companies to put focus on indirect tax  
22 May 2008

“South African businesses are more concerned about tax risk than with their corporate income tax position,” said Dermot Gaffney, head of indirect tax at KPMG SA.  The survey shows that the shift in focus from corporate to indirect tax is about 2:1 in SA.  All of the South African respondents manage a VAT throughput in the R1,5bn to R7,5bn range.

“These are the top companies in SA and the survey’s findings reflect the level of importance of indirect taxes and the maturity of our VAT system. If you get VAT which is a transaction-based tax wrong, there won’t be any profit to worry about for income-tax purposes.”  Gaffney said that leading South African businesses were waking up to this reality and giving greater attention to their indirect tax position.

The research, commissioned by KPMG at more than 500 large corporations in 22 countries this year, helps to provide further evidence of the increasing importance of VAT and other indirect taxes globally. South African Revenue Services (SARS) collected R134,5bn in VAT for the 2006-07 financial year. Although collections exceeded expectations, this total was only R3,3bn above the printed estimate.

In the KPMG study, the UK was cited as the most “VAT-friendly” jurisdiction to do business in, while Italy was cited as the most difficult. SA ranked 17th on the league table of “VAT friendliness”.  Gaffney said: “The government should be concerned at our relatively low ranking (17 out of 32) in the league of countries. While it’s not surprising to find us ahead of Russia or India, it is a bit disappointing to be ranked behind China, where they execute tax evaders.”

He said it was not the job of SARS to be nice to taxpayers, but it should be accessible and present policy in a coherent and transparent way. Niall Campbell, head of indirect tax at KPMG, said that for the first time indirect tax was highlighted as more complex than corporate tax by multinationals. “The level of VAT which global businesses are now handling is quite staggering and clearly causing financial directors and tax directors real concerns,” he said.

“As the cost of getting VAT wrong is so material, it makes sense that errors in VAT compliance have now been identified as the biggest tax risk for these businesses — quite a shift in attitudes away from the traditional focus on corporate and income taxes.”  VAT replaced general sales tax in SA in 1991 and the rate has remained at 14% since 1993. It is the second-most important source of revenue after income tax. The standard rate of VAT applied across Europe tends to be 20%. In Europe certain goods and services are either zero-rated or exempt from VAT, such as postal services, medical care, and lending insurance.

In SA the government has taken a view to keeping the rate steady and rather increasing compliance to get more taxpayers into the net, Gaffney said.  Eighty-two percent of businesses that were prepared to give an estimate, said that their total annual VAT throughput was between $200m and $1bn.

Sanchia Temkin, www.businessday.co.za