Corporate tax still high
REDUCTION: IT’S BELIEVED A LOWER RATE COULD ATTRACT INVESTMENT
Government needs every drop of revenue it can get to balance its books.
There have been calls to lower South Africa’s corporate income tax rate to improve the ciuntry’s relative competitiveness and to ignite economic growth.
Corporate income tax contributes 18% of the country’s overall tax revenue.
Compared with the US, where federal corporate income tax was reduced from 35% to 21% last year, and the UK, where it fell significantly over the last decade, South Africa’s 28% seems high.
At face value, some African counterparts, including Botswana and Mauritius, also appear relatively more attractive on this measure. With government under pressure to ignite economic growth – currently 1.3% – reducing the corporate income tax rate seems like a good idea.
But with an imminent election and union federation Cosatu warning that the 2018 value-added tax (VAT) increase has had a “devastating effect” on the poor, it’s unlikely the corporate tax rate will be lowered.
“They [President Cyril Ramaphosa and Finance Minister Tito Mboweni] need to reverse the VAT hike, announce a wealth tax and also increase the corporate tax back to the 2012 levels of 34%,” Cosatu said on Tuesday.
Other factors
While there may be room to lower the tax rate long term, in line with the recommendations of the Davis Tax Committee, government now needs every drop of tax revenue to balance its books. Also, other issues, including policy uncertainty and electricity pricing, are a bigger deterrent to investment than taxes.
Mike Teuchert of Mazars says while reduced corporate tax may be beneficial to the economy and result in higher tax revenues, it would be a big gamble to lower tax rates in the hope this would happen. Other factors also have an impact on foreign investment.
On whether a relatively high corporate tax rate would deter potential investors, Delia Ndlovu of Deloitte Africa says it’s a factor, but investors will consider the whole picture, including South Africa’s political, economic and technological conditions.
Ultimately, investors place a higher premium on the commercial opportunity than the tax rate, adds Ndlovu.
Billy Joubert of Deloitte Africa says government is very aware of the potential disincentive of a high corporate tax rate, which is why it was cut from 29% to 28% a few years ago.
High rate not necessarily a deterrent
A relatively high corporate tax rate doesn’t necessarily mean companies won’t invest, but it encourages multinationals to plan their tax affairs to minimise what they pay in SA.
In countries with a high tax, there’s a bigger need for rules to restrict illegitimate shifting of profits to jurisdictions with favourable corporate tax rates.