Psychological predispositions and the inefficacy of the general anti-avoidance rules as determinants of tax evasion in South Africa

Abstract

“Every man is entitled to, if he can, order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be”. The heavily cited judgment of IRC v Duke of Westminster confirms a taxpayer’s right to plan their taxes however, such right has been exploited for decades by taxpayers to the extent that it constitutes tax evasion. Tax evasion involves the illegal non-payment of the correct amount of tax that would be properly payable under the tax laws of a country. As a developing country, South Africa heavily relies on taxes paid by its citizens as a major source of revenue. Tax evasion thus has a significant impact on the finances of the country.

This research interrogates why taxpayers continuously engage in impermissible avoidance arrangements (i.e. tax evasion) in spite of South Africa possessing the general anti-avoidance rules (GAARs) which were developed to deter taxpayers from unlawfully avoiding taxes. To answer this question, this research examines the efficiency of the 2006 amendments to the South African GAARs in addressing previously identified weaknesses and, more importantly, in curbing tax evasion. Such assessment is not done in isolation, as one must consider the taxpayer’s psychological predispositions and its bearing on tax evasion. These predispositions influence a taxpayer’s tax morale, which has been described as the taxpayer’s intrinsic motivation to pay their taxes. Therefore, this research also seeks to determine whether a taxpayer’s psychological predispositions have any bearing on their tax compliance.

Using the 2005 discussion paper by SARS, the 2006 amendments to the GAARs, case law and various authors writing on this subject, it was found that the inefficiency of the GAARs has an impact on tax evasion. In addition to this, empirical evidence founded in surveys and studies, as well as the opinions of various authors writing on the subject are analysed, which show that psychological predispositions of the taxpayer also have an impact on tax evasion. Recommendations are made to improve the GAARs as well as the implementation thereof. Recommendations are also made to improve tax morale through treating psychological predispositions of taxpayers as a priority.