A great system that sees the few pay for the many

Jonathan Faurie, FAnews Journalist

As tax season closes, government is counting the pennies and factoring into their calculations the financial wellbeing of the state. Over the past few years, we have heard the age old story of the budget being a fine balancing act, but have we overcome this to finally tread the line towards prosperity?

This will largely depend on tax collections and whether government reaches its original targets or whether they will be revised downwards. FAnews caught up with Andrew Moller, Chief Executive Officer (CEO) of Citadel, to discuss what government could expect when all the taxes are in.

Low growth

South Africa has been struggling with sluggish growth for a long period of time now. The National Development Plan (NDP) points to a growth figure of 6% as optimal growth. However, the South African economy is only growing by an average of 2% a year.

The majority of South Africa’s growth funding comes through the collection of taxes. The first question we asked Moller was whether the South African tax system can reach the 6% target set out by the NDP.

“The South African taxation system has attempted to adopt global best practice and to simplify collection as much as possible over the past two decades. In our view, the South African tax collection system is actually highly efficient,” said Moller.

He added that the source of tax revenues is broad based across South Africa, ranging from personal income tax (±34%), company tax (±20%), VAT which is paid by all South African consumers (±27%) and the balance by additional tax revenues such as the fuel levy and import tariffs.

“While the number of taxpayers has increased substantially, of concern in the long-term is that the majority of the personal income tax earned (±84%) is paid by only approximately 3.3 million tax payers. Higher growth and employment initiatives as suggested by the NDP will be crucial for a more sustainable system over time,” continued Moller.

The beast of burden

There has always been the thought that South Africans are the most taxed people in the world. Whether this is true or not remains a matter of contention for many as countries such as Denmark and Sweden are taxed at 60% while South Africa’s are taxed at 41%.

“Although the tax rates in these countries (Denmark and Sweden) are high compared to our top marginal income tax rate of 41%, those taxpayers generally receive more free services from government in return for their tax contribution,” said Moller. 

“There were 13.7 million registered individual taxpayers in the 2012 tax year. As all employers are required to register all employees as taxpayers regardless of their tax liability, the individual tax register in South Africa has continued to grow strongly. The number of individuals registered for income tax as of 31 March 2013 increased by 1.7 million (12.5%), from 13.7 million in the previous year to 15.4 million. However, less than 5% of the South African labour force pays more than 50% of personal income tax,” said Moller.

He added that while Europe has higher tax rates and death duties and/or other wealth taxes, South Africa is apparently the only country in the world which levies both estate duty and capital gains tax on death, subject of course to various exclusions.

“Cynical commentators would also point to all the other hidden taxes or costs which many South Africans pay as a result of perceived issues with government service delivery and standards: private healthcare, private education, private security services, private transport and so on. This may account for the comment about the South African taxpayer being the most taxed person in the world,” said Moller.

The issue of trusts

After the release of the interim findings of the Davis Tax Committee, there will most likely be an increase in the tax rate on trusts. This seems a bit unfair on those who work hard to set up these savings vehicles.

The elephant in the room is corporate taxes; over the past two years, government has struggled to collect tax from businesses throughout the country. If this improves will trusts find tax relief?

“Not necessarily. Government needs revenue and, together with being part of the G20 Organisation for Economic Co-operation and Development Base Erosion and Profit Shifting (BEPS) action plan, trusts will by default become increasingly part of the tax net. The final package of BEPS measures includes new minimum standards on country-by-country reporting, which for the first time will give tax administrations a global picture of the operations of multinational enterprises and treaty shopping to put an end to the use of conduit companies to channel investments. It will also report on measures put in place to curb harmful tax practices, in particular in the area of intellectual property and through automatic exchange of tax rulings; and effective mutual agreement procedures, to ensure that the fight against double non-taxation does not result in double taxation,” said Moller.

“Offshore trusts and their beneficiaries in particular will, in our view, become more active taxpayers (if not already) in future,” concluded Moller.

Editor’s Thoughts:
While the South African tax system is comparable with systems found internationally, the fact that less than 5% of tax payers carry the burden of 50% cannot be ignored. Do you feel that the Davis Committee is focusing on the wrong areas and should be focusing on addressing this issue? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.