It is more likely than not that National Treasury will again introduce tax hikes in its February budget, but it is implausible that the corporate income tax rate will be raised in light of concerns around South Africa’s competitiveness.
Kyle Mandy, tax policy leader for PwC South Africa, says corporate tax is the most distortive from an economic perspective and the Davis Tax Committee has already indicated that it is not the best avenue to raise additional revenue.
The 10th edition of the World Bank Group and PwC’s Paying Taxes study ranks South Africa 20th out of 189 economies for ease of paying taxes, falling one place from last year. Mauritius, in the 13th position, was the best-ranked African country.
Mandy says in isolation, South Africa’s total tax rate (a measure of the burden of all taxes a company must pay in relation to its commercial profit) of 28.8% compares relatively well with other regions (see chart below).
Source: Paying Taxes 2016 (* Southern African Development Community)
Albeit lower than global and regional averages, South Africa’s total tax rate of 28.8% is also higher than many of its neighbours or competitors, including Zambia (18.6%), Namibia (21.3%), Mauritius (22.4%) and Botswana (25.1%).
Mandy says three of the countries that perform better than South Africa (Lesotho, Namibia and Botswana) are members of the Southern African Customs Union (Sacu). South Africa effectively subsidises these countries through the Sacu system by giving them more than their fair share of customs duties.
“This is the result. Those countries are actually able to have a much lower tax burden on the companies that operate in those countries, with the effect that they are actually able to compete effectively with South Africa through that lower tax burden.”
Another area of concern is South Africa’s profit tax of 21.7%, which is considerably higher than the global and African averages of 16.2% and 17.7% respectively. South Africa ranks 135th in this category.
While the considerable pressure on the fiscus was already apparent during the Medium-Term Budget Policy Statement in October, the situation is unlikely to improve. Government now has to fund an additional R2.7 billion for tertiary education after it announced a freeze on student fees for 2016.
Moreover, economic growth expectations continue to deteriorate.
With corporate tax unlikely to be in National Treasury’s sight, and tax hikes a possibility, where are the additional taxes going to come from?
Mandy says personal income tax is the second most distortive tax. Moreover, individual taxpayers across a very narrow tax base already bear a substantial tax burden.
“There is significant concern whether or not you can actually further burden the individual taxpayer in that regard.”
Of the three major taxes, value-added tax (VAT) would have the least negative impact from an economic point of view if it was to be raised, but it is a political hot potato, which is vehemently opposed in union circles.
Mandy says because VAT is the least distortive National Treasury should theoretically consider this avenue. It is levied across a broader base, and is hence the one tax that would enable it to raise a significant amount of additional revenue without a meaningful increase in the rate. This couldn’t be achieved with increases in personal income taxes.
“I think they’ve probably got little option in terms of raising VAT should they be seeking to raise significant additional taxes in the future.”
However, at this stage National Treasury probably hopes that tax collections will exceed expectations and that it won’t need to raise taxes.
“But I think given particularly where the economy is going and the further downgrades in growth expectations for the year, there is a significant risk that we will be staring at further tax increases next year again,” Mandy says.
The considerable decrease in the price of oil provided government with an once-off opportunity to increase the fuel levy in February this year without having a significant impact on the fuel price.
“That opportunity won’t present itself again. So we got lucky this year.”
With the rand on the slide, any further decreases in the oil price will likely be offset.
“I think we are in a difficult position come February next year.”
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