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I trust this finds you exceptionally well with the first quarter of the year behind us and the traditionally wet and cold Easter week-end well past. (I don’t know why we get excited about the Easter week-end, it is foul weather year in and year out and, religious connotations notwithstanding, it really signals the change of seasons). Having said that, before we get upset about Easter weather in South Africa, given that it is now April in the United Kingdom, they have a had a real treat. When I lived in London from 1996 to 2003, I recall three days in the entire seven years that snow settled on the ground in London.  Given that (at time of writing on 6 April) London has had snow for four days of the six in April (and for many more in February and March), I think we can be a little more grateful for our weather than we have been.

It has been a tricky first quarter and the status quo looks to maintain as the European crisis continues to lurch from non-resolution to disaster and back again and, more locally, what seems to be an impending downward spike in the price of commodities is likely to wreak havoc on the mining and primary sectors which have not recovered from the Marikana disaster. Interesting times – far too many interesting times and too
many maneuverings being stage-managed by the wrong people for the wrong reasons. As I have repeatedly said, it must be lovely to work for government and not be bound productivity, budgetary, cash-flow or any other irksome and irrelevant realities for real/ productive/ normal businesses. Having said that, I do wonder how much SARS missed their collections budget by and how much the final number will be massaged.

I have included the followed excerpt by Yves Smith (from Naked Capitalist), which makes for very troubling reading. This is particularly in the context of the European Union being South Africa’s largest trading partner and, ergo, “if they ain’t buying then we ain’t selling”.

Excerpt commences:

Will Cyprus Be Contained’ (Updated)

In March 2007, Fed chairman Ben Bernanke said that he thought the impact of losses on subprime mortgages was likely to be contained. It took five months for events to start proving him wrong.

August 2007 marked the onset of the first acute phase of the global financial crisis, whenthe asset-backed commercial paper market seized up.

Last week, in a press conference, Bernanke indicated that he thought the likelihood of the crisis in Cyprus having larger ramifications was limited, and avoided using the “c” word. But the message was similar to that of March 2007. So now that Cyprus has agreed to resolve its problem banks on its own, the island nation has secured a short-term sovereign cash fix. As MacroBusiness described it:

The restructure is enough for the IMF to agree to release a 10 billion euro bailout, which will do nothing whatsoever to address Cypriot public debt sustainability or the economy (other than hurt both). (JAL emphasis added).

And there also is a rather visible inconsistency between the Eurocrats’ insistence that Cyprus was too small to make any difference and the stock and currency market response to the news of a deal.

So are we likely to see the sort of delay between the assessment and the onset of trouble, as we did in 2007, or is Cyprus a nothingburger, as the
Troika and many investors contend’ I welcome reader input, but I’d say the odds of knock-on effects are greater than the cheery official assessments would lead you to believe.

As we’ve indicated before, the threat is that bank runs start in other periphery countries, based on a recognition that their bank is at risk plus a concern that they will be made to take losses, as large depositors were in Cyprus (JAL emphasis added). We never thought the odds of a “hot” run, as in people lining up at banks to withdraw money, was all that high, and it’s been reduced even further by the fact that depositors under €100,000 were spared. However, we think the slow-motion departure of depositors from periphery banks is likely to resume…. (JAL emphasis added).

First, confiscating bank deposits is now on the table in any future crisis. That’s toothpaste that’s not going back in the tube. Commerzbank chief economist Jörg Krämer has already suggested (Google translates) “a one-time property tax levy” for Italy and “a tax rate of 15 percent on financial assets.”

And adding fuel to the fire, the Leader of the UK Independence Party has urged expats in the periphery countries, in particular the 750,000 British in Spain to “Get your money out of there while you’ve still got a chance.”

Second, capital controls in Cyprus mean that there are now two Euros in effect: The Euro that you can use only in Cyprus, and the Euro you can use elsewhere in the so-called “monetary union.” So from the perspective of people in Cyprus, the results are in some ways worst that a breakup: rather than having depreciated dough, you have dough that has been impounded, particularly in terms of using it outside Cyprus.

In each case, why wouldn’t every business owner or wealthy Euro-holder in the periphery go into “First, they came for the Cypriots” mode, take economist Krämer at his word, and move their money to where they had some reason to believe it was safe’ (JAL emphasis added).

Third, these concerns may be amplified by how rapidly and visibly the Cypriot economy craters. The “rapidly” is due to the fact, as discussed in greater detail in the post from below, that the Cyprus economy will suffer a one-two punch: the loss of a big chunk of wealth, plus the disappearance of much of the financial services sector, which was 45% of GDP. The author estimates a 20% to 30% fall in output in two years; that could turn out to be conservative, given that the tender ministrations of the Troika will only make a bad situation worse. This is almost certain to be a more rapid and severe decay than in Latvia or Ireland.

