The challenge for government each fiscal year, is consolidating economic policies and introducing reforms that will contribute to long-term growth, through removing barriers to investment and employment; and reducing the cost of doing business, whilst broadening the tax base and not negatively impacting government revenues.
Over the past two years, government has placed emphasis on the review of tax incentives to improve efficiency and equity. Government sees tax incentive reform as a potential lever for broadening the tax base, with the view that reducing tax incentives and placing limitations on benefits such as assessed loss carry forward, will provide the fiscal room to reduce the corporate tax rate. Ten years ago, our effective corporate tax rate was 34.5%, and in 2013 it was reduced by 6.5% to 28% and has remained constant. However, our international tax competitiveness has declined over the years relative to our key investment and trade partners, with the worldwide average corporate income tax rate sitting at 23.5% and at 21.3% for European Union countries, and 23% for Organisation for Economic Co-operation and Development (OECD) countries1. The relatively high corporate income tax rate affects the attractiveness of the country for new investment projects and thwarts the investment appetite for expanding production capacity locally. Thus, a lower corporate tax rate should be more conducive to growth and employment. Looking at the global average income tax rates, it is questionable whether a 1% reduction in the corporate tax rate mooted by National Treasury would significantly impact international competitiveness.
Given this context of incentive tax reform, we expect to continue to see a reduction in the range of tax incentives available particularly to corporates in sectors such as manufacturing, film, port assets and rolling stock– with the focus on broadening the progressiveness of the tax system. Ironically, this seems to be in juxtaposition to the country’s industrial policy that is focused on promoting growth through supporting certain sectors in the economy. Notwithstanding this conflict, we are likely to see the continued trend of incentives that have reached their sunset clauses not being extended, particularly those that are sector specific, with a move to promote more neutrality and equity. There is also likely to be an increasing number of incentives that are up for review, with the R&D tax incentive and the energy efficiency incentive both having sunset clauses that fall in the new budget year.
However, absolute neutrality in tax is a pipe dream. In the ideal world, businesses make decisions purely on market considerations and not tax primarily; although, tax is often used as a tool to change behaviour. For example, the carbon tax was introduced in South Africa as an environmental levy to assist in shifting our country towards a low carbon economy. To address the market failures to energy efficiency, the Section 12L energy efficiency incentive, which gives an incentive of 95c/KWh energy saved, has proved to be an important inducement to encourage firms to invest in energy efficiency projects, with the South African National Energy Development Institute (SANEDI) reporting that 273 projects have saved 27 070 GWh of energy since the inception of the incentive in November 2013.2
Similarly, the research and development tax incentive has been found to have a positive impact on the expenditure and volume of research and development (R&D) conducted in South Africa, with companies receiving the incentive conducting R4 million more R&D than those not accessing the incentive, and that every Rand of tax benefits received results in R1.83 of additional R&D expenditure3. This is similar to data in the OECD paper, where it was found that a unit of R&D support resulted in 1.4 additional units of R&D.4
Given the existence of some evidence of the additional benefits for Section 11D and 12L relative to the tax forgone, and their emphasis on equity in the sense that they are available across the sectors to entities engaging in the required R&D or energy efficiency initiatives, we expect to see an indication of the extension of these sunset clauses, even if it is to allow room for a detailed review of their impact and recommendations for design modifications.
1.Sean Bray: “Corporate Tax Rates Around the World, 2021”; Tax Foundation Fiscal Fact Sheet November 2021
3.South African National Treasury and Department of Science and Innovation: “Discussion Document: Reviewing the design, implementation and impact of South Africa’s Research and Development Tax Incentive”, December 2021
4.OECD Science, Technology and Industry Policy Paper: “The Effects of R&D Tax Incentives and Their Role in the Innovation Policy Mix: Findings from the OECS microBeRD Project 2016-2019”, September 2020 No. 92