History has proved that a key driver of sustained economic growth is international integration: the extent to which capital, goods and services move across borders and between countries. By discouraging foreign businesses from investing in South Africa, we imperil our fragile economy and risk a worsening unemployment situation rather solving it. SA desperately needs more rapid economic growth if it is to tackle one of the globe’s lowest employment ratios.

Taxing Times – Ruan Jooste and Sharda Naidoo

When foreigners scour the globe for attractive investment destinations to set up shop, a stable legislative framework and political stability are top of mind. SA, once seen as a desired destination as a gateway into the rest of Africa, is beginning to lose its appeal.

Cries for the nationalisation of mines and banks in SA and uncertainty over tax rules have international investors and local business in a tailspin. More recently deals have had to be put on ice while government dithers over the details of new policies.

Banks and mining companies confirm having to field calls daily from foreign investors about whether nationalisation will become a reality. The politics and leadership battles ahead of the next general election are another concern.

A recent Citi Global Markets report warns of “great value destruction” if nationalisation materialises in a sector that is already unattractive to foreign investors. SA mining activities contribute up to 20% of GDP, but the report says SA is facing increased competition from Russia, Australia, Canada and Brazil.

These countries have turned their large resource bases into large-scale potential greenfield project growth. SA’s large reserve base (estimated at US$2,5trillion), however, shows a limited number of greenfield projects (translating into low levels of production growth), which indicates low levels of investment .

Though the SA miners’ tax rate is around 36% of earnings (before interest and tax but excluding secondary tax on companies) and below that of the US (42%), Australia (43%) and Brazil (41%), many mining houses say they would rather invest in countries with higher tax rates to ensure tenure, which brings the nationalisation debate to the fore. Analysts say talk of nationalisation raises risk premiums for SA miners (normally around 8%, but which could double) as they would have to make more profit to compensate for potential nationalisation .

But there are other more taxing burdens for investors. Tax and the absence of exchange controls are elements that make a country attractive as a gateway. SA has relaxed exchange controls somewhat, but its complex and uncertain tax laws have pushed foreign investors to go elsewhere on the continent to register their companies and set up their African headquarters.

Foreign investors are snubbing SA in favour of countries like Mauritius, which has a simpler tax structure, a more stable political environment and no exchange controls. Rob Hudson, MD of Hayes, Matkovich & Associates, the local promoter of two integrated resort scheme developments (La Balise Marina and Villas Valriche) in Mauritius, says: “We’ve seen a direct link between our sales for investment in Mauritius and political uncertainty. Every time there’s talk of nationalisation , we see a peak in sales for property. Mauritius offers [ what is tantamount to] an insurance policy for South Africans and other foreign investors.” (See story on page 38.)

Kenya, Botswana, the Seychelles and Dubai are also becoming popular alternatives. SA’s tax rates are not competitive with these countries. SA’s corporate tax rate stands at 34,5%, if secondary tax on companies (STC) is included, compared with Mauritius’s 3% for foreign companies. If SA’s withholding tax regime (of 10%) is enforced, as proposed, in 2012, corporate tax will revert to 28%. SA has an effective capital gains tax rate of 10%. Most of these countries don’t have the added burden of capital gains or dividend taxes (see comparative rates table on page 39).

Apart from not being attractive enough, the tax regime has been thrown out of kilter by two unexpected controversial changes in the Draft Taxation Laws Amendment Bill last month. For example, the suspension, until December 2012, of section 45 of the Income Tax Act, which allowed for intergroup transfer of assets in a tax-neutral manner, will raise the cost of dealmaking in SA.

“This ability to transfer assets tax-free is fundamental in any tax system to enable corporate activity,” says Stephan van der Walt, head of corporate finance at international equity and debt house Bravura. “Section 45 is often used in internal restructuring and acquisitions and [its suspension] will affect deals, including black economic empowerment (BEE) deals, which are already seen as a constraint to international businesses.”

Many companies which negotiated and priced deals under the old rules will have to go back to the drawing board to examine their feasibility . A Bravura study shows that the suspension of section 45 could jeopardise BEE transactions such as those done by Aveng, African Bank, MTN, Altech, Palabora Mining and Sasol. Van der Walt says the suspension of section 45 and the proposed change to the tax treatment of preference shares will force BEE parties to rely on special purpose vehicles, raising the funding cost by about 40%.

From April 2012, dividends on preference share funding will be treated as interest, which is subject to tax. It is proposed that the period within which preference shares can be sold be extended from three to 10 years while dividends on third party-backed shares would be deemed to be interest in the hands of the recipient. This means parties to BEE transactions would be taxed three times: within the companies where the profits were generated; on receipt of dividends on ordinary shares subject to pre-emptive rights; and again on dividends gleaned by the funder.

