Buoyant source of revenue
While personal tax receipts have been below expectations, corporate tax has grown strongly thanks to increased compliance and measures to limit avoidance. Treasury performs a juggling act to please the goose that lays the golden eggs
The corporate income tax rate was once again held at 28%. Yet it has turned out to be the most robust of the four major revenue sources. While personal tax receipts have been below expectations, corporate income tax bagged R189bn in the 2016 tax year, R2.1bn ahead of budget. In the 2017 year, which closes next week, it was R6.8bn ahead at R205bn. As a rule, corporate tax brings in about half as much as personal tax. By 2020 corporate tax revenue will increase to R252bn.
Corporate tax has proved to be one of the SA Revenue Service’s success stories. It helps that it is easier to collect than personal tax as corporates have nowhere to hide. It grew particularly strongly from 2001 to 2009 not just because of economic growth and the commodities boom but also thanks to increased compliance and measures to limit tax avoidance.
There were pockets of buoyancy which helped collections. Export values increased by 8.1% in the first three quarters of 2016. Export volume growth is expected to increase by 5% in 2019 if treasury’s forecast of higher global growth, fewer mining safety stoppages and real depreciation of the rand comes true.
Tertius Troost, a tax consultant at boutique accounting firm Mazars, says SA’s corporate tax rate is considered high, and increasing this would impair the country’s status as an investment destination. But he adds that SA cannot follow countries such as Australia, Poland and Botswana which are reducing corporate tax.
“It takes a significant amount of time to produce any positive results for an economy. Given our country’s vast budget, the short-term effects of this would only further increase treasury’s shortfall. And the high risk of a ratings downgrade would substantially increase the cost of financing SA’s government debt.”
Andrew Wellsted, head of tax at law firm Norton Rose Fulbright, says corporates might not have been hit explicitly through income tax and they are hit harder when they distribute income by the five percentage point increase in the dividend withholding tax, which increases the effective corporate tax rate to 42.4%.
Troost says a significant difference between the 45% top individual tax rate and the company tax rate provides an opportunity for tax arbitrage where business owners will be more inclined to declare dividends to themselves rather than pay themselves a salary — the higher dividend tax closes the arbitrage opportunity to some extent but not entirely.
So it was not a surprising decision to not increase corporate tax. In the Davis committee’s August 2016 report, chairman Dennis Davis argued that corporate tax is not economically efficient, particularly when incentive programmes are introduced. It is unclear how the burden is shared among shareholders, institutional investors and consumers. Also, the tax is complex and open to interpretation. It is also highly sensitive to the business cycle, both positively and negatively. There is a danger that, as Troost suggests, corporates might be tempted to shift profits to report income in lower tax countries. Finance minister Pravin Gordhan announced in the budget that government was re-evaluating existing items that narrowed the corporate tax base, such as tax incentives and deductions for excessive debt financing, such as Edcon’s funding under private equity. Treasury has refocused and tightened the urban development zone tax incentive as well as the learnership and employment tax incentives. The main tool for protecting the corporate income tax base will be through measures introduced across the G20 after their meeting in November 2015. Along with more than 100 jurisdictions, SA has adopted a multilateral instrument to swiftly modify and implement tax treaty related measures. There will be no need to renegotiate each tax treaty on a bilateral basis. There will also be an automatic exchange of financial information from September 1.
Andrew Wellstead: Corporates not hit through income tax