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Should SA cut its company tax rate?

Can it afford to; can it it afford not to?
Having more companies in business means having more people in employment, which will boost the take from personal income tax too. Picture: Waldo Swiegers/Bloomberg

In the lead-up to the medium-term budget policy statement (MTBPS) on Wednesday (October 24), there is speculation that new finance minister Tito Mboweni may have to announce that the government is considering additional taxes. In a persistent low-growth environment, there are doubts that the South African Revenue Service (Sars) will be able to meet its collection targets.

Read: The two big questions ahead of the medium-term budget

The weak state of the economy is likely to translate into lower company profits, and therefore less tax collected from corporates. At the same time, individuals may not receive salary increases or could even be retrenched, further weakening the tax base.

The most potent antidote to this is economic growth, since a robust economy boosts government revenues. And for growth to occur, South Africa needs a lot more private investment.

Investment drive

This is no mystery, and government is quite aware of the need for it. President Cyril Ramaphosa’s three-day Investment Summit kicks off the day after the MTBPS and will focus specifically on generating more investment into the country. This is part of his drive to mobilise R1.2 trillion in investment within the next five years.

Read: Davos comes to Sandton

Part of that discussion, however, has to be how to make South Africa a more attractive investment destination. How does government create an environment that is truly appealing?

Usually, an obvious way to do this would be to lower the corporate tax rate, which is currently at 28%. That is fairly high by international standards, particularly if one also factors in dividend withholding tax.

“You want a corporate tax rate that is internationally competitive,” says Mike Teuchert, national head of taxation services at Mazars. “Our corporate tax rates are currently at the upper end.”

Bringing that down would act as a stimulus, just as it has done in other parts of the world.

“It is what Trump effectively did in the US,” Teuchert explains. “If you reduce tax rates, that should be a trigger for businesses to invest in new products, new projects, new ventures. Tax is a charge to a company, and by reducing it you could make additional projects provide a required return that is acceptable.”

The effect on tax revenues

The challenge to this approach, however, is that the country is facing the rather urgent need to support the fiscus. If tax revenues are not going to meet the targets set, can the country afford to cut rates?

Company taxes are the third largest contributor to tax revenues after personal income tax and value added tax (Vat), providing 17.9% of all government income.

Given the situation in which South Africa finds itself, however, government needs to try new approaches. If investment is its priority, then it needs to do what it can to attract it.

“I have a view that we need some innovative measures to drive growth in this economy,” says senior tax consulting partner at Mazars, Bernard Sacks. “If the minister of finance were to consider a drop in the corporate tax rate, what that may do is attract more foreign direct investment (FDI).

“By attracting FDI you would effectively have more companies operating here,” he adds. “Admittedly they would be paying tax at a lower rate, but that could be made up by the greater overall profits subject to tax. And allied to that would be a greater number of people in employment, which means that personal income tax take would be greater as well.”

The longer term benefits are therefore significant. This makes it something that Ramaphosa should give serious consideration to as he looks for ways to attract more investment.

Other measures

A lower corporate tax rate won’t, however, be enough on its own. Unless the overall environment is appealing, it won’t work.

“Most economies are driven by trust and the expectation that things are going well,” says Teuchert. “You need businesses to invest and they are only going to do that if they have confidence.”

What needs to be addressed for this to be the case was covered in an analysis released this month by PwC entitled: ‘What foreign investors want: South African insights from a global perspective on factors influencing FDI inflows since 2010’.

The study found that “differences in factors such as trade openness, efficiency of government regulation, safety and security, property rights, quality of infrastructure, control of corruption, and policy continuity are associated with differences in FDI inflows”.

In other words, address those issues, and investors will follow.

“Foreign investors look to a number of macro factors when considering FDI,” says PwC economist Christie Viljoen. “These not only relate to the economic outlook for a particular country but also policy decisions taken by a government.

“Investors also tend to be wary of any economic and political uncertainty. In South Africa, recent political and economic uncertainty, including the perception of corruption, have clouded investor sentiment.”

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In my opinion a reduction in company tax rate would not create a large increase in FDI. You can argue about political and economical uncertainty, corruption and other problems, but you should not forget one thing which is effectively a tax and it is around the same rate as the company tax: the racist BEE, AA and such requirements. The company tax and the different empowerment requirements reduce the profit by more than 50% so the only reason a company might set up a business in SA is to supply the local market. If they want to produce things for export there are several other countries where the profitability is much better.

100% correct.

All the stimulation packages, R100 billion investment drives and incentives for industry are near worthless with race based AA and bbb-eee and mining charter drivel.

If anything the mining charter with its racist staff quotas will make business worse. Who in their right mind will want to invest or even work in an organisation with such a large component of it’s workforce employed on race not capability. The outcome will be exactly the same as government departments.

