Business Law Focus
PODCAST | As budget looms, what tax hikes can be expected?
Evan Pickworth asks ENSafrica tax executive Kazi Mbangeleli
With the budget statement looming large, editor Evan Pickworth asks ENSafrica tax executive Kazi Mbangeleli whether an increase in the corporate tax rate to 30%, or in the VAT rate, is on the cards.
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The context by ENSafrica
President Cyril Ramaphosa, in his 2021 state of the nation address (Sona) on February 11, proudly demonstrated how SA still remains an attractive investment destination for both local and offshore companies. Despite the difficult economic circumstances worsened by Covid-19, it has managed to receive R773bn in investment commitments to date towards a five-year target of R1.2 trillion.
Working on securing additional foreign investment for economic recovery is a priority for SA. Any increase to the already high 28% corporate income tax rate would surely neutralise these good intentions.
If one takes a closer look at the recent tax changes, one can see a clear, targeted and well-thought-out strategy of broadening the SA tax base as opposed to any intention of increasing the corporate income-tax rate.
This aligns with finance minister Tito Mboweni’s 2020 Budget Speech, during which he spoke of an intention to broaden the corporate income tax base to create additional revenue to be used to reduce the corporate tax rate in the near future, to help SA businesses grow.
The Treasury’s strategy towards broadening the tax base appears to include a close monitoring of market activity. In recent years, the market has seen numerous unbundling transactions.
An unbundling transaction is a transaction in which all of the equity shares of one company (the unbundled company —Company B) are distributed by another company (the unbundling company — Company A) to the unbundling company’s shareholders in accordance with their effective interest.
Our tax rules make provision for tax deferral (not tax exemption) in unbundling transactions. The distribution of Company B shares by Company A to its shareholders would be tax neutral for Company A and there would be no dividends tax at the level of the shareholders. Treasury would allow this in anticipation that when the shareholders sell Company B shares, the SA Revenue Service would collect the tax at this point.
It then becomes a headache for the Treasury, where the recipient of Company B shares is a tax-exempt person (a public benefit organisation or a retirement fund) or a non- SA tax resident (these being disqualified people) because that means after the deferral, capital gains or taxable income from subsequent disposals or distributions will fall outside of the SA tax net and that tax collection that Treasury was counting on becomes permanently lost.
Prior to the recent tax changes, to curb the abuse of distributing shares on a tax neutral basis if the shareholders are not in the tax net, the unbundling rules contained an anti-avoidance measure in terms of which the relief would not be granted if immediately after the unbundling 20% of the unbundled Company B shares were held by disqualified people either alone or together with connected disqualified people. This limitation was understood by the taxpayers as it had been around since 2008.
The recent tax changes delivered a bombshell that sent shock waves throughout the market. In respect of unbundling transactions entered into on or after October 28 2020, no tax deferral will apply where a disqualified person holds at least 5% of the equity shares in the unbundling Company A (not the unbundled Company B) immediately before that unbundling transaction ensuring that, but for smaller shareholdings in listed entities of less than 5%, only shares distributed to people that are not disqualified people will benefit from the tax deferral.
The Treasury realised that where disqualified shareholders were not connected people, individually holding less than 20% of the unbundled shares but collectively held in excess of 20% of the unbundled shares, the manner in which the 20% exclusionary rule was designed still allowed a permanent erosion of the SA tax base, as the distribution of the unbundled shares to foreign shareholders and retirement funds would still be tax-free under such circumstances.
Given the significant aggregate percentage of the market capitalisation of SA companies listed on the JSE that is held by foreign shareholders and retirement funds, this change — including within the tax net equity distributions to such disqualified people where there is holding of at least 5% of the equity shares in the unbundling company thereby broadening the base — was an opportunity the Treasury could not miss.
Meanwhile, it is unlikely that VAT will increase. While VAT is a broad-based tax and even a 1% increase would collect a significant amount of revenue, this would only serve to stunt economic growth and burden consumers who are already battling lockdown-induced retrenchments and salary cuts.
While the current rate of 15% is low in global and African terms, any VAT increase would lead to further calls for more products for consumers to be zero-rated. It It is significant that since VAT was introduced 30 years ago to replace sales tax, there have only been three rate increases. It was introduced at 10%, increased to 14% on April 1 1993, then to 15% on April 1 2018.
There is, however, scope to increase this rate and the minister could, as some other countries do, announce a new rate to be introduced in 2020 or even 2023. This would give business and consumers alike the opportunity to plan for the increase.
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