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Cape Town - Globally, the question of corporate tax rates has been thrown wide open in recent months, according to Ruaan van Eeden, managing director, tax and exchange control, at the Geneva Management Group.
He said one of US President Donald Trump’s election promises was to bring benefits to American businesses and, by implementing a drop from 35% to 21% in the corporate tax rate, he has started to fulfil this election promise.
Trump aims to benefit the US economy by making it more attractive for businesses to register in the US and to pay tax in that country.
"However, this move has created an environment fertile for a possible 'tax war' among developed countries, as they try to counter the perceived impact of America’s actions," explained Van Eeden.
Developed economies such as the United Kingdom, for instance, have followed suit: the UK is working towards a headline corporate tax rate of just 17% by 2020.
Ireland’s headline corporate tax rate is 12.5%, and many other countries - for instance France, the Netherlands and Israel - have spoken about dropping their rates in response.
Van Eeden considers it noteworthy that the economies engaged in the debate are all in the developed world. That raises the question of what the implications could be for the developing world.
He expects US foreign direct investment (FDI) to decline, because there will be less incentive for US companies to invest elsewhere. This, he believes, is concerning as America has been the biggest outbound FDI investing country.
Companies based in emerging economies could also potentially shift their company registrations to the US, so that they can benefit from the lower tax rate.
"The practice of shifting business operations to benefit from better rates of taxation is widespread.
"But authorities the world over are concerned about the practice which, according to the International Monetary Fund, could involve up to $600bn in lost taxes to various countries," said Van Eeden.
"While one may understand the motivation of the current American regime, it is indeed ironic that a leading G20 nation like the US - a major participant in the efforts of the Organisation for Economic Cooperation and Development to work against profit shifting by multinational companies - is likely to itself become a cause of the problem."
Opportunity for SA government
From a South African perspective, Van Eeden said the strong leadership promised by a Ramaphosa presidency has given the emerging world the opportunity to follow the example of the global economy's leading states.
"Our new government could well respond to the developed world’s actions by potentially reviewing the corporate tax rate during the 2019/2020 legislative cycle," he said.
"A gradual reduction in the SA corporate tax rate to a level similar to the European Union average of 19.48%, coupled with political stability, could possibly achieve a comparable outcome for the SA economy by making it attractive for SA businesses to remain registered here and to continue paying tax here, and attract other businesses to our shores, too."
Similarly, government can stimulate local economies in particularly deprived regions of the country – the Eastern Cape for example – through the establishment of exclusive economic zones which would benefit from far lower corporate tax rates.
He believes this type of initiative will encourage investment in businesses, create job opportunities and slow down the huge semigration into large urban centres as people search for work.
"While a move of this sort would be bold and courageous, the potential for SA to regain its prominence as the leading economy on the African continent in the medium to long term is likely to bring significant rewards," he concluded.
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