The use of preference-share funding is, in many cases, the only practical form of funding, says Van der Walt. “This will have a detrimental effect on the majority of transactions.” The removal of section 45, he says, has left the market with not much choice.

Ernie Lai King, head of tax services at international law firm Norton Rose SA (formerly Deneys Reitz), says the proposals will affect pricing and financial terms of existing and new deals. “The lack of certainty around these changes is disruptive to commercial activity and disappointing as the tax system has been relatively stable in the past,” he says. “Uncertainty arising from talk of nationalisation and tax surprises is not attractive to business and foreign investment,” he says . “Investors are deterred by unpredictability.”

The fact that mining minister Susan Shabangu has dismissed talk of nationalisation on international investor road shows and finance minister Pravin Gordhan’s pronouncement that the taxman will, at its discretion, grant BEE transactions a tax reprieve, hasn’t done much to dispel industry concerns. Many businesses are adopting a wait-and-see approach on deals until there is further legislative clarity.

“Unless the law is changed, it is difficult to envisage how the SA Revenue Service (Sars) can bless certain transactions as qualifying for section 45 tax relief when that section has been suspended,” says Barry Garven, tax director at Bowman Gilfillan Attorneys. Under current legislation, Sars has no authority to approve any type of transaction, except under the advance ruling process. “The [Income Tax] Act allows Sars to give advance tax rulings only, applied for by taxpayers who are unsure of how a certain part of the act should be applied.” Such a ruling is binding on both the taxpayer and Sars.

However, even under the advance ruling process, Sars cannot approve a transaction as qualifying for tax relief if it falls outside the act’s tax-relief provisions, he adds. The act does not specify that BEE deals should get preferential tax treatment, either.

Lai King suggests that treasury and Sars should rather address their concerns through the use of anti-avoidance provisions, of which there are plenty. “A specific anti-avoidance provision could be introduced into section 45, rather than a holus- bolus suspension, which gives the impression of a knee- jerk panic reaction.”

The general anti- avoidance regulations consist of many complex sections aimed at identifying the type of transactions that are “impermissible tax avoidance arrangements”. Sars has sweeping powers in such transactions. Lai King says it would be preferable to leave the judgment of tax transgressions to the courts. “Tax authorities should not be the sole judge and jury.”

Treasury is not averse to the idea of using the anti-avoidance tools at its disposal as a preferred option. But Ismail Momoniat, treasury’s deputy director- general responsible for tax & financial sector policy, says they have to make judgment calls to curb abuses that are “overly aggressive, and bleeding” the tax system.

“We strive to be fair and equitable, and have a transparent and consultative process to deal with new tax legislation, but sometimes we have to be harsh,” he says. “At times abuse of rules falls out of proportion to the benefit it creates and we need time to investigate.”

He concedes that “we don’t always get it right when we make tax announcements”, and often have to “revise our original proposals” after taking into account public comments. “This is the nature of the tax process,” he says. The public had until last week (July 5) to submit their comments.

Momoniat adds that they will not be intimidated by those consultants making the most noise. “They are often the ones making lots of money from such tax- avoidance structuring.”

But SA’s tax laws are not all restrictive . Treasury is making an effort to attract foreign investors who have been eyeing countries like Mauritius, largely on the basis of their benign tax regimes.

From January 1 this year, treasury introduced less strenuous tax rules under the foreign headquarter (HQ) company framework, offering special dispensation to companies using SA as their regional headquarters for their subsidiaries.

“The incremental tax cost of coming to SA has been taken out of the system,” says Werksmans tax director Ernest Mazansky (see infographic on benefits on page 33).

But independent tax specialist Johan Troskie says the rules are more applicable to holding companies than an HQ regime. “An HQ regime implies that other taxes — like interest, royalties, dividends and management fees — will be tax-free, but it is still taxable at the corporate tax rate of 28%.”

Also, existing companies do not qualify for the regime as they must have had uninterrupted compliance with most of SA’s tax conditions from inception. “It is not attractive enough, still too complicated and administrative-intensive,” says Troskie. “The recent Taxation Laws Amendment Bill added to that burden by requiring HQ companies to prove annually that they still qualify.”

Mauritius, for example, goes out of its way to not tax income, or at a low rate. “By doing that the investment that followed and jobs that were created proved to be very lucrative,” says Troskie.

Momoniat disagrees that SA’s corporate tax rate is uncompetitive. “We need to take long-term sustainability into account and not create artificial bubbles through a race to the bottom, especially after the financial crisis,” he says.

Ireland, for example, has a particularly low tax rate of 12,5% and now finds itself in crisis. Greece’s problems are even worse. “We strive to ensure certainty in the tax system, particularly for those companies and investors that don’t indulge in aggressive tax-avoidance measures,” he says.

