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The Budget - here's hoping What would we wish to see?

02 February 2007 Ian Wilson, PricewaterhouseCoopers, Tax Division

It's close to Budget Time with the 2007-2008 Budget being presented to Parliament in February. As usual, we turn our thoughts to what we can expect and do some speculating. The country is presently in a growth phase, and fiscal change is often more acceptable in times of relative prosperity. So this year could hopefully see some significant budget developments.

The past seven years have seen a major upgrade to SA taxation, aligning us more closely with the tax systems of major Western economies.  Specifically, the move to a residence basis system of income taxation as well as the introduction of capital gains tax have expanded the tax base of the South African Revenue Service.  There has also been an element of conceptual liberalisation, seen in the introduction of comprehensive group rationalisation relief for companies and the participation exemption in respect of substantial holdings in foreign companies.  Stamp duty has been effectively abolished with only leases and share transfers still attracting the tax.

In the enforcement arena, consistent rules are now in place for the gathering by SARS of information relevant to taxpayers and transactions. A rulings mechanism has been introduced that provides some certainty to taxpayers in relation to the taxation of transactions and new anti-avoidance measures are soon to be promulgated. 

Despite these positive advances, there remain areas where change would be welcome. First on the list is secondary tax on dividends declared by companies (STC), introduced in the early 1990s, when inflation was rampant and political and economic conditions uncertain.  The objective of the tax was to encourage the retention and reinvestment of profits by companies.  After nearly fourteen years, we ask whether this tax is still relevant?

Non-resident investors are largely unfamiliar with STC but quickly calculate that it pushes the SA effective rate to beyond the statutory income tax rate of 29%.  European and American multinationals complain that it complicates the reorganisation and rationalisation of their group structures. Perhaps the abolition of STC and reversion to a system of a withholding tax on dividends paid to non-residents would provide foreigners with greater certainty and allow them to work within a more familiar conceptual framework.  The complex STC provisions could be deleted.  This would reduce the tax risks and uncertainties associated with inter-company loans and transactions between companies and shareholders.  If a quid quo pro for the reduced tax recovery resulting from abolition of STC were needed, it is suggested that setting the rate of normal tax for companies at 30% would, in the circumstances, be adequate compensation, and be seen as a positive step.  After all, this is an internationally competitive rate.

We are also seen as dragging our feet on the matter of taxation of groups of companies.  The introduction of group taxation would undoubtedly involve complex conceptual issues, particularly relating to the treatment of existing assessed losses, but these are surmountable.  For instance, group taxation could be introduced on a prospective basis (going forwards only), effectively ring-fencing existing losses, and permitting utilisation only of future losses within groups.  The ring-fenced losses could be made subject to forfeiture if not utilised within a reasonable time, say, seven years.  Existing legislation to combat improper loss utilisation could remain in place. 

The individual taxpayer will surely want to know whether the Minister will be introducing more and much needed reforms in respect of retirement taxation. Last year saw a halving of the rate of tax on retirement funds (from 18% to 9%), so is there scope for further relaxation?  South Africans are not a nation of savers and retirement funding plays a vital role in encouraging and developing a saving mentality. Some definitive guidance on the future of tax on the industry will clarify individual taxpayer uncertainty and allow them to commit to long term planning. Reforms in this area will undoubtedly be complex but the individual has the right to expect guidance from the Minister as to where his thoughts lie and what the future holds. 

This could all be wishful thinking but in other jurisdictions they are realities. Ideas cannot be dismissed using the argument that the tax base here is too small for radical change.  SARS is now consistently exceeding its collection budget and the public service has, in the main, not reached its expenditure targets.  There is definitely capacity for fiscal liberalisation and the modernisation of SA tax laws that will make the country internationally competitive in its principles and practices of taxation.

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