South Africa has a budget deficit of 3.1% of GDP and debt on government spending alone amounting to a staggering 48% of GDP.
The main reason for this is an abnormally large and burgeoning government bureaucracy which is often perceived to be inefficient and which pushes up government spending to unacceptable levels.
This cost to government cannot easily be reduced as fast as is required to retard or properly reduce the deficit in the short term, so Treasury has to look to alternative sources of revenue.
Finance Minister Pravin Gordhan announced that there is a R30 billion shortfall in mainly personal income tax and VAT collections due to anaemic economic growth last year of under 1%, which has impacted on wages and personal earnings. As 95% of the country’s wealth rests with 10% of the population, the higher income bracket is a logical target to attract taxes, and as we have seen, those who now earn more than R1.5million a year have been targeted and will be taxed at 45%, which equates to levels in countries like the UK and others in Europe.
The other area of focus is the increase on dividends withholding tax from 15% up to 20% so as to further tax non-resident shareholders of South African subsidiaries under BEPS (Base Erosion and Profit Shifting) initiatives previously announced by Treasury.
We will have to wait and see whether this increase in withholding tax falls in line with an announcement by the minister to update the Double Taxation Treaties South Africa has with other countries.
It is perhaps disappointing that there is also no further clarity at this stage on which recommendations made by the Davis Tax Committee are to be addressed on the numerous topics mentioned by the DTC, and that the only reference here was for the DTC to draft a governance and accountability model for the South African Revenue Service.
With the increase in personal taxation and other measures, now more than ever it is advisable to obtain sound advice.
Mertens is chairperson of
Sovereign Trust