Increased taxes not the solution to raise additional revenue

Anthea Scholtz

It is with this statement that the Minister of Finance, Nhlanhla Nene, set the tone of the Medium Term Budget Policy Statement (MTBPS) which he presented against a fiscal backdrop of amongst others, slow and fragile economic growth, a budget deficit, tax revenue collections being below the budgeted projections, continued high levels of unemployment and income inequality and government debt continuing to increase as a percentage of GDP in the short-term.

Against this cocktail of challenges, it was thus no surprise that the MTBPS articulated a careful balancing act between both 'spending' and 'revenue-generating' activities to ensure fiscal sustainability in the country whilst at the same time, protecting our social and economic programmes.

The MTBPS, inter alia, communicates to parliament and the broader South African public, the economic context within which the National Budget will be presented next year. Over the years, the MTBPS has also given us a credible sense of the medium-term economic outlook of the country. This is evidenced by the fact that South Africa recently came in third, after New Zealand and Sweden, in the 2015 Open Budget Index Survey, in recognition of the country's commitment to a transparent budget process.

Tax collections

Over the last few years, tax collections have increased progressively, from R598.7bn in 2009/10 to R986bn in 2014/15 (which incidentally, was R7.3bn higher than the 2014/2015 budget target, mainly due to an increase in personal income taxes). Approximately 35.7% of the R986bn revenue was contributed by personal income taxes, 26.4% was contributed by value-added tax and approximately 18.7% was contributed by corporate taxes.

The challenge now is for SARS to sustain these 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, the Minister noted today that gross budgeted tax revenue for the 2015/16 fiscal year has been revised downwards by R7.6bn to R1,073 billion mainly due to the fact that corporate tax and VAT collections are expected to be below budgeted levels.

It is clear that significant revenue is needed to address SA's challenges and as noted by the Minister, "Without a buoyant revenue base, a nation cannot develop and succeed".

The main component of our revenue base will, as always, be tax revenues. The Minister highlighted that government would continue to explore reforms that will (a) promote an efficient tax system (namely, by ensuring that SA collects all the taxes which are rightfully due to it) and (b) promote a progressive tax system (in other words, ensuring that those with higher incomes bear a higher proportion of the tax burden).

Davis Tax Committee

Slight hints were also given as to 'how' and 'from where' additional tax revenues could potentially be generated. Specifically, the recommendations of the Davis Tax Committee on the key tax areas below were highlighted as potential sources of revenue.

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 SA manages to get its fair share of these taxes.

Previous measures which have 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, there is still today in South Africa a material gap between our nominal corporate tax rate of 28% and the effective tax rates being paid by some companies and whilst there are valid ways of decreasing a company's effective tax rate, this gap is cause for concern.

The Minister's words: "Soon, tax evasion and aggressive tax planning will have nowhere to hide" seems to be a clear warning to taxpayers on these issues.

Increase in VAT

VAT is the second largest source of tax revenue (for the 2014/2015 tax year, VAT comprised 26.4% of the total revenue collections and it is an important source of funding for SA's public expenditure programmes).

Over the years, a possible increase in the VAT rate has consistently been mooted by various stakeholders, 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 (i.e. any movement in the VAT rate would proportionally impact those with lower incomes to a greater extent).

The Minister however indicated 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 apply.

Reducing fraud

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.

The Minister indicated that further advice has been sought on wealth taxes. The possible introduction of a wealth tax in South Africa has been mooted on various occasions over the years, more recently by the economist, Thomas Piketty, during his visit to South Africa.

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

It is estimated that there are approximately 2,900 individuals in South Africa who fit into the category of high net worth individuals (i.e. individuals whose annual gross income is R7m or more and/or whose gross wealth is R75m 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.

Advantages of wealth tax

The advantages of wealth tax are that it will obviously increase fiscal revenue and, at the same time, it would be seen as a measure to reduce the inequality in income levels between the rich and the poor (a key discourse currently in South Africa).

However the disadvantages are that South Africa already has wealth taxes in the form of estate duty and donations tax, whilst capital gains tax can also be seen as a form of wealth tax (although it is not necessary a direct wealth tax, but rather a tax on income/gains). This tax however, is a focus area and it remains to be seen whether such a tax would in fact be introduced in SA.

The Minister also highlighted the following aspects which are under consideration, namely, carbon tax (National Treasury will soon publish a draft carbon tax bill for public comment), small business taxation and mining taxation. It was also noted that a review is proposed to assess the impact of fiscal incentives on various areas, such as for example economic growth, productivity and employment.

As expected, no reference was made to personal tax rates. However, unfortunately, when revenue is needed, personal tax is normally the easiest tax to use to generate that revenue and this year, we saw an increase in the maximum marginal tax rate from 40% to 41%.

Progressive tax system

However, even though the Minister noted that government will continue 'to explore reforms that promote an efficient and progressive tax system' (which suggests that higher-income earners may pay higher taxes, come next year), it is not expected that higher taxes will arise by way an increase in the marginal tax rate.

As South Africa's tax revenues as a percentage of GDP continues to be above the 24% mark, from a tax perspective, the MTBPS seemingly aims to retain this ratio and moreover, to ensure that our tax system is efficient, equitable and progressive.

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

That said, we do however need to do more with less and what is clear is that the Minister will have his task cut out for him come February 2016 when he will table the country's annual budget.