He believes SA has a favourable tax regime to attract foreign investment, citing the HQ rules, various tax incentives in the Income Tax Act and cash incentives offered by the department of trade & industry as proof . “These incentives are internationally competitive.”

But Lai King insists these measures are not enough to make SA as attractive as some neighbouring countries, which offer tax holidays and other incentives. And SA should be careful of introducing incentives only to withdraw them a short while later. “The explanatory memorandum on the Tax Laws Amendment Bill admits to some of the shortcomings of the incentives, like greenfield projects for example, which have led to a small uptake by business.”

There is also suspicion among industry players about Sars’ overall ability to administer the complex (and ever-changing) tax rules. “The tax system’s complexity increases every year and it is not only taxpayers who are struggling to keep up,” says Lai King. “Perhaps that may explain why there has been what is perceived to be an overreaction from the fiscus in this year’s amendments.”

Lai King says if the skills and systems were sufficient to implement, monitor and police tax concessions, “there perhaps would not be such fear of abuse of the system”.

The introduction of the Tax Administration Bill at the end of June this year might address some of these concerns. Sars feels it will have a profound effect on tax administration in SA to the benefit of both the taxman and compliant taxpayers.

“The bill , once law, will establish a solid legal framework for Sars to continue modernising its systems, redesigning its processes and optimising its pool of talented staff,” says Sars spokesman Anton Fisher. “Like other organisations in SA we do feel the effects of a lack of specialist skills, but this has not constrained us at any point to where we are unable to execute our mandate.”

Looking at past achievements, particularly in areas such as improved compliance, Fisher says Sars recorded improvements in personal income tax returns submitted by deadline between 2008 and 2009 from 58% to 80%. In the past financial year (2010/2011) Sars collected about R2bn more than was targeted. “In fact a total of more than R674bn was collected.”

On the suspension of section 45 and the subsequent outcry, Fisher says its litigation record provides clear evidence that “bad apples” are being identified and dealt with. “The proposed suspension of section 45 was about managing the risk presented by unacceptable avoidance schemes.”

But not everyone is comfortable with the new powers allocated to Sars under the Tax Administration Bill and the way it has been conducting its business in the past. Prof Henry Vorster, chairman of the taxation committee of the Law Society of SA, says they commented on several provisions of the bill during this public submissions period but only some of their concerns have been addressed.

“It has changed significantly, but is still materially flawed in many respects,” he says. “Of major concern to the Law Society was the exclusion of the high court in relation to disputes with Sars searches without warrants and the enforcement of payment before consideration of a taxpayer’s objections to an assessment.”

He says Sars informed the Law Society that it had received advice from external constitutional experts that the bill was constitutionally compliant. “We asked Sars to produce those opinions for discussion and evaluation but Sars has refused to do so,” he says. “We have followed the procedure provided for in the Promotion of Access to Information Act 2000 after our internal appeal was refused, and we are considering our position in relation to that.”

He expects though that Sars will feel compelled to make these opinions available to the parliamentary committee and the Law Society will gain access to the information at that stage. “Unfortunately we’ll have to wait until the law is enacted before we are able to challenge it.” The real concern, he says, is “how Sars officials will exercise these powers to the detriment of taxpayers”.

Tax collection is crucial to a sound fiscus. But SA tax authorities’ overzealous focus on tax avoidance restricts the regime unnecessarily.

Dealmakers and related parties feel SA can achieve much more by using global best practice and setting up a competitive structure. They’re not suggesting SA become a tax haven, but there is definitely room for a more attractive regime that is competitive with other African countries . Treasury should take a leaf out of Mauritius’s book.

The South African government is set to have the taxpayer fund its propaganda. In a classic pincer movement, a free media is being threatened by the imminent passing of the secrecy bill (the Protection of Information Bill) to prevent certain information being published, while the carrot of government advertising is being used to support those carrying government information.

Manyi vs the media: The ad budget battle begins – Mandy De Waal

The ANC government is in charge of running South Africa and newspapers must report on this. But the press must mirror messages issued by government if they want a share of the state’s massive ad budget. This is the new government spin redux delivered by Manyi. Media that don’t comply with this edict will be punished where the government thinks it will hurt the most: revenues.

SA editors were understandably outraged after government communication and information system boss, Jimmy Manyi, announced that Cabinet had approved a state communications plan to reward media which put a positive spin on what government was doing. The government communication plan sees the consolidation of an R1 billion advertising budget under GCIS, which means that media buying will now be done internally at GCIS instead of through individual government departments. South Africa’s media was deeply sceptical when Manyi was appointed to head the GCIS late last year. This latest move seems to validate that scepticism as the real shocker was Manyi’s statement that media which mirrored government spin would get more of his budget, and those which didn’t, would get less.