The next trick will be to extend the mining charter principles to the private sector. This will be an even bigger catastrophe as the negative effects are plain to see. No goose no golden egg.

Do not invest in SA till this insanity stops.

…..a pantomime thats waiting for an end is this dull story of current governership

The ANC knows what really has to be done, its just too cowardly too do so

Indeed, the ANC does not have the balls or guts to drop (Individual) tax to 15%, as in Mauritius, Georgia, Montenegro, etc.

OF COURSE CUT TAXES!! Look @ all the social countries that steal more and more money from the hard working people so it can give it through governments’ “needy” hands and be redistributed, stolen, misappropriated, hidden, and just plain TAKEN and then what’s left, they decide to give to the poor and keep them subservient on government (which then solidifies their job.) You see what My MAN DONALD TRUMP did with the corporate tax? Let me school you “on the job training politicians” who have no understanding of economics. Those politicians that just want to tap the honey basket of the government fiscus. If you let the people keep more of their money they will spend more and IF YOU WOULD DO AWAY WITH LOSING STRATEGIES LIKE B.E.E. you would actually see growth. BUT some idiot just wants to take South Africa down the toilet. I can hear the flushing sound now. I have an escape plan do any of the other hard working schmucks? NO they are at the behest of a feckless thieving government that only cares about the ANC’s survival! I don’t mean that in a bad way. As an international debater once said about 9 years ago. “It takes a fledgling democracy 40 years to become a TRURE democracy. Foe the first 20 years they steal all the money and hire all their friends and family.” Does any of this ring true???

“You see what My MAN DONALD TRUMP did with the corporate tax?”

You mean help create the biggest budget deficit, through tax cuts and spending increases?
Yeah what a beacon of intelligence he is….

Make no mistake tax cuts are great, but if you don’t cut spending you are not going to achieve anything, well, you will manage to create a bigger budget deficit.

Dah if you see ALL the deficits, debt and unfunded liabilities, you will realize that your boy that Kenyan guy did it.Quit watching CNN

@Zokey

I find it interesting that having a negative or even natural view of Trump on MW gets you branded as a “leftist”, I have been called many things on here because of my criticism of Trump, sadly a leftist I am not, perhaps I would have felt better if I was? Anyways.

Trump colluded with the Dems to increase welfare spending in exhange for more warfare spending, one of the few that stood in their way was Rand Paul, a libertarian, like I am btw.

The budget deficit in this year increased 17%! Y/Y
And remember this isn’t Trump first year in office, I will wager that next year its going to be 20%+
It is physically impossible to collect less money, and at the same time spend more and not expect to have a deficit, except maybe in Trumpland.

And as interest rates start to kicking up Trump will have a even harder time with that deficit, a deficit that was there before he came into office definitely, but instead of spearheading the problem he decided to ride the waves of QE and stock market glory.

What Trump should have done:

-Cut government spending.
-Increased Taxes.
-Remove tariffs as far as the eye can see.

Some short term pain for long term gain.

From : “Mr left wing”

Trump is doing amazingly well given that interest rates have only increased during his term thus far. last quarterly growth. 4,2 %?

They should have a look at what happen with the US plan by the republicans to do this.. seems like they got even closer to a default with next year’s deficit likely hitting 1trilion.

Unless you a reserve currency it’s a receipe for disaster and even then there are limits as the US will find out.

The end of the tax in SA is like an algebraic equation.. lower one part and you have to increase another.. not factioring in the deficit & interest rates.

What gov need to do is clamp down on spending.. why are gov officials granted so many special claims? The rest of the country does not get flights, security details, vehicles, meals, housing renovations etc unless they are performing well and/or ceos.. speaking of which.. these ones are getting paid over a million to serve? If you want to save taxes and encourage growth cut gov by 50% and reduce benefits by 90% only exception is presedential security and even then only at official government homes.

Good solution, never going to happen, the ANC will never do that, as that is why they joined, for the perks of leadership, not one of them came to serve…

They are not public servants, they are making the public their servants… they have perverted their roles…

Way i see it the ANC will be forced to make some harsh cuts and/or asset sales and push up income tax & vat. The problem they have is that most professional people who are under 45 are applying, in process or have already permanently left this year myself included (applying to leave post elections) because the writing is on the wall. I suspect there will be more social unrest as reality of money stolen becomes evident with economy not recovering.

Of cause if this was the only thing going on life would be do-able but the reality is Ramaphosa won’t remain at the top. Groups are actively trying to take him and others out and post elections i have sneaky suspicion we will see something dramatic happen (hence exodus). As every African country has experienced.. it’s easy to make them feed at the trough but try cutting them off after the fact let alone take them to jail and without the later political instability will increase unabated.

