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Is a corporate excess profits tax on the cards?

Rather than increase taxes for citizens – who have reached their taxation ceiling – an unprecedented solution may be in order.
Image: Shutterstock

As South Africa tumbles haphazardly into the second year of the epidemic, with uncertainty prevailing around when corruption will be curtailed, criminals jailed, the zombie state-owned entities (SOEs) culled, and the majority of citizens vaccinated, the only certainty is the steadily rising dam of debt.

Citizens are already being lumbered with more than their share of taxes, with value-added tax (Vat) and fuel taxes (which impact transport costs) being carried by even the very poor. They have reached their taxation ceiling (as indicated by the Laffer curve).

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Read: No matter the label, SA has little tolerance for tax hikes

Filling the Covid-19 fiscal hole

There are global calls for post Covid-19 fiscal policies to accelerate transformation, support the poor and struggling companies, and make those who have done well through the pandemic pay more.

But the emphasis seems to be on taxing so-called wealthy individuals. Gold mining, resource and technology companies have done very well in the last year.

A paper written by International Monetary Fund experts Ruud de Mooij, Ricardo Fenochietto, Shafik Hebous, Sébastien Leduc, and Carolina Osorio-Buitron, Tax Policy for Inclusive Growth after the Pandemic, raises valid policy considerations that are also applicable to South Africa, particularly this extract: “build their administrative capacity to better enforce existing taxes”.

Further crucial suggestions include “improve and simplify their Vat and excises, protect their income taxes better against avoidance and evasion, reduce discretionary tax incentives, enhance fiscal regimes for extractive industries, and better exploit taxes on property and pollution”.

Company tax rates (1985 to present)

Over the last 30 years, company tax rates have been slowly coming down. 

Between 1985 and 1991, the company tax rate was 50%. This was reduced to 48% for the next two years, and then 40% for 1993/94. In 1994/95 the rate was reduced to 35%, but a one-off transitional levy of 5% was introduced. In 1995 the tax rate was 35%, from 1996 to 2005 it was 30%. It slowly came down and is now sitting at 28%.

Corporates have not suffered any increases in tax rates in recent years.

And even the secondary tax on companies was passed on to individual shareholders when it was replaced with the dividend tax, effective April 2016.

Undistributed profits tax (prior to 1990)

The undistributed profits tax (UPT) was levied at 33.3% of a company’s distributable profits, less any dividend paid. There were exemptions for companies that were more than 50% held by foreign shareholders.

The UPT led to various tax avoidance stratagems, such as dividend-stripping tax schemes.

Secondary tax on companies (1993 to 2016)

The secondary tax on companies (STC), of 15% payable on dividends, was introduced for dividends paid after March 1993. The STC was borne by the company.

There were special rules for gold mining and insurance companies. The STC rate shot up to 25% in June 1994 and thereafter came down.

The STC rate was 10% when it was replaced with a tax on dividends, to be borne by the shareholder, which became effective in April 2016.

The STC also led to a proliferation of STC avoidance schemes, such as schemes that manufactured an STC credit.

One-off excess profits tax for companies

So why not have companies bear the additional Covid tax?

A one-off excess profits tax (EPT), say 5%, can be levied on the ‘excess profits’ of a company.

The excess profits could be calculated on the distributable reserves as at the end of the financial year, less capitalised interest, and less all unrealised profits such as the fair value adjustment to fixed assets (plant, machinery and equipment, land, and intellectual property), and less the dividends declared for the year. The distributable reserves will include dividends received. 

The rationale for using distributable reserves as a base would mean that companies that qualify for tax incentives (which will reduce the taxable income) could still be liable for the excess profits tax.

This tax should be limited to the larger companies, the threshold of which would have to be determined if the tax was introduced. It would also be easier to administer and apply as the audited figures would be readily available.

An advantage of such a tax is that it will be automatic, and the South African Revenue Service (Sars) will not have to increase its workforce. This is as opposed to a wealth tax on individuals, which is not only difficult to define, but for which Sars does not have the resources to administer.

Read: Rising debt, the fiscal deficit, and taxes

Keith Engel, CEO of the South African Institute of Tax Professionals, says that “this is an interesting academic concept”.

While stressing that he is not a fan of additional taxes, “an undistributed profits tax would be the least damaging amongst the alternatives and may be the most effective way to raise funds from those most able to pay”.