The SA National Editor’s Forum slammed Manyi’s plan and chairman Mondli Makhanya said the decision constituted a “serious offence”: “This incredible plan which was approved by the Cabinet means government wishes to bribe newspapers to become its propagandists or even its mouthpieces by publishing only the government’s view of news and affairs,” Makhanya said.

Manyi, not surprisingly, is aghast at this. He told Daily Maverick the media itself was trying to blackmail government. “The press are[sic] making a very interesting statement. I have said we want to support people that are carrying government information. Government is here to give out content and the role of the media is to give out information and to be a watchdog. Clearly the media I am going to focus on is where I have a base to reinforce my message. How can I advertise in a media that doesn’t carry my message? It is my role as a communicator is[sic] to reinforce my message. The challenge I am posing to media is this, are they now saying they have no intention of relaying government messages?”

“If the press takes offence, it shows all they are interested in is government money. They don’t want to pass on our message and are only prepared to carry government communication if they get paid with advertising? This is ridiculous. The media is saying: ‘Government, you can make all the press statements you want, but if you don’t pay us we won’t carry these.’ It is quite unfortunate.”

Manyi said the only newspaper that had reported on the governments’ new communications strategy in a balanced fashion was Business Day. “All of those that will carry our adverts, but not our messages are trying to blackmail the government willy-nilly into paying them. It is a blackmail tactic.”

Nic Dawes, editor-in-chief of Mail & Guardian, said Manyi’s statement showed he didn’t understand the basic tenets of either news or advertising. “We carry stories on the government where they have news value. We carry advertising in return for money. Manyi is asking us to break down the most basic ethical wall between our advertising and editorial departments,” said Dawes. “What is striking about this is that the ANC thinks the press is too beholden to advertisers. But now Manyi would like us to become even more beholden to advertisers. It is such a fundamental error it boggles the mind. Would he like us to be more positive to everyone who advertises? If we did that, we wouldn’t have newspapers. We would have PR leaflets.”

If government pulled its advertising from investigative stalwart Mail & Guardian, Dawes said the effect would be relatively small. “We do get government job advertising and some national and provincial state advertising, but it is relatively small and certainly wouldn’t affect us at an existential level, but at a marginal level.” Dawes said that it was very clear from Manyi’s statement who was blackmailing whom.

Sunday Times’ editor Ray Hartley said the withdrawal of government’s advertising from critical press could hurt any newspaper, but said his paper was less dependent on government advertising than ever. “The real growth in advertising has been from the private sector. I don’t think it will be deadly for newspapers, and if that is the intention – to kill critical newspapers – it won’t work.” Hartley said Sunday Times was a mass market publication and existed to serve its readers, and would never serve another master. “You can never publish to impress an advertiser if you want to keep your readership. It is just not going to happen.”

Hartley added a lot of the issues related to corruption and inefficiency were, ironically, put out by government itself. “Trevor Manuel’s recent diagnosis of South Africa included these issues, and everyone acknowledges that there is a problem with service delivery,” he said. Chairman of the National Planning Commission, Manuel released a document on the challenges and achievements of South Africa that showed the country was in decline.

“There are certain people in government driving this agenda,” said Hartley, adding he felt there was a relentless, continuous assault taking place on the press. “I think certain people in government were quite stung by criticism around the municipal elections. What the government needs to realise is that protests will continue and voters will continue to ask questions about who they are voting for,” he said.

Media expert and MD of Starcom MediaVest, Gordon Patterson, said Manyi’s decision undermined the very basis of advertising. “Media selection needs to be objective. If you want to communicate honestly and openly with consumers, you use the best media. And that is not the government’s view of what is the best media, but the people’s view. People speak with their choice in media and if you want to reach the people you need to respect their choices. That is how you decide how to achieve the best reach at the best cost.”

Patterson said rewarding those media who shared the state ideology was neither open, nor honest. “In media we study consumers and their choices and not the ownership or the ideology of the media platform. That is irrelevant. We invest millions in media owners we don’t necessarily subscribe to ideologically, or that I wouldn’t personally have over for dinner.”

Using media that only reflected state views goes against everything democracy stands for and would betray the very philosophy of advertising, said Patterson. “This decision is most likely to affect the print sector because of government’s involvement in radio and television.”

Anton Harber, Caxton Professor of Journalism and Media Studies at Wits University, questioned whether government’s communications plan was constitutional. “There are very strict rules about how you spend public money and if you spend money on your friends you will be breaking all the rules. The Public Service Act sets strict criteria on how public money is spent. I have no doubt this would rule out spending on what the government likes rather than achieving bang for the government’s buck.”

