Corporate tax war can hurt SA

LEADERS NEED TO BE BOLD IN THEIR APPROACH TO TAX TO ENCOURAGE FDI SA could benefit significantly from a change in corporate tax culture.

Donald Trump’s America is on the brink of setting off a corporate tax war among developed nations, and this holds a significant threat to global greater economic equality.

Corporate tax rates set by countries play a huge role in driving what is known as profit shifting: the move by the world’s largest corporates to limit their tax liabilities by selecting a region with a low rate of taxation as the jurisdiction that will collect tax from them on certain types of passive income.

Although this is not illegal, it has significant negative effects on many parts of the world, in particular those in the developing world (including SA as a high tax jurisdiction), which desperately need greater tax revenue to develop their economies, work against poverty and create employment.

Profit shifting has been the subject of numerous working groups under the banner of the Organisation for Economic Cooperation and Development, and the developed nations have demonstrated their support for these efforts strongly, not least by participating in the efforts to limit profit shifting. Their goal is to limit the huge losses in tax revenue caused by profit shifting – approximately $600 billion.

If positioned correctly, developing nations like SA could benefit significantly from a change in corporate tax culture globally, by driving foreign direct investments (FDI) its way.

But the probability of greater FDI is threatened by the looming corporate tax war. President Trump is using lower corporate tax rates – down from 35% to 21% – to stimulate the US economy through attracting more business to the country. In addition, by announcing the substantial decrease in American taxes for businesses, Trump has set off a chain reaction of other countries announcing similar moves – all geared to keep their piece of the global tax pie.

The UK, another leading player in the action against profit shifting, plans to drop its low rate of 19% to just 17% by 2020, and a number of other strong economies plan to reduce their rates.

SA will find itself at the tail end of FDI globally since it’ll be far more attractive for corporates to put money into jurisdictions that will charge them less tax, in addition to removing or reducing barriers to entry. If we gradually reduce our corporate tax rate to a level similar to the EU average of 19.48%, starting with the 2019/2020 legislative cycle, and if we maintain greater political stability in the near future, we are likely to see SA becoming more attractive to global businesses, and local companies will also be more keen to remain registered here and continue paying taxes here.

If government were to do this, and to introduce initiatives to stimulate local economies in the most deprived regions of SA, such as establishing exclusive economic zones offering even lower corporate tax rates, we’d see more investment in SA’s poor areas.

Ruaan Van Eeden is at the Geneva Management Group.