Banking industry under tax pressure

During the 2001 Budget speech, the minister of finance indicated that the taxation of the financial industry would be looked into, as government was of the view that this industry does not carry its fair share of the tax burden. Subsequently, the South African Revenue Service (SARS) issued a far-reaching media release during September 2001 regarding this issue.

Koos van Wyk, tax partner with PricewaterhouseCoopers specialising in tax and financial services, indicated that the taxation of the financial industry became a concern for government mainly as a result of a perceived difference between profits reported by this industry and the amount on which tax is paid. SARS intimated that it would either intensify investigations into the utilisation of tax shelter transactions with the view to challenging the transactions under existing legislation, or bring about possible amendments to the Income Tax Act to counter tax-avoidance transactions.

SARS commenced this campaign by issuing a draft questionnaire for comments by the banking industry. This questionnaire, currently still being deliberated on by the industry as represented by COSAB, tries to elicit information that is almost impossible to comply with due to the sheer volume of information that is required. It is foreseen that this line of attack will be met with continued resistance from the industry, and it is also strongly argued that the information so sought goes way beyond what tax legislation allows SARS to request, excepting when it has specific information on transactions in transgression of the tax law.

It is clear that SARS`s scrutiny is mainly focused on structured finance transactions. Tax experts commissioned by the banks from time to time have, however, considered most of these types of transactions in terms of current legislation. Given that there are definite commercial reasons for the structuring of most of these transactions in a specific way, it would be difficult for SARS to attack these transactions under current law.

In view of this, it is possible that we may already see interesting changes to current anti-avoidance legislation in the coming budget proposals or perhaps in future years the introduction of specific rules for the financial industry in order to meet the objectives of SARS regarding the taxation of this industry. What is often problematic, is that any legislation intended to curtail abuse also adversely affects structures that fulfil a perfectly legitimate purpose in financing commerce and industry. It is also likely to affect the profit margins of banks facing difficult times in the aftermath of worldwide recessionary conditions.

It is also advisable for legislators to widely consult on bringing about far-reaching changes in taxing financial transactions, so as to minimise their impact on the free flow of capital and the cost of financing for the corporate sector.

Rumour has it that SARS is building capacity in forming specialised expert financial teams to conduct field audits in specific banks and to test some of the structures in court. Although this may cause some hardship for those subjected to these audits, it is clearly the preferred course to keep some of the more aggressive and adventurous market players within the boundaries of the law.

Whether all the afore-going is necessarily good news for our economic sector is another question. The financial industry is one of the strongest industries in SA and also one of the most well-established and sound financial sectors in the world. It certainly contributes significantly to the economy and is essentially responsible for the short-term management of most of South African`s hard-earned savings. A less than well thought through structural change in the taxation regime of this industry may impact negatively on an already fragile economy.

It is sincerely hoped that government would think twice before changing the law in instances where it is merely necessary to scrutinise tainted transactions under current legislation rather than to harm the financial industry by the introduction of far-reaching and sweeping changes with incalculable financial consequences.