Johannesburg — ONE of the biggest successes of SA's tax reforms of the past decade is also one of the tax system's greatest sources of vulnerability. Corporate SA's contribution to the tax take has doubled since the late 1990s, even though the corporate tax rate has come down significantly.

The trouble is that corporate tax is the most volatile of taxes, because of the way company profits change in response to the business and commodity cycles. That has tended to work in favour of the fiscus in recent years, with boom times seeing big overruns in corporate tax collections. But those days may be coming to an end as the economy starts to slow. And with just nine working days to go to the end of the current tax year, the officials of the South African Revenue Service may well be feeling the strain of meeting targets for corporate tax collections at a time when companies themselves are not as upbeat as they were a few months ago.

Opening a tax policy symposium yesterday, Finance Minister Trevor Manuel pointed out that corporate income tax revenues had increased from a low of 2,6% of gross domestic product in 1993-94 to a high of 6,6% in 2006-07, though the share was "very volatile".

Treasury figures show that what's happened to SA's tax mix in the past 10 years (since 1998-99) is that corporate income taxes (including secondary tax on companies, or STC) have grown from about 13% to 28%, despite the cut in the company tax rate from 35% to 29%. Indeed, Manuel commented wryly that "as an avowed social democrat, the scariest aspect of all this is that we prove the correctness of the Laffer curve with each move". (The Laffer curve, much favoured in the past by more right-wing economists, posits that lower tax rates will lead to higher tax revenues.)

MANUEL noted that the shift in the tax mix, from personal to corporate, carried with it an increased risk of volatility, and was one of those issues that "we watch". In his budget last month, the minister came in at the upper end of market expectations when he estimated revenue for the current fiscal year would be R14,5bn higher than the original budget number at R571bn. Though much of the overrun is in personal income tax, reflecting higher job creation and pay increases, company income tax and STC collections were again expected to run ahead of original estimates, while VAT was expected to fall short.

In these last few days of the tax year, officials at SARS's large business centre will be phoning around to check that companies will be paying up as expected. No doubt SARS will find the R571bn, but it won't come easy. And it's likely to get tougher in the year to come, not only because growth is slowing, but also because the mix of growth is shifting from consumption to investment spending. As consumer spending slows and household balance sheets start to come under pressure, the profitability of retailers and banks comes off, affecting the corporate tax take. Added to all that is that when corporate cash flows start coming under pressure, companies tend to look to tax measures to enhance their cash flows, underestimating tax liabilities and delaying payment for as long as they legally can.

The budget had already taken much of this into account, pencilling in slower, but still healthy, growth in revenues in coming years. But there may be more uncertainty now than there was even a month or two ago, with the world economy looking worse, commodity prices looking crazier and SA's own power situation still looking unpredictable. To the extent that it does affect employment and investment, that could impact on personal and corporate tax collections. It may be too soon to tell but we clearly shouldn't expect the revenue overruns of the past few years to be repeated in the next year or two. Nor would it be desirable in the context of a slowing economy for the tax authorities to be going all out to beat the budget. Now might be the time to be sensitive to the cycle and take it carefully.

Joffe is senior associate editor.