Obstacles to rapid improvements at SARS are not insurmountable.
There has been a deliberate and focused program to rebuild SARS’s infrastructure to revive taxpayer confidence and improve citizens’ participation in the fiscal contract, including through voluntary compliance. The first wave of recommendations has already been implemented, with National Treasury due to release a discussion document that reviews and proposes options to improve tax administration oversight. This continued focus should ultimately lead to healthier functioning of the tax collector.
Data science and technology innovation hold great promise for boosting tax performance.
Advanced data analytics, including predictive algorithms and artificial intelligence could help SARS to better identify and combat sources of non-compliance. Both the automation of the tax administration process and of taxpayer information services using advanced technologies may significantly enhance the overall taxpayer experience and lower the cost of compliance. Automating compliance processes can also provide efficiency gains to SARS by providing an integrated view of the taxpayer. Innovation can reduce human involvement and potential errors, while increasing transparency, fairness and certainty in the tax system. With the increased tax enforcement, improved experience coupled with a reduced compliance cost, and boosted morale, technology can have a measurable impact on tax compliance and enhance tax performance.
Budget20 should focus on efficient taxes that maximise revenues without imposing the highest rates possible.
Whereas government has stated that additional tax measures are being considered, there has been no signalling from National Treasury as to what to expect in Budget20. Some commentators speculate an increase in the VAT rate by 1%, highlighting again that policy options to raise revenues are limited. A VAT increase may ultimately slow spending in the economy and will require careful consideration at a time when consumer confidence is low, disposable incomes are under pressure and unemployment rates at their highest in over a decade. Proponents for a VAT increase cite our relatively low VAT rate compared to other emerging economies as an important indicator but recognise the political challenges associated with the perception that VAT increases burden domestic consumers.
It may be time for trade, economic reform and competitiveness to drive the direction of travel for corporate income tax (CIT).
Even though it is unlikely that the Minister will consider a CIT rate cut in Budget20, we recommend a critical review of the existing headline CIT rate to consider whether it should be reduced over the longer term. Globally, high corporate tax rates are fast going out of fashion in a ‘race to the bottom’; cutting the CIT rate should align South Africa with this trend and arguably make it more competitive.1 There are three reasons why this proposal merits some consultation:
- Despite its high headline rate, CIT is only the third largest contributor to tax revenue and continues to see a declining contribution to total tax collection. In addition to crowding out mobile capital when it is uncompetitive, the associated compliance and collection costs of CIT have also been known to be relatively higher. This makes it inefficient in comparison to other taxes. Because of the limited number of companies contributing to CIT, the overall economic impact of a rate cut may be less dramatic for the total CIT base.2 In contrast, a rate cut should send powerful signalling to prospective entrepreneurs and investors who are critical to unlocking key pockets in our economy - for this group, the important indicator will often be the actual CIT rate, and not the change from a previous rate.3
- Corporations behave more like tax collectors than taxpayers as the corporate tax burden is ultimately passed on to individuals. Debates about who ultimately bears the CIT cost – the shareholders, employees or consumers - show no clear consensus on what proportion of the burden each of these groupings absorb. Because CIT incidence may partly fall on domestic wage earners, even if immediate benefits of a rate cut favour wealthy and foreign investors, appropriate policy measures could be put in place to ensure that part of the corporate savings drift to workers and households in the form of permanently higher after-tax real wages and consumption.
- The general notion that high CIT 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.[4] What the economy desperately needs is growth and it will be naïve to assume that we can tax our way into that growth. Reform with a growth outlook should recognise the CIT rate reduction as the cheaper option to balance policies that are competitive enough to attract new investors whilst ensuring that that it does not overburden existing (mobile) capital.
We do not propose a rate cut as a short-term stimulus measure nor invite its assessment narrowly under our current market and economic condition. Ultimately, we believe that the subject of a CIT rate cut is a question of when, not why. Our proposal subscribes to a long-term strategy for the economy and competitiveness on a global stage. A phase-in CIT rate reduction program to minimise short-term budgetary cost whilst broadening the CIT base such that its net outcome is an increase in CIT revenue collections will be ideal. Such reform will however not be without its challenges; challenges which should not encourage permanent inaction.
-ends-
Notes to Editors
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