A significant change in tax policy this year is the announcement that government will be reducing the number of tax incentives, expenditure deductions and assessed loss offsets for companies.
The aim with these measures is to lower the corporate income tax rate of 28% which is high compared to the global average rate of just over 23%. The corporate income tax rate will be lowered to 27% for companies with years of assessment commencing on or after April 1, 2022.
National Treasury says in this year’s Budget Review the burden of corporate income tax is borne by the owners of capital, the workers and consumers. “By implication, reducing the rate can have a positive effect on wages and employment, while promoting additional investment.”
Government has been looking at reducing the number of incentives to business, saying these tax incentives are “public subsidies” to the private sector.
They illustrate a persistent trade-off in tax policy – the narrower the tax base, the higher the tax rate required to raise a given level of revenue.“Tax incentives often undermine the principles of a good tax system, which should be simple, efficient, equitable and easy to administer.”
In line with government’s view on incentives it has announced that the sunset date for the venture capital company (VCC) incentive will not be extended beyond June 30, this year.
The Section 12J tax incentive was introduced in 2009 to encourage retail investments in smaller businesses. Following an assessment by Treasury, it did not sufficiently achieved its objectives.
The objectives were to generate economic activity and to create jobs.
“Instead, it provided a significant tax deduction to wealthy taxpayers. The majority of investments supported by the incentive seem to be in low-risk or guaranteed-return ventures that would have attracted funding without the incentive.”
According to information provided by 100 VCCs and 360 qualifying companies almost R12 billion had been invested at VCC level (on which a 100% tax deduction was applicable), with R4.2 billion invested at qualifying company level.
The total tax contribution from qualifying companies was R207 million for 2019/20, half of which was Vat. Qualifying companies employed 8 239 people, of which 4 035 people were in direct employment. In total, only 37% of qualifying companies added new jobs after receiving VCC funding.
Since 2015/16, total tax revenue foregone due to the incentive was R1.8 billion, of which R1.7 billion went to individuals who had a taxable income and VCC investment above R1.5 million per year. Revenue foregone in 2018/19 was R745 million before the deduction cap of R2.5 million was introduced.
Government has also introduced a sunset date of February 28, 2022 for tax incentives dealing with airport and port assets, rolling stock and loans for residential units. These incentives, together with the incentive to the film industry, will lapse once they reach their respective sunset dates.
However, Treasury has given affected stakeholders until the end of March this year to submit comments if they wish to retain the incentives.
The urban development zones and learnership tax incentives will be extended for two years while Treasury completes its reviews.