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Corporate tax cut will be revenue neutral — Momoniat

The treasury’s post-dated 1% cut to the corporate tax rate is designed to widen the tax base and will, therefore, prove neutral to the government’s revenue baseline, deputy director general Ismail Momoniat said on Thursday. 

It is also in line with the treasury’s wider thinking to gradually lower taxes to create a more equitable structure and ensure greater compliance, Momoniat, the deputy director general for tax and financial sector policy, told MPs in a post-budget briefing to parliament’s standing and select committees on finance.

The cut, to 27%, is the first to the corporate tax rate since 2008 and came as a surprise announcement in Finance Minister Tito Mboweni’s 2021 budget speech on Wednesday.

It was not included in the budget review, but Momoniat said it would not affect the fundamentals set out in the document.

“Because it will only take effect from next year and will largely be in 2023, effectively what it means is that the fiscal framework was not changed. Because it is being done in a revenue neutral manner, for that reason it was not put into the budget review book, but was mapped as an announcement for the future,” the deputy director general said.

Momoniat said the treasury was prompted to table a cut partly because of recent corporate-tax rate reductions in the United Kingdom and the United States.

“The announcement that was made covers the next fiscal year. Now, normally, that announcement would not even be made next year. It would be made in two years, in the 2023 budget. What we wanted to do was just to signal the future path,” he said.

“The problem that we face is that in the last few years, both the UK and last year or the year before, the US, reduced their corporate rates significantly, and we are quite an outlier.

“Now, we are not just reducing the rate: we are doing so in a tax-neutral manner.”

Momoniat said this was linked to a decision to limit interest deductions and assessment losses included in a taxation discussion document produced by the treasury, but that had been delayed by the Covid-19 pandemic.

However, the budget review noted that the treasury wanted to do away with corporate tax concessions, because they benefited only a few and lent themselves to abuse.

“We are saying we want corporates to continue paying the same amount of tax that they pay, but do it more fairly between corporates by allowing a lower rate for all, which we think is a bigger stimulus towards supporting growth than, for example, only giving tax deductions to a few companies which in any case get abused, from what we can see.”

Momoniat confirmed that the cut was also part of a treasury philosophy to prefer a wider, compliant base rather than higher tax rates.

It was forced to deviate from this thinking in 2015 when the politically fuelled problems at the South African Revenue Service saw collections plummet. This led to an increase in  the personal-income tax rate by 1% in all except the lowest bracket.

A subsequent increase in the top bracket to 45% for the wealthiest proved to have little effect on increasing actual revenue, Momoniat said, “presumably because very wealthy people know how to structure their way out of paying and to do it legitimately”.

“The compact we had with taxpayers was that if we can broaden the base, we will reduce the rate. That is what we are doing with the corporate income tax, and that is what we want to do with all our taxes,” he said.

Wednesday’s budget saw Mboweni extend private-income-tax relief worth R42.2-billion, as he withdrew increases announced in his Covid-19 special adjustment budget in June that would have taken effect over the next three years.

He announced further relief in the form of a 5% increase in personal-tax-income brackets, translating into a windfall of R2.2-billion for households.

On Thursday, senior treasury officials stressed that revenue collection, which came in at R213.2-billion below estimates because of the pandemic, would take up to four years to fully recover as the country battles successive waves of the Covid-19 virus and continued economic fallout.

Democratic Alliance MP Geordin Hill-Lewis said he questioned Momoniat’s assertion that the corporate tax would not affect the revenue baseline over the medium term.

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