Tax burden falls on a few firms
A mere 340 companies are responsible for the majority of tax contributions made by the corporate sector.
As with personal income tax, this narrow company tax base is under increasing economic pressure, and corporate income tax contributions have declined as the share of overall tax revenue fell from 26.7% almost a decade ago to 18.1% currently.
This is according the latest statistics released on Tuesday by the South African Revenue Service (Sars).
But tax compliance by both individuals and companies has emerged as a key problem in raising revenue. Sars is seeking tougher tools, including the reintroduction of tax courts, to curb noncompliance.
Further evidence of declining company contributions is revealed by the company income tax to gross domestic product ratio, which dropped from 6.9% to 4.7% in the past 10 years.
According to the statistics, Sars collected R207-billion in company tax for the 2016-2017 tax year. The number of companies registered with Sars reached 3.7-million this year but, of these, only 884 459 are expected to submit returns, a decline on last year’s 932 118.
Gina Schoeman, an economist at Citibank Global Economics, said that having such a small number of companies to provide the bulk of tax contributions is a common trend in countries like South Africa, which has a narrow tax base.
“You have a handful of very big players in every sector that dominate and you have to have them contributing the lion’s share towards corporate tax revenues.
It’s not too surprising and it’s actually quite common across other countries,” she said.
But tough economic times have hit company profitability. According to Sars, only 25% of the total companies assessed had taxable income, 47% had no taxable income and 28% reported losses.
Schoeman said these declines could easily be attributed to low economic growth, but she added that the tax behaviour of small and medium businesses should be as closely scrutinised as that of large businesses.
“There’s more of a tendency for businesses that do not have public shareholders to, for example, pass personal items to their business in order to evade tax,” she said.
Sars’s head of research, Randall Carolissen, said there were noticeable increases in people failing to submit their tax returns or submitting without payment. He said some taxpayers also preferred to pay an administration penalty rather than to submit their returns.
Sars has approached the National Prosecuting Authority to allow it reintroduce tax courts to address noncompliance. “Because if people don’t feel the heat, they won’t comply,” Carolissen said.
According to Sars, personal income tax filing by individuals declined by 5% in the four years between 2012-2013 and 2015-2016, although it picked up in the 2016-2017 fiscal year, but only by 0.3%. Pay-as-you-earn (PAYE), which is directly linked to employment levels, dropped sharply between 2013-2014 and 2014-2015 and continued to decline in 2016-2017. Filing compliance by trusts and companies decreased by 11% and 7% respectively in the past four years.
Overall, filing compliance for PAYE and value-added tax is more than 70% and 60% respectively but Carolissen said Sars was witnessing a declining trend, specifically with this group of offenders who were persistently not paying their taxes.
“They’re using Sars’s money to fund their operations despite the fact that we keep warning them and telling them not to do it,” he said.
Finance Minister Malusi Gigaba has set up a commission of inquiry into tax administration and governance at Sars to establish the reason for revenue undercollection and to look into Sars’s governance. In his mid-term budget policy statement, he projected a R50-billion tax shortfall for the current financial year.
Carolissen and Schoeman agreed that decreasing tax morality is probably being driven by taxpayers’ dissatisfaction with how revenue is being used by the state.
“People comply with tax policy; however, they don’t see the results of that in the economy. Instead, you hear about corruption and state capture, and that can often make people less compliant,” Schoeman said.
The chief executive officer of the tax ombudsman’s office, Eric Mkhawane, said tax courts were extremely effective in dealing rapidly with tax offenders.
“You could take those kind of cases and prosecute them from that court, meaning you could summons people instead of begging them to submit their tax returns,” he said.
Sars said, besides reintroducing the tax courts, “teams have been assembled to focus on outstanding returns and the imposition of administrative penalties and its impact on compliance levels”.
At the same time, the rights of taxpayers came under the spotlight in the recent tax administration report by the Davis tax committee. Among other things, the report examined the tax policy framework and its role in supporting the objective of raising tax revenue while protecting individual taxpayers with a bill of rights.
Some of the rights proposed include the right to pay no more than the correct amount of tax and the right not to pay tax under dispute before an impartial review has been completed.
“This is a controversial right in the South African context where the ‘pay now argue later’ principle is applied by the Sars savagely, regardless of the fact that its constitutionality has not been tested,” the committee said in the report.
It recommended that, to strike a balance between the taxpayer’s right not to pay amounts in dispute and Sars’s powers to collect taxes without the impediment of frivolous objections, taxpayers be required to pay 40% of the disputed claim. This amount would be deemed to be a down payment if the matter was decided against the taxpayer, the report said, but could be refunded should the matter be decided in their favour.
The report is in alignment with the findings of the Katz commission, which confirmed that the tax system should be brought in line with the Constitution. The Katz commission was tasked with overhauling the South African tax system in a democratic order.
But Mkhawane said prosecution did not compromise taxpayers’ rights, especially when Sars had shown that it had provided a service in line with their processes and procedures.
“It’s not a contradiction at all. Everyone needs to pay their fair share and if everyone pays their fair share we’ll all pay less tax at the end of the day,” he said. — Additional reporting by Thulebona Mhlanga
Tebogo Tshwane and Thulebona Mhlanga are Adamela Trust trainee financial reporters at the Mail & Guardian