PricewaterhouseCoopers survey reveals total tax contributions differ between industries

The PricewaterhouseCoopers (PwC) results of Total Tax Contribution (TTC) of large companies in South Africa reveals that total tax rates differ substantially between industries. This is reported in the second annual TTC results for large South African companies.

This distinction between industries is one of the significant findings of in-depth research conducted at the end of 2008 by PwC into how much tax large South African companies pay, collect and remit to the South African Revenue Service.

The Effective Tax Rate (ETR) is the headline tax commonly quoted and disclosed in annual reports and often provides the only insight into a company’s tax affairs. “The total tax rate provides a much more complete picture of the real tax burden than the ETR”, says Charles de Wet, the PwC director responsible for the South African TTC project. The total tax rate compares all business taxes borne to profit before all business taxes borne and is one of three key measures in terms of the PwC TTC framework.

The average total tax rate for all participants was 31.8%. Although oil and gas companies made the highest total tax contribution in rand terms, retailers had the highest total tax rate at 42.2%. Insurance companies had the lowest total tax rate at 20.6%, with banks at 24.5%, telecommunication companies at 37.6%, mining companies at 36,41% and companies producing consumer goods at 31.3%.

The total tax contribution as a percentage of turnover was 40.9% for consumer goods companies mainly as a result of excise paid. Retailers had the lowest percentage at 5.3%, with oil and gas at 20.1%, banks at 17.0%, and insurance companies at 15.6%. The average contribution for all participants was 15.8% which is higher that the average for Australia at 11.6% but lower than the average for the United Kingdom at 21.6%.

“The amount of data collected as part of the study is significant as it makes it possible to benchmark companies within industry groupings to determine a particular company’s performance against its peer group,” adds de Wet.

The TTC Framework draws a fundamental distinction between business taxes borne by a company (in other words, the company’s own tax contribution to the fiscus, which constitutes a cost to the company) and, taxes collected by the company and paid over to the fiscus, where only the cost of collection, and not the tax itself, is a cost to the company. The services that members of the corporate sector perform as unpaid tax collectors represent a valuable contribution to the fiscus and the national economy.

All participants contributed R144 085 million in taxes borne and taxes collected to the fiscus. This represents 23.89% of government taxation receipts from these sources. The largest contributor to taxes borne is corporate income tax where participants paid R45 756 million or 32.3% of the corporate income tax collected during the 2008 fiscal year. The total taxes borne by participants was 11,4% of government taxation receipts from these sources, while total taxes collected was 21% of receipts.

The survey also reveals the cost implications related to large companies that comply with South African tax legislation. Tax compliance cost includes more than the cost of simply submitting a tax return, and refers to the total cost incurred by a company to meet its obligation with regard to South African taxes.

Participants spent R238 million on managing their tax obligations, R159 million on their own resources and infrastructure while R79 million was spent on external resources. For corporate income tax this translates to an average of R1.74 for every R100 corporate income tax paid. In total, to comply with the South African tax system, companies paid R2.03 for every R100 of business taxes borne. This effectively represents a surcharge on participants’ tax bills.

Participants on average employed the equivalent of 8.6 full-time employees to deal solely with tax compliance. It is also not widely appreciated that the shadow tax department contributes significantly to the tax compliance function. The shadow tax department (employees in other business functions i.e. accounting, finance, shared services, payroll, etc.) added an additional 56.8% to the time spent by the central tax department on tax compliance activities.

Once again the study emphasised that participating business pay many other business taxes apart from corporate income tax. On average, for every R1 of corporate income tax, there was another R0.44 in other business taxes borne. These other business-related taxes usually have little visibility in financial statements, and because of the lack of transparency over these other business taxes, there is generally limited understanding of the nature and extent of the total tax that companies pay.

The collection obligation imposed by government on business is significant and it is important to appreciate that the amount of tax collected by companies is an important aspect of their TTC. Companies collected on average R1.71 in taxes for every R1 of corporate income tax borne.

Through TTC surveys undertaken by PwC in a number of countries internationally, it is now possible to compare the impact of the global economic downturn on large business. Paul de Chalain, tax leader of the Southern African firm, said that in the year leading up to March 2008, taxes borne in the UK decreased significantly. Corporation tax fell 24.2% and total business taxes borne receded12.4%.

In addition to this, the UK reported a decrease in profit before tax of 25.9% and a marginal decrease in total employees for participants. Although not as significant as the of the UK, Australia and the United States also reported decreases in profit before tax. South Africa, Australia and the US reported increases in corporate income tax borne (31.26%, 4% and 11.5% respectively), increases in total taxes borne (28.12%, 8% and 8.7% respectively) and increases in total employees (2.85%, 5.8% and 1.7% respectively), with South Africa the only country reporting an increase in profit before tax (34.6%).

Looking forward, De Chalain emphasises that the current economic outlook indicates that further declines are likely in 2009 surveys and that tax receipts from the financial services and the profitability of other sectors will undoubtedly be much lower in 2009.

TTC data received from the largest companies in South Africa provides the opportunity to gain an understanding of the impact of all business taxes, including tax compliance activities. By placing the information in the public domain, PwC facilitates an informed debate with all stakeholders on the contributions that these companies make to the South African economy.

Key findings

Total Tax Contribution (total taxes borne + total taxes collected)

• The study shows that 50 of the largest companies in South Africa contributed R144 085 million in taxes borne and taxes collected to the fiscus.

Number of taxes

• Corporate Income Tax is only one of 21 taxes (19 national taxes and 2 local taxes) that companies pay in South Africa;
• Participants reported that on average they were responsible for 8.26 taxes borne and 3.56 taxes collected.

Taxes borne

• Participants bore R65 959 million in taxes;
• Corporate Income Tax represents 69.37% of total taxes borne, followed by secondary tax on companies (10.58%) and irrecoverable value-added tax (6.36%);
• Fuel-related taxes (fuel levies, fuel excise duties and Road Accident Fund) contributed 4.15% of total taxes borne.

Taxes collected

• Participants collected R78 126 million in taxes;
• The large number of participants in the oil and gas industry resulted in fuel-related taxes collected being significant and in total represents 36.62% of total taxes collected by participants;
• Pay-as-you-earn contributed 32.33%, excise duties (on alcohol, beer, wine, fermented beverages and tobacco) 15.78% and value-added tax 13.71%.

Key measures

• The average total tax rate for participants is 31.8%;
• The average for taxes borne and taxes collected as a percentage of turnover for participants is 15.8%;
• The average people taxes (i.e. pay-as-you-earn, occupational injuries and disease levy, skill development levy, Unemployment Insurance Fund) borne and collected per employee for participants are R69639.

Tax Freedom Day[1]

• Tax Freedom Day is the notional day of the year when a nation and its taxpayers have met all tax liabilities for that year;
• South Africa’s Tax Freedom Day falls on 10 May and last year, Tax Freedom Day was on 12 May[2].
• The Tax Freedom Day for participants was 28 April.
• Insurance companies celebrated Tax Freedom Day early on 17 March and also had the lowest total tax rate (20.6%), while retailers only had the privilege on 9 June 2008.

TTC to the fiscus

• Large companies have a major economic impact in South Africa

• Taxes borne and taxes collected represent 23.89% of total estimated government taxation receipts.
• Taxes borne and taxes collected as a percentage of value distributed is an approximation of how companies add value to their stakeholders- taxes borne and taxes collected represent 24.64% of value distributed to stakeholders, in this case the fiscus.