The President’s State of Nation Address 2013 set the tone: the study of current tax policies by the Minister of Finance was “…to make sure that we have an appropriate revenue base to support public spending.”
This echoed the Finance Minister’s own foreword in the SARS Strategic Plan 2012/3 – 2016/17. There he stressed the need for SARS “… to generate and collect sufficient revenue to fund public expenditure”. It was anticipated that, for the medium term, the demands on revenue collection growth would be between 10 - 12% per annum.
Clearly the rallying call is “find the money” rather than, “pull in the belt”.
Austerity measures don’t endear politicians to the electorate. The lessons from Europe have been learnt – especially with an election coming up in 2014. Less is more – but not in politics. Someone has to cough up.
The mining sector is first in line. According to the President, the upcoming tax study will evaluate the current mining royalties regime, with regard to its ability to suitably serve the South African people.
Australia has gone down this road. Late in 2012 an ex-South African, Marius Kloppers, BHP Billiton CEO, told Australian Prime Minister Rudd that, “all bets were off” regarding the punitive mining tax Rudd envisaged. Rudd’s political career nose-dived. BHP subsequently suspended its anti-government advertising. End-result: new Prime Minister Gillard watered down the mining tax regime.
Ironically, an Australian as CEO designate of Anglo American now faces the imposition of a new mining tax dispensation in SA. Pulling a “Kevin Rudd” like BHP Billiton did down under, is out of the question locally. Following its 2012 annus horribilis, the mining sector is expected to repent and increase its contribution to state coffers.
Then there are the rich - always a politically-expedient target. They have been in the sights for a while. Higher taxes on the wealthy: some say it will create “social cohesion and improve the integrity and morality of the tax system”. T
he problem sits in the numbers though. According to the 2012 Tax Statistics – Highlights, there were only 553 139 taxpayers in the R400 000+ Income Group (i.e. out of a total 10 346 175 individual taxpayers on register as at 31 March 2011). Higher taxes on the so-called “wealthy” (i.e. 5.35% of those on register) is unlikely to plug the dyke. Furthermore, the rich are fickle and are quick to pack their Louis Vuitton bags. President Putin has already welcomed French film star Gerard Depardieu to Russia with its 13% flat income tax rate, compared to the 75% on income over Euro 1m threatened in France. Some warn that South Africa cannot afford to lose it rich citizens. While the rich are easy prey, the reality is that when they vote with their feet, their entrepreneurship, skills and capital also depart.
Last year dividend tax came in at 15% (rather that the expected 10%). Tepid economic growth currently restricts a bigger corporate tax take. In any event, the 2012 Tax Statistics – Highlights (assessed data for the 2010 tax year) showed that 221 large companies, with taxable income in excess of R200m, delivered 50% of the tax assessed.
For now, no change to the corporate tax rates is expected. But there is a real likelihood of stronger compliance measures vis-à-vis the corporate sector. Transfer pricing is already on the radar. The heavy artillery of the General Anti-Avoidance Rule will see more action to curb tax structuring that offends. Moral leaning on corporates is part of the tax landscape. Tax statutes no longer exclusively determine tax liability. Reputation management and so-called "good corporate citizenship" are equally important when deciding on tax risk appetite. Nobody wants to make the front page for tax reasons.
South African companies will have to contend with international trends: A while ago Starbucks moaned about the “politicisation” of its UK tax dispute. A recent OECD report urged an overhaul of international corporate tax rules because certain rules protecting multinational companies from double tax sometimes allowed them to escape tax altogether. Although technically legal, the OECD feels that such tax-planning strategies erode the tax base of many countries and threaten the stability of the international tax system.
The Australian Federal government wants to lift the veil of secrecy hiding the complex arrangements and contrived corporate structures used by multi-national companies to avoid paying their fair share of tax. Australian companies also face pressure to disclose the tax actually paid in jurisdictions where they operate. On the other side of the world, the Canadian Revenue Authority is aggressively auditing international transactions (especially where transfer pricing applies) to weed out those out of kilter with the applicable benchmarks.
Has South Africa been ignoring the elephant in the room for too long?
There are inconvenient truths to South Africa’s fiscal situation: the tax base is very narrow. From March 2010 to March 2011, the number of individual taxpayers increased by 75% from 5.9m to 10.3m. A policy decision over-night added 5m individuals to the register – unfortunately most of these individuals are below the tax-paying threshold. The higher number merely disguises the problem. VAT is the holy cow of South African taxes. Upping the VAT rate by 1 % should raise an additional R16bn. But slaughtering that holy cow is politically unthinkable since VAT is regarded as regressive. There will immediately be demands for more zero-rating. So there’s limited room to maneuver on the income side.
What about the expenditure side? Mike Schussler points out that only four out of ten adults work, less than one in nine pay tax and South Africa has more people on welfare than those who work. The government wage bill and debt-servicing costs consume 52% of total expenditure. Treasury wants personnel spending cut to 34% of total expenditure by 2015-16.
Despite the fact that it is well funded, South Africa's bloated Public Service (approximately 1m employees) does not deliver. Even the Minister of Public Service says "… that it is generally accepted that the output of the public service is less than desirable."
So South Africa has seen service delivery protests increasing of late and on the ground, patience is wearing thin.
Despite education getting a lion’s share budget allocation, South Africa’s education efforts bottom-rank globally. The budget deficit has been revised to 4.8% of GDP with the 3% benchmark only to be reached by 2015/16. We hear those (despised) rating agencies are (again) sharpening their pencils…
So, South Africa is looking to higher growth and job-creation for salvation. The President laments a GDP growth rate averaging 2.5% when the country needs growth in excess of 5% to create more jobs. The State of the Nation Speech mentioned that the National Development Plan sets the target for job creation at 11 million by 2030. The economy needs to grow threefold to create the desired jobs.
The President says he’s spoken to the business community and to achieve that “… we must remove certain obstacles”. As Rev. Frank Chikane recently said in Washington: “We can’t do it with tax revenue alone.” Job-creating investment must happen. So at Davos, South Africa told the world it’s open for business. Whether they believed us, is another story.
There’s limited potential to squeeze out more tax. A clinical look at the expenditure side and what South African taxpayers’ get for their hard-earned tax appears to be a no-go area. So our collective wish is for robust economic growth more than double of what South Africa is achieving at the moment.
Government is saying: “Get us more tax.”
SA taxpayers are responding: “Get us more for our tax.”
Minister Gordhan will have to do some serious juggling….