JOHANNESBURG – South Africa does not have the scope to increase corporate tax rates, a new survey suggests.
Finance minister Nhlanhla Nene is under pressure to find ways to increase tax revenues to reduce South Africa’s budget deficit and keep rating agencies at bay. But with economic growth now expected to reach a meager 1.4% this year, any potential tax hikes would need to be implemented with care.
According to PwC’s Paying Taxes 2015 survey, South Africa’s total tax rate (a measure of the burden of all taxes a company must pay in relation to its commercial profit) of 28.8% ranks it 40th out of 189 countries. The global average total tax rate is 40.9%.
The survey compares the ease of paying taxes across 189 economies by considering the situation of a medium-sized business in its second year of operation. It studies the time the case study company needs to prepare, file and pay its taxes, the number of taxes it has to pay, the method of payment and the total tax liability as a percentage of its commercial profits.
Kyle Mandy, head of tax technical at PwC, says on the face of it South Africa performed relatively well. However, its total tax rate is still higher than a number of its peers including Zambia, Mauritius, Namibia and Botswana.
But a comparison of the underlying taxes included within the total tax rate, suggests that South Africa has a relatively high rate of profit taxes at 22% compared to the global and regional averages of 16% and 18% respectively.
Mandy says from an economic growth point of view corporate taxes are the most negative.
If you want to promote economic growth, you need to bring corporate tax rates down, he says.
A tax on profits reduces a company’s after-tax rate of return on its investment. The higher the after-tax rate of return on its investment the more likely the company is to invest.
For the same reason, a higher corporate tax rate is also a disincentive to entrepreneurship.
Mandy says that from a global perspective, a lower effective corporate tax rate also makes a country more competitive.
But if raising corporate taxes is out of the question, where will the money come from?
It is possible to increase taxes while undertaking reform that is growth positive, Mandy says.
Growth conducive tax reform would require a shift away from direct taxes like corporate tax to indirect taxes like value-added tax (VAT).
But with Cosatu fundamentally opposed to an increase in the VAT rate, this would be a tough sell.
One way to make any increases in VAT more bearable for the poor would be if some form of relief were provided at the same time.
Mandy says structural tax reform needs to be accompanied by social security reform to make it more politically acceptable.
In South Africa the time it takes the case study company to prepare, file and pay the applicable taxes is 200 hours (global average: 264 hours).
Mandy says South Africa has already introduced eFiling and electronic payments and there is not really scope for improvement in this regard.
The real opportunity lies in moving from the assessment system to a self-assessment system where companies would essentially assess themselves. This could reduce the amount of information and detail that has to be provided to the South African Revenue Service.
Locally the case study company has to make seven tax payments compared to the global average of 25.9.
Mandy says this is the area where South Africa fares best and it is principally the result of its electronic payments system.
This is also the main reason for South Africa’s 19th position in the overall Paying Taxes rankings.
However, the number of payments also represents the single biggest risk to its ranking.
Mandy says as other economies reform and move to electronic payment systems their number of payments would drop dramatically.
There is not much room for South Africa to improve in this area and in the absence of further reforms in the total tax rate and/or a reduction in the time to comply, its overall ranking will fall, he says.