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

Financial Mail - Investors Monthly - - Budget 2017 - Stephen Cranston cranstons@fm.co.za

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

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