Finance Minister Tito Mboweni.  ANA, PHANDO JIKELO/ANA
Finance Minister Tito Mboweni. ANA, PHANDO JIKELO/ANA

'SA’s corporate tax rate should be lower'

By Supplied Time of article published Feb 25, 2020

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As we approach Budget day, it may be time to consider embarking on a programme gradually to reduce the headline rate of corporate tax in South Africa over a sustained period in order to foster and support an environment that attracts investments and drives economic growth, according to financial services firm EY South Africa.

Ekow Eghan, tax leader of EY South Africa, said: “Globally, high corporation tax rates are fast going out of fashion.

“Cutting the corporate rate should align South Africa with this trend and arguably make it more competitive and provide a much-needed boost to gross domestic product over time.”

The headline corporate tax rate in South Africa is 28 percent. As a comparison with some of our largest trading partners, US federal corporate rate is 21 percent, the UK’s rate will be 18 percent from April, and Germany’s is 15 percent.

But it’s not only the developed countries that have rates lower than South Africa. The country’s 28 percent headline rate could be considered high compared with its BRICS colleagues, other large African economic countries and some fast-growing regions attracting foreign investment.

Eghan cites three reasons why a lower corporate tax rate in South Africa should be considered:

First, “despite its high headline rate, corporate income tax (CIT) is only the third-largest contributor to tax revenue and continues to see declining contribution to total tax collection”, Eghan says.

“In addition to crowding out mobile capital when it is uncompetitive, the associated compliance and collection costs of corporate tax are relatively high.”

He says this makes it inefficient in comparison to other taxes, because many companies find ways to get around not paying the full 28percent headline rate. The overall economic impact of a rate cut therefore may be less dramatic for existing taxpayers.

“In contrast, a commitment to cut rates over an extended period could be a powerful signal to prospective entrepreneurs and investors who are critical to unlocking key pockets in our economy. For this group, the important indicator is the actual CIT rate, and not the change from a previous rate - a commitment to a reduction over a period could boost investor confidence,” Eghan adds.

The second reason is that corporations behave more like tax collectors than taxpayers, as the corporate tax burden is ultimately passed on to individuals (for example, through higher prices to consumers or lower wages to employees).

Debates over who ultimately bears the CIT cost - shareholders, employees or customers - show no clear consensus on what proportion of the burden each of these groupings absorb.

Finally, the general notion that high corporate rates serve to ensure fair contribution by foreign investors to South Africa’s welfare may be a double-edged sword given the inflection point we find the economy at.

“Our corporation tax regime must balance policies that are competitive enough to attract new investors whilst ensuring that it does not overburden existing highly mobile capital. A competitive CIT rate achieves both goals,” Eghan says. 

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