Government is reducing the number of tax incentives, expenditure deductions and assessed loss offsets, with the aim of lowering the corporate income tax rate over the medium term. These changes are expected to enhance efficiency, transparency and fairness in the business tax system, while facilitating economic growth through improved investment and competitiveness.
Although corporate income tax is paid by the business, the burden of this tax is ultimately borne by three parties – the owners of capital, labour (through wages) and consumers (through prices). By implication, reducing the rate can have a positive effect on wages and employment, while promoting additional investment. South Africa has a relatively high corporate tax rate in comparison with similar countries and trading partners. High tax rates reduce competitiveness and create an incentive for profit shifting to lower-tax jurisdictions.
Tax incentives are public subsidies to the private sector. They illustrate a persistent trade-off in tax policy: the narrower the tax base, the higher the tax rate required to raise a given level of revenue. For example, many African countries have corporate income tax rates similar to or higher than South Africa, but raise lower levels of revenue because their tax bases are often narrower due to generous incentives, exemptions and tax holidays. Tax incentives often undermine the principles of a good tax system, which should be simple, efficient, equitable and easy to administer.
Reducing the extent of tax incentives for individuals and companies will provide the fiscal room to lower the corporate tax rate, which is aimed at benefiting all businesses, employees and consumers. Tax incentives and some expenditure deductions provide favourable tax treatment to certain taxpayers or groups of taxpayers, and inevitably result in the creation of vested interests and lobby groups. The 2021 Budget proposes to either limit or let lapse those tax incentives that erode the equity of the tax system or do not meet their intended objectives.