Whistleblowers and tax evasion…


The importance of whistleblowers has again been highlighted recently in South Africa. In one of the reports released by Judge Raymond Zondo, who led a commission of inquiry into the state capture, he recommended that whistleblowers be protected. He also recommended that they be incentivized to make disclosures – a monetary reward based on a percentage of the product recovered based on this information.

Academics, including myself, have called for similar treatment for tax whistleblowers.

The logic of these calls is that whistleblowers play a role in exposing corruption. Moreover, they can expose those who avoid paying their fair share of taxes.

In the financial year 2020/2021, South Africa’s tax revenue decreased by 7.8%. This was due to a number of factors, including tax evasion. Exposing tax evaders would be welcome as it could lead to increased tax revenue.

In turn, the additional tax revenue can be used by the government to realize the socio-economic rights of the South African people.

But can a financial incentive for a tax whistleblower program work?

I believe it is possible, but South Africa needs to refine its laws and regulations. For now, the country simply plans to report suspicious tax activity via a link.

I would say that South Africa should learn from the experience of the United States and introduce monetary incentives for tax whistleblowing. In particular, recent developments in the United States provide valuable insight into what South Africa could do to improve the current system.

The American approach

The United States has implemented a monetary incentive for tax whistleblowers.

Under his system, a whistleblower must receive between 15% and 30% of the proceeds collected from information he provided that led to enforcement action taken by the Secretary of the Internal Revenue Service.

The reward percentage is determined by factors such as:

  • whether the whistleblower acted quickly in reporting the non-compliance,
  • whether the disclosed information revealed a problem previously unknown to the IRS, and
  • whether the whistleblower took advantage of the non-compliance but did not initiate the non-compliance actions to determine the reward percentage within the specified range.

These mandatory rewards only apply to disputes over $2 million. The Whistleblower Bureau has the discretion to award a reward for amounts less than this. There is no minimum statutory award percentage for discretionary awards.

From 2018 to 2020, the US Whistleblower Office raised over $2.5 billion based on information received from whistleblowers. It awarded 567 scholarships for an amount of $519,131,900. No statistics are available on the administrative costs associated with this program. But Theo Nyreröd, PhD student, and Ginarcarlo Spagnolo, professor of economics, make a valid point about administrative costs. They believe that the costs associated with other means of obtaining the same information must be considered. Generally, “social enforcement” through whistleblowing of an inducement is more cost-effective than typical enforcement methods.

However, the actual design and implementation of the program plays an important role in the cost-effectiveness of the program.

In addition to collecting more taxes, non-compliant taxpayers are brought into the tax system through the whistleblower program. In subsequent years, the IRS will have information about these taxpayers and can ensure that they remain in tax compliance.

The South African framework

South Africa has numerous pieces of legislation that deal with whistleblowers. These include:

  • the Protected Disclosure Act 25 of 2006,
  • the Labor Relations Act 66 of 1995, and
  • Companies Act 71 of 2008.

All of them create a general framework of denunciation. As there is no specific tax whistleblowing framework, the general framework should be relied upon to protect tax whistleblowers from possible retaliation.

So what needs to be in place in South Africa to have a tax whistleblower program similar to the US program?

The United States made at least three fundamental changes to its old IRS rewards program to create its current system.

First, the IRS created a national whistleblower office to handle claims and provide centralized administration.

Second, it implemented mandatory rewards at fixed percentages.

And finally, it gave whistleblowers the right to appeal IRS award decisions.

The IRS Whistleblower Program Improvement Act of 2021 also suggested improvements. These included creating a presumption of anonymity in Tax Court, charging interest if the IRS failed to pay the award one year after collecting the taxes due to the disclosure, and allow the IRS to retain 3% of the proceeds collected (limited to $10). million) to reinvest in the whistleblower program.

Further, in a recent article, law professor Monray Marsellus Botha and I argue that an effective whistleblowing framework for South Africa should include these principles:

  • confidentiality regarding whistleblower information is paramount
  • the information must be previously unknown and unlikely to have been discovered without the whistleblower’s information
  • the disclosure is made in the public interest; and
  • the monetary incentive should be linked to the tax collected based on the information provided by the whistleblower.

Also, in my view, the corruption scandals in South Africa make it essential that there be proper checks and balances in place for any whistleblower program, otherwise it could just be used as another avenue for corrupt officials.

Carika Fritz, Associate Professor of Tax Law, University of the Witwatersrand

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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