But the “visibly” is just as important. The financial media has taken perilous little interest in the human suffering in Greece, Ireland, and Latvia (that should actually be no surprise given who their advertisers are). Oh, you’ll read the stories about how many medications aren’t being imported in Greece, sheets are being re-used in hospitals, suicides have skyrocketed, and trash collection is erratic at best, but these articles are few and far between. The dire conditions and the depopulation of Ireland and Latvia get even less press.

By contrast, the revolt by Cyprus’ parliament and the fraught negotiations have given this bailout negotiation far more profile than its
predecessors. There is almost certain to be a fair amount of media coverage of the immediate impact of the bank restructurings and the capital controls. And we are also likely to get the BBC effect, which is ongoing coverage by the English press of conditions in Cyprus due to the number of expats living there (Richard Smith tells me that it was popular among RAF retirees, since their modest pensions and savings would not allow them to buy adequate housing in the pumped-up English market). That will probably produce some echo coverage in other English language press and possibly on the Continent. So the odd favor having ongoing media depictions of Cyprus’ distress, which in turn would increase anxiety levels in periphery countries.

Excerpt ends

So what this illustrates is that where-ever in the world they seem to be, politicians just cannot help messing (OK, in the interests of political
correctness, I substituted the real word with “messing”) it up spectacularly. Even if they purportedly have the best interests of the electorate/ proletariat at heart, the unintended consequences of their ignorant, foolish and ill-considered ministrations blight lives and livelihoods the world over.

The Cypriot bomb is going to implode publicly and with noisome and ever-reaching ripple effects as the old adage (forgive my poetic license) that all Euro’s are created equal, some are just more equal than others is proved yet again. The very perception that one’s money is not safe in a particular bank or a particular continents bank’s can and do lead to bank runs (Northern Rock anyone’). Watch this space.

As I have repeatedly agitated, energy costs remain and are likely to increase well above the order of inflation (if energy inflation was only double or triple the official CPI rate, it would be a wonderful result, however, the compounded effects of (say) Eskom increases at 25% per annum for three years means an effective 95% increase over three years – with ABSOLUTELY NO CHANCE of sales pricing increasing by anything remotely approaching that magnitude. (As a matter of interest, petrol in April 2010 was a (at the time) hefty R7.80 per litre – look at it now after three years). The prosecution rests your honour.

It delights me immeasurably to re-iterate that Michael Kumm from our office, after completing his Articles of Traineeship with this office, passed his Final Qualifying Exam and can now add the letters CA(SA), RA after his name. We are all absolutely overjoyed for him.

CIPC continues their extremely successful efforts to frustrate and raise the barriers for entry to the South African economy. My mom always told me that if you have nothing nice to say, then say nothing. Moving swiftly on then……………

As has been previously mentioned, SARS have added a truly vicious and malevolent beast to their arsenal known as an IT14SD. This is a reconciliation which requires reconciliation between the payroll numbers on the financial statements to the payroll reports (IRP5s and EMP501s) and a reconciliation of the VAT inputs and outputs (to cost of sales). This is an incredibly labour intensive reconciliation which easily takes 40 man hours. It is a VERY VERY expensive and time-consuming submission (and seeing as SARS developed this without informing the software providers, as of March 2013, there still isn’t, to my knowledge, a software provider in South Africa that has set up their software to generate the inputs/ reports in the format required). I asked the question at the annual Southern Suburbs SAICA/ SARS meeting, last year, if we could not submit the document and rather invite SARS to audit. We are also finding that, quite literally, one in three tax returns are going for review or audit. It is absolutely ludicrous! Basically if one is receiving a refund or has ANYTHING other than a plain vanilla type of the tax return the documents are required to be submitted. It is chewing up time and costing money that is unnecessarily spent due to poor risk profiling. It is making us change the way that we approach tax on an annual basis, as instead of aiming for a small refund, we are aiming to have to rather pay in and hopefully avoid the time and costs associated with an audit. Having said that, even then, where clients are having to pay in, we are finding a disproportionate amount of document requests/ audits. It really is a lose/ lose situation. Further thereto, to put another obstacle in the way of the small South African entrepreneur, SARS are now insisting that, where previously sole proprietors could use deemed costs for calculating their vehicle expenditure, now only actual costs multiplied by actual business mileage from the actual log-book may be used. That means that the poor sod (read backbone of the South African economy) has to now account for every kilometer travelled and keep every single piece of vehicle expenditure with military precision – or face reduced tax write-offs. This is also the poor sod who has to comply with FICA/ RICA/ tax law/ labour law/ etc etc etc. Well, if you can’t kick a man when he is down, when can you kick him’
As noted previously SARS are still raping and pillaging bank accounts across the nation if they believe that you owe them money. It does also turn out that SARS aren’t always correct more often than you’d think – but try explaining that to your creditors! Kick him again SARS. (I don’t think that SARS can possibly comprehend the damage that they are doing to the business engines of the South African economy). It must be particularly special to be all-powerful and stupid.

