Pravin Gordhan’s 10-point solution to tax evasion

14 July 2016

Pretoria - Tax and prosecution bodies must build the capacity to curb illicit activities that rob countries of tax revenues, said Finance Minister Pravin Gordhan on Thursday, speaking at the High Level Conference on Illicit Financial Flows at the University of Pretoria.

Illicit money leaving Africa reduces the amount of resources available to the continent for development, he explained. The problem with tax avoidance is that while it is not explicitly classified as illegal, the consequences are still damaging to economies.

Gordhan's solutions to tax evasion

- Governments should put in place laws to deal with corruption, money laundering and tax crimes. They should spend effectively, efficiently and transparently to build confidence in the economy and among their people and to improve tax morality.

“Those benefiting from [illicit] activities don’t want government to become effective, don’t want effective institutions and don’t want people of integrity to operate in institutions,” said Gordhan. Institutions are meant to serve the public interest in a viable and sustainable way, without interference.

“Those with the intention to undermine institutions must be controlled in some way.”

- No matter how well drafted and intended, laws are “utterly useless” if they are not enforced, explained Gordhan. Public education of law is key. “The impact of what is happening is felt by 1 billion citizens of the African continent. It is the citizens who must understand, because it is ultimately the citizens who will defend the public interest together with institutions.”

- Action must be taken if standards set by legislation are not met. This could be seen when BNP Paribas was fined $8.9bn by US authorities in 2014 for breaking US sanctions.

- Enforcement systems and dedicated personnel focused on achieving higher conviction rates for tax crimes are necessary. If no convictions take place and there no attempts at prosecuting people engaging in criminal activities, then these actions carry no consequences.

“Emphasis is placed on effective enforcement systems and the political will to enforce these laws, whether (the perpetrators) happen to be someone’s friend or not,” said Gordhan.

- Enforcement agencies must coordinate and communicate domestically and internationally for financial crimes and abuses.

- Domestic and enforcement agencies must take care not to fall into the trap of silo approaches and territorial battles.

- Multinational companies must work on improving their business culture and commit to a code of good tax practice. They should take active steps to stop aggressive tax structuring activities and pay their fair share of taxes in countries where they generate profits and add value.

“Multinational companies can’t extract value from all of our countries, our continent and other continents and have them stashed somewhere as trillions of dollars outside their domestic economies and outside ours as well,” said Gordhan. These lost tax revenues can contribute to the fiscal capability of our country, he added.

- Reporting standards that facilitate global transparency and information exchange for tax purposes are necessary. Enforcement agencies that work well together present a united front against crime and make it difficult for individuals to hide their illegal activities, explained Gordhan.

- For international standards to be effective, all countries - irrespective of power, size or influence - must adhere to standards. Rules imposed by one part of the world must not be exempt in a different part of the world, he said. “Uniformity in the application of the law is crucial. All countries and regulatory regimes must fight financial crimes.”

- Developed countries must dismantle all tax havens that allow their territories to engage in such practices. “Advanced economies ensure that their companies, governments and citizens do not abuse their influence when dealing with smaller countries,” said Gordhan.

This article first appeared on Fin24, see here.