Sanchia Temkin
13 February 2008
Johannesburg — COMPANIES can look forward to a reduction in corporate tax rates as the country moves from a system of secondary tax on companies (STC) to one of withholding tax on dividends, say tax analysts.
Finance Minister Trevor Manuel might cut the corporate tax rate from 29% to 28% in next week's budget, Billy Joubert, a tax director at Deloitte , said at a briefing in Sandton yesterday on tax predictions for the budget.
Ernie Lai King, head of Deneys Reitz Tax Services, said SA's corporate tax rate was still high by international standards, but as the tax system moved from STC to a withholding tax the rate would drop.
The South African Revenue Service (SARS) collected R120,1bn in corporate tax for 2006-07, nearly R23,8bn more than the original estimate, as corporate income tax rose to 24,2% of overall revenue, up from a 20% average over the past four years.
Companies are taxed at a basic rate on income of 29%, including an additional secondary tax of 12,5% on profit declared. If a company distributes 100% of earnings as a dividend, an effective rate of 36,9% applies.
In a surprise move two years ago, the finance minister cut the company tax rate one percentage point to 29%.
Joubert said that even after that reduction, company tax remained above that of international levels. The emphasis internationally is on stimulation of companies. Most countries changed corporate tax rates to reduce the burden on businesses.
Lai King said that the conversion of STC to a dividend withholding tax was a significant change in SA's tax policy and would drop the effective company tax rate.
Joubert said that withholding tax on dividends was a more conventional sort of tax, and would be more familiar to prospective investors in SA. The tax would be levied on the shareholder rather than the company distributing the dividends, though it would continue to be the organisation that withholds the tax when it pays out dividends and pays the tax to SARS.
Some foreign shareholders will be able to claim relief, or partial relief, from the new tax under a double-tax agreement. But as the government is concerned about resulting loss of revenue it intends renegotiating certain double-tax treaties, where an undue amount of tax would be lost, before it took the final step of abolishing STC.
Joubert said taxpayers would be interested to know what progress was being made with this process. "Taxpayers are also hoping for more information regarding how the new tax will work. One key issue would be what will happen with unutilised STC credits."
In the light of the economy slowing, Lai King said that there was less opportunity for individual tax cuts. "The finance minister is unlikely to have as much room to manoeuvre as he has had in past budgets."
Delia Ndlovu a tax director at Deloitte, said the government was trying to phase out travel allowances for taxpayers. About 600000 taxpayers were believed to use travel allowances, one of two remaining fringe benefits.
Duane Newman a director at Deloitte Indirect Tax, said that the changes would prove to be punitive for taxpayers and the motor industry.
"Car sales have dropped due to interest rates and stricter credit controls," Newman said. Hopefully, the treasury would take the effect of the car allowance tax changes on the automotive market into account, Newman said.
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