South Africa’s tax to gross domestic product (GDP) ratio has increased dramatically over a period of 15 years (2000 to 2015) and is way above the average for Africa and Latin America. South Africa is not alone, however, with a recent study by the Organisation for Economic Cooperation and Development (OECD) showing that 75% of the 80 countries surveyed have seen increases.
The level of taxes in an economy gives an indication of the resources available to government to fund public services and infrastructure, but it also gives a rough estimate of the tax burden on the economy.
The OECD recently released its working document on tax-to-GDP ratios in 80 countries in Africa, Asia, Latin America, and the OECD from 1990 to 2015. (The OECD has 34 member countries, most of which have high-income economies.)
According to the report, the average tax-to-GDP ratio in Africa increased by approximately five percentage points to 19.1% between 2000 and 2015. In South Africa, it increased from 22.4% to 29%. The 2018 Budget Review published in February shows a tax-to-GDP ratio of 25.9% in the 2017/8 fiscal year.
In 2015, the average tax-to-GDP ratio was 23.1% in Latin America and 34% in the OECD. In Asia, Japan had the highest at 30% and Indonesia the lowest at 11.8%.
Ferdie Schneider, head of tax at BDO, says that although South Africa is not comparable with countries in the OECD, we are pretty close to their 2015 average of 34%. The social infrastructure enjoyed by OECD member countries is absent in South Africa. If one compares South Africa with a country in Africa (average 19.1%) and both offer little social security, one can argue that South Africans are overtaxed.
Logan Wort, executive secretary of the African Tax Administration Forum, was quoted at the recent Deloitte Global Trade and Indirect Tax conference as saying that the region’s historically low tax-to-GDP ratios “limit the economic options on the table”.
He says Africa’s tax-to-GDP ratio increased from 15.6% in 2010 to 18.3% in 2017. To some extent this reflects the lower income-per-capita ratio many African economies have compared to other regions.
“However, this may not represent the full picture as Africa loses more money through illicit financial flows than it receives in aid,” says Wort. He believes it is imperative for African revenue authorities to work together to ensure that world tax rules take account of the continent’s needs and that inappropriate standards are not imposed. The authorities also need to coordinate tax policies that encourage intra-regional trade.
Schneider remarks that South Africa’s high tax-to-GDP ratio, compared to the level of social security offered to taxpayers, may be attributed to administrative incompetence, misappropriation and overspending of revenue, corruption and fraud. The dismantling of efficient structures within the South African Revenue Service (Sars) and a mass exodus of highly qualified and experienced people has taken its toll on tax morality and revenue collections.
Although there is no magic figure, South Africa should have a tax-to-GDP ratio closer to 23%, as it had in 1990 (23.9%) and 2000 (22.4%), says Schneider, who is a member of the South African Institute of Tax Professionals (Sait).
The ratio remained relatively stable for a decade (1990 to 2000), then increased by six percentage points in 15 years. “It is obvious that things are getting out of control.” The consequences of overburdening taxpayers include a “brain drain from people wanting to get out of the tax oven”, tax avoidance and even tax evasion.
“When your tax burden is too high, a country is effectively shrinking its tax base – people want to get out from under the load,” says Schneider.
The real danger is that the government then has to look for alternative sources of income where nationalisation, expropriation without compensation and a shift to socialistic ideologies may become the only options.
Many countries in Africa – including Angola, Chad and Nigeria – rely on revenue from oil. South Africa doesn’t have similar resources to replace tax revenue. Schneider says there have been positive trends since the election of President Cyril Ramaphosa, which may impact on the high tax-to-GDP ratio in years to come.
State-owned enterprises – currently a massive drain on the fiscus – are being turned around. Several of these entities have new boards and new CEOs. The exposure of the catastrophic derailments at Sars and the messages and actions by Acting Commissioner Mark Kingon are certainly positive.
“If Sars can be turned around, collections will once again improve and tax morality can be restored,” says Schneider. “We would not have to continue worrying about our tax money.”
What about the fact that South Africa has been hit with a technical recession? Schneider says things has been worse – nine years ago the economy contracted by 2.7%, this time it is only 0.7%.