BUDGET2016 – IS THERE ROOM TO PAY MORE TAXES?

Anthea Scholtz calls for a careful balance between ‘spending’ and ‘revenue-generating’ activities.

All eyes will be on Parliament on 24 February 2016 when South Africa’s annual national Budget will be presented by the newly re-appointed Minister of Finance Pravin Gordhan.

The Budget speech has over the years given South Africans a credible sense of the economic outlook of the country. This is evidenced by the fact that South Africa came in third last year (after New Zealand and Sweden), in the 2015 Open Budget Index Survey, in recognition of the country’s commitment to a transparent budget process.

The minister will, however, have his work cut out for him come 24 February as, against a challenging global and South African fiscal backdrop, he will need to articulate a careful balancing act between both ‘spending’ and ‘revenue-generating’ activities to ensure fiscal sustainability in the country, while at the same time, ensuring that our critical social and economic programmes are protected.

In the recent ‘Global Economic Prospects’ report issued earlier this month by the World Bank Group, it was noted that economic activity in Sub-Saharan Africa decreased from 4.6% in 2014 to 3.4% in 2015. Closer to home, the report notes that South Africa showed very modest growth of 1.3% in 2015 (compared to 1.5% in 2014) and is expected to continue on this modest growth trajectory in 2016. Key reasons for this modest growth include power supply constraints, difficult labour relations, continued high unemployment levels, a severe drought and higher interest rates.

Thus, whilst South Africa is growing, we are not growing fast enough; importantly, we are also not growing inclusively enough and as a result poverty and income inequality remains key challenges on the country’s agenda. We, however, need a buoyant revenue base to address these and other key challenges in South Africa and given our growth expectations, one of the key questions is: Who will foot the bill for the additional revenues required?

SA TAXPAYERS – WHO IS CURRENTLY PAYING WHAT?

Before we assess who can pay more, let’s first see who is currently paying what. The South African ‘2015 Tax Statistics’ report, an annual report which is issued jointly by National Treasury and the South African Revenue Service (Sars) provides a useful overview of our country’s tax revenue collections as well as key tax return information.

The report (which was published during November 2015), noted that tax collections in South Africa have increased significantly and progressively over the last few years to R986 billion in the 2014/15 fiscal year (this represents a 9.6% increase (R86.3 billion) over the prior fiscal year).

While these increases in our country’s tax revenues over the past few years are encouraging, it should be noted that these were not mainly driven by increases in tax rates, but rather driven by a combination of factors, including above-inflation wage settlements, increases in domestic consumption, improvements in tax administration and compliance, increase in the value of imports etc.

In South Africa, personal income taxes, value-added tax (VAT) and corporate income taxes collectively account for approximately 80% of the total tax revenues of the country. Of the R986 billion revenue collected during the 2014/15 fiscal year, personal income taxes continue to be the main contributor to our country’s tax coffers, contributing a total of 35.9% of the total tax revenues. VAT contributed 26.5% and corporate income tax (CIT) contributed approximately 18.9% to the total tax revenue (this reduced contribution by corporate South Africa being mainly due to companies incurring assessed losses as a result of tough economic conditions). The fuel levy together with specific excise and customs duties account for a further 12% while other taxes account for the remainder.

It is clear from these statistics that the average citizen is paying a significant amount of tax (both direct taxes such as personal income tax and indirect taxes, such as VAT and fuel levies).

BUT IS EVERYONE PAYING THEIR FAIR SHARE?

The tax-to-GDP ratio is an important measure as it can, among others, provide an indication as to the extent to which taxes fuel our economy. South Africa’s tax-to-GDP ratio increased steadily over the past five years from 23.9% in 2010/11 to 25.7% in 2014/15 (though the 25.7% remains below the peak of 26.4% in 2007/8). The increases in the tax-to-GDP ratio is mainly driven by increased revenue contributions from personal income taxes and VAT.

In South Africa, the current challenge is for Sars to sustain its revenue collection levels in the current economic climate and by so doing, to enable National Treasury to maintain a healthy fiscal framework. In this regard, various successful legislative changes and initiatives have already been introduced over the last few years which were aimed at sustaining and improving tax collections and broadening the tax base.

The question now though is what further measures will be introduced by the minister in the 2016 Budget speech to generate the required additional revenues? In this regard, the previous minister of finance, in the 2015 Medium Term Budget Policy Statement (MTBPS) alluded to some broad measures which could (or would?) be applied to achieve these additional revenues.

Specifically, it was highlighted that government would continue to explore reforms that will (a) promote an efficient tax system (in other words, ensure that South Africa collects all the taxes which are rightfully due to it); and (b) promote a progressive tax system (in other words, ensure that those with higher incomes bear a higher proportion of the tax burden).

Slight hints were also given in the MTBPS as to ‘how’ additional tax revenues could potentially be generated and in particular, certain recommendations of the Davis Tax Committee were highlighted as areas which could potentially be used to contribute additional revenue to the fiscus.

It is accordingly expected that the 2016 national Budget speech will progress the measures alluded to in the MTBPS in October last year, some of which are considered below.

AN INCREASE IN PERSONAL TAX RATES OR A SUPER TAX RATE?

South Africa has a progressive income tax system which is based on the premise that the wealthy should contribute a greater proportion towards supporting the state than the poor. In other words, the more you earn, the higher tax you should pay.

In line with this premise, we saw an increase in the maximum marginal tax rate from 40% to 41% for the 2016 tax year (prior to this increase, the maximum marginal tax rate remained unchanged for many years). The question now is: Will the maximum marginal tax rate be increased again for the 2017 tax year?

