Higher tax rates are not the solution to revenue shortfalls, a tax practitioner has warned.
Nishana Gosai, transfer pricing practitioner at Regan van Rooy, says she fully agrees with the South African Revenue Service (Sars) that everybody should pay their fair share of taxes and that tax compliance is important.
“But when we are falling short on revenues the answer can’t be ‘tax the people more’. It can’t be ‘well we’ll increase the tax rate; we’ll put personal income taxes up to 45% and we’ll tax the people more’,” she says.
Over the last two years, there have been growing concerns about a slippage in tax compliance amid anger about wastage and corruption.
But Gosai says there is another reason tax compliance has deteriorated.
“We are simply, as an economy, feeling overtaxed. We are taxed out.”
National Treasury increased the Vat rate by one percentage point in April as a last-resort effort to stabilise the country’s deteriorating fiscal position. The top marginal personal income tax rate was increased to 45% in 2017.
There have been ongoing warnings that South Africa needs to increase its small tax base. While lower corporate income tax rates have been introduced in some other countries – making South Africa less attractive by international standards – the country’s weak fiscal position has made it difficult to follow suit.
Finance minister Nhlanhla Nene on Monday warned that the economic contraction during the first six months of the year posed an “additional downside risk to tax revenue”, raising questions about South Africa’s ability to stick to its path of fiscal consolidation.
Gosai says although governments do not like tax incentives and there are debates about whether the country will get the economic stimulus it requires, it can play a role in broadening the tax base. The US has introduced significant tax reforms, and the UK is also taking steps to ensure they don’t lose out after Brexit.
“They [the UK] are doing all sorts of things [related to] lowering their tax rates. What is South Africa doing?”
Wayne Fuller, head of group transfer pricing at Old Mutual, says despite all the shenanigans between members of the ruling party in the UK, its mantra has been that it is open for business.
“The minute you are open for business and you have policies that back that statement up, you will attract corporates.”
While small and medium enterprises are important, it is the big corporates that bring big jobs, high-paying jobs, and with that, tax revenues. Sadly, South Africa has lost value as a country and there is also uncertainty around policy, Fuller says.
Corporates aren’t going to move to a country purely for tax reasons, the entire package a country has to offer needs to be attractive. Tax legislation has to support the direction the country wants to go in, he says.
“If we want to create jobs, if we want to bring our unemployment down, and [if] we want to grow our economy, we need policies that support that, which are enabled by tax legislation. I don’t think tax legislation is going to do that on its own.”
Gosai says while business decisions shouldn’t merely be informed by tax, efforts to combat base erosion and profit shifting globally have increasingly meant that tax considerations do play a role in evaluating the investment and commercial decision.
“It now has entered that space where board members are talking about tax,” she says.
The Nigerian attorney general’s allegation that MTN should have paid roughly $2 billion in taxes related to foreign payments and imports, and allegations that MTN unlawfully took $8.1 billion from Nigeria, have raised questions about whether the telecommunications giant should pull out of its biggest market.
“It is an eye-opener that these government policies can actually impact on a big giant like MTN deciding whether to stay or go in a particular country,” Gosai says.
She believes one of the things South Africa can do to promote itself as a transparent and certain tax jurisdiction in the transfer pricing space is to revisit advance pricing agreements (APAs).