Corporate tax: a balancing act

How does the Corporate Tax Income rate affects the average taxpayer and what are the ways in which we can start to curb tax evasion?

This year, OpenUp launched a project that interrogates transparency within the private sector, “Transparent Corporates” (TRACE). Our mission is to make corporate data freely and publicly available, and to empower everyone living in South Africa to hold the right people in the private sector accountable when they do things that affect everyday life. Over the next few weeks, we’ll be publishing a series of pieces that highlight some of the work we do, from looking at international shareholding to tax evasion, Trump to “paid Twitter” and much, much more. In this next article we look at how the Corporate Tax Income rate affects the average taxpayer, and ways in which we can start to curb tax evasion.

“The most reported about form of tax abuse, is the immoral behaviour of companies who do not pay their fair share of taxes within the societies they operate.” This is according to the Organisation Undoing Tax Abuse (OUTA). Tax evasion by corporates is nothing new and as OUTA points out, Corporate Tax Policies should be interrogated in relation to their obligation to human rights and sustainable development. In other words, the more unlawful companies are when it comes to tax, the more their employees and surrounding communities (who likely make up their employees) are the ones who suffer most. Here in South Africa, we have a bit of a catch-22 when it comes to tax: the higher the Corporate Tax Income (CIT) rate, the more likely companies are to set up tax haven subsidiaries. So, it would make sense to say that in lowering the CIT, the risk of companies, particularly multinational enterprises, dodging paying tax, would be lowered.

In the 2015/16 budget, CIT was the third largest contributor to tax collected, at R193.4-billion. At present, Personal Income Tax (PIT) is the largest. So here’s the problem: if government were to lower CIT, PIT would have to make up for the loss of other revenues; in other words, the tax that you and I pay would have to increase even more. If you’re interesting in finding out where you taxes go, have a look at the Tax Clock, which calculates how much of your day is spent actually paying taxes. Add to this the fact that every year, more and more budget cuts are happening, and at the end of the today, the country’s poor and vulnerable suffer the most, but are expected to hold us all up at the same time. Now, as I’ve said, this is already indicated by the fact that PIT brings in the most revenue. This is the situation for many developing countries, some of them situated right beside tax havens. So, how should we be dealing with tax abuse?

Before we even try and answer that question, it’s important to try and understand the situation at large.

In South Africa, the CIT (remember, that’s the Corporate Income Tax rate) is a tax collected from companies. It is based on the net income companies obtain while conducting business, and is measured annually (it is adjusted according to company revenue each year). Our average CIT sits somewhere in the middle of the scale at 28 percent, with places like the Maldives and Cayman Islands at 0 percent and the United Arab Emirates at a high of 55 percent. Just a note: next on the scale is Puerto Rico at 39%, so the jump is a drastic one. Corporate tax in South Africa averaged 34.22 percent from 2001 up until 2016, reaching an all time high of 37.8 percent in 2013. It has remained steady, at 28 percent, ever since.

On 31 March 2016, there were 3.3 million registered companies in South Africa (of which about 900,000 submit income tax returns). About a quarter of the 700,000 companies assessed had positive taxable income, just under half had taxable income equal to zero and the remaining companies reported a loss. The numbers point to a very concentrated economy, with only 0.2 percent of companies (325 large companies) assessed having taxable income of more than R200-million, but being responsible for more than half of the CIT revenue.

The total turnover of private sector businesses increased by 5.5 percent to an estimated R8.3-trillion in 2015, according to Statistics South Africa and the South African Revenue Services. This turnover increased across all industries included in their most recent assessment. The estimated total income was R8.7 trillion, a large proportion of which was turnover (as previously mentioned, R8.3 million). The largest contributor to South African private sector enterprises, other than turnover, was profit on financial and other assets (R110 billion), followed by ‘other’ income (R104.8 billion), interest received (R78 billion) and dividends (R55.5 billion). Private sector expenditure has increased to R8.2 trillion (by about 5.5 percent). Purchases (R5 trillion) and employment costs (R1.1 trillion) were the largest contributors.

Translation: Corporates are making more money and spending more money. At the same time, as we’ve seen, tax abuse continues and a majority of hard-working, tax-paying, poorer South Africans are expected to pay the price (literally). The corporate world, meanwhile, continues to thrive and bring in the big bucks; and tax obligations slowly but surely start to fall away. Of course, this isn’t the case for all corporates, but a fair few are doing all they can to avoid paying tax; enough to make a difference.

Today’s tax avoidance goes beyond loopholes and smart schemes. In the corporate sector, above all others, there is an elaborate system that allows companies to ‘legitimately’ get away with not paying tax. Avoidance allows multinational companies illegitimate market and competitive advantages. This in turn affects the entire tax, supply and value chains, and distorts the economy.

So, with all of this in mind, here are a few things that we can be doing to at least start dealing with tax abuse in South Africa:

  1. Start seeing tax abuse for what it is: a human rights issue as well as an economic one.
  2. Channel the growing public restlessness towards both public and private sector leadership into constructive, active and participative citizenry.
  3. Restrict qualifying criteria for offshore and residency statuses.
  4. At the same time, curtail the benefits of offshore, ownership and residency statuses.
  5. Enforce rules - and in the future, legislation - that requires companies to provide transparent country-by-country accounts.
  6. Major tax reform, especially when it comes to the complexity surrounding taxes: replace that with consistent, equal treatment of all types of earnings, and create a balance between over-taxing of work and under-taxing big companies.

But what we need more than anything is major political reform when it comes to monitoring and managing tax. We need to do our best to put a stop to offshore investments and allowing our own country to act as a tax haven for major companies, and in doing so, we can create a balance in tax revenue; that way, everyone wins and companies can truly be held accountable for paying an amount of tax that’s directly aligned with their earnings, all while remaining reasonable.

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