Corporate tax rate cut alone won’t work
• Davis committee recommends review of incentives
A reduction in the corporate tax rate on its own was not sustainable in the current economic climate, the Davis tax committee has concluded in its final report on SA’s corporate tax rate.
SA’s corporate income tax rate of 28% is higher than that of most of its trading partners and that of its neighbours, which critics say contributes to reduced competitiveness.
But the committee recommended in its report on corporate tax released on Thursday that a detailed review be undertaken of the cost-benefit of each tax incentive currently provided through the mechanism of the corporate income tax system, with a view to removing inefficient incentives that do not achieve their objectives. This mechanism could effectively be used to reduce the overall corporate income tax rate or other “tax handles”, and benefit all corporates simultaneously.
The report examined the structure and efficiency of SA’s corporate tax system. It also looked into tax avoidance, tax incentives to promote developmental objectives and the average (marginal) and effective corporate income tax rates in the various sectors of the economy.
It highlighted some of the commonly noted obstacles to investment, namely the reliability of electricity supply, labour relations and policy uncertainty. Only once these factors were addressed could a decreased corporate income tax viably assist in attracting investment and stimulating growth.
“It was also established that countries that attract foreign direct investment by offering lower tax rates are not necessarily more competitive than those with high tax rates. Thus the competitiveness of a tax system cannot only be judged by rates, incentives or even by reference to the overall tax burden.
“In order to have a tax system that contributes to a competitive economy, it is necessary to focus on the quality of the tax system by ensuring that tax evasion is reduced and that the principles of efficiency and neutrality are adhered to in the treatment of corporate groups,” the report said.
In considering a reduction in the corporate tax rate, account had to be taken of the different allowances and exemption regime. The report refers to a World Bank study on SA’s tax system, which found that while its statutory corporate tax rate might be somewhat higher than that of other countries, the system overall was not a major deterrent to investment.
In making its proposals, the committee took into account the current and future outlook for the economy.
The committee recommended that the dividend withholding tax rate, which was increased last year from 15% to 20%, should be reduced back to 15%, as the 20% rate had a negative impact on black economic empowerment policy objectives and investment decisions. It also recommended that consideration be given to allowing investors in foreign shares to deduct the costs they incur in generating taxable dividends.
The committee called for a review of the capital gains tax system and a reduction of the inclusion rate for corporates (now 80%) to make up for the effects of inflation on an asset’s base cost in real terms. Alternatively and preferably, an indexation system should be considered to increase the base cost to compensate for the effects of real inflation in any sector.
It recommended that the rules governing corporate restructuring be amended and for consideration to be given to group taxation, though this should only be introduced in a “more positive” economic environment and when the South African Revenue Service has the capacity to handle it.
IT IS NECESSARY TO FOCUS ON THE QUALITY OF THE TAX SYSTEM BY ENSURING THAT TAX EVASION IS REDUCED