There will be little room for significant tax increases in this year’s budget. However, tax commentators believe it is a good opportunity for finance minister Tito Mboweni to introduce some of the many recommendations made by government-appointed committees and commissions.
Patricia Williams, partner at law firm Bowmans, says increased tax rates over the last few years have not resulted in more revenue, a clear indication that more increases may be counterproductive at this stage.
The expected tax revenue was revised downwards in the medium-term budget policy statement in October by some R27 billion, mainly because of Vat refunds amounting to R20 billion, says Kyle Mandy, tax policy leader at PwC Africa.
Expected corporate income tax revenue has also been revised downwards, by R6 billion – and matters have deteriorated further since the October mini budget.
PwC expects a R10 billion tax revenue shortfall for the 2019 fiscal year, mainly because of lower-than-expected collections from individuals and companies. And although the Vat rate has been increased from 14% to 15%, there is a real risk that Vat collections for the last three months of the fiscal year could “fall off”.
No space for tax increases
This could result in an even higher shortfall than the anticipated R10 billion. Mandy says it is clear that there is no space for tax increases to make up for the expected shortfall.
Williams suggests that it may be an opportune time for government to implement the Davis Tax Committee’s recommendation to reduce the dividend-withholding tax rate back to 15% from the current 20%.
Non-residents are typically entitled to double tax treaty relief, often reducing dividends tax to 5%. South African companies are also not subject to dividends tax.
“The higher dividends tax rate was accordingly seen by many as punitive taxation on South African individuals, who would pay up to four times as much dividends tax as a non-resident,” says Williams.
This has negatively impacted employee share incentive schemes, personal savings and investments, and broad-based black economic empowerment schemes.
The Nugent Commission of Inquiry, appointed by President Cyril Ramaphosa to investigate tax administration and governance concerns at the South African Revenue Service (Sars), suggested the appointment of an Inspector-General at Sars.
Restoring trust in Sars
Implementing critical recommendations, particularly around governance and integrity, would send a strong signal to the market that the tax agency can start to be trusted again.
“Trust is a critical factor in the collection of taxes, and improved trust and legitimate authority significantly increases tax compliance and associated collections levels,” says Williams.
The lack of enforcement by Sars and the dismantling and destruction of elite units that combatted illicit trade, tax evasion and money laundering has led to the deterioration of the tax administration system, says Elle-Sarah Rossato, dispute resolution and tax controversy leader at PwC.
She says the Constitutional Court’s dismissal of former Sars commissioner Tom Moyane’s application to appeal his dismissal brought to an end a “tumultuous period in which irrational and destructive leadership” impacted the administration of Sars.
It will take years to rebuild the knowledge and expertise of the dismantled elite units. “Ultimately, these are some of the areas where immediate action can and must be taken,” says Rossato, who chairs the tax administration work group of the South African Institute of Tax Professionals.
But the full reconstruction of Sars will take over a decade to complete, she says.
Paying tax ‘approximately voluntary’
Williams says the lack of enforcement by Sars has resulted in tax becoming “approximately voluntary”, where there can be a perception that if you register you pay tax, but if you do not register then it is highly unlikely that Sars will bother to come and “catch” you.
“Only through proper tax registration can we promote equality among taxpayers in similar circumstances, share the tax burden more fairly, and improve tax collections to fund some of the much-needed government expenditure for the benefit of society.”
Tax practitioners have expressed concerns that the Tax Administration Act, which is core to taxpayer rights, has been perceived to be “one-sided”.
The legislation comes solely from Sars, with only minor involvement from National Treasury. There is a need for the Office of the Tax Ombud to have a greater role in the development and annual amendment process of tax administration.
Some tax practitioners have expressed the need for the Tax Ombud to be given the role of independent reviewer of pending tax legislation in order to broaden the debate on the impact of legislation.
Williams says key changes to expand the role of the Tax Ombud include giving it legal separation from Sars, the ability to hire its own staff, and sufficient funding to ensure that complaints can be resolved within a shorter timeframe.
She would also like to see the Tax Ombud empowered to give binding interim orders, where necessary, while investigating a matter.
“The important aspect is that taxpayers are often facing extremely harmful consequences, and these should be capable of being averted during the investigation of a matter.”
Williams also believes the ombud should be in a position to act and litigate on behalf of the taxpayer, challenging decisions made by Sars when it believes Sars’s reasons for failure to implement its recommendations are not fair and reasonable.