Corporate tax hikes are an unnecessary burden on SA's economy

26 February 2020 3 min. read
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EY has become the latest of the Big Four accounting and advisory firms to recommend a relaxation of the corporate tax rates in South Africa. Managing Partner at EY South Africa’s Tax practice Ekow Eghan has highlighted the costly nature of collecting corporate taxes, money that could be better deployed elsewhere.

Most advisory firms have been putting forth their recommendations to the Finance Ministry ahead of the upcoming budget statement later this week. The advice comes as South Africa’s economy enters a pivotal phase of its development, looking to shed the economic stagnation of recent years.

Low GDP growth and high rates of unemployment are among the factors holding the economy back. While long-term plans are being hatched to tackle these issues, the government has turned to its fiscal policy to manage the immediate challenges with respect to revenue collection.

Corporate tax hikes are an unnecessary burden on SA's economy

Hiking tax rates has been among the central strategies for South Africa in recent years, and advisory firms across the board agree that this needs to change, albeit for different reasons. PwC recommended that the focus shift to improving the collection process, given that default rates are among the chief factors contributing to low revenues.

Deloitte’s justification for relaxing tax rates is that it deters foreign investment and is shackling the small and medium business sector, both of which are detrimental to the economy. EY’s justification is that collecting corporate tax in itself is an expensive venture with less than adequate returns.

“There's actually no real link between tax rate and economic growth. Foreign investors generally think of political stability and access to labour. A favourite corporate tax rate is always a plus. In South Africa, corporate tax has been the third highest revenue generator in terms of taxes for government. A very small fraction of the corporate population actually contributes to corporate income taxes,” said Eghan.

“Corporate income tax is difficult and costly to collect, compared to say VAT. You have this incredibly difficult tax to collect, with a very small population contributing. There's a view that corporates pay taxes. We know the corporation is a fiction. Ultimately that tax is either borne by the shareholders, the consumer or the employees. We know the shareholders pull the strings, so it's a lot easier for them to pass it to labour or the consumer by hiking up prices. National treasury produces no research in this area, even in developed nations it is tricky to get data,” he added.