This sentiment was echoed by Dawes who said the methodology suggested by Manyi was a move away from proven marketing methodologies toward a communication plan based on punishing media that are not on government message. “If they do this, they will be in breach of the Public Finance Management Act and in breach of the most basic principles of marketing, which are linked. If you spend money in a way that isn’t linked to a rational outcome or return, you are breaking state rules on how to spend public funds,” Dawes said.

Mail & Guardian broke the news of plans to reward propaganda-supporting media in October last year. Government’s ratifying of this plan is just one of a number of moves by the state to control what it calls “truth” and restrict the free flow of information. The state was set to push through a very broad and subjective ‘Secrecy Bill” on 24 June. The effect of the bill would be to stem information flow and, not unlike the apartheid National Party government did pre-1994, criminalise media which attempted to report on issues deemed to be “state secrets”. Only after threat of mass protest by Cosatu was the deadline delayed.

While the “Secrecy Bill” has been momentarily stalled, the media appeals tribunal is returning to Parliament and is another muscle in the pincer grip of government’s ongoing attempts to strangle free, critical and independent media.

Firstly we welcome the M&G’s heading of this article which highlights the fact that it is taxpayers who are footing the bill for corrupt deals. Continued investigation of fraudulent deals by both the media and the public protector are welcomed. We call upon the public protector to act swiftly so that taxes can be rechanneled for the upliftment of the country and not connected individuals. If this lease is cancelled, those involved will suffer a significant financial setback and send a strong message that corruption does not pay.

Taxpayers suckered in new police leasing deal- Craig McKune

Roux Shabangu, the BEE business person at the centre of the police leasing scandal, was the proud recipient of another multimillion-rand state lease — for a building twice as large as the government required and way over its budget.

The R137-million, 10-year lease (which the Mail & Guardian has seen) by the department of public works is for a Pretoria CBD building as the headquarters for the police department’s Independent Complaints Directorate (ICD).

According to the M&G’s calculations, taxpayers have once again bought Shabangu a building the state itself could have bought for less.

In an interview this week Shabangu’s business partner, Japie van Niekerk, said Shabangu had bought the building because his political connections had told him the public works department wanted to lease it.

This claim was not answered by either Shabangu or the department.

Van Niekerk also stands to benefit because he lent Shabangu the money to buy the building.

Van Niekerk told the M&G that the lease, signed in April 2009, was Shabangu’s first foray into the lucrative state leasing business. It was a trial run for his controversial R500-million lease agreement for the new South African Police Service headquarters in Pretoria and a yet unconsummated R1.1-billion lease for the police in Durban. These were signed in July and November 2010, also with the department of public works.

The Pretoria SAPS lease was the subject of a damaging report by the public protector, raising questions about the involvement of national police commissioner Bheki Cele, Public Works Minister Gwen Mahlangu-Nkabinde and senior officials.

The protector is about to release a report on the Durban lease.

Taxpayers to the rescue
Shabangu’s company, Majestic Silver Trading 275, bought the ICD building, 114 Vermeulen Street, from Pretoria property mogul Sayed Mia in September 2008.

Mia, who owned the building for almost two years, sold it to Shabangu for R23-million, R10-million more than he paid for it.

After Shabangu bought Vermeulen Street, he and Van Niekerk mysteriously transferred it between them twice, with Shabangu’s Majestic Silver ending up as the owner for an escalated purchase price of R41.8-million. Shabangu owed the full amount to Van Niekerk’s company, HMKL 3, in the form of a private bond.

Van Niekerk would not say what interest Shabangu was paying him for the bond other than that it was “prime linked” and had to be paid off over 10 years.

Assuming a 9% interest rate, Shabangu would have to pay Van Niekerk about R530 000 a month for the next decade. Once that is done, the building will belong to Shabangu, unencumbered by debt.

But according to Shabangu’s April 2009 lease agreement with public works, the government would pay him R729 280 a month for the first year, escalating by 10% a year — so that by year 10 he will be paid a handsome R1.9-million a month.

In other words, Shabangu’s bond repayments would be serviced by the taxpayer. Van Niekerk would earn big interest on a big bond and Shabangu would have hundreds of thousands of rands to spare each month.

Problem 1: Insider information
Asked to explain the property transfers and whether Shabangu had secured the lease by legal means, Van Niekerk said: “To get there, I’m going to have to give you some history.”

He explained how he and Shabangu had gone into partnership a decade ago to build shopping malls in “deep rural areas” (see “Roux is like my little brother” below).

In 2008 public works announced a new policy to favour BEE companies in the allocation of long-term state leases. “Shabangu … jumped at the opportunity. For him to go and buy a building in the CBD and get the government to rent it from him is an easy deal, a very lucrative deal.

