Gordhan Launches Extensive Review of SA’s Tax System
19 August 2013
Posted by: Author: Linda Ensor
Author: Linda Ensor (BusinessDay)
Finance Minister Pravin Gordhan has initiated a far-reaching and fundamental review of South Africa’s tax system that will be undertaken by a team of eminent tax experts led by Judge Dennis Davis.
The team has been tasked, among other things, to assess whether or not South Africa’s tax system is able to generate sufficient and sustainable revenue to fund the government’s current and future expenditure priorities, including its much-vaunted National Health Insurance.
Mr Gordhan’s announcement at a media briefing on Wednesday — first signalled in his budget speech in February — comes as South Africa faces increasing pressure on its macroeconomic and fiscal projections.
Already in his budget speech, Mr Gordhan warned that the government might have to reassess its revenue and spending plans, if economic circumstances deteriorated, to secure South Africa’s fiscal footing.
In addition to the tax review, he also announced on Wednesday a comprehensive review of expenditure, focusing on both spending controls and value for money in government programmes and agencies.
The minister warned earlier this week that South Africa’s growth outlook and its fiscal stability were threatened on various fronts. He said on Wednesday that the pace of globalisation, the relatively modest economic growth after the 2008-09 economic recession and South Africa’s significant social challenges required a review of the role the tax system could play in addressing them.
There is also a need to address concerns about profit shifting by companies and the erosion of the tax base.
The tax review committee members will include Annet Wanyana Oguttu, Matthew Lester, Ingrid Woolard, Nara Monkam, Tania Ajam, Nirupa Padia and Vuyo Jack, as well as Treasury chief director Cecil Morden and South African Revenue Service official Kosie Louw in an ex officio capacity to provide technical support and advice.
The committee will make recommendations to Mr Gordhan, and any tax proposals arising from these will be announced as part of the normal budget and legislative processes. The committee will be required to submit interim reports before its final report, which will be published on a date yet to be determined.
Mr Gordhan said the committee would be required to evaluate the South African tax system against international tax trends, principles and practices, as well as recent international initiatives to improve tax compliance and deal with tax-base erosion.
In particular, he said it would have to look at the overall tax base and tax burden, "including the appropriate tax mix between direct taxes, indirect taxes, and provincial and local taxes".
"An analysis of the sustainability in the long run of the overall tax-to-GDP (gross domestic product) ratio, and the tax-to-GDP ratio for each of the three major tax instruments — personal income tax, corporate income tax and value-added tax (VAT) — should be undertaken," Mr Gordhan said.
"This in essence requires an evaluation of the economic and social impact of the tax system and an assessment of whether the current tax structure is able to generate sufficient and sustainable revenues to fund the government’s current and future expenditure priorities."
The committee will also have to examine the effect of the tax system on the promotion of small and medium-sized businesses, including analysing tax compliance costs, streamlining tax administration and simplifying tax legislation.
With regard to corporate tax, the committee will be required to look into its efficiency, tax avoidance, tax incentives to promote developmental objectives, and the average (and marginal) effective corporate income tax rates in various sectors of the economy.
Mining taxes will also be reviewed to ensure that the sector contributes to growth and job creation and remains a competitive investment proposition. The review will take into account the challenges facing the mining sector, including low commodity prices, rising costs, falling outputs and declining margins, as well as its current contribution to tax revenues.
Various elements of taxation within the financial sector, namely the taxation regime of long-term insurers, the taxation of hedge funds, the taxation of various innovative financial instruments and the application of VAT by the sector will also be examined.
VAT, with specific reference to its efficiency and equity, will be investigated and the advisability and effectiveness of dual rates, zero rating and exemptions considered.
The effect of e-commerce (especially the use of digital delivery of goods and services) on the integrity of the tax base, in particular on VAT and corporate income tax revenues, has also been included in the terms of reference for the committee.
Also to be addressed are the progressivity of the tax system and the role and continued relevance of estate duty to support a more equitable and progressive tax system. Specifically, the interaction between capital gains tax and estate duty should be considered.
Mr Gordhan said the committee would also conduct "an evaluation of proposals to fund, for example, the proposed National Health Insurance and long-term infrastructure projects to boost the growth potential of this economy."