SA's tax system ranks number one among BRIC economies for efficiency

South Africa’s tax system is ranked number one among the emerging economies for its efficiency and in easing the compliance burden for taxpayers, according to a new report issued today by the World Bank, IFC and PwC.

“South Africa is seen as taking the lead ahead of the BRICS economies (Brazil, Russia, India, China and South Africa) as a result of first world initiatives taken by the Government, such as the electronic filing system,” says Charles de Wet PwC Tax Partner, responsible for the South African Total Tax Contribution. “South Africa has streamlined its tax system, made use of effective technology and moved to a simplified tax system. Electronic filing and payment reduces the amount of paperwork, and allows a more targeted and risk based approach to audit and compliance,” says De Wet.

However, this year South Africa’s worldwide ranking declined 10 points from 24 to 36 out of 183 economies that took part in the study. De Wet says that the decline in South Africa’s ranking is due to an increase in property rates by various municipalities, it is also due to improvements by other countries. South African ranked above several countries in the past. However, they have since accelerated ahead of the country. These include: Finland, Kazakhstan, Macedonia FYR, Seychelles and Solomon Islands.

For instance, Macedonia's number of tax payments decreased by 19, this coupled with the slight decrease of 1 percent in the Total Tax Rate has improved their overall ranking from 33 to 20. Seychelles' Total Tax Rate decreased by 12 percent, which improved their overall ranking from 38 to 26.

The Total Tax Rate measures the burden of all the taxes that a company must pay in relation to its commercial profit. Therefore all kinds of taxes that impose a cost on the business are considered, such as property taxes, labour taxes, and other payments that do not require filing, such as a dividend tax, capital gains tax, environmental tax, financial transaction tax, and vehicle and road tax.

The study found that the Total Tax Rate for small and medium-sized companies had fallen by 8,5 percentage points since 2006, more than one point per year. During that period, the time it takes to comply with business taxes declined by more than a day a year (54 hours), and the number of payments required dropped by five.

The Paying Taxes 2012 Report also finds that 33 economies made it easier and less costly to pay taxes from June 2010 through May 2011. The most common tax reform was the increased use of online systems to facilitate tax compliance, introduced in 23 economies.

The Paying Taxes 2011 Report is the fifth annual study that measures the ease of paying taxes in 183 economies by assessing the administrative burden for companies to comply with tax regulations, and also by calculating companies total tax liability as a percentage of pre-tax profit.

The purpose of the study is to provide analytical data to facilitate the debate on tax policy and tax administration, and encourage tax reform.

Recent reforms to the South African tax system include the reduction of the corporate tax rate from 29 percent to 28 percent, the introduction of the new turnover-based tax for qualifying small businesses, and the simplification of tax returns. Next year the Government intends replacing the Secondary Tax on Companies (STC) with a dividend withholding tax.

Worldwide, the average Total Tax Rate for a small to medium-sized company is now 44,8 percent of its commercial profit.

Although South Africa declined five points from 29 to 24 for the number of tax payments required each year, there was no change in tax payments and time spent, explains De Wet. The decline is attributed to an improvement in other countries’ tax payment and time spent, he says.

South Africa’s Total Tax Tate is 58, of which 24,4 percent relates to profit, and 4,1 percent to labour tax , and 4,6 percent to other taxes.

South Africa’s tax system also ranked number six among the African Union Member States, and the Sub-Saharan African states, respectively. Mauritius ranked number one in Africa.

In most of the Southern African Development Community (SADC) economies, taxes are paid and filed manually. Only South Africa and Mauritius have online systems. On average, a company pays 8,4 taxes in these economies.

The top reformer was the Maldives, for its efficient tax system and simplified tax administration. In the Maldives tax payments are subject to only three tax payments. It also take less than an one hour to comply with taxes and the Total Tax Rate is only 9,3 percent.

“Governments have it in their control to develop tax systems that foster business investment and make the private sector an engine for a return to economic growth and prosperity,” says Paul de Chalain, Head of Tax, PwC Southern Africa. “Reducing rates and making compliance less burdensome helps companies focus on making their business grow,” says De Chalain. South Africa can play an important role in this, especially as multi-national companies expand their operations into Africa by having tax systems that encourage these investments.

For more information or to access the report, please go to: http://www.pwc.com/payingtaxes