When promulgated in 2009, proposed changes to provisional tax in the form of the Revenue Laws Second Amendment Bill look set to impact both individuals and corporates significantly. Whereas provisional tax was previously calculated based on one’s taxable income for the year less a 10% margin of error, with a taxpayer’s most recent assessed income acting as a safety net, P2 (the second provisional tax payment) submissions will now need to be 80% accurate at the time of submission – with historic figures no longer guaranteeing compliance. A more prudent approach for SARS to take would have been to follow some of the principles recognised by other jurisdictions which have undergone provisional tax reform in the not too distant past, like those of Britain and New Zealand – as suggested by the tax division of BDO Spencer Steward.
By its very nature, calculating provisional tax involves estimation. “For this reason,” explains Tony Brislin, consultant at BDO Spencer Steward, “Countries such as the UK have opted for a system of investor friendly ‘soft compliance’. Prior to implementation of the UK reforms, considerable thought was given to aspects such as the proportion to be collected ‘in-year’, penalties for getting it wrong, refund mechanisms to prevent unnecessary liquidations, interest credits for overpayments, and size and level of sophistication of various taxpayer groupings.”
This makes recent changes to the Revenue Laws Second Amendment Bill for 2008 both surprising and very significant for provisional taxpayers. “While taxpayers could previously fall back on historic data from previous assessments, this safety net has now been removed without revising the penalty provisions and the overpayment mechanisms,” explains Brislin. Although SARS’ revision of its provisional tax system was to be expected based on worldwide trends, it could have made its system achieve more accurate approximations without creating such high compliance costs by modelling this upon other international mechanisms. Brislin adds that SARS has fortunately acknowledged the outcry to some degree by allowing for a 20% margin of error and by ruling that the old basis can be used on and before February 2009, “Although welcomed this is just a temporary stay of execution and only partly fulfils the various recommendations made. For example, the South African Institute of Chartered Acoountants recommended a 30% margin of error.”
Whilst it may be argued that taxpayers have benefited from the previous system, enjoying a significant cash flow benefit as a result of its low safety net, Brislin maintains that there are other means of addressing this, “Other countries such as the USA, UK, Australia and New Zealand have all conducted thorough investigations and have given detailed consideration as to how best to collect provisional tax. In so doing they have taken into account the practicalities and challenges associated with provisional calculations.” It is not known to what extent South Africa has drawn on these findings when considering the latest changes.
Helene Fourie, associate director: corporate tax, BDO Spencer Steward, echoes this view. “Various countries around the world have grappled with similar issues and come up with a number of appropriate solutions. For example, countries such as the USA have differentiated between large companies and individuals, thereby acknowledging the ability of larger corporates to deliver far more accurate estimates than individuals. We also see a greater number of instalments in other countries: typically there would be two during the financial year, and two reconciliatory instalments the following year. In this way the system takes cognisance of the difficulties of estimating income and the value of historic data.”
Brislin adds that New Zealand, Australia and many countries in the Eurozone have fallback methods in place. New Zealand for example, allows taxpayers to use a turnover to profit ratio method, or alternatively make use of historic data increased by an inflation adjustment. Australia allows one to approach the tax authorities directly to determine an estimate which will be immune from penalties. This stands in contrast to the South African situation with taxpayers facing an onerous – and potentially costly – compliance burden. “If one’s estimate falls outside the margin of error, one can expect to pay a penalty of 20%. This can be further exacerbated by a late submission penalty of 20%, as well as a 10% penalty for late payment,” says Fourie. “Although SARS has stated that taxpayers will be able to approach it to have penalties reduced, this should require significant resources on SARS’s part, not to mention creating a lengthy and highly discretionary process as each penalty case would need to be judged upon its own merits.”
When it comes to any further P2 changes then, one hopes that SARS will consider the wealth of international precedent. Drawing on this might offer potentially more practical solutions that balance its tax collection requirements with the practicalities and cost of P2 compliance to individuals and companies.
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