Fully in agreement, alot of the fence sitters such as myself, have now begun the process to be visa ready and leave…

As a 30yr old white male, this country holds very little promise of a sound future for myself and young family…

I have watched over the last 3 years as literally 8 out of 10 of my mates who are all top professionals leave. The friends that remain have European passports, so the choice to leave is firmly theirs, they pack bags and go, those on RSA citizenships have had to move faster, as they needed visa’s…

Brain drain of note. Mates with little or no qualifications are all stuck as first world immigration is evidently very complex, most are thinking Botswana, some have bought investment apartments in Gabarone as saftey net.

The only solution for the financial malaise effecting this country is for the entire ANC and EFF caucus in parliament to sail into the Atlantic and scuttle the vessel

That’s a cruel blow, Pamplona! Do you realise that many of the ANC or EFF cannot swim too well?

(well, in that case only, I’ll support the Sharks!)

cough … exactly

Isn’t that animal cruelty for sharks?

If the answers to the countries problems are so obvious and yet every decision that is made takes us further away from the solution, we have to assume that the Govt / ANC does NOT want the country to succeed in the way we want. Assuming this is the case, what is their agenda ? It is clearly spelled out in the National Democratic Revolution which is their guiding policy document to this day. We will continue bashing our heads in frustration if we think they are somehow going to start doing things differently. Things are going exactly according to plan for the ANC. Unfortunately the poor taxpayers are funding their own demise. Very sad !

The ANC wants to remain in power, first and foremost (i.e. as you correctly summed it up…to the detriment of the economy)

Drop Taxes, Flat rate 15% for EVERYTHING-
Speeding fines, sin tax – all imposed to stop us from doing bad stuff- Income/business tax to stop us from producing?

Follow Dr.Arthur Laffer’s advice. Don’t look at what the rich countries are doing today- look at what they done before they got rich!

Capitalism without Capital -another great read to figure out some of our problems.

Your suggestions make perfect sense but unfortunately in this country you will be whipped for being a greedy capitalist and “anti poor”. They will not rest until everyone has been reduced to the lowest common financial denominator and then their dream of an equal society will have been reached. As you say – all they need to do is copy what the successful countries such as Mauritius have done but this is not their agenda.

What utter tosh. The deficit is already ballooning and there is talk of having to increase VAT even more yet MW wants to see the corporate tax rate being cut?

Corporates should carry their fair share of taxes. To further burden the middle class and the poor is an absolute joke.

IN the long run lower taxes will hopefully lure direct investments which will lower the burden on individual taxpayers. ( more employees , more income taxes, more companies, more taxes). but then there are other taxes such as BEE and poor service delivery.

Impossible for now, worst timing possible. Who will pay the Tax?

Unfortunately the previous Government Administration looted almost everything of value. If Government could repatriate some Dollars from Dubai it might help.

Remember we have just excited the Zuma era (Worst entry in our History book).

South Africa has started down the road of populism a number of years ago. Once breakaway parties started out-ANC-promising the ANC, the end-result was always going to be this mess.

The ANC would rather see SA eat itself, than relinquish political power. That means Promises ™ version 2.0 is only going to get bigger! better! now with more added free! this time round.

Strap in & stock up on lubrication. Or leave.

Short answer – yes.

– Cut government and SOE wage bill.
– cut SoE guarantees
– do away with compliance redtape for SMEs(tax, labour, etc).
– guarantee a percentage of the loans SMEs/startups take from commercial banks as opposed to guaranteeing unproductive SoE.
-Do away with NEF, NYDA, SEFA and all other ANC employment schemes.
– do away with ministerial handbook.
– cut VAT on capital items(Commercial/industrial land sales/rent, machinery/equipment).

– cut individual tax to stimulate spending.
– cut interest rates to stimulate spending.
The economy is not growing because too much money is flowing into governments hands and it is being used unproductively, mainly for consumption of imported goods.

70% + of government spending is on salaries and wages. We defnitely do not get value for taht money as citizens. However, cutting back on this meaningfully will be impossible. The country will erupt in chaos.

We have just over 2 million civil servants producing little of worth. A further 15% of government spending is on 17 million social grant recipients. Furthermore the bloated SOE’s like SABC, SAA, Eskom et al are being carried by the dwindling productive sector. It will not end well.

Cutting Company tax will definitely stimulate the economy in the short term. The long term solution would be to stimulate interest first by cutting corporate tax followed up with a long term plan to cut the SOE inflated wage bills, getting the SOES functioning properly and encouraging investment into South Africa. This can only be done by getting rid of racist BEE policies and putting the right people into jobs who can in fact do the job!

Everyone ask for FDI, what about LDI? If the locals are not even willing to invest in their own country, why would the foreigners do it?

End of comments.

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