The Treasury Department’s ex post lowering of the corporate tax rate by 1% is intended to expand the tax base and will therefore prove neutral to the government’s revenue base, Deputy Director General Ismail Momoniat said on Thursday.
It is also in line with the Treasury’s broader thinking to gradually cut taxes to create a fairer structure and ensure better compliance, Momoniat, the deputy director-general for tax and financial sector policies, told MPs in a briefing after the State of Parliament budget and selected finance committees.
The reduction to 27% is the first reduction in the corporate tax rate since 2008 and was surprisingly announced on Wednesday in the 2021 budget speech by Finance Minister Tito Mboweni.
It was not included in the budget review, but Momoniat said it would not detract from the bases set out in the document.
“Since it won’t come into effect until next year, and most of it will be in 2023, it effectively means that the fiscal framework has not changed. As this is done on a revenue-neutral basis, it has therefore not been included in the budget review book, but planned as an announcement for the future, ”said the Deputy Director General.
Momoniat said the Treasury Department had been induced to cut, in part due to recent corporate tax rate cuts in the United Kingdom and the United States.
“The announcement relates to the next fiscal year. Ordinarily, this announcement wouldn’t even be made in the next year. It would be done in two years in the 2023 budget. We just wanted to signal the future path, ”he said.
“The problem we are facing is that over the past few years in both the UK and last year or prior to that, the US has slashed corporate rates and we are quite an outlier.
“Now we are not only lowering the tax rate, but also tax-neutral.”
Momoniat said this was tied to a decision to cap interest deductions and investment losses, which was included in a tax discussion document prepared by the Treasury Department, but which was delayed by the Covid-19 pandemic.
However, the budget review found that the Treasury Department wanted to abolish corporate tax breaks because few benefited from them and abuse was a possibility.
“We say we want companies to keep paying the same amount of tax they pay but be fairer between companies by allowing a lower tax rate for everyone, which we think is a greater incentive to support growth than just us, for example some companies give tax deductions which are definitely misused as far as we can see. “
Momoniat confirmed that the cut was also part of a treasury philosophy of preferring a broader, more compliant base over higher tax rates.
It was forced to deviate from this thinking in 2015 when the politically-fueled problems at the South African Revenue Service led to a collection slump. This resulted in an overall increase in the income tax rate of 1% with the exception of the lowest range.
A subsequent increase in the top bracket to 45% for the richest companies had little effect on the increase in actual revenue, Momoniat said, “presumably because very wealthy people know how to structure their way out of paying and do it legitimately” .
“The contract we had with taxpayers was that we would lower the tax rate if we can broaden the base. That’s what we do with corporate income tax, and that’s what we want to do with all of our taxes, ”he said.
In Wednesday’s budget, Mboweni extended the R 42.2 billion personal income tax break when, in June, he withdrew the increases announced in his special adjustment budget for Covid-19, which would have come into effect over the next three years.
He announced further relief in the form of an increase in income tax brackets by 5%, which means a profit of 2.2 billion R2 for private households.
On Thursday, senior tax officials stressed that it would take up to four years for revenues, which were R 213.2 billion below estimates due to the pandemic, to fully recover if the country battled successive waves of Covid-19 -Virus struggled and continued economic fallout.
Democratic Alliance MP Geordin Hill-Lewis said he had questioned Momoniat’s claim that corporate tax would have no impact on the revenue base in the medium term.