ARE WE IN FOR FURTHER TAX HIKES?
Nothing is certain but death and taxes. At least that is how the saying goes. And who better to tell us what tax increases are in store for us than the chairperson of the South African Tax Commission, Judge Dennis Davis?
The South African tax system has changed significantly since the recommendations of the Katz Commission in 1995, shortly after the introduction of VAT, which, at the time, signalled a fundamental shift in the country’s taxation landscape.
It was as a result of this that Pravin Gordhan, former finance minister, felt it was time for a review. In 2013, he announced the members of the Davis Tax Committee (DTC) that would assess our tax policy framework and its role in supporting the objectives of inclusive growth, employment, development and fiscal sustainability.
Judge Dennis Davis, who st il l performs his duties as a High Court judge while teaching tax law at the University of Cape Town, was appointed as the DTC chairperson.
If South Africa did not at least have a stable tax system, the country would not be in a position to conduct business as it currently does. “The question now is how to sustain this stable system and grow the tax base,” Davis says.
And this is where the DTC comes in. The committee, usually in the voice of Davis at parliament, has voiced the pros and cons of raising, creating or illuminating certain taxes. Davis has been especially vocal on how corruption in the public and private sphere is narrowing the revenue that the South African Revenue Service (Sars) could collect.
I f Sars focused on r ecovering money from transfer pricing abuses‚ says Davis, finance minister Nhlanhla Nene probably wouldn’t have had to raise personal income taxes by 1% in his budget speech.
Transfer pricing refers to transactions for goods or services between related entities within multinational companies. Transfers become problematic when they are manipulated to benefit the affected company, says Davis. So-called “transfer mispricing” results in more lenient tax regimes for such countries, but erodes the SA tax base.
The cost to the economy of transfer mispricing has been cited as anything from R30bn to R200bn.
“We are not sure of the correct figure,” says Davis. “But when we were investigating how to f ind the R17bn for this year’s budget‚ we said if you can find R5bn or R6bn by virtue of transfer pricing abuses as an example‚ then you probably wouldn’t have had to increase personal income tax by 1%.
“The l aw i s good but it i s not implemented effectively,” he adds.
In this regard the DTC recommended to the Treasury that the special unit in Sars dedicated to base erosion and profit shifting be strengthened. The unit consists of about 20 members, including clerical staff, whereas the UK’s unit has more than 200 people. “It is ridiculous that we have so few people,” he says.
In July, two reports were published for public comment; one on the issue of raising VAT and the other on estate duty.
In the interim report on VAT, the DTC confirms that SA has an efficient VAT system that compares well with international benchmarks.
The report notes that increasing the VAT rate would ultimately result in short-term inf lation. It also states that the impact on the economy would be far less severe than that of a rise in personal income tax or corporate income tax, and would result in less distortion than an increase in these taxes.
PwC welcomed comments made in this report. “Studies carried out by the
“WHAT WE NEED IS MAJOR GROWTH. IT NEEDS TO BE 5% UPWARDS SO THAT WE CAN EMPLOY MORE PEOPLE,
REVERSE APARTHEID TENDENCIES AND LIFT THE
OECD indicate that broadening the VAT base is the best way of increasing VAT revenues as part of a tax shifting exercise as it improves efficiency and reduces administration and compliance costs,” says Charles de Wet, head of indirect tax at PwC Africa.
IDEAL TAX SYSTEMS
An ideal tax system does not impede the economy, while simultaneously avoiding extra pressure on the lower and middle classes. “But a utopian tax system can’t work in South Africa for a variety of reasons,” says Davis.
“I know this issue is always talked about, but South Africa inherited a skewed distribution of wealth. We are top-heavy, which makes it difficult to raise huge amounts of personal tax, because our tax base is so small.”
SA has 6.6m income taxpayers and 16.4m people on social welfare.
“But you cannot test the ideal by looking solely at the tax system, one also needs to consider the redistribution side.”
Compared with other countries, SA is doing well on the tax and transfer side. But there is a limit to the amount of tax and transfer that can be brought into an ideal economic mix, he says.
“What we need is major growth. We will never succeed at the current 2% growth rate. It needs to be 5% upwards so that we can employ more people, reverse apartheid tendencies and lift the lower classes. Tax on its own can’t do that.”
According to him, if Eskom is taken out of the mix, SA could have grown an extra 1%.
“The government is under immense pressure to close the deficit gap. If we keep running the deficits that we are, our economy will not grow. And what’s going to happen? We will find ourselves running greater deficits, which will drag down our stable tax and transfer system. That will be disastrous,” Davis says.
“However, the longer Eskom stays in a chaotic state, the less the economy will grow, which will inf luence the amount of tax that can be collected.”
There is a need to keep the tax system stable, “something Sars and Treasury have done splendidly,” Davis says. “But it is not just their job to keep revenues growing. If we do not get a stable energy system soon, we can forget about higher economic growth and collecting more taxes.”
While the DTC provides guidance on the pros and cons of reforming certain classes of tax, determining what SA’s budget needs remain up to the minister of finance and Treasury. Going forward, Davis does not see dramatic increases, but “we will need to see how the deficit has been brought down by the time the finance minister delivers his medium term budget later this year. However, if the National Health Insurance scheme kicks in, then we will need to talk about significant i ncreases i n ta x. Something t hat’s unaffordable now.”
Minister of finance