CORPORATE TAX: All eyes on incentives
Finance minister Malusi Gigaba must have been tempted to increase the corporate tax rate. It has remained at 28% since 2013, when the more neo-liberal Pravin Gordhan regime reduced it from 34.5%.
But companies can be a lot more mobile than people and are certainly more prepared to shop around for a more attractive environment. It would be a major blow if there were an outflow of big corporates along the lines of the 1999 exodus of Old Mutual, Anglo American, Billiton, Dimension Data and SAB.
According to the Budget Review, falling corporate income tax rates in advanced and emerging countries have already affected SA’s global competitiveness. This trend limits the room to increase or even maintain the tax rates on business. Corporate income tax already contributes more to GDP than in virtually every sizeable economy except Chile.
"There was definitely a danger that we would price ourselves out of the market," says Andrew Wellsted, a partner at Norton Rose Fulbright.
Life was already made somewhat uncomfortable for shareholders by last year’s increase in the dividend withholding tax from 15% to 20%.
Corporate tax has been reduced from 35% to 21% in the US and from 30% to 19% in the UK.
The SA government has opted for a simplified corporate tax regime in which businesses know exactly what they are going to pay, and wasteful tax incentives have been removed, though a few high-profile special zones have been set up.
They will get additional tax incentives. The initiative is being led by the department of trade & industry and is focused on the manufacturing and tradable services sectors to support exports, economic growth and job creation. Coega in the Eastern Cape is the best known but others include Dube TradePort in Durban, East London, Maluti-a-Phofung, Richards Bay and Saldanha Bay. Against the national trend they will be offered a lower corporate tax rate for qualifying firms as well as employment tax incentives not just for young people but workers of all ages. But the intention is not to let local companies simply shift their activities to reduce their tax liabilities. All tax incentives and grants are being monitored — all must meet inclusive growth incentives.
The research and development incentives have certainly missed the mark. They allow taxpayers to deduct 150% of expenditure on qualifying projects. But there is a long application backlog and the incentive will be reviewed to reduce complexity.
Nazmeera Moola, co-head of fixed income at Investec Asset Management, says the budget, including a stable corporate tax rate, is a necessary but not sufficient condition to shoring up SA’s one remaining investment-grade investment rating (from Moody’s).
As it is there is a pick-up in resistance to paying tax. Tax buoyancy, or the relationship between tax revenue growth and economic growth, fell to 0.96, materially below economic growth.
After much debate the minister decided to let Vat take the strain rather than corporate or personal tax increases.
Corporates might be getting away with no tax increase, but they will need to be well aware of some government initiatives featured in the budget.
It will be reviewing the controlled foreign company comparable tax exemption. SA-controlled companies operating in countries where tax payable is less than 75% of what would have been payable at home are required to include the foreign net income in their SA tax calculation. This prevents these firms from shifting profits to low-tax jurisdictions. In view of the global trend towards lower corporate tax rates, government will review the controlled foreign company tax exemption to see whether a reduction is warranted.
Government is also reviewing the tax treatment of excessive debt financing. As interest payments are tax deductible it is an incentive to use debt rather than equity, and is often used to strip profits from high-tax countries. There will be a discussion document coming out soon. The aim in corporate tax is to balance certainty, simplicity and protection of the revenue base, the Budget Review says.
There are also ambitions to expand Vat to foreign electronic services including cloud computing and other online services.
And to ensure proper governance of public entities and encourage accountability, losses or expenditure classified as fruitless or wasteful will not qualify for a tax deduction.
Corporates will also be pleased to hear that there will be improvements to tax administration. Perhaps the SA Revenue Service (Sars) can become a partner to business after all.
It is looking to bring in electronic fiscal devices, or electronic cash registers, to help revenue administration by monitoring business transactions. It is also looking to prevent "forestalling" in which abnormal volumes of products are moved from warehouses into the market to avoid increases in excise duty rates.
It also plans to take on counterfeit cigarette operations with fiscal markers required under the tracking and tracing obligations of the World Health Organisation’s protocol to eliminate illicit trade in tobacco products. Other products could soon be subjected to fiscal marking.
Sars collects more than 30% of total revenue from the customs and excise system and is at an advanced stage in its customs modernisation programme: strengthening data and revenue collection associated with cross-border trade.