Increasing corporate income tax rate could negatively affect revenue collections

Published: 5 February 2021

The COVID-19 pandemic has resulted in a massive shortfall in revenue collections and has created a desperate need to raise additional taxes. How best to do this without causing further damage to the economy is a matter of intense debate.

The three key revenue-raising taxes are income taxes on individuals, income taxes on companies and value-added tax (VAT). Nearly everyone agrees that individuals are overtaxed and raising the VAT rate is politically fraught given its regressive nature. This raises the obvious question whether the corporate income tax rate, which is currently at 28%, should not be increased? In fact, that may not be a good idea because raising the corporate rate may paradoxically negatively affect revenue collections. In this regard, it should be noted that South Africa's corporate tax rate is significantly higher than the corporate rate of a number of its important trading partners - raising the rate could only make us even more uncompetitive and may encourage undesirable practices like transfer pricing insofar as it heightens the risk of multinationals trying to “shift” their tax burden from South Africa to lower taxed foreign jurisdictions by pricing intra-group transactions between South Africa, and such lower taxed foreign jurisdictions in the foreign jurisdictions’ favour.

Furthermore, increased corporate taxes may have a detrimental effect on boosting economic growth which ultimately is the real key to unlocking a sustained increase in revenue collections (together with strengthening the  South African Revenue Service’s capacity to collect taxes). It is also worth noting that increased taxation over the recent past has led to increasingly lower revenue collections - further tax increases are likely to exacerbate this trend.

For these reasons, we believe that it is highly unlikely that National Treasury would increase corporate tax rates at this time, however psychologically soothing it may be for some people. On the contrary, if anything, National Treasury may be tempted to reduce the corporate rate. That would be a bold and imaginative step!