Corporate income tax collection posted a strong recovery this year, mainly because the boom in commodity prices boosted the mining sector’s uptake.
However, it is clear that the windfall is not sustainable and the contribution of corporate taxes to total tax collection will decline quite rapidly in the medium term. It is reduced from 19% of total tax collection this year to 14% (R230 billion) during fiscal year 2024/25.
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At the same time, individuals will contribute 39% (R665 billion) of the total tax collection for 2024/25 and the value added tax with 29% (R491 billion) during the same period.
South Africa’s corporate tax rate of 28% is high globally, particularly when compared to the rates of its major trading partners. The global average corporate tax rate has fallen 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 income tax rate would be lowered to 27% in April 2022. To allow a fiscal margin for a lower rate, the compensation of Losses assessed with income will be limited in the future to 80% of taxable income.
Several commenters have raised concerns about the timing of the cap given the impact of the Covid-19 pandemic and political unrest in KwaZulu-Natal and parts of Gauteng.
Many are in a losing situation. Commenters noted that having to pay 20% of taxable income instead of using cash flows to recover and reduce debt will place an additional burden on companies trying to recover from these adverse events.
Therefore, the decision to reduce the rate and at the same time limit the use of assessed losses to reduce taxable income was rejected.
The National Treasury recognized that some companies are in survival mode and that it is important to provide space for recovery.
The proposal will only come into effect at a future date that will be announced by the Minister of Finance.
Keith Engel, executive director of the South African Institute of Taxation, says this is the right decision. The proposed rate reduction and loss limitation were designed to encourage investment and not to act as a punishment.
The government also made a concession for startups, smaller businesses, and businesses that are cyclical in nature when the cap finally takes effect. Treasury included a de minimis threshold of 1 million rand.
“The goal is to provide relief to a variety of businesses that may experience cash flow challenges at different times,” Treasury said in the response document to the Tax Law Amendment Bill.
Bowmans partner Mike Benetello says some may argue that 1 million rand is not enough. “At least there has been some concession. Perhaps, once we settle into the change, there may be room for an increase in the R1 million 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 up to R20 million may qualify to pay income tax at a reduced tax rate.
Global tax reforms
Tax avoidance and evasion have occupied the minds of legislators for years, and the Organization for Economic Cooperation and Development (OECD) has been at the forefront of global tax reforms.
Ernest Mazansky, Werksmans chief tax officer, writes in a recent article that it is relatively easy to locate one’s business in a low-tax jurisdiction and provide services and products to clients located in high-tax jurisdictions without having a discernible presence in the latter. . and therefore not pay taxes on them.
Some of the reforms orchestrated by the OECD will see the introduction of a corporate tax of at least 15%. “Clearly, this will not go well with various offshore jurisdictions where the tax rate is zero, including jurisdictions such as the Channel Islands, the Isle of Man, Liechtenstein, the Cayman Islands, the Seychelles and many others,” he noted.
South Africa is clearly far from a 15% corporate tax rate.
Charles de Wet, executive consultant for ENSafrica, says that at 28% and even 27% our corporate tax rate is competitively high in global terms. A reduction in the rate will have a positive impact on foreign investment.
“However, we are unlikely to see the kind of decline 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 other countries on the continent,” says Benetello.
However, when compared to European countries, our largest 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 is not comparing favorably on tax rates, but it is also becoming more expensive to do business here.