Global business news has been dominated by fears of a trade war between the United States of America and China – a situation that would no doubt impact many other countries too.
In addition to the challenge that this poses to the stability of the world economy, Donald Trump’s America is on the brink of setting off a corporate tax war among developed nations, and this holds an equally significant threat to efforts at greater economic equality across the world.
Corporate tax rates set by countries play a huge role in driving what is known as profit shifting: the move by the world’s largest corporates to limit their tax liabilities by selecting a region with a low rate of taxation as the jurisdiction that will collect tax from them on certain types of passive income. Although this is not illegal, it has significant negative effects on many parts of the world, in particular those in the developing world (including South Africa as a high tax jurisdiction), which desperately need greater tax revenue to develop their economies, work against poverty and create employment.
Profit shifting has been the subject of numerous working groups under the banner of the Organisation for Economic Cooperation and Development (OECD), and the developed nations have demonstrated their support for these efforts strongly, not least by participating in the efforts to limit profit shifting. Their goal is to limit the huge losses in tax revenue caused by profit shifting –approximately $600 billion.
If positioned correctly, developing nations like South Africa could benefit significantly from a change in corporate tax culture globally, by driving foreign direct investments (FDI) its way.
But the probability of greater FDI is threatened by the looming corporate tax war. President Trump is using lower corporate tax rates – down from 35% to 21% – to stimulate the US economy through attracting more business to the country. In addition, by announcing the substantial decrease in American taxes for businesses, Trump has set off a chain reaction of other countries announcing similar moves – all geared to keep their piece of the global tax pie. The United Kingdom, another leading player in the action against profit shifting, plans to drop its already low rate of 19% to just 17% by 2020, and a number of other strong economies plan to reduce their rates too.
South Africa will find itself at the tail end of FDI globally since it will be far more attractive for corporates to put money into jurisdictions that will charge them less tax, in addition to removing or reducing barriers to entry. While our government has in the past looked to the possibility of raising the headline corporate tax rate to address our backlog in tax revenue, I believe that consideration should be given to the exact opposite approach. If we gradually reduce our corporate tax rate to a level similar to the EU average of 19.48%, starting with the 2019/2020 legislative cycle, and if we maintain greater political stability in the near future, we are likely to see South Africa becoming more attractive to global businesses, and South African companies will also be more keen to remain registered here and continue paying taxes here.
If government were to do this, and to introduce initiatives to stimulate local economies in the most deprived regions of the country, such as establishing exclusive economic zones offering even lower corporate tax rates, we will see more investment in poor areas of South Africa.
Implementing ideas like this requires bold leadership. But it would be leadership that would align our country with the leading economies of the world. If any country on the African continent is in the position to do so, it is South Africa.
Ruaan Van Eeden is managing director, Tax and Exchange Control, at the Geneva Management Group.