7. Summary and key recommendations

This report presents results from a joint project between the OECD and South Africa National Treasury, which assesses tax compliance and IFFs in South Africa. The present analysis evaluates the impact of recent tax compliance initiatives, where continuing gaps remain, and provides estimates of historical non-compliant foreign wealth and resulting illicit outflows. Based on a variety of unique anonymised individual tax data, most importantly foreign financial accounts exchanged under the CRS, the project not only provides an order of magnitude of IFFs from South Africa in recent years but also evaluates the behaviour of taxpayers facing increasing global and domestic tax transparency.

The analysis comes at a crucial juncture for South Africa. The country faces significant fiscal and socio-economic challenges, which have been exacerbated by the ongoing COVID-19 pandemic. While extensive fiscal measures have helped to mitigate the pandemic fallout, they have contributed to the build-up of contingent liabilities and may put debt sustainability at further risk. At the same time spending pressures are mounting to fund short-term policies but also achieve more resilience in the long term as envisioned by the SDGs. Successfully curtailing IFFs, combatting tax evasion, and expanding the tax base are therefore important elements to foster domestic resource mobilisation and to increase the potential for revenue growth.

The analysis reveals that tax evasion has a long history in South Africa and has been concentrated among the very wealthy and top income recipients. In 2018, estimated non-compliant assets worth between USD 40 billion and USD 54 billion were held in IFCs relying on cross-border financial account data from the CRS. Based on these figures, the analysis estimates that these deposits could be associated with annual IFFs of between USD 3.5 billion and USD 5 billion per year over the last decade. While this analysis is also subject to well-founded assumptions, it is based on new data of foreign financial assets that has never before been used in the assessment of IFFs, which allows for a more granular assessment of IFFs as well as a tailored methodology. Combatting IFFs in South Africa will thus significantly contribute to increasing tax revenues and financing the country’s continued economic development, but this analysis suggests that this will likely be to a lesser extent than suggested by some other estimates of IFFs, reported by, for instance, AU/ECA (2015[1]) and GFI (2021[2]).

The analysis shows that important progress has been made in enhancing taxpayer compliance in recent years. Examining taxpayer data, revenue source data and data from voluntary disclosure programmes shows evidence of increasing taxpayer compliance and additional revenues collected as a response to multilateral tax transparency initiatives that increase the global risk of detection of tax evasion, such as the CRS. In addition, the commencement of AEOI appears to have provided a significant boost to taxpayer responsiveness to domestic policy initiatives such as voluntary disclosure programmes, which have successfully encouraged evaders to declare non-compliant foreign accounts. In light of growing tax transparency, compliance of taxpayers, particularly among high-income earners, may thus continue to increase in the future.

Despite the progress made, further work is needed to tackle IFFs. All taxpayers need to pay their taxes where and when they are due and effective use of tax data and transmitted CRS information can help to achieve this aim by constantly increasing the risk of detection in case of non-compliance. The analysis suggests that matching CRS accounts with domestic tax records continues to be a challenge for South Africa. Moreover, South Africa’s use of EOIR is more modest than some other African countries. Data exchanged under the CRS is being used for tax cases, but could be used also to assist in examining and analysing other kinds of financial crime.

Further strengthening tax capacity in South Africa is essential to ensuring that South Africa can make the most of EOI to address IFFs. Turning exchanged CRS information into an even more effective tool in the fight against tax evasion and IFFs requires further capacity building within tax authorities to comprehensively analyse taxpayer data, including by exchanging data with other agencies. Fostering inter-agency collaboration between authorities is necessary to exchange relevant information on a mutual basis and strengthen domestic enforcement, prosecution, and the possibility of asset recovery. Necessary cross-border information for this purpose is best obtained by increasing the number of actually exchanging AEOI partners and by more effectively using EOIR relationships, particularly with IFCs. These improvements will not only result in much needed additional revenue gains, but they will also increase the overall progressivity of the tax system and contribute to a more equal society.

Technical assistance can assist in expanding tax capacity. By providing technical assistance, the OECD through its Tax Inspectors Without Borders (TIWB) programme or regional initiatives such as the OECD Africa Academy for Tax and Financial Crime Investigation can assist in supporting countries in effectively implementing exchange of information and pursuing the impactful criminal investigation of financial crimes.

Meeting these targets sometimes reaches beyond the capacity of a single developing country and requires a strong collaborative effort with international partners. The present analysis is the first of its kind that conducts a targeted analysis of IFFs in an emerging economy through granular taxpayer and CRS data in close collaboration with national authorities. Further analysis could use a similar approach to analyse IFFs in other countries, or could deepen the analysis in South Africa through use of other data sources related to financial crime.

References

[1] AU/ECA (2015), Track it! Stop it! Get it! Report of the High Level Panel of Illicit Financial Flows from Africa, https://repository.uneca.org/bitstream/handle/10855/22695/b11524868.pdf?sequence=3&isAllowed=y.

[2] Global Financial Integrity (2021), Trade-Related Illicit Financial Flows in 134 Developing Countries: 2009-2018, https://secureservercdn.net/50.62.198.97/34n.8bd.myftpupload.com/wp-content/uploads/2021/12/IFFs-Report-2021.pdf?time=1643653304.