The Democratic Alliance has urged Minister of Finance Trevor Manuel to appoint a special task team to review South Africa’s tax structure.
Speaking in debate in the National Assembly on the budget, DA finance spokesperson Ian Davidson said there could be no complaint that the budget’s main impact would be on enhancing the spending power of lower-income groups.
”But this raises a basic dilemma; we also need to encourage savings and investments and that is predominantly done by the corporate sector and top-income individuals. And this is were this budget fails,” he said.
The tax burden, and therefore the cost of doing business in South Africa, was high in comparison to competitor nations in other emerging markets.
Despite a long-held official target of a tax-to-GDP ratio of 25%, this ratio had increased from 23,3% in 2002/03 to the current 26,8%.
”Now I know that the minister is sceptical, if not cynical about the role the tax rate has in encouraging investment. In this he is joined by Professor Katz, but with respect, the Katz Commission, when it sat, faced an investment world in and outside SA which was fundamentally different.
”I would far rather listen to Business Unity South Africa (Busa), which believes that the time has come for a critical review of the corporate tax structure including the secondary tax on companies (STC),” Davidson said.
This followed their own research as well as others, such as Merryl Lynch and KPMG, which placed South Africa on the high side in respect of international corporate tax rates and very high when the STC was added in.
Manuel had responded by noting that at an effective rate of 36,9% South Africa compared favourably with a whole list of countries.
”I couldn’t help noticing, however, that the list he produced was mostly developed countries,” Davidson said. ”What we need to compare ourselves with are developing countries, more particularly the so called emerging market club, against which we are competing for that highly mobile investment capital.”
In respect of STC, Busa indicated that this form of double taxation ”does not go down well internationally”.
The objective of STC was to encourage companies to retain earnings and invest, instead of paying those earnings out.
”I think we have to critically examine the success of this. The trade-off the minister makes of saying that shareholders would prefer the tax paid in companies’ hands as opposed to taxing the dividend in theirs wrongly places the purpose of this tax.
”STC was never intended to be a tax on dividends, nor was it a trade-off,” he said.
The tax on dividends was abolished in 1990, and STC was brought in with a different objective in 1993.
Davidson said committing to a tax rate of 25%, by say 2010, would bring the tax rate down to the nominal international norm, send out a strong signal of confidence in the economy and provide business with an incentive to commit to expansionary projects, and most importantly, create jobs and alleviate poverty.
”Now let me concede: fiscal policy is both complex and integrated. We might be wrong, Busa might be wrong.
”But I think the time is right, as part of the growth initiative, for a critical review of our tax structure.
”And so I ask the minister — is it not time for him to constitute a task team of all stakeholders to address this issue?” — Sapa