TAX INCREASES ARE LIKELY IN THE 2017 NATIONAL BUDGET SPEECH
In the Medium-term Budget Speech, on 26 October 2016, Finance Minister Pravin Gordhan indicated that there would be tax increases of ZAR13 billion in 2017, and provisionally further tax increases of ZAR 15 billion in 2018. These are in addition to the approximately ZAR 15 billion tax increases that were introduced in 2016. This is according to Patricia Williams, Tax partner at Bowmans law firm, who notes that middle to high-income earners can expect further tax increases in the National Budget Speech next month.
Williams explains, “The tax tables are routinely adjusted on an annual basis, to minimize the effect of bracket creep (also called fiscal drag), where the inflation-related increase received by a taxpayer pushes her or him into a higher tax bracket, resulting in higher taxes.
Williams notes that when the fiscus seeks tax increases, however, this is an “easy” way to raise a few billion rand. Williams notes that the Davis Tax Committee Second and Final Report on Macro Analysis Framework - Executive Summary (21 April 2016) suggested raising the lower marginal tax rates and the top tax rates, while reducing those in the middle of the schedule.
“One can therefore anticipate that the tax tables will not be adjusted fully for the bracket creep effect in 2017, and that we will most likely see the top marginal tax rate increase from 41% to 42%, at a minimum. This may potentially be accompanied by an increase in the lower marginal tax rates with some relief in the “middle” rates,” she notes.
Williams notes further that last year, there was an “inclusion rate” for capital gains tax increases, increasing the effective CGT rate. However, the gap between the effective tax rates for income and capital gains provides certain incentive for structuring or incorrect categorization of amounts.
“We may therefore see further increases to the inclusion rate, to increase the CGT rate and narrow this “gap,” she adds.
In addition, certain jurisdictions have tax rules in relation to “super cars” or other unusually expensive cars. Most recently, China was in the press in relation to a 10% surtax on cars that cost more than 1.3m yuan (approximately R2.6 million), imposed for the joint purpose of curbing lavish spending and reducing carbon emissions.
“South Africa may well follow suit on this type of approach, over the next few years,” says Williams.
Further, the absence of branch profits tax in South Africa has the result that non-residents trading through branches of external companies are at an advantage relative to South African companies, or non-residents trading through South African subsidiaries.
“Given the significant effort that has gone into the renegotiation of tax treaties, with the aim of securing a minimum dividends tax rate of 5% in a cross-border context, it appears anomalous that this can be (and is) avoided through the use of branch structures. In the circumstances, a branch profits tax, at a minimum rate of 5%, should be anticipated,” she notes.