Should SA cut its company tax?

DISCUSSION: HOW TO MAKE SA MORE ATTRACTIVE

‘Bringing [tax] down would act as a stimulus, as it has done in other nations.’ Moneyweb

In the Medium-Term Budget Policy Statement (MTBPS) this week, there’s speculation that Finance Minister Tito Mboweni may have to announce that government is considering additional taxes. In a persistent lowgrowth environment, there are doubts that SA Revenue Service will meet its collection targets.

The weak state of the economy is likely to translate into lower company profits, therefore less tax collected from corporates. Individuals may not receive salary hikes or may even be retrenched, further weakening the tax base.

The most potent antidote to this is economic growth. For that, much more private investment is needed.

Investment drive

This is no mystery. President Cyril Ramaphosa has convened the inaugural South Africa Investment Conference to take place after the MTBPS to focus specifically on generating more investment. This is part of his drive to mobilise R1.2 trillion in investment within five years.

Part of that discussion, however, has to be how to make South Africa a more attractive investment destination.

Usually, an obvious way to do this would be to lower the corporate tax rate, currently at 28% (fairly high by international standards, particularly considering dividend withholding tax).

“You want a corporate tax rate that is internationally competitive,” says Mike Teuchert of Mazars. Bringing that down would act as a stimulus.”

Effect on tax revenues

The challenge to this approach, however, is that South Africa is facing the urgent need to support the fiscus. If tax revenues won’t meet the targets set, can South Africa afford to cut rates?

Company taxes are the third largest contributor to tax revenues after personal income tax and value-added tax (VAT). Given the situation, however, government must try new approaches.

Bernard Sacks of Mazars says: “I have a view that we need some innovative measures to drive growth in this economy. If the finance minister were to consider a drop in the corporate tax rate, what that may do is attract more foreign direct investment (FDI).

“By attracting FDI you would effectively have more companies operating here,” he adds. “Admittedly they would be paying tax at a lower rate, but that could be made up by the greater overall profits subject to tax. And allied to that would be a greater number of people in employment, which means that personal income tax take would be greater as well.”

Other measures

“You need businesses to invest and they are only going to do that if they have confidence, says Touchert.

What needs to be addressed for this to happen was covered in PwC’s analysis this month entitled What foreign investors want: South African insights from a global perspective on factors influencing FDI inflows since 2010.

It found that “differences in factors such as trade openness, efficiency of government regulation, safety and security, property rights, quality of infrastructure, control of corruption, and policy continuity are associated with differences in FDI inflows”.