Kyle Mandy, Tax Policy Leader for PwC South Africa.
Electronic tax filing and payments were the most common tax reforms undertaken by countries worldwide during the past year, according to the latest edition of the Paying Taxes report from the World Bank Group and PwC.
As a result, paying taxes has become easier for medium sized companies globally, but the focus has moved from reducing tax rates for companies to embracing technology and relieving their compliance burden. The report also shows that low-income economies continue to face the biggest reform challenges.
Paying Taxes, 2016 finds that on average, the model company has a Total Tax Rate (as defined under the Doing Business methodology) of 40.8 percent of commercial profits, down by just 0.1 percentage points from last year. It makes 25.6 tax payments per year and takes 261 hours to comply with its tax requirements, a drop of two hours compared to last year.
Economies which have invested in online filing and payment infrastructure are reaping a digital dividend from these systems. Low income economies, however, which often have a substantial compliance burden, have shown the least reduction in the time to comply and the number of tax payments. This suggests that there are other challenges to be overcome in these economies, such as the availability of modern communications infrastructure, before the tax system can be substantially reformed. The study also discusses the benefits that good tax compliance systems can have in helping to reduce the size of the informal economy.
South Africa was ranked 20th out of 189 economies in the overall rankings, falling one place from last year. While this is a very good result, South Africa is not the best ranked African country. That honour goes to Mauritius in 13th spot. The overall rankings are dominated by the Middle East region with the first three positions occupied by Qatar, the United Arab Emirates (in joint first) and Saudi Arabia in third position.
“South Africa’s Total Tax Rate of 28.8 percent compares favourably with global and regional averages. However, it ranks behind many of its regional neighbours such as Zambia (18.6%), Namibia (21.3%), Mauritius (22.4%) and Botswana (25.1%). The average Total Tax Rate for the BRICS economies is 54.7%,” says Kyle Mandy, Tax Policy Leader for PwC South Africa.
Cause for concern, however, is South Africa’s relatively high rate of profit taxes of 21.7% which is well above the global and Africa averages of 16.2% and 17.7% respectively and where South Africa ranks 135th.
“There is a risk that the total tax rate will increase in future as pressure mounts to introduce new taxes on business to fund increasing spending pressures,” adds Mandy.
Despite some improvement to its Total Tax Rate, South America is still by far the region with the highest average Total Tax Rate at 55% and the greatest average time to comply at 615 hours. The region which stands second, Africa has an average Total Tax Rate of 46.9% (2014: 46.6%) and an average time to comply of 313 hours. Over the study period, Africa is the region with the greatest reduction in its average Total Tax Rate which is largely as a result of the abolition of cascading sales taxes in a number of economies. Over the ten editions of Paying Taxes, the average Africa Total Tax Rate fell by 22.5 percentage points. In Africa, only Comoros still retains its cascading sales tax.
In Africa, changes in profit taxes were the most significant driver behind increasing the average Total Tax Rate, though there was a mixed picture, with some economies raising corporate income tax liabilities while others reduced theirs. Another good example of the varied picture is where Zambia has doubled its property transfer tax from 5% to 10%, while Mauritius did the reverse, halving its land transfer tax from 10% to 5%.
In total, 12 of the 53 economies in the region increased their Total Tax Rates with significant increases in Liberia, Gabon, Zambia and Senegal. On the other hand, nine economies reduced their Total Tax Rates in 2014. The most significant reductions were: Mauritius’s Total Tax Rate fell by 2.1 percentage points to 22.4%; Swaziland’s Total Tax Rate fell by 2.1 percentage points to 34.7%; Tunisia’s Total Tax Rate fell by 2.6 percentage points to 59.9%; and Angola’s Total Tax rate fell by 3.6% percentage points to 48.4%.
The average time to comply in the African region is 313 hours (2014: 316 hours), which is well above the world average and the second highest of any region. The average time to comply in 28 economies in Africa is above the world average with seven economies having over 600 hours (15 weeks). The average time to comply for the region decreased by three hours overall, with a drop of 50 hours in The Gambia accounting for more than a third of the overall change in the region. There was a reduction in 10 other economies for a variety of reasons; Cabo Verde, Liberia, Morocco, Mozambique, Namibia, Rwanda, Seychelles, South Sudan, Tanzania, and Zambia.
The time taken for companies to comply with their tax obligations in South Africa (200 hours) has declined significantly since electronic filing was introduced more than a decade ago. Since then, a number of improvements have been made to streamline the tax system.
Overall, the number of payments in the Africa region decreased by 0.1%. The largest decrease in the payments sub-indicator among the African economies was in Zambia where full implementation of an electronic system for filing and paying VAT reduced the number of payments. This was partially offset by increases in the number of payments arising from new taxes in five other economies: Benin, Democratic Republic of Congo, Republic of Congo, Namibia, and Sierra Leone.
“South Africa is a leader when it comes to the number of tax payments (7) due to the widespread use of electronic payments. This is the primary reason for South Africa’s very good overall ranking at number 13 in this sub-indicator,” says Mandy. “However, it may represent a significant risk to South Africa’s future overall ranking as more countries introduce electronic payment systems.”
“Taxes are essential to finance public services and development globally. The design of a tax system can influence firms’ decisions on whether to operate in the formal sector. It is encouraging that economies worldwide continue to introduce substantial improvements in their tax environment. It means both an easing of the burden on business, and sustainable revenues for governments.
“There is still considerable scope for reform of tax systems in terms of simplification and supporting compliance. This year’s report demonstrates in particular the acute challenge in developing countries of the availability of IT infrastructure including broadband, needed to design and run a modern tax system to raise the revenues to sustain growth,” concludes Mandy.
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