TAX INCREASES ARE LIKELY IN THE 2017 NATIONAL BUDGET SPEECH
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 R13bn in 2017, and provisionally further tax increases of R15bn in 2018. These are in addition to the approximately R15bn tax increases that were introduced in 2016. Therefore, middle to high-income earners can expect further tax increases in the National Budget Speech later this month.
The tax tables are 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. When the fiscus seeks tax increases, however, this is an “easy” way to raise a few billion rand.
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. We 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”.
Further, there was an increase in the “inclusion rate” for capital gains tax last year, 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,”.
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.
Branch profits tax
Also predicted to be on the agenda the absence of branch profits tax in South Africa, which means 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.
Extending the tax base
Another priority in 2017 will be the extension of the South African tax base. While SARS has always had the power to verify tax registration of taxpayers, the Tax Administration Act (TAA), which came into effect on 1 October 2012, extended these powers to allow for “inspection” (in terms of section 45 of the TAA). This allows SARS to arrive, unannounced, at any premises where a SARS official has a reasonable belief that a trade or enterprise is being carried on, to check the identity of the person occupying the premises, confirmation of tax registration status, and confirmation of compliance with tax record keeping requirements.
While SARS’ use of these provisions has been lower than was anticipated, increasing the “spread” of taxes, so that the tax burden is shared more evenly amongst income earners, has become important during difficult times.
Further, one of the key factors highlighted in The African Tax Outlook (ATO) Report, 2016, published by the African Tax Administration Forum (of which SARS is a member) on 27 June 2016, is that “small taxpayers should not be overlooked”. In this report, it was highlighted that “As the ATO countries seek to maximize domestic revenue mobilization, they should not overlook the potential of MSMEs. In Rwanda, for example, MSMEs operating in the informal sector account for 46% of GDP”. In another section, the ATO report states: “Penalties should be severe enough to act as a deterrent.”
Appropriate legislative changes to facilitate this transition to tax registration for all businesses would therefore include new penalties for non-registration as a taxpayer (for any tax type, including VAT and PAYE), of, say, R200,000. These penalties would be implemented from a point in the future, say in six months’ time, to give businesses a chance to register before being “caught” and subject to these harsh penalty amounts.
In addition, legislative changes might include a limited amnesty or voluntary disclosure programme, applying exclusively to businesses that have not previously registered for tax, to allow for tax to only “kick in” with effect from a more recent date, for example the last one or two tax years. This is because having to pay taxes for the last five or ten tax years may be so prohibitively expensive that people would be economically forced to keep hiding.
Taxing of waiters
The taxing of waiters and others who earn voluntary incomes from tips, for example, may also come under scrutiny in Budget Speech.
To promote equality and broaden the tax base more equitably, a new law may be introduced to deem all voluntary or other payments paid by customers of the employer to an employee, in relation to services rendered, as paid by the employer. In this way, employees tax would be payable in the same manner as for other equivalent income earners.
One of the fundamental constitutional values is equality. However, technicalities of our tax system sometimes do not promote equality amongst people in similar circumstances. For example, a normal salaried employee earning over R75,000 per year is currently subject to employees’ tax, whereas waiters who earn the same amount ordinarily escape employees’ tax on a technicality.
Waiters should be paying income tax on these amounts, but because “tips” are paid by the restaurant’s customers and not the restaurant itself, the waiters are supposed to submit an income tax return and declare and pay the relevant taxes themselves, instead of having employees’ tax deducted as the amounts are earned. Practically, these taxes are lost to the fiscus.
Restaurateurs have always argued that it is very difficult for them to know how much waiters receive in “tips”. This might have been the case when most bills were paid in cash, but these days by far the most restaurant bills are paid via credit card, or other forms of electronic transfer of funds. This should enable restaurateurs to determine amounts received by waiters much more accurately. With a small amount of extra effort even cash receipts could be included in the reporting of “tips”.
It is further anticipated that the National Budget Speech will introduce recommendations set out the Davis Tax Committee Estate Duty Report (published on 24 August 2016). These recommendations include increasing the estate duty rate to 25% for that part of an estate with a value over R30 million and the removal of spousal rollover relief, in relation to estate duty, capital gains tax and donations tax (partially offset by an increase in the primary abatement for all estates).
If this is implemented, transactions between spouses will start to fall within the tax net, potentially triggering capital gains tax and donations tax. Leaving assets to one’s spouse upon death would become a very fiscally expensive choice, since these assets would be taxed upon the death of the first spouse, and then a second time upon death of the second spouse.
In addition, the taxation of trusts as separate taxpayers in most instances will likely be introduced, with the “attribution” rules (in terms of which income in the hands of trusts is attributed back to individuals) in relation to South African resident trusts being repealed. This is a fundamental change which would disrupt planning structures set up over decades. Increased disclosure requirements in relation to trust interests and property interests, with associated penalties for non-compliance is also to be expected.
The jury is still out on VAT and whether it will be increased in the National Budget Speech. While all indications are that the planned tax increases should not impact low income earners, the South African VAT rate, and contribution to total tax, is low compared to international norms.
The South African VAT rate of 14% is substantially lower than the Organisation for Economic Co-Operation and Development (OECD) average, which as per the “Rates of Value-Added Tax (General Sales Tax)” table, updated July 2016, reflects an unweighted average rate of 19.1%.
The ATO Report, 2016, also identified that South Africa’s consumption tax (VAT and excise duty) contribution to total tax was 34% in 2014, compared to an OECD average of 42% and an Inter-American Centre of Tax Administrations average of 54%, which indicates that South Africa should consider increasing either VAT or excise duties.
Options for VAT increases would include an overall increase in the VAT rate, combined with certain specific exemptions or zero-ratings to offset the negative impact on low income households; a third category of VAT rating (in addition to the 0% and 14% categories), for example a luxury rate of, say, 19% for certain categories of goods and/or services; and the removal of certain categories of exemptions and zero-ratings within the current VAT system.