Tax hikes and changes proposed for South Africa – including digital products and services

South Africa is facing a significant shortfall in revenue collection due to the coronavirus lockdown and other economic factors, says the Parliamentary Budget Office (PBO).

The PBO provides independent, objective and professional advice and analysis to parliament on matters related to the budget and other money bills.

In a presentation ahead of finance minister Tito Mboweni’s Medium-Term Budget Policy Statement (MTBPS) next week, the PBO said the cost-of-revenue collection ratio continued to decline from 0.97 in 2014/15 to 0.78 in 2019/2020.

The revised estimates tax revenue estimates for 2020/21 are now:

  • R238 billion (18%) lower than 2019/20 actual tax revenue collected
  • R304 billion (21%) lower than the budget review estimates in February 2020; (including Covid-19 tax relief)

“Covid-19 economic conditions together with continued digitalisation of business activities and continued base erosion and profit shifting will negatively affect all of these tax revenue sources,” it said.

The PBO said that government is now considering discretionary tax measures to raise additional revenue over the medium-term.

It highlighted some of the global suggestions for reforming tax measures as mooted by the UN and other international organisations.

This includes:

  • Higher corporate tax rate for multinational enterprises in oligopoly sectors (sectors with limited competition);
  • A minimum effective corporate tax rate of 25%;
  • Taxation of capital gains at ordinary income tax rates – not low inclusion rates;
  • Sharing of international tax information amongst jurisdictions to combat base erosion and profit shifting (BEPS) and consideration for unitary taxation.

Digital tax 

The PBO also highlighted the possibility of introducing a digital tax  – an issue which is also gaining international attention.

“The global discourses to rethink allocation of taxation rights has intensified. South Africa taxes consumption (VAT) but not income of digital economic activities,” it said.

The PBO has previously presented on the introduction of a digital tax, noting that South Africa was one of the first countries to introduce tax measures to generate revenue from consumption of commercial activities in the digital economy, which raised additional government revenue since 2014.

However, like many other developing countries, it has continued to lose tax revenue in the absence of specific tax measures that enable taxes to be imposed on income raised by digitalised economic activities, the PBO said.

“Given that South African corporate tax revenue as a share of revenue has declined over the years, and that more businesses have become more digitalised, it is necessary to consider taxation measures that enable revenue to be raised from digital economic activities income,” it said.

“By applying this approach, South Africa would be following recent international trends, which would not only guarantee additional needed revenue but also ensure that all business activities contribute their fair share into the fiscus.”

Apart from a digital tax on consumption and income generated by digital economic activities, South Africa could also generate additional revenue from customs duties on cross border digital economic activities, the PBO said.

It noted that the current tax regime makes provision for custom duties for non-digital cross border products and services.

The group added that online global imports and exports have grown faster than physical imports over the last decade, however this is restricted by a World Trade Organisation (WTO) moratorium that has been in place since 1998.

“The revenue losses of Sub-Saharan Africa are expected to range between $600 million and $2.6 billion (R10.8 billion and R46.8 billion) annually in potential custom duties due to the WTO moratorium,” the PBO said.

“South Africa is estimated to have lost between $25 million (R475 million) and $37 million (R700 million) in potential custom duties revenue as a result of the WTO Moratorium.

“Unsurprisingly, South Africa and India have raised concerns about the fiscal impact of the 1998 WTO Moratorium over the years, and the duo submitted a proposal to end the WTO Moratorium in March 2020,” it said.

Other proposals 

A document seen by Bloomberg in October also proposes a number of specific tax hikes and changes as part of the country’s new economic recovery plan.

The document, prepared by the President’s Economic Advisory Council, proposes a number of tax hikes and changes be considered, including:

  • Increases to the fuel levy and estate taxes;
  • A three-year ‘solidarity tax’ that would increase taxes for higher earners;
  • The introduction of a basic-income grant that could cost R243 billion a year and would necessitate tax increases;
  • Pension funds and other private investors backing infrastructure projects if there is a clear pipeline for the next 10 to 20 years.

These proposed changes align with comments made by the National Treasury in a July parliamentary presentation.

At the time, chief director Edgar Sishi said that National Treasury is considering a number of new tax measures as government seeks to raise an additional R40 billion through hikes in the coming years.

In his presentation, Sishi said that Treasury was considering research reports from the Davis Tax Committee on the possible introduction of new measures, including the viability of a wealth tax and how it relates to a land tax and estate duty.

In June, Mboweni told selected clients that Treasury is discussing the possibility of an inheritance tax and a so-called solidarity tax in a bid to raise additional finances.

Taxes on the wealthy are favoured politically, and a solidarity tax associated with the virus outbreak would be limited in duration.

In South Africa, the top income-tax rate is 45%, corporate tax is 28% and VAT is 15%.

Read: Disposable income has halved in South Africa

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