Corporate income tax collections have rebounded strongly this year, mainly because soaring commodity prices boosted revenues from the mining sector.
However, it is clear that the windfall is not sustainable and the contribution of corporate tax to total tax revenue will decline quite rapidly in the medium term. It goes from 19% of total tax revenue this year to 14% (230 billion rand) in fiscal year 2024/2025.
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At the same time, individuals will contribute 39% (665 billion rand) of the total tax collection by 2024/2025 and value added tax 29% (491 billion rand) during the same period. .
South Africa’s corporate tax rate of 28% is high globally, especially compared to the rates of its major trading partners. The average corporate tax rate around the world fell from 49% in 1985 to 24% in 2018, according to a study by the Center for Economic Policy Research.
Former Finance Minister Tito Mboweni announced during his budget speech in February that the corporate tax rate would be reduced to 27% in April 2022. 80% of taxable income.
Several commentators have raised concerns about the timing of the limitation given the impact of the Covid-19 pandemic and political unrest in KwaZulu-Natal and parts of Gauteng.
Many find themselves in a deficit position. Commentators have noted that having to pay 20% of taxable income rather than using cash flow to collect and reduce debt will place an additional burden on businesses trying to recover from these adverse events.
Therefore, the decision to lower the rate while limiting the use of assessed losses to reduce taxable income was postponed.
The National Treasury has recognized that some companies are in survival mode and that it is important to provide space for recovery.
The proposal will not come into force until a later date to be announced by the Minister of Finance.
Keith Engel, CEO of the South African Tax Institute, says this is a good move. The proposed rate cut and loss limitation were designed to encourage investment, not to act as a punishment.
The government has also made a concession for start-ups, small businesses, and businesses that are cyclical in nature when the limitation finally becomes effective. Cash included a de minimis threshold of 1 million rand.
“The goal is to relieve a variety of businesses that may experience cash flow problems at different times,” Treasury said in the tax law amendment bill response document.
Mike Benetello, partner at Bowmans, says some might argue that R 1 million is really not enough. “At least there were concessions. Maybe once we settle into the change, it will be possible to raise the one million rand threshold. ”
Engel believes that the small business relief should have been more closely linked to the small business regime. In terms of the scheme, small businesses with an annual turnover of less than R20 million may be eligible for income tax at a reduced tax rate.
Global tax reforms
Tax avoidance and evasion have been on the minds of lawmakers for years, and the Organization for Economic Co-operation and Development (OECD) has been at the forefront of global tax reform.
Ernest Mazansky, Head of Tax at Werksmans, writes in a recent article that it is relatively easy to locate your business in a low tax jurisdiction and provide services and products to clients located in high tax jurisdictions without to have a noticeable presence, and therefore not to pay tax on them.
Some of the reforms orchestrated by the OECD will see the introduction of a corporate tax of at least 15%. “This clearly won’t go well with a number of offshore jurisdictions where the tax rate is zero, including jurisdictions such as the Channel Islands, Isle of Man, Liechtenstein, Cayman Islands, Seychelles and many others, ”he noted.
South Africa is clearly a far cry from a 15% corporate tax rate.
Charles de Wet, executive consultant at ENSafrica, says that at 28% and even 27%, our corporate tax rate is competitive globally. A lower rate will have a positive impact on foreign investment.
“However, we are unlikely to see the kind of drop that will put us on par with our biggest trading partners.”
On average, global tax rates vary between 20% and 27.5%. “If we compare ourselves to Africa, a tax rate of 27% is more or less in line with that of other countries on the continent,” Benetello explains.
However, when we compare it to European countries – our major 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 doesn’t compare favorably to tax rates, but it’s also getting more expensive to do business here.