“Roux asked for help with the first one, which was Vermeulen Street. The building was standing empty and he had information that public works was interested in renting that building.”

Here is problem number one. Someone gave Shabangu inside information and, on the basis of this, according to Van Niekerk, Shabangu wanted to buy the building, with an eye to being awarded a lucrative state lease.

Van Niekerk said he did not know who gave Shabangu the information and he was adamant that when they bought the building they had no guarantee Shabangu would be awarded the lease.

“All these guys are politically connected. That’s what we do,” he said.

As it happened, just three months after Shabangu’s Majestic Silver bought Vermeulen Street from Mia, Shabangu was authorised by a company resolution attached to the lease to “negotiate and sign a lease agreement with the department of public works”.

This statement highlights two important points:

• It proves that Shabangu was in talks with the department almost immediately after buying the building, if not before.
• It suggests the department did not follow an open tender process and chose to negotiate directly with Shabangu, opening a window for him to be unfairly favoured.

Asked to comment, Mia said: “I sat with that building for a long time and I couldn’t get a lease. That’s all I can tell you.”

Problem 2: tender process
Asked if an open tender process was followed, Van Niekerk said: “Public works wanted that building. I don’t know if there was an open tender process.”

He said that an open tender would not have been necessary because the department had identified the building and simply needed to approach Shabangu as the owner.

This is incorrect. According to established procurement procedures designed to prevent corruption clear steps should be followed in such cases.

First, the department looking for a lease — in this case the ICD — should identify a need for new accommodation and supply a needs assessment and budget to public works.

Public works then decides whether to follow an open tender process or, if it can provide a valid reason, unavoidable urgency, for example, it can choose to approach property owners and negotiate a lease.

If it chooses an open tender, the department must advertise and choose the most appropriate bidder based on a technical evaluation, cost and empowerment credentials.

When this was put to Van Niekerk, he pointed a finger skyward in a “eureka!” moment: “Oh, yes, he did go through that process. I know there was a tender that went out. I do remember something like that.”

For more than two weeks the department has failed to explain how Shabangu was awarded the lease.

Problem 3: an inflated lease
Approached for comment, Moses Dlamini, the ICD spokesperson, said he did not know whether an open tender process was followed — that was public works’s responsibility — but the ICD had submitted a needs assessment and a budget.

The ICD needed 3 668 square metres of space, with 105 parking bays, at a budget of R6.2-million for the first year of the lease.

But with Shabangu’s building the ICD got 7 614 square metres and 102 bays, for which it had to pay R8.8-million in the first year. The rent would increase at a top-end rate of 10% a year.

In other words, the ICD received more than twice the space it needed at more than 40% above its budget.

Mia is the same business person who later sold Sanlam-Middestad to Shabangu. Sanlam-Middestad is the building Shabangu acquired in the SAPS Pretoria leasing scandal.

Cele has protested that he cannot be blamed for the fact that two SAPS leases were awarded without an open tender.

But there is one more glaring coincidence — both the SAPS and the ICD report to the same ministry — that of police.

Asked who decided that the ICD needed a new building, Dlamini said: “The top management of the ICD was responsible. At the time the ICD was housed in two different offices because of space constraints.”

Shabangu has refused to answer detailed questions (see “I’ll tell the ANC on you!” below).

‘Roux is like my little brother’

Roux Shabangu is a big man. He has presence, he is intelligent and has unbelievable drive, according to property developer Japie van Niekerk.

“I like to call it ‘horsepower’,” said Van Niekerk, a charming man who refuses to talk on the phone.

Sitting in his office in Lyttelton, Pretoria, this week, surrounded by collages of shopping mall developments, Van Niekerk described his relationship with Shabangu in glowing terms.

“Ten years ago, Roux Shabangu came to me and had nothing. I saw a lot of myself in him when I had nothing. I wanted to help the guy.”

He said he gave Shabangu a car, clothes, an office and a secretary. “And I offered him a stake in some developments.”

Van Niekerk’s New Africa Developments was building malls in “deep rural areas”, where a lot of time needed to be spent negotiating with locals, “securing the land from the local chiefs” and “going through the government”.

Shabangu was good at this, said Van Niekerk. “He was instrumental in obtaining the land. He was good at negotiating. He liked to engage with communities.

” I went out of my way to teach him to do the right things, to get the right attorneys and the right auditors. I explained that tax is a thing that you need to pay so the business sits legally clean.

” He was like my little brother. He went through the process of crawling and walking and then he was ready to run.

“That is where Vermeulen Street came in,” Van Niekerk said, referring to Shabangu’s first state lease.

