Reducing corporate tax alone will not attract additional investment
It seems that Treasury may have been pushed into a corner when it comes to corporate taxes and the deficit in the national budget. Treasury itself has commented that already high corporate income taxes should not be increased for fear that it could lead to increased disinvestment in the economy. Yet, as the Davis Tax Committee (DTC) concluded last week in its final report on corporate tax in SA, reducing it will not be enough to attract additional investment on its own.
Globally, the trend in developed countries has been to decrease corporate tax rates to attract additional investment. As the trend-setter on the African continent, we should be comparing ourselves to our trade partners in these regions.
At the start of this year, the US reduced its corporate tax rate from 35% to 21%, and other countries, such as France and Belgium, have introduced proposals to do the same. However, owing to the large budget deficit, SA has not had the luxury of following suit. It is also worth noting that policy uncertainties and issues such as labour and spiraling electricity costs will also need to be addressed if the country has any hope of attracting more investment in the corporate sector.
With that said, the DTC has made a number of recommendations that could help to improve revenue for Treasury in the long run. While single changes to either corporate taxes or dividends withholding taxes are not likely to grow a taxpayer base or increase investment, a combination of amendments to both these aspects may make a significant difference.
The first suggestion regarding corporate taxes was that a detailed review be undertaken of the cost-benefit of each corporate tax incentive and remove inefficient incentives. However, a much more intriguing option put forward by the DTC was that certain tax incentives for businesses be removed altogether, substituted by a reduction of corporate tax rate across the board. While it seems counter-intuitive at first glance, given that Treasury cannot really afford to decrease taxes at this stage, it might actually make the most sense.
We believe that if Treasury makes certain allowances for smaller businesses in terms of tax compliance, making it easier and quicker for these companies to register and file their tax returns, it already puts most of these businesses in a better position to grow, removing the need for incentives and potentially increasing the revenue collected by Treasury.
Reducing the dividends withholding tax from 20%, back to 15%, will align it with the government’s transformation objectives
Dividends withholding tax
We can also not address the issue of company taxes without discussing dividends withholding tax, which is currently set at 20%. This in itself presents a number of major challenges for SA. First, it results in an effective corporate tax rate of 42.4% for shareholders looking to extract earnings from companies, making the country less competitive among the continent’s emerging markets and serves as a major disincentive for foreign or local investment.
Secondly, the DTC has also made note of the fact that this high rate has been proven to negatively impact black economic empowerment (BEE) policy objectives. In fact, this tax almost exclusively impacts South African shareholders (among them a high percentage of broad-based BEE shareholders), since most individuals living in foreign countries can get some tax relief as a result of double-taxation agreements.
The DTC captures the problem of the current dividends withholding tax perfectly with one line: "Policy makers should ensure taxes are not increased only to satisfy revenue collection needs without consideration of the long-term fiscal impacts on the whole tax system."
The recommendation here is a sensible one. Reducing the dividends withholding tax from 20%, back to 15%, will align it with the government’s transformation objectives. Although with this the problem is slightly larger, since this reduction will definitely decrease Treasury’s revenue.
This seems to be where Treasury’s viewpoint diverges from that of the DTC. While the DTC’s recommendations are definitely aimed at stimulating growth in a still difficult economy over the next few years, Treasury has placed much more importance on its short-term goal of closing the budget deficit. As we have seen in the past, Treasury is extremely selective with regards to the DTC’s recommendations it chooses to implement.
The question remains whether Treasury’s tendency towards short-term thinking can ever lead to positive changes in SA’s economy. One can only hope that the recent changes in leadership and business-sector polices will filter into the country’s fiscal policies by the time the next budget speech is delivered.
Finding a balance between long-term strategies and short-term goals will be critical if SA is to recover in the coming years.
• Troost is a senior tax consultant at Mazars