CityPress - - Business - DEWALD VAN RENSBURG dewald.vrens­burg@city­press.co.za

South Africa’s ef­fec­tive cor­po­rate tax rate is nowhere near the nom­i­nal 28% the law pre­scribes.

It prob­a­bly falls be­tween 10% and 12% over­all, with sec­tors such as con­struc­tion and min­ing pay­ing as lit­tle as 4% to 7%, says Judge Den­nis Davis, who heads the Davis Tax Com­mit­tee (DTC).

The ef­fec­tive tax rate is the ac­tual tax paid as a per­cent­age of prof­its. It gets low­ered by the le­git­i­mate use of al­lowances and in­cen­tives – and the abuse of loop­holes.

The DTC is cur­rently study­ing cor­po­rate taxes in South Africa as part of its sweep­ing re­view of the en­tire tax sys­tem since 2013. Ac­cord­ing to Davis, crit­i­cisms that the 28% rate is too low misses the point that prac­ti­cally no one even pays that much to be­gin with.

“The only sec­tor that is close to pay­ing 28% is fi­nan­cial ser­vices, at 26%. I first want to get a han­dle on what is go­ing on with our rates,” he said this week at a con­fer­ence on tax eva­sion and il­licit fi­nan­cial flows, or­gan­ised by the Al­ter­na­tive In­for­ma­tion De­vel­op­ment Cen­tre, a non­govern­men­tal or­gan­i­sa­tion, in Cape Town.

At the end of apartheid, South Africa had a nom­i­nal cor­po­rate in­come tax rate of 49%. It has been dra­mat­i­cally re­duced over time. But even larger re­duc­tions in tax rates stem from in­cen­tives.

“The World Bank did a re­port on our in­cen­tives and said the min­ing in­cen­tives are crazy. It is wor­ry­ing when the World Bank is to the left of your ac­tual poli­cies,” said Davis.

This re­port, pub­lished in Jan­uary, said the “mar­ginal ef­fec­tive tax rate” of the min­ing in­dus­try was neg­a­tive at -1.2%.

This is a dif­fer­ent mea­sure from the ef­fec­tive rate of cor­po­rate in­come tax Davis was re­fer­ring to, and mea­sures the to­tal nom­i­nal ef­fect on the re­turn of in­vest­ment of a va­ri­ety of taxes and in­cen­tives.

This varies wildly for dif­fer­ent com­modi­ties. It is -19.7 for chrome min­ing and 31.9 for iron ore, said the bank. The main rea­son for the vari­a­tion is to write off mines’ mas­sive on­go­ing cap­i­tal ex­pen­di­ture against tax­able in­come, as well as the spe­cial regime for gold com­pa­nies’ cor­po­rate in­come tax. This sys­tem was in­cen­tivis­ing a “mis­al­lo­ca­tion” of in­vest­ment into cap­i­tal-in­ten­sive rather than jobin­ten­sive ac­tiv­i­ties, said the bank. Re­gard­ing tax dodgers, Davis said his com­mit­tee sup­ported the re­cent Vol­un­tary Dis­clo­sure Pro­gramme (VDP) – giv­ing non­com­pli­ant tax­pay­ers a chance to dis­close unau­tho­rised off­shore as­sets and in­come un­til Au­gust 31 – de­spite dis­ap­prov­ing of let­ting “crooks” off the hook for il­le­gally mov­ing as­sets out of the coun­try. The Or­gan­i­sa­tion for Eco­nomic Co­op­er­a­tion and De­vel­op­ment’s (OECD’s) pro­gramme on base ero­sion and profit shift­ing has come up with rec­om­men­da­tions that are now mak­ing their way into na­tional tax laws around the world, in­clud­ing South Africa’s. One out­come is the Com­mon Re­port­ing Stan­dard (CRS), an in­ter­na­tional deal on the au­to­matic ex­change of tax in­for­ma­tion that more than 100 coun­tries have signed.

The im­mi­nent en­act­ment of this stan­dard mo­ti­vated the VDP. The idea was tax dodgers would con­fess rather than face the prospect of be­ing flushed out by the CRS later, and face heav­ier penal­ties.

“I was in­un­dated by Swiss banks. They are be­gin­ning to get very ner­vous about hold­ing these monies ... They thought that if we did a VDP, we could get in R100 bil­lion eas­ily. The tax and in­ter­est on that would be an im­me­di­ate in­jec­tion of R35 bil­lion into South Africa,” said Davis.

To date, the VDP has only seen dec­la­ra­tions of R3.8 bil­lion in foreign as­sets, lead­ing to taxes to­talling R600 mil­lion.

“The tax sys­tem that the OECD ad­vo­cates is un­sur­pris­ingly fo­cused on pro­mot­ing the de­vel­oped world,” said Davis.

A pow­er­ful new coun­try-by-coun­try re­port­ing rule that would make multi­na­tional cor­po­ra­tions break down their fi­nan­cial reports by tax ju­ris­dic­tion shows this bias. The OECD pro­poses it ap­ply only to firms with turnover above €750 mil­lion (R10.4 bil­lion).

“We would want that to come down rad­i­cally. I would have thought that R750 mil­lion would be a more ac­cept­able fig­ure for us,” said Davis.

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