In the MTBPS, it was noted that government will continue “to explore reforms that promote an efficient and progressive tax system” (which seems to suggest that higher-income earners may pay higher taxes, come the 2017 tax year). It is thus not inconceivable that the maximum marginal tax rate could be increased in line with government’s intention to promote a progressive tax system (that is, increasing the tax rates for the wealthy whilst still granting tax relief for low income earners). We should remember that in the late 1980s the maximum marginal tax rate was 45%. Alternatively, a so-called super-tax rate could also be imposed on wealthy individuals who earn above a certain threshold.

ARE WE READY FOR ANOTHER TAX AMNESTY PROGRAMME?

It has also been mooted that the minister is expected to announce a new round of tax and foreign exchange control amnesty in his Budget speech to encourage those taxpayers who may still have significant amounts of cash and assets offshore, to bring those assets into the South African tax net.

One of the main issues underlying the tax debate in South Africa is the significant inequality in the income levels between the rich and the poor. The South African debate is further fuelled by the perception that there seems to be a number of very, wealthy individuals in South Africa and the question is whether these individuals are paying their fair share of taxes in the country?

It is estimated that there are approximately 2,900 individuals in South Africa who fits into the category of high-net worth individuals (that is, individuals whose annual gross income is R7 million or more and/or whose gross wealth is R75 million or more).

It is accordingly important for our fiscus that these individuals bring all their income (local and offshore, in particular income routed via offshore trusts) into the South African tax net and that they pay their fair share of taxes. That said, it has previously been noted that the level of filing compliance by high-net worth individuals in South Africa was very high.

OTHER SOURCES OF PERSONAL INCOME TAX?

An analysis of the 2014 tax assessments raised by Sars as detailed in the ‘2015 Tax Statistics’ report reveals the following key information:

– Income from salaries, wages and remuneration, pension, overtime and annuities accounted for 75.5% of total taxable income assessed;

– Travel allowances amounting to R26.7 billion in total was assessed and this allowance remains the largest of the total allowances assessed, comprising 27.6% of the total allowances assessed;

– Medical aid paid on behalf of employees by employers remain the largest fringe benefit at R42.8 billion, comprising 74.7% of the total fringe benefits assessed; and

– Contributions to retirement funding (pension and retirement annuity funds) amounting to R49.2 billion (49.4%) constituted the largest tax deduction claimed by taxpayers.

The above statistics do provide Treasury with guidance on what the ‘high’ ticket items are in our personal tax system and hence, where collection efforts could potentially be focused to increase tax revenues, without increasing the tax rates.

A CLAMPDOWN ON PROFIT-SHIFTING & THE MISUSE OF TRANSFER PRICING

A continuing, raging debate is how to effectively combat the significant financial leakages in the South African economy through the erosion of the tax base, profit-shifting and illicit money outflows. The use of tax havens by taxpayers whereby profits are shifted to no-tax or low tax jurisdictions where the taxpayer has no or very little economic presence, remains a significant concern to the fiscus. It is, however, also a significant potential pool of revenue, if South Africa manages to get its fair share of these taxes.

Globally, a number of studies have identified broad areas in which tax systems in sub-Saharan Africa could be strengthened and a key recommendation in this regard is that policy makers should concentrate on ways to broaden the tax base, by for example, introducing measures to streamline transfer pricing by multi-national companies.

In South Africa, measures which have previously been proposed in this regard include:

– improving transfer-pricing documentation;

– placing a greater focus in corporate tax returns on indicators of potential base erosion and profit shifting; and

– revising the rules for controlled foreign companies and the digital economy.

That said, in South Africa today there is still a material gap between our nominal corporate tax rate of 28% and the effective tax rates being paid by some companies, and while there are valid ways of decreasing a company’s effective tax rate, this gap is a potential cause for concern.

Accordingly, as was noted in the MTBPS, initiatives are underway to comprehensively deal with leakages in corporate income tax and it is thus expected that further measures will be announced by the minister in the 2016 Budget speech to combat tax evasion and aggressive tax planning.

AN INCREASE IN THE VAT RATE

VAT is the second largest source of tax revenue (for the 2014/2015 tax year, VAT comprised 26.5% of the total revenue collections) and it is an important source of funding for South Africa’s public expenditure programmes.

Over the years, a possible increase in the VAT rate has consistently been mooted by various stakeholders as a possible option for increasing revenues, but no significant developments have transpired to date, and it is assumed that is primarily due to the fact that VAT is perceived as a regressive tax (that is, any movement in the VAT rate would proportionally impacts those with lower incomes to a greater extent).

However, in the MTBPS it was noted that whilst VAT may be perceived as a regressive tax, comparative studies show that South Africa’s overall fiscal system is strongly redistributive and hence while to date, no decisions have been made on this issue, an increase in the VAT rate remains one of the options available over the medium-term to finance key elements of the national development plan.

One would of course need to consider very carefully what effect an increase in VAT would have, in particular, on the poor and what effect it would have on consumer spending and how that would in turn impact, economic growth. The effect of an increase in the VAT rate on the poor could also potentially be mitigated by broadening the goods and services to which the zero rate of VAT currently applies. Another school of thought on this issue is that instead of increasing the VAT rate, efforts should be focused on increasing VAT compliance and reducing VAT fraud.

CONCLUSION

While the main component of our revenue base, will as always, be tax revenues, tax is certainly not the only solution to raise additional revenues. Key parts of the solution must also include expenditure cuts, curbing the size of the civil service, having an economy that is growing, creating jobs etc.

“Developing countries should focus on building resilience to a weaker economic environment and shielding the most vulnerable. The benefits from reforms to governance and business conditions are potentially large and could help offset the effects of slow growth in larger economies.” – World Bank Group president Jim Yong Kim.

What is clear is that there are tough times ahead and South Africans need to start tightening their fiscal belts, come 1 March 2016.