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Business was the biggest loser in this year's budget as far as tax increases are concerned. Because the National Treasury recorded a R63.3 billion revenue shortfall in the 2019/20 tax year and did not want to raise tax rates, fearing that this may obstruct short-term recovery, it decided to cut certain tax incentives and reduce some tax deductions available to businesses.
Treasury said because South Africa’s corporate income tax (CTI) is high by global standards and is already significantly under-performing, the only solution to raise additional tax revenues from the business sector was to broaden the tax base.
This broadening will entail minimising tax incentives, limiting corporate interest expense deductions to 30% of earnings from 2021 and capping the amount of deductible losses that can be carried forward to the next tax year to 80%. Treasury has also proposed a new export tax on scrap metal, but will consult with the industry on this until the end of May 2020.
Incentives to fall away
The first rebate to be axed will be the Section 12I tax incentive as it will not be renewed beyond 31 March 2020. This is the incentive aimed at encouraging manufacturing companies to invest in new industrial projects or expanding existing ones.
In the Budget document, Treasury argued that incentives reduce the tax base, they require higher tax rates for the rest of the economy, and they open opportunities for tax avoidance. It also said that administering incentives required additional effort and resources from the South African Revenue Service (SARS).
Consequently, it proposed the end of February 2022 as a sunset date for all tax incentives dealing with airport and port assets, rolling stock, and loans for residential units. Between now and then, these incentives will undergo reviews to determine whether they should be extended. The urban development zone incentive will also be up for review, but for now it will continue for another year. Incentives related to special economic zones will not be extended beyond the six zones already in place.
Government will systematically review tax incentives and repeal or redesign those found to be redundant, inefficient or inequitable," said Treasury in the Budget document.
But corporate tax rates may fall
Mboweni said government intends to restructure the corporate income tax (CIT) system over the medium term with the aim of reducing the tax rate. Treasury acknowledged that South Africa’s CIT rate had caused the country's relative competitiveness to decline as countries like India, the United States and the United Kingdom have all reduced theirs to below 28%. The logic behind removing incentives and capping other tax deductibles for businesses is that government could then implement lower tax rates, without reducing revenue.
"If we get all our ducks in a row, we should be in for a corporate tax accommodation in the future," said Mboweni during a media briefing.
Lullu Krugel, chief economist at PwC, said the proposed reduction in corporate income tax made sense given the direction of the rest of the world, but it had to be done in a tax neutral way, hence the review of incentives and other deductibles. "However, they should be very careful what they do decide to do, in particular on the incentive side, as that could negate the positive impact of reducing CIT, in particular because the reduction in CIT will only happen later," she said.
Graham Molyneux, tax partner at Mazars, said the move to limit the deductible assessed losses in subsequent tax year will have adverse cash-flow implications for few local businesses, like those in the property development sector. But the plan to lower CIT rates will be positive for the economy.
"Government clearly recognises the importance of making South Africa a more attractive proposition to foreign investors," said Molyneux.