“Corporate funds otherwise left unused also seemingly do the least for economic growth.”

Engel cautions however that the tax shouldn’t force a company to liquidate assets.

No doubt National Treasury is mindful that in the current climate of rampant corruption, and the continuing cost of propping up zombie SOEs, any additional taxes imposed in next week’s budget will be viewed askance by taxpayers.

However, these are unprecedented times, which require unprecedented solutions.

Read:
Electricity tariffs to rise 15%
SAA pilots fuming over unpaid salaries

Listen: Wikus Furstenberg of Futuregrowth Asset Management discusses his expectations for Budget 2021 with Simon Brown; he believes an increase in personal income tax is unlikely.

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COMMENTS   17

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There is no such thing as “excess profits”. Who determines the profit margin anyway? The idea of excess profits is a socialist concept.

Many businesses, like mining, are cyclical. The business goes through periods of low profitability and needs periods of higher profit margins to support the viability of the business model. Undistributed profits do not sit idle in an account somewhere. Those funds are employed as working capital or for capital investment in the business. Undistributed profits are also invested in government bonds. When undistributed profits are taxed, it implies that capital formation is used for consumption. This is a dead-end because the nation consumes the assets that were supposed to create jobs and grow the economy.

Other than mines and the global tech and heavyweights( Richemond, BTI etc) corporate SA looks as though it needs money rather than having the ability to pay money! Look at ABSA and Santams recent results-both SA focused entities. Not a very appealing result…

But then the taxpayer here will simply accept the situation and the voters that have been paid off( basic income grants, government employees and BEE tender thieves) will keep voting for the glorious ANC led by the frog-boiler and Zupta CFO

Barbara. SA’s problem is lack of economic growth. If you tax companies more, they will simply decrease their exposure to SA, and economic growth will be negatively impacted, further decreasing tax revenues. As it happens, our company tax rates extremely uncompetitive vs other nations. For example, companies tax in UK 19%, US is 21%, China 25%, etc. As you can see, our companies tax rate of 28% needs to be reduced to increase our competitiveness, not increased! Furthermore, is it not time, we acknowledged that our budget shortfalls are primarily attributed to bloated government wages, corruption and mismanagement of public resources? There isn’t a day that goes by that doesn’t have some or other corruption story being exposed (today’s one being GEMS) The level of corruption in government is clearly staggering and yet our solution is increase taxes further, thereby fueling further corruption. Government wages haven’t been reduced at all, despite the fact that many in the private sector have taken 20% pay cuts during the pandemic.

Why is it so hard for our government to acknowledge that they need to and tackle the underlying root causes of the problem? i.e. cut government wages, tackle corruption and reduce government expenditure?

For me it can be explained when you look at Zim’s downward trajectory. Like in Zim, the ANC wants to keep its voters (and cadres) in money as long as possible, by any means possible. The ANC regime is not going to suddenly do the right, correct and honest thing; cutting bloated staff, appointing competent staff and investigating corruption. They just want to keep their hands on the levers of power and their snouts in the trough.

That is all; the economy etc does not feature except in a Dunning Kruger / cargo cult way.

Yes.

What is clear is that companies were much more successful even at a tax rate of 50% and full sanctions than under the current “regime”

Why would you ever invest any money in SA?? This lot kills everything they lay their long fingers on.

TSK!!!!

The whole purpose of keeping reserves, otherwise described here as “Corporate funds otherwise left unused” should be manifestly obvious. Organically grown cash reserves are of the highest quality capital that a company possesses, and as such are a massive contributor to FUTURE growth not itinerant spending in year zero.

Secondly a reserve is ‘a reserve’ for the rainy day(s) that arrived in spades via Covid-19 last year. Government on the other hand have been spending like drunk sailors for more than a decade AND this is why we are where we are with government finances: Unable to afford vaccinations and nothing really to show for spending in the last decade.

An excellent notion would be for all members of state parliament to lead the way and take a 35% pay cut as a gesture of ‘revolutionary solidarity’. I have no doubt that would focus the minds.

Exactly. Why does it never seem to be “public servants” taking any form of knock?

Above inflation increases for years with collapsed service delivery to show for it (& that’s before looking at the theft and corruption).

