Corporate tax rulings showed a strong rebound this year, largely because the boom in commodity prices boosted mining revenues.
However, it is clear that the windfall is unsustainable and the contribution of corporate taxes to total tax revenues will decline quite quickly in the medium term. It will drop from 19% of total tax revenue this year to 14% (230 billion R) in tax year 2024/25.
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At the same time, individuals will contribute 39% (R 665 billion) of total tax collection by 2024/25 and 29% of VAT (R 491 billion) to VAT over the same period.
South Africa’s corporate tax rate of 28% is high globally, especially when compared to the rates of its major trading partners. According to a study by the Center for Economic Policy Research, the average corporate tax rate worldwide fell from 49% in 1985 to 24% in 2018.
Former finance minister Tito Mboweni announced in his budget speech in February that he would cut the corporate tax rate to 27% in April 2022 and 80% of taxable income.
Several commentators have raised concerns about the timing of the cap amid the impact of the Covid-19 pandemic and political unrest in KwaZulu-Natal and parts of Gauteng.
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Many are in a losing position. Commentators noted that paying 20% of taxable income instead of using cash flows to collect and reduce debt will put an extra burden on businesses trying to recover from these negative events.
Hence, the decision to lower the tax rate while limiting the use of established losses to reduce taxable income was initiated.
The National Treasury acknowledged that some companies are in survival mode and that it is important to make room for recovery.
The proposal will only come into force at a later date to be announced by the Finance Minister.
Keith Engel, CEO of the South African Institute of Taxation, believes this decision is the right one. The proposed rate reduction and loss limitation should encourage investment, not act as a punishment.
The government has also made concessions to startups, smaller businesses, and companies that are cyclical in nature when the restriction eventually goes into effect. Treasury included a de minimis threshold of R1 million.
“The aim is to relieve a large number of companies that may face cash flow challenges at different times,” said the Treasury Department in the response document to the draft law amending tax laws.
Mike Benetello, partner at Bowmans, says some may argue that 1 million ren is really not enough. “At least there are concessions. Once we have settled in with the change, there may be scope for raising the threshold of 1 million ren. ”
Engel is of the opinion that the relief for small businesses should have been tied more closely to the regime for small businesses. For the purposes of the scheme, small businesses with an annual turnover of up to R20 million may be entitled to pay income tax at a reduced rate.
Global tax reforms
Tax avoidance and tax evasion have preoccupied legislators for years, and the Organization for Economic Cooperation and Development (OECD) is at the forefront of global tax reforms.
Ernest Mazansky, head of tax at Werksmans, wrote in a recent article that it is relatively easy to set up your company in a low-tax area and offer services and products to customers in high-tax areas without it being visible there. and therefore do not pay taxes in them.
Some of the reforms orchestrated by the OECD include the introduction of a corporate income tax of at least 15%. “This is clearly not going to do well in a number of offshore zero tax rate areas including countries like the Channel Islands, Isle of Man, Liechtenstein, Cayman Islands, Seychelles and many others,” he noted.
South Africa is clearly a long way from a corporate tax rate of 15%.
Charles de Wet, Executive Consultant at ENSafrica, says that our corporate tax rate of 28% and even 27% is competitively high by global standards. Lowering the rate will have a positive effect on foreign investment.
“However, it is unlikely that we will see a decline that will equate us with our largest trading partners.”
On average, global tax rates fluctuate between 20% and 27.5%. “If we compare ourselves with Africa, a tax rate of 27% is roughly on par with other countries on the continent,” says Benetello.
However, compared to European countries – our largest trading partners – the average rate is around 20%. In Asia, the corporate tax rate averages 22%.
Corporate tax rates are important when considering investment goals. SA doesn’t do cheap on tax rates, but it also gets more expensive to do business here.