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Corporate tax contribution dwindles, despite high rate in global terms

Concerns raised over limitation of assessed losses against income to offset the corporate tax rate reduction announced in February.
The impact of the pandemic and political unrest on business has led to the implementation of the proposal being postponed. Image: AdobeStock

Corporate income tax collections showed a strong recovery this year, mainly because the boom in commodity prices boosted the intake from the mining sector.

However, it is clear that the windfall is not sustainable and the contribution from company taxes to total tax collections will decline quite rapidly over the medium term. It drops from 19% of the total tax collections this year to 14% (R230 billion) during the 2024/25 tax year.

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At the same time individuals will contribute 39% (R665 billion) of the total tax collection by 2024/25 and value-added tax 29% (R491 billion) over the same period.

South Africa’s corporate tax rate of 28% is high in global terms, particularly when compared to the rates of its major trading partners. The average corporate tax rate globally has fallen from 49% in 1985 to 24% in 2018, according to a study from the Centre for Economic Policy Research.

Former finance minister Tito Mboweni announced during his budget speech in February that the corporate income tax rate would be reduced to 27% in April 2022. To allow fiscal room for a lower rate, the offsetting of assessed losses against income will in future be limited to 80% of taxable income.

Bad timing

Several commentators have raised concerns about the timing of the limitation given the impact of the Covid-19 pandemic and the political unrest in KwaZulu-Natal and parts of Gauteng.

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Many find themselves in a loss-making position. Commentators remarked that having to pay 20% of taxable income rather than using cash flows to recover and reduce debt will place an additional burden on companies that are trying to recover from these adverse events.

Hence, the decision to lower the rate while limiting the use of assessed losses to reduce taxable income was kicked down the road.

National Treasury acknowledged that some businesses are in survival mode and that it is important to provide space for recovery.

The proposal will only come into effect on a future date to be announced by the Finance Minister.

Decision welcomed

Keith Engel, CEO of the South African Institute of Taxation, says this is a sound decision. The proposed rate reduction and loss limitation was designed to encourage investment and not to act as a punishment.

Government also made a concession for start-ups, smaller businesses and businesses that are cyclical in nature when the limitation eventually becomes effective. Treasury included a de minimis threshold of R1 million.

“The aim is to provide relief for a variety of companies that may experience cash flow challenges at different times,” Treasury said in the response document to the draft Taxation Laws Amendment Bill.

Mike Benetello, partner at Bowmans, says some may argue that R1 million is really not enough. “At least there has been some concession. Perhaps, once we get settled into the change, there may room for an increase in the R1 million threshold.”

Engel believes that the small business relief should have been more closely linked to the small business company regime. In terms of the regime, small businesses with an annual turnover of up to R20 million may qualify to pay income tax at a reduced tax rate.

Global tax reforms

Tax avoidance and tax evasion have for years occupied the minds of legislators and the Organisation for Economic Cooperation and Development (OECD) has been at the forefront of global tax reforms.

Ernest Mazansky, head of tax at Werksmans, writes in a recent article it is relatively easy to locate one’s business in a low-tax jurisdiction and provide services and products to customers located in high-tax jurisdictions without having any discernible presence in the latter, and therefore not paying tax in them.

Some of the reforms orchestrated by the OECD will see the introduction of a corporate tax of at least 15%. “This will clearly not go down well with a number of offshore jurisdictions where the tax rate is zero, including jurisdictions such as in the Channel Islands, Isle of Man, Liechtenstein, Cayman Islands, Seychelles, and many others,” he noted.

High rate

South Africa is clearly far from a 15% corporate tax rate.

Charles de Wet, executive consultant at ENSafrica, says at 28% and even 27% our corporate tax rate is competitively high in global terms. A reduction in the rate will have a positive impact on foreign investments.

“However, it is unlikely that we will see the kind of drop that will bring us on par with our biggest trading partners.”

On average global tax rates vary between 20% and 27.5%. “If we compare ourselves with Africa, a tax rate of 27% is more or less in line with other countries on the continent,” says Benetello.

However, when we compare it to European countries – our biggest trading partners – the average rate is around 20%. In Asia the corporate tax rate is on average 22%.

Corporate tax rates are important when considering investment destinations. SA is not comparing favourably on tax rates, but it is also getting more expensive to do business here.

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We could learn from the US when it comes to assessed losses. Losses acquired when buying another company (US files consolidated tax returns) are only utilisable at a prescribed rate about the Fed rate. So the nonsense of buying companies for their “tax asset” gets stopped. Eg if bought company with a $100m assessed loss, the group gets to use that at about 2% a year. That wipes out the Present Value of assessed losses M&A nonsense.

Here, there are going to be unintended consequences. Eg we get a 100% tax deduction on solar. For many companies that will create a tax loss since solar is big capex. Now next year you don’t get to use that tax loss…

End of comments.

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