A total joke.

I would not want to see such a tax going into the national pool (where it will disappear) but I do think companies need to be forced to set aside a stabilization reserve. It is patently wrong that companies reward the hired help and shareholders with monster bonuses in good times but run crying to courts for business rescue or largescale retrenchments or state assistance when times are not good.

That stabilization fund can be drawn down as company leverage decreases and it proves it has very good longterm ratios for return on capital, operating cashflow : reported earnings, debt service cover ratios, etc – not a difficult actuarial exercise.

My goodness, the tax is getting out of control.

Turn left you get taxed, turn right you get taxed.

Makes sense to stay at home and use up the money, let the politicians go to work!

And you get sooo much in return.
Brilliant education, health care security and a social blanket.
In short the chief frog-boiler, as well as Accused number 2 Uncle Ace and the Zupta CFO ensure that your taxes are well spent…on themselves and their fellow gang members!

This new tax idea would be laughable if it wasn’t outrageous. SA’s fiscal and economic crisis precede the Covid pandemic. As any corporate finance student will tell you, companies determine their capital structure policy as well as their dividend policy based on the most tax efficient (minimal tax paid) strategy available, thus if this undistributed profits tax is imposed, companies will buyback shares with current internal funds and also issue debt just to buyback more shares(even at elevated share prices) this will be a form distributing earnings to shareholders while leveraging the balance sheet to avoid the tax burden on companies and shareholders. This will harm long-term investment prospects for the economy since any form of tax is rarely a one-off or temporary government revenue source, they will always be a reason (excuse) to keep it.

yeah, because the money sitting in the reserves is just there because the Directors have been too lazy to distribute it. What a stupid concept this article proposes.

There is no responsibility in a collectivist mindset and our government. Therefore there will be no change in SA until the government is replaced by one that respects individual property rights, the rule of law. No government has ever taxed its way out of debt, let alone to prosperity. No government (as far as I know) has ever repaid its debt, they always default. So whether they pass this tax law or another, expect taxes upon taxes upon taxes. I wouldn’t be surprised if they decided to tax stock-on-hand!

NEVER ask for the advice of a “Tax Expert” about how to fix the national tax problem!

Every single one of these “experts” has a VESTED INTEREST in keeping the taxation system as complicated and obtuse as possible.

The simple solution is a complete revision of the tax system to one of a “Turnover Tax”.

In one fell swoop, the ENTIRE nonsensical Byzantine monstrosity that Business and the ordinary taxpayers are currently enshackled by, is INSTANTLY consigned to the dustbin – where it should never have been allowed to escape from in the first place.

The benefits of a Turnover Tax are immediate and immense.

It’s simple to understand, almost impossible to fiddle the books on, and requires minimal administrative input or support.

Instantly, an entire cohort of very clever and able people that are currently doing what is really useless and NON-PRODUCTIVE work for the national economy, will be redirected to find USEFUL economic activity that will be much more beneficial to the total SA economy.

Now where is the DA on proposing, and driving forward, a simpler taxation system for SA??

Unbelievable… Who pays tax? A company is made up of (broadly); investors or owners, employees and customers.

Whacking a tax onto companies necessarily means 1,2 or 3 of those groups loose out… Either in profits, salaries & bonuses or higher prices.

Ultimately people pay tax. A company is just a way to structure people in the provision of goods and services.

Also… Once again, no mention of the real hard decisions like cutting costs, dumping SAA and opening up power production etc etc etc.
We know the REAL solutions, but we must continuously do this political dance because we simply lack any real leadership.

The current regime is hellbent on stealing farming land from white farmers. Now they want to steal dividend payouts and share price growth as well. Meanwhile, the current regime is punting this Godforsaken hellhole as a prime investment destination. How dof can you actually be? Wish I was young and/ or rich enough to leave…cry the beloved country.

Instead of this extra tax take a once off payment of a few R100bn out of the Government Employee’s Pension Scheme funds and reduce the benefit scale slightly.
As a defined benefit scheme with old actuarial tables the benefits are already so absurdly further ahead of what any poor defined contribution or RA pensioner in the country can purchase (suffering with low returns in Reg 28 funds) it is almost obscene.
Call it a ‘solidarity scale reduction’ to help pay for government employee involvement in corruption.

End of comments.

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