On the one hand, expenditure cuts have been mooted, but another potentially more pressing issue for taxpayers is whether tax rates will be increased. It has been reported in the media that according to some senior National Treasury officials, there is little scope to raise taxes as South African tax rates are already uncompetitive and that other options need to be considered to stabilise Government’s finances.

Tax rates

The comment that South Africa’s tax rates are uncompetitive and are unlikely to increase is positive news for the South African business community, amongst others, given the research that has been done on South Africa’s corporate tax rate. According to research published by the Organisation for Economic Co-operation and Development in 2022, the average statutory corporate tax rate (headline tax rate) amongst more than 100 jurisdictions was 20%, compared to South Africa’s corporate tax rate of 27% (which was announced in the 2022 Budget). Prior to this, the rate was 28%. When it comes to tax on individuals, our highest marginal tax rate is also comparatively high at 45%, more than the highest marginal tax rate in some developed countries. Then, of course, there is also value-added tax (VAT), which currently stands at 15%. While this is not necessarily that high (some African countries have higher rates of VAT), VAT is often seen as a regressive tax in that it taxes all consumers the same, irrespective of their socio-economic situation or income. Furthermore, on the environmental front, although South Africa’s carbon tax rates were recently increased and will continue increasing annually until 2030, Government has explained that this is to encourage companies to make changes within their businesses to reduce their greenhouse-gas emissions and thereby their carbon tax liability.

Tax policy

While tax rates are a more obvious way of trying to increase Government’s tax revenue, changes in tax policy can also have this effect. For example, this can be done by including specific rules in tax legislation which result in a particular amount being taxed at a higher rate or, in the case of a company, for example, by limiting the amount that a company can deduct from its income, thereby increasing the amount of its taxable income. Some examples of these are:

• The introduction of rules in income tax legislation, stating that the amount of assessed losses a company may claim annually is limited. This change came into effect with the corporate tax rate reduction, with Government indicating that the intention of this amendment was to increase the tax base. In many instances, the likely result of this amendment is that a larger portion of a company’s income will be subject to tax. Thus, it is not the rate that has increased, but the amount that is taxed at the reduced rate of 27%.
• The amendment to the foreign employment income exemption (section 10(1)(o)(ii) of the Income Tax Act, 58 of 1962), which was amended a few years ago to indicate that a maximum of R1,25 million of foreign sourced remuneration earned in a tax year could be exempt, whereas the amount of foreign sourced remuneration that could qualify for exemption was previously unlimited. In this case, it meant that a South African resident working abroad and earning more than R1,25 million in remuneration, would now potentially be subject to tax on the excess amount, in accordance with the marginal income tax tables.
• The proposal in the draft 2023 Taxation Laws Amendment Bill that income of South African resident trusts vested in non-resident beneficiaries would be taxed in the hands of the trust, at the rate of 45%. While this change is currently merely a proposal and it remains to be seen whether it will come into effect, if implemented, it would result in the income vested in the non-resident beneficiary being taxed at 45%, as opposed to in accordance with the marginal income tax tables, where only income in the top bracket is taxed at 45%.

The future

It remains to be seen whether there will be changes to tax rates or tax policy in the foreseeable future. One hopes that the tax rates discussed in this article (and the rates applicable to other taxes not mentioned here) will not increase, but the Minister of Finance’s (Minister) Medium-Term Budget Policy Statement (MTBPS) on 1 November will potentially provide some insight into this.

In our Tax and Exchange Control Alert of 12 January 2023, we discussed the annual cycle that takes place in amending South Africa’s tax legislation. We are currently in the middle of the 2023 cycle and changes to tax policy (in the form of amended tax legislation) will also likely be known when the Minister gives the MTBPS, as tax amendment bills are often tabled before Parliament at the same time.

All South Africans will hope that the country’s fiscal position improves, without changes to tax rates or changes to tax policy that lead to substantially increased tax liabilities.