Interestingly, as per the SARS Annual Report for the 2019/20 financial year, the contribution of corporate income tax revenue as a percentage of overall tax revenue (i.e. also including for example personal income tax and value-added tax) has decreased from 18.9% in 2014/15 to 15.9% in 2019/20. In the Corporate Tax Statistics (Second Edition) published by the OECD (OECD Paper), one of the key insights highlighted was that in 2017, the share of corporate tax revenues as a percentage of total tax revenues is on average 14.6% across the 93 jurisdictions that formed part of the OECD study. South Africa therefore sits a little above the average.
National Treasury, in the 2021 Budget Review Documents (specifically Chapter 4), reference a research study, namely Southern Africa – Towards Inclusive Economic Development (Kemp, 2020) which shows that tax increases have a greater negative effect on growth than reduction of expenditure, and these effects are more noticeable during an economic recession. It is in this context, that it was announced in the 2021 National Budget Speech (Budget) that previously announced tax increases of approximately R40 billion over the medium term have been withdrawn to support the economy. While it was unclear what these increases would exactly be at the time that they were originally announced, this fresh announcement regarding the withdrawal of such increases can be welcomed by companies, as they may have been in the firing line in some way or another.
In the OECD Paper, it is recognised that statutory corporate income tax rates have been decreasing on average over the last two decades. In 2020, the global average combined (i.e. central and other government) statutory corporate income tax rate was 20.6%. The average global statutory tax rate fell by 7.4% from 28% in 2000 to 20.6% in 2020. South Africa sits just above New Zealand on the table, and its rates are higher than some of its key trading partners, including the United Kingdom and the United States. Furthermore, Mauritius has a corporate income tax rate of 15% and Botswana 22%. Compared to some of its immediate competitors, its key trading partners and the global average, South Africa’s corporate income tax rate is relatively high. This makes it less attractive for investment, which ultimately negatively impacts on growth.
Against this background, the Minister of Finance (Minister) announced in the Budget that Government would be reducing the corporate income tax rate over the medium term. This would commence with a reduction from 28% to 27% in years of assessment commencing on or after 1 April 2022. In this way, Government recognises that tax policy must also take into account tax regimes in neighbouring and competitor countries and that the current corporate income tax rate is not conducive to investment and growth.
However, the restructuring of the corporate income tax system is, according to Government, to be undertaken in a revenue neutral manner. Government thus intends on widening the corporate income tax base through various means, including limiting the limitation of assessed losses as well as interest expense deductions. The Minister did, however, announce in the Budget that these two previously announced limitations on the limitation of assessed loss as well as interest expense deductions would be postponed until 2022. This is welcome relief, given the ongoing uncertainty and negative impact of the global COVID-19 pandemic on business profitability.
In addition to the two aforementioned proposals, Government intends on reducing the number of tax incentives available to companies. It is recognised by Government that while the corporate tax rate is being reduced, there needs to be a widening of the corporate tax base by, amongst others, limiting the number of tax incentives available to companies. It was thus announced that those tax incentives that either erode the equity of the tax system or do not meet National Treasury’s objectives will be limited or Government will allow them to lapse.
Given the various incentives available in the energy sector (and more broadly), it will be interesting to monitor which incentives National Treasury intends on limiting and/or letting lapse. Some practical examples of the various approaches are discussed below – i.e., relevant incentives that may be limited or allowed to lapse and incentives that will be extended. As a start, some provisions in the Income Tax Act, 58 of 1962 (the ITA), including for example the accelerated depreciation allowances for renewable energy plant and machinery in section 12B of the ITA, do not have sunset dates.
Other incentives, such as the section 12L energy efficiency savings allowance, can currently only be claimed in years of assessment ending before 1 January 2023. Furthermore, it was announced in the Budget that the sunset date for the venture capital regime contained in section 12J of the ITA would not be extended beyond 30 June 2021. In relation to other tax incentives dealing with airport and port assets, rolling stock, and loans for residential units, a sunset date of 28 February 2022 has been introduced.
On the other hand, the urban development zones and learnership tax incentives will be extended for two years pending completion of their reviews. Furthermore, the tax incentives in relation to Special Economic Zones (SEZs) were extended in the most recent round of tax amendment bills from an initial sunset date of years of assessment commencing on or after 1 January 2024 to years of assessment commencing on or after 1 January 2031.
While the intention of Government to reduce the corporate income tax rate over the medium term to attract investment and increase growth should certainly be welcomed, energy companies should nevertheless keep in mind that the intention of Government is to simultaneously widen the corporate tax base through various means. Energy companies would thus be well advised to keep apprised of developments insofar as the limitation of assessed losses and deduction of interest is concerned as well as the ongoing review of the efficacy of various tax incentives.