As second or third generations take over the reins of family businesses, they may be more open to outside investment to grow their companies. East Africa in particular has a rich seam of such businesses, which canny private-equity investors should be exploring.
South Africa’s taxman goes global
South Africa has long faced the reality of ‘flight’ by citizens to other countries for a myriad of reasons, including lack of economic opportunity and the prevalence of crime.
South African officials accordingly have long focused on these expats as a potential source of income, with the discussion most notably bubbling to the surface during parliamentary hearings in 2017. In those hearings, government officials, in particular from the South African Revenue Service (SARS), quoted the number of South Africans abroad and the discrepancies between tax disclosures and bank information of South African expats.
Hence, in the minds of some officials, the arrival of a worldwide tax system in South Africa could not come soon enough for a country with a burgeoning national debt that struggles to generate higher tax revenue. Expected to come into effect on 1 March 2020, an amendment to the South Africa Income Tax Act will require South African citizens to pay taxes to South Africa regardless of where income is earned (including on benefits such as housing and flights).
Getting to implementation
But making a law is quite different from implementing a law. A worldwide tax system in South Africa may become an implementation problem for the newly mandated administration of President Cyril Ramaphosa.
- First, SARS already noted that there were discrepancies between the tax disclosures and bank accounts of South African expats. Thus accurate reporting will heavily rely on South African expats fully disclosing all sources of income. The US Internal Revenue Service (IRS) struggles with its expansive (and sometimes expensive) bench of investigators and lawyers to ensure every penny of income to US citizens is recorded tax-wise. Will South Africa be able to expend similar effort and monies? Will the benefit (or return) be higher than the costs?
- Second, South Africa also lacks the international clout of the US as a world power. The US has come down hard on other national banking systems (i.e., the Swiss banking system) when it wants more information on US citizens’ bank accounts and cross-border money movement. For example, in 2013, the US Department of Justice (DOJ) and Swiss Federal Department of Finance created the US Tax Program for Swiss Banks to combat tax evasion. At the time, the DOJ had evidence that several Swiss banks had systematically aided US citizens in evading taxes, and the DOJ had several banks under investigation. For South Africa to carry out this type of far-reaching effort will require more engagement with global powers. It will likely include sharing more information on money movement within the South African banking system – which could prove to be a political football for the ANC if it includes information on political leaders.
- Third, enforcement and retribution includes political traps for the South African leadership. Although the tax system will likely encounter a compliant populace, many South Africans, especially wealthy ones, will weigh the value of keeping a South African passport and paying worldwide taxes against giving up their citizenship. Many Americans have given up US citizenship for tax reasons… and the value of the US passport is generally assumed to be higher than that of the South African one. The option of getting a new passport is also not available to everyone – for example, most of the large pool of South African expats who live in the United Arab Emirates. That said, many South Africans do not imagine returning back to South Africa, and, accordingly, may choose not to pay taxes (regardless of whether they give up their citizenship).
Some observers wonder if South Africa will detain South Africans guilty of tax evasion when they travel back to South Africa. A detention policy would likely only discourage many South Africans (and potentially foreign investors) from travelling as freely between South Africa and other countries as they do today. Any policy that would decrease foreign direct investment and consumer spending – including tourism spending – within South Africa could be drastically detrimental to current attempts to jumpstart the South African economy.
What’s the end goal?
The goal is ultimately to increase tax revenue. But it is not clear that increasing tax rates – including a recent bump to VAT – and expanding the reach of taxes will necessarily bring more money into government coffers. Both South Africans and foreign investors may choose to avoid South Africa if taxes start to undermine their ability to achieve comparable returns against other markets. There is little to suggest that investors will pull back at this stage – but if there is any future indication of reduced foreign direct investment, the tax policy will come under higher public scrutiny.
Reducing the national debt is naturally intertwined with the attempt to boost tax revenue. Many sceptics will argue that increased tax revenue never correlates with paying debts, which is vital to South Africa. South Africa currently maintains investment-grade status but any change from that will force many investors out of the country and likely destabilise its financial ecosystem. All attempts to grow revenue accordingly garner little excitement unless associated with a true plan to cut the national debt.
Some critics argue that South Africa is targeting the richer individuals who have fled the country but use it as a home base (e.g., with properties in Cape Town). Others cynically view this as South Africa’s attempt to become a major global power. Such arguments generally fail to appreciate the reality of South Africa’s national balance sheet and its impetus to make drastic changes.
South Africa must find a way to convey the seriousness of the national crisis. This is not easy considering how the US (with all its practice) struggles to translate the debt crisis into actionable items backed by a majority of the populace. Similarly, South African citizens will ultimately have to believe in the greater goal of these changes.
There is little to suggest that those expats think the new taxes on them will make their home country feel like “home” again – considering that the lack of economic opportunity and security that drove some of them away remains an issue. If expats (and investors) are not compliant and in support, the endeavour to raise new revenue will fail to match the cost of actual effort.