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).
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.
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.
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.