By then, about two to three years ago, Shabangu had bought his own office space in Irene, Van Niekerk said.

” In that time, he came to me and said he wanted to do these government buildings.”

This was after the department of public works announced a policy in 2008 to award long-term state leases to black property owners.

“He wanted to jump and I said: ‘You must do it’.”

It was easy money.

Van Niekerk funded Shabangu’s first deal, which he explained in detail (see main article, above).

“Subsequent to that, I had no dealings with Roux.” — Craig McKune

‘I’ll tell the ANC on you’

Instead of denying that he secured a lease by means of political connections, Roux Shabangu said he would use his political connections to deal with the Mail & Guardian.

In a hotly worded response to questions, Shabangu turned on his business partner of 10 years, Japie van Niekerk, suggesting there was “growing animosity” between them because Shabangu had entered the property market, “the so-called ‘white man’s terrain’”.

He also accused the M&G of seeking “to put our government, its leadership, state organs and Nedbank [who bonded his purchase of Sanlam-Middestad] into disrepute”.

“By continuing to pursue its own agenda, M&G has helped us confirm what we have always suspected, identify one of the culprits [sic] …

“With regard to [the Independent Complaints Directorate headquarters at] Vermeulen 114, suffice to say it was a legitimate transaction between two astute business partners who have been doing business together for over 10 years.

“We want to put it on record that we will not be drawn into accusations that are a foregone conclusion in the eyes of [the] M&G. Seemingly, Mr Van Niekerk knows everything and has all the answers. In view of all this, it might be in M&G‘s best interest … to stick with its sources and publish what it wants.

“NB.If you choose to report selectively, as has been the case in previous articles, we reserve the right to escalate your questions to other newspapers, all ANC and government structures and our response to that effect.” — Craig McKune

State leases costing billions

Public Works Minister Gwen Mahlangu-Nkabinde has finally realised the state is wasting billions on state leases of the kind described on these pages.

In her budget speech this week she announced plans to slash spending on state leases over three years.

“The leasing portfolio is costing the state a lot of money. The department has, in the past year, spent billions on leases and functional accommodation for client departments,” she said.

“Investment in repair and maintenance, continuous maintenance and construction of new government buildings could generate major savings for the state.”

Last week the Mail & Guardian exposed how state leasing had reached scandalous proportions. Businesspeople around the country are using their political connections to secure inflated state leases, which, in turn, service overblown bonds, enriching them at the expense of taxpayers. — Craig McKune

In his budget address Gordhan stated that National Treasury had identified billions of rands worth of tender fraud. This move to black list companies is a step in the right direction. We would also like to see a follow up where taxpayers funds are recuperated through significant fines of guilty companies and the firing of bureaucrats involved in the tender fraud process.

Gordhan blacklists 120 firms for years – Donwald Pressly

Finance Minister Pravin Gordhan has instructed government departments to stop doing business with 120
blacklisted companies for up to 10 years.

While more than half of the companies and individuals, which are listed on the “database of restricted
suppliers” on the National Treasury’s website, have connections to Limpopo, significantly none of them
appear at this stage to have any connections with ANC Youth League president Julius Malema.

Malema has come under continued focus for allegedly having made deals with government departments,
particularly in Limpopo.

There are a number of cases of contractual misrepresentation of facts, poor performance and breaches of
contracts with the Ekhurkuleni municipality in Gauteng and various Western Cape and Gauteng departments
and the Treasury itself.

Treasury spokesman Jabulani Sikhakhane said the blacklisting applied “for a period not exceeding 10
years”. It was at the discretion of the accounting officer or a government authority to extend the restriction “to
any other enterprise or any partner, manager, director or other person who wholly or party exercises or
exercised or may exercise control over the enterprise of the first mentioned person”.

Asked if any politicians were involved, Sikhakhane said that a check would have to be done with the
Companies and Intellectual Property Commission, which lists directors, to establish connections “to any
specific person”.

Details as to state officials who were involved in business with the government were not yet available but this
would not become the responsibility of the Treasury, said Sikhakhane. The Public Service Commission was
seen to be a more appropriate vehicle for this task.

The blacklist contains a host of restricted suppliers that have done deals with the Limpopo Department of
Local Government and Housing.

Gordhan told parliamentarians this week that the blacklist would be put on the website. The Treasury on
Tuesday issued “an instruction note” to deal with fraud and corruption in the public procurement system “and
(to) give effect to the commitments made in the (February) Budget speech”.

The website item provides either the registration number of the offending firm or the ID number of the person
associated with a procurement.

The Limpopo Information Technology supplier was described as blacklisted for not obtaining permission to
conduct business with the state, in this case the Agriculture Department in Limpopo.

