Reducing corporate tax alone may not be sustainable, says Davis Tax Committee
A reduction in the corporate tax rate on its own is not sustainable in the current economic climate, the Davis Tax Committee has concluded in its final report on company tax in SA.
SA’s corporate income tax rate of 28% is higher than that of its trading partners and neighbours, which critics say contributes to lower economic competitiveness.
However, the committee has recommended that a detailed review be undertaken of the cost-benefit of each corporate tax incentive with a view to removing inefficient incentives that do not achieve their objectives. This mechanism could effectively be used to reduce the overall corporate income tax rate or other "tax handles".
The committee examined the efficiency of SA’s corporate income tax system structure. It also looked into tax avoidance; tax incentives to promote developmental objectives; and the average (marginal) and effective corporate income tax rates in the various sectors of the economy.
In making its proposals, the committee took into account the current and future outlook for the economy characterised by weak growth, high unemployment and inequality.
"In the current context of low economic growth, it is critically important to ensure taxes are raised in a manner that is, inter alia, least disruptive to economic growth and employment," it said.
The report highlighted some of the common obstacles to investment that have been noted in its review, namely the reliability of electricity supply, labour relations, and policy uncertainty. Only once these factors were addressed could a decreased corporate income tax viably assist in attracting investment and stimulating growth.
"It was also established that countries that attract foreign direct investment by offering lower tax rates are not necessarily more competitive than countries with high tax rates. The competitiveness of a tax system cannot, therefore, only be judged by rates, incentives or even by reference to the overall tax burden.
"In order to have a tax system that contributes to a competitive economy, it is necessary to focus on the quality of the tax system by ensuring tax evasion is reduced and that the principles of efficiency and neutrality are adhered to in the treatment of corporate groups."
In considering a reduction in the corporate tax rate, account had to be taken of the different allowances and exemption regimes. The committee referred to several World Bank reports on SA’s tax system, which found that, while its statutory corporate tax rate might be somewhat higher than that other countries, the system overall was not a major deterrent to investment.
The committee recommended that the dividend withholding tax rate, which was increased last year from 15% to 20%, should be reduced back to 15%
The committee recommended that the dividend withholding tax rate, which was increased last year from 15% to 20%, should be reduced back to 15% as the higher rate had a negative impact on black economic empowerment (BEE) policy objectives and investment decisions.
The committee also recommended that consideration be given to allowing investors in foreign shares to deduct the costs they incur in generating taxable dividends.
It also called for a review of the capital gains tax system and a reduction of the inclusion rate for corporates (now 80%) to compensate for the effects of inflation on an asset’s base-cost in real terms. Alternatively, and preferably, an indexation system should be considered to increase the base-cost to compensate for the effects of real inflation in any particular sector.
With regards to tax incentives, the committee recommended that Treasury and the South African Revenue Service (SARS) review each and every tax incentive to determine whether it is justified, and undertake a cost-benefit analysis of retaining them, compared to an overall reduction in the corporate tax rate based on the reduced cost of eliminated incentives.
The committee proposes that Treasury adopt an approach currently being adopted in many other countries "of removing some or all targeted incentives and replacing them with an overall corporate tax reduction aimed at incentivising all businesses simultaneously".
The committee also made recommendations to amend the rules governing corporate restructuring and for consideration to be given of group taxation, though this should only be introduced in a "more positive" economic environment and when SARS has the capacity to handle it.