Facing what it considers to be a growing problem with increasingly complex and sophisticated forms of tax evasion, the South African Revenue Service (SARS) has released a discussion paper on proposed changes to the income tax to clamp down on "impermissible tax avoidance" by corporate taxpayers.

In keeping with international trends, SARS and the National Treasury (NT) have been reviewing the effectiveness of applicable legislation on impermissible tax avoidance contained in Section 103 of the Income Tax Act (Act No. 58 of 1962). As a consequence, SARS and the NT last week released a discussion paper on tax avoidance for public comment.

A key question the paper raises is the distinction between tax evasion, impermissible tax avoidance, and tax planning.

"Trends in tax avoidance have been driven by several factors including globalisation, deregulation (particularly in the financial markets), rapid advances in computer and telecommunications technology, and a new emphasis by many professional firms on the development and marketing of so-called 'tax products,'" SARS noted in a statement.

"Unfortunately, Section 103 of the Income Tax Act has not kept pace with the times," it added.

The discussion paper proposes five major changes to section 103. These changes would:

• Introduce a non-exclusive set of factors to be considered in determining abnormality for schemes in the context of business and create a rebuttable presumption of “abnormality” where certain of those factors are present;
• Change the existing subjective purpose requirement to an objective determination based upon the relevant facts and circumstances;
• Clarify that section 103 may be applied to steps within a larger scheme (and that a general business purpose for a larger scheme is not sufficient to shield each and every step in that scheme from review);
• Authorise the Commissioner to apply Section 103 in the alternative; and
• Introduce new penalties for scheme promoters and for taxpayers that substantially underreport their income.

Certain textual changes would also be made to simplify and clarify the provisions of the section.

The consultation period runs until January 31, 2006.