Masego Lahili, a Business Unity SA (Busa) spokesman, welcomed the announcement on tighter regulations.
“It is an important step and will certainly assist in eradicating the fraud and corruption associated with
government contracts.”

The key to success, he said, was to ensure effective implementation and enforcement of the regulations.
Busa also welcomed transparency provisions of Gordhan’s “note”, including that successful bids for
government contracts must be published. – Business Report

Source: The Free Market Foundation – SA’s 2011 Tax Freedom Day – Monday, 2 May – Garth Zietsman

South Africans pay higher taxes as a percentage of GDP than Australians and Americans. While their Tax Freedom Day (TFD) fell on 6 April and 16 April 2011, respectively, SA’s will fall on 2 May. The citizens of those countries have more economic freedom than we do because they spend less of the year working to pay their taxes.

Garth Zietsman, the FMF Council Member and honorary statistician who annually calculates TFD says, “This year, South Africans will start working for themselves eight days earlier than last year’s 10 May as a result of the recession. As a percentage of GDP, we will earn less money and pay lower taxes, but, unfortunately, that does not mean that government will spend less. They are going to borrow and spend more, which will mean all South Africans will be faced with higher taxes in future to pay the interest on these borrowings and to repay the loans.”

How does government get its hands on the finance it needs? Through income tax, VAT, fuel tax and the host of other taxes we all have to pay. To determine the real impact of all these taxes on any one individual is very difficult, but the TFD measure was developed to try and give citizens some idea of how much of the nation’s earnings government takes from them in taxes. In SA’s case, the nation will spend 121 days, or 33.2% of their time, working to pay their taxes and only on 2 May, the 122nd day of the year, will they be able to start working for themselves.

Of course, taxes are spread throughout the year and a chunk of every day’s earnings goes in taxes. We nevertheless gain a useful perspective on taxes when we calculate an overall average tax burden by converting into days and months the time that a nation spends on earning money with which to pay taxes. It is a sobering thought to know that we have only 244 days or 66.8% of the year left to work to pay all our other expenses and to try and put away money for retirement.

TFD gives us a macro-economic picture of taxes, taxpayers and the economy. To determine your own personal TFD add up the total taxes you pay in a calendar year (including the hidden taxes that are contained in the purchase prices of most things you buy), divide the number by your total income for the year, multiply by 365 days (366 in a leap-year) and add 1 day.

Everyone’s earnings are not the same and the tax burden is not spread evenly. The top 1% of American taxpayers, for instance, pays 40% of all US taxes and the top 1% of Australian taxpayers pays 18.5% of Australian taxes. In both cases we would need to know their total incomes in order to calculate their collective TFDs. Similar figures for SA are not readily available but according to SARS 2009 figures, 52,446 taxpayers (1.5% of the total) earned more that R1m each and paid 24.5% of all income taxes collected from individuals.

Economists tend to disagree over the level of taxes that individuals should pay, who should pay the taxes, what effects taxes have on their lives, and what form taxes should take. US economist Arthur Laffer became well known for his famous graph (the Laffer Curve) which suggested that there is a tax rate level beyond which total taxes tend to decline rather than increase when the rate is raised. According to this theory, cranking up the taxes on the highest-earning taxpayers can be counter-productive, while reducing the rates can result in increased tax income for the state. Ronald Reagan’s administration proved the accuracy of this prediction when it slashed tax rates and ended up with more revenue.

Numerous reasons are put forward for the Laffer Curve phenomenon; higher after-tax income increases incentives and productivity; money saved from lower taxes is invested to increase production, and taxpayers spend less time on tax avoidance schemes and more on growing their incomes. Whatever the reason, some governments have implemented low-tax regimes with positive results. Unfortunately, the lessons learned are soon forgotten and calls for higher tax rates are once again making the headlines.

TFD for the UK this year has been calculated as 30 May, 28 days later than SA. Other TFDs due to occur after SA’s as indicated by their 2010 TFD dates are Croatia (10 June), Israel (22 June), Poland (23 June), and Sweden (20 July). Swedish people spend 200 days (55% of the year) working to pay their taxes and have only 165 days to work for themselves.

At the other end of the scale is Mauritius. This small island nation is the envy of most taxpayer nations. Its TFD fell on 22 March as a result of a deliberate effort to cut back taxes (15% tax rate for individuals and companies) and to make it more investment friendly. It is 9th on the 2010 Economic Freedom of the World index compared to SA’s 82nd, and 20th on the World Bank’s Ease of Doing Business index, with SA at 32nd.

According to FMF Executive Director, Leon Louw, “A deliberate effort on the part of government to give SA an earlier TFD would make the country more business and investment friendly, increase disposable incomes, savings and investment (including foreign direct investment), increase economic growth, and reduce unemployment”.