Aggressive tax planning is presenting a significant challenge to tax authorities around the world as companies and wealthy individuals shift their assets and income offshore to evade paying their fair share of taxes.

Globally, tax authorities are eyeing banks' structured finance teams, many of which use aggressive tax planning in some of their transactions. The tax authorities are scrutinising deals that involve 'arbitraging' differences between the tax regimes and rates of different jurisdictions.

South African Revenue Service (Sars) chief operating officer Edward Kieswetter said yesterday that Sars had placed emphasis on deals in the financial services sector.

Kieswetter was speaking to the media at the Inter-American Centre of Tax Administration (CIAT) Technical Conference hosted by Sars in Sandton yesterday.

In the past, banks had an effective tax rate of three percent – four percent. Sars had engaged the Banking Council and managed to unwind a number of structured deals, Kieswetter said. The effective tax rate for the sector was now 15 percent-19 percent.

Modern tax planning techniques

SA's Income Tax Act had contained a general anti-avoidance provision for more than 60 years. However, the laws were inadequate to deal with the sophistication of modern tax planning techniques. SA's anti-avoidance legislation had been revised.

The schemes used by the banks, boutique structured finance firms, multinational accounting firms and law practices proved to be very complex as many of them were cross-border transactions.

Kieswetter said that anti-avoidance of the tax laws was an ongoing process. "The minute the tax authorities close one loophole, another one is designed."

Sars had also set up an advance tax ruling system for companies to approach the taxman for guidance, procedure and interpretation of the law relating to specific transactions.

"We invite companies to come forward to discuss their tax planning schemes if they are uncertain," Kieswetter said.

"However, there are so many companies out there who are still not coming forward. If they were sincere, they would be lining up outside. Aggressive tax planning thrives in the zone of uncertainty."

Bank secrecy jurisdictions

Barry Short, deputy commissioner (international) of the Internal Revenue Service (IRS) of the US, said during the past several months, in the US and several European and Asian countries, individuals and bankers in bank secrecy jurisdictions attempted to avoid the disclosure and reporting rules.

Short said that the US tax authorities had a multi-faceted approach to combating offshore tax evasion. "We are deploying a wide array of techniques and resources to uncover unlawful activities. One of those tools is information reporting which is extremely effective if it used properly."

The US has tax information exchange relationships with more than 70 countries and has expanded the programme in recent years to include offshore jurisdictions such as the Cayman Islands and the Bahamas. Informants had been valuable sources of information for IRS civil and criminal investigations into offshore tax evasion, Short said.

With the new "whistleblower" standards that reward informants, the IRS was hopeful that it would obtain additional input on potential violations, he said.

Claudemir Malaquias, tax examination co-ordinator at the tax revenue secretariat of the ministry of finance in Brazil, said that big taxpayers were subject to differentiated treatment from other taxpayers.

Brazil had also implemented a public digital tax system and about 10 000 companies were expected to present their accounting records in digital mode this year. The advantage of the new system was that it allowed the tax authority to verify risk indicators, Malaquias said.

Source: Business Day