CORPORATE TAX: Cut will come, just not yet

The government will deliver on its earlier commitment to cut corporate taxes — a move that happily coincides with news that tax collected from SA businesses will rocket in the 2021/2022 tax year.

The Budget Review — released on Wednesday — reiterated the notion, first aired in last year’s budget speech by former finance minister Tito Mboweni, that the corporate income tax rate will be reduced from 28% to 27%.

The market anticipated a delay in introducing a lower corporate tax, and a number of commentators had predicted a move in the 2023 fiscal year. One report suggested that as many as 10 out of 15 economists did not believe finance minister Enoch Godongwana would follow through on Mboweni’s plan to lower the corporate tax by one percentage point to 27% from April.

As such, the JSE seemed unmoved by the development, albeit on a day when a falling resources index dragged on the entire market.

The Budget Review confirmed Mboweni’s work on restructuring the corporate income tax system in a manner that has no effect on net revenue collections, but effective for the "years ending on or after March 31 2023". Mboweni initially envisaged introducing a lower corporate tax from April this year.

The budget document noted that changes to corporate income tax have the largest impact on investor behaviour — influencing jobs, wages and prices — and can support economic growth.

"The government’s role is to find the balance between a reasonable tax burden that minimises the negative effect on investment and reduces incentives for base erosion and profit shifting, while ensuring that companies and their stakeholders contribute fairly to tax revenues," says the document.

An immediate cut on the corporate tax rate would obviously have been much more welcome — noting the struggles some companies endured during the Covid pandemic. The lower tax rate would have also coincided with the mini commodities boom that is driving cash flows in the broader mining sector, which is likely to spill over into other business areas such as services, equipment supply, engineering and financial services.

There are already indications that corporate tax will see a marked increase in the short term.

In his maiden budget speech, Godongwana said: "Restructuring the corporate income tax system is an important part of our efforts to create a conducive environment for businesses to grow, increase investment and employ more people."

Economists and business leaders have warned that postponing a reduction in the corporate tax rate would ultimately hamper the economy, as lower tax payments would help struggling companies to survive what has been a tough two years with Covid disruptions and a brittle business environment. They have stressed that job losses would have a direct impact on personal income tax collections and VAT.

The reduction in corporate tax also needs to be contextualised. Not only does SA’s corporate tax rate exceed the Organisation for Economic Co-operation & Development’s average of 23%, but the rate is also higher than many emerging market economies. While many countries have reduced their corporate tax rates over the past decade and a half, SA has remained stubbornly at 28%.

The Budget Review conceded that, with so many countries that have strong investment and trading ties with SA having significantly lower tax rates, there was a "strong incentive" for tax avoidance.

The chances for corporate tax incentives look slim. The Budget Review argued that tax incentives created complexity and preferential treatment for certain taxpayers. It pointed out that expiring incentives had not widened social or economic benefits. Godongwana said these would not be renewed.

The Budget Review added: "Government continues to assess existing incentives to enhance transparency and efficiency. Those found to be effective and which create the intended benefits will be retained and, where necessary, redesigned to improve performance."

In terms of corporate tax collections, there was good news. The Budget Review said commodity prices had declined since November 2021, but remained above pre-pandemic levels.

The document observed: "At the same time, provisional corporate income tax collections from the mining, finance and manufacturing sectors have accelerated. The positive performance of finance and manufacturing, which historically accounted for close to 60% of total provisional corporate income tax collections, indicates a wider revenue recovery."

The budgeted corporate tax collection figure for 2020/2021 of R189bn was exceeded, with actual collections coming in slightly higher at R202bn. But the big change is that the initial budget for the 2021/2022 tax year of R213bn will be comfortably outstripped with the revised forecast now sitting at a far heftier R314bn.

Other good news for the business sector was that Godongwana said the employment tax incentive would be expanded through a 50% increase in the maximum monthly value to R1,500. He estimated this expansion would provide additional support worth R2.2bn.