Former Finance Minister Pravin Gordhan (Photo: Gallo Images)
Cape Town - In his February 2017 budget speech former finance minister Pravin Gordhan cautioned that both SA's tax administration and taxpayer morality posed a risk to public finances, said Ian Matthews, head of business development at Bravura, in his comment on the mini budget.
Matthews said these words of caution are now ringing true, as rising public concerns about corruption, wastage of public funds and inefficiencies in service delivery are clearly affecting the willingness of South Africans to comply and pay their taxes.
Gordhan, who was removed as Finance Minister in late May, had highlighted the necessity of having a strong social contract between government and taxpayers, given that the effectiveness of a tax system relies largely on the willingness of citizens to contribute and to be compliant.
In his maiden mini budget Finance Minister Malusi Gigaba did not give a clear enough indication on how it intends to address its revenue shortfall, leaving experts to speculate that the majority of revenue will be financed by taking on additional debt, according to Mike Teuchert, national head of taxation at Mazars.
Minister of Finance Malusi Gigaba revealed that Treasury’s revenue shortfall currently stands at R50.8bn, amounting to 4.3% of SA’s gross domestic product (GDP) and around 38% higher than expected.
“Attempting to close the growing shortfall with increasing amounts of debt each year, just puts the country in a bigger and bigger spiral. Treasury also estimates that repaying SA’s debt will amount to 15% of GDP," said Teuchert.
"We would like to know whether this estimate is only taking SA’s current credit rating into account, or whether the minister is also making provision for future downgrades.”
In addition to more debt, Teuchert speculates that income tax will once again bear the brunt of the tax burden.
“Income taxes will almost certainly increase next year and the top income brackets will likely see the highest increases once again," he added.
"Treasury has already noted a slippage in income tax compliance, and there is definitely an increased risk that the revenue gained from income taxes will decrease, either a s a result of the country’s top earners emigrating, or an increase in tax avoidance.”
Tertius Troost, tax consultant at Mazars, said that increasing VAT is becoming an increasingly difficult option.
“Even though it had the potential to bring in the most revenue last year, increasing VAT is a very unpopular move. We believe that it will be even harder for Treasury to motivate for a VAT increase in 2018, as we get closer and closer to the next general election.”
Bianca Botes of Peregrine Treasury Solutions said it was fairly positive that no tax increases were announced in Gigaba's mini budget.
"But, then again, when you look at where SA is in terms of funding, there is a massive budget deficit and the gap needs to be filled somehow," she said.
"There is already such a tax burden on the middle class that it would be impossible keep applying tax pressure to it. Government will need to look at alternative tax provisions, such as potentially increasing the VAT rate which would then target the entire population."
David French, tax consulting director at Mazars, said he was pleased that Gigaba indicated his intention to boost investor confidence.
"At the same time, his speech very clearly lacked any concrete resolutions relating to how Treasury will increase revenue, in effect damaging investor confidence even further,” said French.
Ettiene Retief, chair of the national tax and SA Revenue Service (SARS) Committee at the SA Institute of Professional Accountants (SAIPA), told Fin24 there is a noticeable downward trend in tax compliance, which Gigaba explained was due to tough economic times.
“Generally there is a trend toward some form of tax revolt. Ultimately there is a downward trend in tax morality which means it is more difficult to collect taxes,” he said.
Although there is a downward trend in tax compliance SARS’ biggest problem is the economic pressures and reduced revenue pool to collect from," he said. “The biggest factor is the economic downturn.”
Natalie Napier, partner at Hogan Lovells South Africa, said higher taxes may lead companies and individuals to change their behaviour, but there are limits to how they can respond.
“It is possible that companies or individuals may try to work overseas or shift their operations and profits offshore to lower tax jurisdictions. However, this can be a costly exercise and may not be practical given the particular business concerned," she explained.
"In today's global tax environment it is has also become very difficult to avoid detection from any revenue authorities, including SARS, because of the automatic exchange of information between countries.”
She added that there may be instances where the taxpayer will seek to externalise funds or operations to reduce tax payable in South Africa.
“This requires careful consideration, especially of the tax implications of bringing personal income or company profits back to South Africa. It is also important to consider that there can be a substantial exit charge for a company or individual that ceases to be a South African tax resident,” she said.
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