somebody how to come clean, then they won’t. The problem is that if you ask for an amnesty and you open this whole issue of amnesties again, then you’re opening amnesties for murder, etc. etc. etc. simply because you want to sort out the offshore money. That’s the reason why there’s a hedge to looking into this problem, because we open up the whole amnesty debate. However, at the end of the day, it would make very good business sense for us to legitimise offshore money. I think there are a lot of South Africans who would rather pay their tax on that money abroad, keep it abroad legitimately, but stay on the right side of the law, because this is an ancient form of tax planning that is now internationally not acceptable.

MONEYWEB: Is there scope at the moment … could the South African Revenue Service, do you think, cope with what would be an influx of tax debts?

MATTHEW LESTER: SARS could cope with it. The problem is not SARS itself, it’s the legislation for SARS to operate within the law to accept this money without going back and digging up a horrendous past.

MONEYWEB: Is this in any way even under discussion at the moment within government?

MATTHEW LESTER: I think it’s been thought about, yes. In the debates leading up to RBT legislation, this was brought up. The problem with it is that we needed the legislation very urgently in South Africa, and this was a detail that was probably passed by. I think, though, that with events of last week on the RBT front we maybe need to reconsider it very quickly. Otherwise things could become embarrassing for all concerned and there won’t be any winners.

MONEYWEB: What would it involve, do you think, to actually get the legislation changed?

MATTHEW LESTER: It would take number one, recognition of the fact that South Africans have used tax havens abroad for the last 100 years since Paul Kruger ditched out of the country with all his cash. And saying, right, if you’ve got this money abroad you may legitimise it, this will be the taxation implication, number one, whatever that might be cast in stone, and number two, these will be the implications for exchange control purposes, because inasmuch as some of these things can be a tax violation, they are also an exchange control violation.

MONEYWEB: But at the same time the only way that is going to happen is that if there is an amnesty because …?

MATTHEW LESTER: It might not be a total amnesty. In discussions that I’ve had with people about it, they say listen maybe we’ll take a levy on it. Let’s say the cost of coming clean is 10% or 15%. There are people who are prepared to pay that. Because right now they can’t even get that wealth back into South Africa with out it being detected by the [indistinct] system, that you’ve suddenly had a major incoming deposit from a tax haven.

MONEYWEB: Rhodes University tax professor, Mathew Lester, with some very interesting thoughts on the implications of the fact that tax havens may very well soon be a thing of the past. International governments have been trying for years to find sufficient excuses to get rid of them, and the twin tower attacks in New York and the Pentagon attack in the United States may very well provide a catalyst for those to disappear. The tax implications for South Africans are huge but, Arthur Buchner, there must be an extraordinary amount of South African wealth sitting in tax havens. It would be enormously good for the country to have it legalised and have it come back?

ARTHUR BUCHNER: 100%. The problem is there’s a lot of people in the country who would actually like to swop their money for that money coming back inside. At current rand exchange rates, the rand is ridiculously oversold and I think a lot of people would like to come and bring their money in.

MONEYWEB: I’m very happy that you’re still here with us, Arthur, because Clive Simpkins our regular communications specialist is incommunicado at the moment. So it gives us an opportunity just to explore a couple of extra things in terms of the markets. If we do have a look at what happened on our markets today, we did speak earlier about the fact that there was the futures closeout yesterday and also the derivative traders in the market taking advantage of a lot of negativity in the market. But what did strike me is Investec last week buying back its shares at R184. It announced that it bought back about 3.5% of its issued share capital. And announced that it still intended to do the same. We saw Investec today down 5% to R153.80. Yet still no sign from Investec that it is buying back those shares. Do you think that this is a sign that Investec is watching the share price and thinking it might go lower and we might get a better deal on our own company?

ARTHUR BUCHNER: I do think so, but if I look at companies that are looking at share buybacks, my view is write puts on your own stock. So sell …

MONEYWEB: Write puts on your own stock? Sorry, explain that.

ARTHUR BUCHNER: That means go and sell puts. Sell someone the ability to sell your stock if it is at a lower price. So you get a premium income in, and if the stock is lower than today and it is exercised, you by nature have to take it from them, but if it rallies you get the premium income which you can put on your income statement. So rather than buy back shares, let someone else be the front runner and, say, we don’t think your share is going up anymore. It’s a far better way to actually purchase shares back.

Posted in Market commentary

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