Does Treasury have room to manoeuvre? | Fin24

Does Treasury have room to manoeuvre?

Feb 17 2020 18:54

In the 2019 budget, personal income tax accounted for 38% of the gross tax revenue, VAT 25% and corporate income tax 17%. These three taxes combined make up 80% of the gross tax revenue, says Zohra De Villiers, managing partner at KPMG in Cape Town.  

These estimates were revised downwards with the 2019 Medium-term Budget Policy Statement and it is expected that there will be a shortfall as follows: personal income tax by R25.3 billion, corporate income tax by R10.6 billion and VAT by R12.1 billion.

She takes a closer look at where there could be scope for Minister of Finance Tito Mboweni to make up the shortfall by increasing any of the taxes that make up the bulk of tax revenue.

Personal Income Tax

In terms of the 2019 Budget Review, there are approximately 14 million registered taxpayers in South Africa. Of the 14 million, 6.4 million (46%) do not pay tax as they earn below the tax threshold. Of the balance of 7.6 million taxpayers, an estimated 283 000 (those who earn above R1 million per annum) pay 41% of the total PIT revenue.

The maximum marginal tax rate in South Africa is 45%, which is the same as Australia and France. According to KPMG’s latest tax rate review, the average marginal tax rate for countries in Africa is 31.96% and the global average is 31.23%.

Therefore, South Africa ranks higher than both the African and global average, which may affect companies considering sending their employees on assignment to South Africa. From a competitiveness perspective, South Africa cannot afford to increase the PIT rate if it wants to attract foreign talent and avoid any further migration of South Africans to other countries.

In addition, the much talked about amendment to the foreign services exemption (effective March 1, 2020), inspired many South Africans working abroad to change their intention of moving back home to rather make the offshore host country their permanent residence and as such, avoid paying tax on the income earned offshore.

This amendment will, therefore, in her view, have a significant impact on the tax liability of South African residents working in jurisdictions with no personal income tax or a lower tax rate than South Africa.

Value Added Tax

VAT is the second largest contributor to the gross tax revenue. On 1 April 2018, the VAT rate was increased from 14% to 15% – the first VAT rate increase in 25 years. There has been recent speculation that another VAT rate increase may be on the cards in this month’s Budget Speech, to try and narrow the budget deficit.

However, strong arguments are raised against a VAT rate increase. The impact on all consumers and, in particular, the low-income earners is significant as the cost of all goods and services increases. Further, according to the KPMG tax rate review, the African average rate is 15.55% and the global average is 15.40%.

To stay in line with these averages and to avoid hitting the pocket of the majority of South Africans, the Minister should ideally not increase the VAT rate just two years after the previous increase.

Corporate Income Tax

With the low economic growth, compared to the average growth rate in developing countries of 3.9%, (according to the IMF World Economic Outlook, October 2019) South Africa would put itself out of contention as an investment destination should the corporate income tax rate increase beyond 28%.
There have been retrenchments at several companies recently due to poor trading results and streamlining of operations. Certain countries have reduced their corporate income tax rate over the past few years – case in point the UK reducing from 28% in 2010 to 19% currently – with the average, according to the KPMG tax rate review, being 23.79% (globally) and 28.24% (Africa).

To remain competitive as an investment destination, and to stimulate economic growth, South Africa cannot afford an increase in its corporate income tax rate.
"It is, therefore, clear that an increase in any of the main contributors to the tax collections would be extremely unpopular and burdensome to South Africans," says De Villiers.
"However, there may be another avenue to consider. Based on the Auditor General's Citizens' 2018/2019 Report the following items were highlighted: unauthorised spending (especially overspending) amounted to R1.37 billion; there was an increase in irregular expenditure, which increased to R62.6 billion; during the year, R849 million was lost through fruitless and wasteful expenditure in government departments and public entities, bringing the five-year total since 2014/2015 to R4.16 billion."
For her this is a cause for concern.

"Managing this and reducing, if not eradicating, these expenditure items would boost the state's coffers and at the same time restore confidence that there is accountability. This would perhaps be one of the easier ways to fund the budget shortfall if there is a will to act," she concludes.

kpmg  |  money  |  tax


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