The terms of reference of the Davis Tax Committee (DTC) in general required the Committee “to inquire into the role of the tax system in the promotion of inclusive economic growth, employment creation, development and fiscal sustainability”, and in particular as it relates to value-added tax (“VAT”), to give specific attention to:
“…efficiency and equity. In this examination, the advisability and effectiveness of dual rates, zero rating and exemptions must be considered"
Brief summary of recommendations.
Taxpayer compliance: The VAT gap
Essentially the tax gap in the VAT environment is the difference between the tax that is due under the VAT law, and the amount of actual tax collected. The magnitude of the gap “can be seen as an indicator of the effectiveness of VAT enforcement and compliance measures, as it arises as a consequence of revenue loss through cases of fraud and evasion, tax avoidance, bankruptcies, financial insolvencies as well as miscalculations”.
The following observations and actions have been recommended to SARS:
- continue to monitor the VAT compliance gap as a means of evaluating its performance, and to inform strategic decision makers about tax;
- take the opportunity of the release of the supply-use tables in February 2015 to update its estimate of the VAT gap, and its sectoral composition;
- consider broadening its tax gap analysis to include other major taxes and;
- further integrate its revenue and national compliance analyses, to support systemic compliance risk management. There is scope for more detailed revenue analysis of revenues from individual industry sectors and taxpayer segments to support strategic risk analysis.
The recommendation of the DTC is that no further zero-rated food items should be considered.
Dual (multiple) rates
The DTC recommends that multiple rates not be adopted.
This has been considered mainly from a financial services perspective and the DTC has suggested that the various approaches adopted in other jurisdictions should receive further urgent consideration by National Treasury and SARS.
Place of Supply Rules
Explicit place of supply rules have been adopted in most jurisdictions so as to fix the place in which supplies are to be taxed and accounted for. Given the magnitude of cross-border trade, in particular cross-border services, generally accepted place of supply rules are necessary to prevent double taxation and non-taxation. The OECD has issued the International VAT/GST Guidelines that seek to promote common place of supply rules.
The DTC recommends that the VAT Act be amended to ensure the inclusion of clearly stated ‘place of supply rules’, specifically rules that are in harmony with the OECD Guidelines and which are supported and adhered to by other VAT jurisdictions.
The new frontier for VAT is its application in an electronic commerce (“e-commerce”) environment, where the supply of electronic services across jurisdictional boundaries has given rise to many compliance challenges for governments. A significant number of foreign jurisdictions have sought to address this conundrum by adopting place of supply rules that apply specifically to e-commerce.
The Committee recommends that a number of technical amendments be made to the South African rules as regards the definition of “electronic services”, while the Committee also recommends that a distinction be drawn between B2B and B2C supplies.
Macroeconomic impact of raising VAT
The recommendation was to not increase VAT, however if it were to be increased (as it now has been), the recommendation was that a range of compensatory mechanisms be considered for adversely affected consumers.
The DTC recommends that the VAT Act be amended to place traditional communities who operate similarly to a municipality on the same footing as municipalities.
It is interesting that, despite the in-depth analysis by the DTC, VAT was indeed raised to 15%. The most logical approach would be to close the “VAT Gap” by improving collections disclosure and the like. One can expect an increase in activity in this area as well.