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Pressure on Gordhan to reassure rating agencies in budget

Tuesday, 28 January 2014   (0 Comments)
Posted by: Author: Amanda Visser
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Author:  Amanda Visser (BDlive)

WHEN Finance Minister Pravin Gordhan presents his national budget next month, he will not only have to restore South African taxpayers’ confidence in the way government will be spending tax revenue, but will also have to assure rating agents who are watching movements on the budget deficit closely, says Deloitte tax service leader Nazrien Kader.

Mr Gordhan will be delivering his budget speech on February 26 at a time when the country is facing tough wage negotiations in several key manufacturing industries, a weakening currency, increased government debt and low economic growth.

Ms Kader said the tax to gross domestic product (GDP) ratio in South Africa has been hovering near 25%, which showed that South Africa was a high tax jurisdiction compared to countries in the Brics (Brazil, Russia, India and China) grouping. Brazil has a tax to GDP ratio of almost 16%, Russia 15%, India 10.5% and China 10%.

She said the last thing South Africans wanted to see in the 2014 budget was tax hikes. "All we want of him is to say he has a plan, that there is commitment at all levels of government to implement this plan and that there is a sense of urgency in the execution of the plan.”

Pressure on tax revenue was set to continue, with revenue from personal income tax remaining the most stable income stream. VAT collections and corporate income tax have been declining and the government would be looking for additional revenue streams.

Anne Bardopoulos, manager in Deloitte’s VAT division, said the tax mix and the VAT rate were focus areas of the tax review committee headed by Judge Dennis Davis. She said many jurisdictions have a multitier system with several different VAT rates.

This allowed them to charge a much higher rate on luxury items in an attempt to collect more VAT from the wealthy without negative affecting the poorer part of society. She said South Africa could introduce a third VAT rate of, for example, 20% on items such as CDs, movies and luxury goods.

Deloitte associate director Alex Gwala said he did not expect any changes to the mining tax regime, given the work that the Davis committee still had to do. The committee had been asked to investigate whether the current regime was appropriate, given the agreement between the government, labour and business to ensure that the sector contributed to growth and job creation and remained competitive.

Deloitte’s representative on the base erosion profit shifting sub-committee of the Davis committee, Billy Joubert, said some aspects introduced into South Africa’s transfer pricing rules (aimed at preventing base erosion) were problematic.

A generic "arms’ length test” had been introduced in terms of inbound financial assistance. "We still do not have any definitive guidance on how to apply that test. I am not saying the old rules were perfect, but everybody knew exactly how they worked. At the moment taxpayers and their advisors are pretty much at sea,” he said.

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