The wealthy get richer even when governments ‘clamp’ down

By Maarten Mittner

The global tax system decided on a minimum level of corporate tax. This won’t address the creation of rampant wealth.

Markets have shown little fear in reaction to renewed revelations of vast personal wealth accumulation among the wealthy over the past decade. The Nasdaq has risen to an all-time high, Facebook hit a market cap of $1tr and Apple remains comfortably above the $2tr level.

A new minimum global tax level of 15% for companies has been agreed to by 130 countries. This is lower than the 22% which has been calculated to offset any tax arbitrage, whereby a tax rate of 28% is levied in one country, say South Africa, as compared to 11% in another, say Ireland. And obviously, the country with the lower tax rate is preferred. Therefore, a rate of 15% may not be as effective as hoped.

The reality is that the global tax system continues to favour the wealthy, and their companies. Low-tax havens may not become a thing of the past. Yet. But how do the wealthy actually pay less tax?

Globally, as in SA, the creation of wealth is not taxed. Only income, and to a lesser extent capital gains. Theoretically, the wealthy face hefty capital gains tax on the selling of shares. But that rarely happens. Why? Mainly because capital gains taxes are linked to residency requirements. If a person is not a resident of a particular country, no tax is payable in thatcountry, unless it is from a local source. As it relates to ownership of a house, for example, or immovable property in tax jargon.

But determining tax residency is subjective, and not based on the passport holder or nationality. The owner of a house in Clifton, and who has another in London, will arrange affairs to only pay tax in the country with the lower tax.

Residency is also linked to a physical presence test. A holder of an SA passport who only lives here for a certain number of days per year and is mostly domiciled in the UK (and can prove it) will not be held liable for tax in SA. Many of the wealthy escape this requirement by living in one country only half of the year.

The application of double tax agreements (DTAs) also provides an escape route to the well-off. Most DTAs have provisions whereby only a certain country may tax an individual, to avoid double taxation, with tie-breaker rules in the event of a dispute. DTAs are so designed to offer lower tax payable in certain countries, mainly the developed ones, as a quid pro quo for investing in a developing country, apart from certain provisions that cater for a permanent establishment. In which case tax will be payable in the developing country.

Every taxpayer has the right to legally avoid taxes. But not to evade tax, which is illegal.

But, as can be expected, a lateral-thinking tax expert may be able to prove that a permanent establishment in a certain country is non-existent because the board meets in another country. Or if a distribution outlet is only temporary, or leased.

Then there are dividends. The wealthy receive income mainly in the form of dividend pay-outs. Unlike income, dividends are tax-free. Well, mostly. SA introduced a withholding dividend tax of 20% a few years ago, paid over by the company. But income from dividend tax has been disappointing because exemptions are available and most DTAs make provision for a lower dividend tax rate, say 5%. Or nothing at all.

Another big favourite among the wealthy has been trusts. Especially foreign trusts. This is where most of SA’s expat wealth is held. Many measures have been taken to curb tax avoidance among local trusts, such as the section 7 attribution rules, or the section 7C interest-free loan provisions. These rules are quite stringent. But the results have been mixed because the SA Revenue Service (Sars) cannot touch foreign trusts, for obvious sovereignty issues. Local trust beneficiaries can be taxed, but only if they are SA residents. Once again, if you can prove non-SA residency or pass a physical presence test in favour of a foreign trust, tax cannot be levied on a beneficiary. This is all legal. No cloak-and-dagger stuff.

Every taxpayer has the right to legally avoid taxes. But not to evade tax, which is illegal. In the past it has been difficult to prove evasion as intent must be shown. Sars recently removed this provision from legislation, with potentially adverse consequences for tax evaders. But it has not been tested in practice.

All this has resulted in Tesla mogul Elon Musk only paying 3.27% tax on his wealth of $14bn, created between 2014 and 2018. And Warren Buffett forking out 0.1% on his $24bn created. Sometimes even a percentage is lacking, as no tax was paid, as with Amazon CEO Jeff Bezos, who even claimed a tax deduction over the period.

Market investors and asset managers know markets will always follow the big money. Where tycoons continue to add to their existing wealth. Sure, it has been way too easy for the wealthy to avoid taxes. But unless the whole tax system is reconfigured, this trend is set to continue as the wealthy will always find ways to avoid a high tax burden. ■ editorial@finweek.co.za

Maarten Mittner is a registered tax practitioner, freelance financial journalist and a markets expert.