Overview on the Davis Tax Committee on the Corporate Income Tax Report
The Davis Tax Committee (DTC) has published final reports in respect of VAT, Corporate Income Tax, Public Benefit Organisations and Wealth Tax.
In this article we note some of the DTC's recommendations relating to the Corporate Income Tax report. We will comment on the other reports separately.
The increase in the dividends tax rate from 15% to 20% had certain negative outcomes in particular relating to BEE policy objectives. The DTC recommends that Dividends tax rate be returned to 15%.
In determining an efficient Corporate Income Tax Rate (CIT) and what it could be, it is necessary to take a holistic view that takes into account the efficiency of the Dividends tax rate and the Capital Gains Tax (CGT) corporate inclusive rate. It was established that countries that attract foreign direct investment by offering a lower tax rate are not necessarily more competitive than countries with high tax rates. In order to have a tax system that contributes to a competitive economy, it is necessary to focus on the quality of the tax system by ensuring that tax evasion is reduced and that the principles of efficiency and neutrality are adhered to in the treatment of corporate groups. It was concluded that, whilst a reduction in the CIT rate on its own cannot be sustained under the current economic climate in South Africa, a detailed review of the cost benefit of tax incentives be carried out, with a view to remove inefficient incentives that do not achieve their objectives. This in turn could effectively reduce the overall CIT rate.
In respect of the CGT corporate inclusive rate, the DTC recommends that the inclusion rate be reduced to levels which adequately compensates for the effects of inflation, or alternatively that an indexation system be considered whereby an asset's base cost is stepped up to compensate for inflation.
In respect of incentives, the DTC suggests that the Treasury and SARS consider the option, which is currently being adopted in many countries, of removing certain targeted incentives and replacing them with an overall corporate tax reduction aimed at incentivising identifiable businesses (such as small business's).
The DTC is of the view that the timing of the introduction of a possible group taxation system would need to be aligned with a more positive economic environment, together with the determination as to whether SARS is adequately resourced to handle group taxation. In the meantime, the corporate restructuring rules should be enhanced, where applicable, to deal with group transactions more efficiently.
These reports by the DTC brings to an end 5 years of insightful work and valuable contributions by the committee. In time, it would be interesting to see how and if these recommendations find their way to statute books. As always, there will be a balance required between fiscal collection and enforcement versus spend. From a business perspective, what would be encouraging to see would be a sustainable enabling fiscal framework to support business growth, in particular, small business growth.