SARS are also focusing on Value-Added tax in the worst way possible. What they are doing is denying VAT claims where a valid VAT invoice has not been issued (which actually sounds quite reasonable, until the implications are noted). This means that if the VAT number is wrong/ missing, the addressee is wrong/ missing, the address and or contact details are wrong/ missing then the VAT claim is denied. The worst example we have been made aware of (fortunately not a client of ours and we were in no way associated with it) was as follows: ACo issued BCo with a VAT invoice for R10m plus R1.4m VAT. BCo paid ACo the R11.4m. ACo recorded the output sale and paid SARS the R1.4m VAT. BCo recorded the input and claimed the R1.4m VAT. ACo’s invoice to BCo was incomplete so SARS, having actually received the R1.4m from ACo, denied BCo the input and for the brazen effrontery of the BCo for daring to submit an incomplete invoice denied issued a fifty percent penalty as well. The net effect is moving from a R1.4m refund to a R700k payment to SARS (that is a R2.1m smack in the crotch for what was really an administrative error at a clerk level). It is enough, given the incompetence at all levels of government, the ineptitude and complete ignorance about realities of business life in South Africa, to make one go and work for government. Arrive late, long lunch, leave early, get a big bonus, have a burning/ breaking festival once a year whilst striking for higher wages.

FEBRUARY 2013 – ISSUE 161. The following extract is INCREDIBLY important and your attention is urged. In the event of a VAT audit from SARS, ensure that all invoices pass muster as the consequences are ruinous.

No business registered for Value-Added Tax (VAT) can claim input tax from SARS unless, at the time of the claim, they are actually in possession of a VAT invoice which complies in all respects with the requirements of section 20 of the Value-Added Tax Act, 89 of 1991 (the VAT Act). The statutory VAT invoice is described in the VAT Act as a “Tax Invoice”.

It is extremely important to check that all tax invoices received by you (and those issued by you) contain all the required information. A formal tax invoice must be issued by a VAT registered supplier to a recipient within 21 days of the date of a supply.

Only one tax invoice may be issued for a supply. If the original is lost, a copy can be issued if it is clearly marked as “copy”.

A full tax invoice must contain all the following –

  • the words “Tax Invoice” in a prominent place;
  • the name, address and VAT registration number of the supplier;
  • the name, address and (if the recipient is registered for VAT), the VAT registration number of the recipient;
  • an individual serialised number and the date on which the tax invoice is issued;
  • a full and proper description of the goods (indicating, where applicable, that the goods are second-hand goods) or services supplied;
  • the quantity or volume of the goods or services supplied;
  • either – the value of the supply, the amount of VAT charged and the total consideration for the supply, or the total consideration for the supply and either the VAT charged or a statement that it includes a charge in respect of VAT and the rate at which the VAT was charged.

The consideration or value of the supply must be expressed in the currency of South Africa (i.e. Rands) except in the instance of zero-rated supplies in which instance the foreign currency may be used.

With effect from 20 December 2012, if the total consideration does not exceed R5 000 (R3 000 if before 20 December 2012), an abridged tax invoice may be issued and must contain at least the information set out in paragraphs 1, 2, 4, 5 and 7. In other words, the details of the recipient (paragraph 3) and quantity or volume of the goods or services (paragraph 6) may be omitted. It is important to note that this “abridged tax invoice” may not be issued in respect of zero rated supplies e.g. certain exports and services supplied to non-residents.

Excerpt ends.

According to a missive from Moonstone (FSB compliance), there is a new SARS requirement in that your home loan balance and interest charged will be submitted to SARS from Feb ’13. This means that if one is declaring income of say R2.0m per year but has a residence costing (say) R250m (hmm, I wonder who that could be) then if you aren’t a really important government official, SARS will investigate the mismatch.

Finally, with regards to SARS, they have now taken a position whereby interest free loan accounts between related parties are now the subject of scrutiny. This aspect of the legislation has been largely ignored by them but they are now taking the position that where a debit loan account exists e.g. a director has been loaned (say) R500,000 interest free by the company that this transaction is now a deemed dividend and STC or dividends tax is payable. It is thus vitally important that debit loan accounts are no longer run by related parties to entities.

Whew, that was a lot about SARS. All true. None of it good. The facts, I only give you the facts.

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