MEDIA RELEASE: Unmasking SA’s real tax rate

Unmasking South Africa’s real tax rate

Johannesburg: Hundreds of professionals from the Financial Services Sector joined the Graduate Institute of Financial Sciences (GIFS) for a sobering discussion on South Africa’s authentic tax rate. GIFS CEO, Dr Kershen Pillay, led a perspicacious conversation with Johan Heydenrych, Director of Tax Services at Kreston SA, during an IIG Insights Session on 8 July 2021.

Dr Pillay kicked off the robust discussion by pointing out that while other countries reap the rewards of paying higher taxes in the form of free social services, South Africa fails to deliver even the most basic services at a national level. The indirect tax burden comes in the form of the private cost of health, education, and security.

Heydenrych, who has specialised in taxation for the past 30 years, 23 years of which as Director of Tax Services at KPMG, responded by highlighting that SA’s corporate tax rate and VAT rate are comparable to similar countries in the world. However, SA’s tax system is heavily reliant on Personal Income Tax, which has come under immense pressure because of the COVID-19 crisis.

“Personal income tax (PIT) rate increases are often advocated when higher revenues are needed,” Heydenrych said. “Over the past six years, these taxes have been adjusted upwards five times to raise more revenue. Further increases would put additional pressure on households that have been negatively affected by COVID-19 and undermine the chance of a stronger economic recovery.”

The pandemic has shrunk SA’s tax base turning up the heat on an already-strained system. In early July, SARS commissioner, Edward Kieswetter, raised concern about SA’s 32.6% unemployment rate, pointing out that this, together with company closures, will have an “immeasurable impact” on SA’s tax base. It is estimated that just 25% of those who pay income tax, pay 80% of all personal income tax collected. In the 2019/20 tax year, SARS noted 22.2 million registered taxpayers, of which 6.3 million were expected to submit tax returns. In effect, this means that around 1.58 million people are shouldering the bulk of all income tax paid.

“It is not sustainable that 22% of total government revenue is collected from 3.4% of the total population,” says Heydenrych, who has three decades of experience in Corporate Tax, Value-added Tax, Tax Accounting, Tax Process and Technology, Tax Due Diligences, and Restructure and mergers. “High-net-worth individuals have access to highly skilled tax professionals that can externalise wealth (sometimes within the framework of the law, but unfortunately also sometimes outside the framework of the law). This negatively impacts tax morality resulting in a downward spiral of increased non-compliance, increased aggressiveness by SARS, and a negative impact on economic growth.”

While the protracted pandemic and subsequent rise in tech-enabled industries and operations have resulted in a shrinking tax base, misuse and mismanagement of state funds are equally responsible. Growing sentiment that our taxes are not being put to good use is resulting in more individuals choosing to withhold their tax contributions, which increases pressure on the system and stokes this vicious cycle.

“The majority of us are law-abiding citizens who work tirelessly to make a positive socio-economic impact. We want nothing more than to see South Africa flourish,” said Dr Pillay. “Yes, rampant corruption and misuse of monies is steadily gnawing away at taxpayers’ faith in the system. We need a bigger groundswell of voices calling for accountability. We need to see our tax spend being used for the purposes they are collected, namely improved infrastructure such as transport, water, and electricity supplies, firming up of education and healthcare systems, and the strengthening of security systems. Currently, in addition to paying taxes, we must fork out for reliable infrastructure, quality education, effective healthcare, and the like. This disparity fuels tax apathy which, in turn, makes a complex situation all the more complicated.”

An additional factor in SA’s tax conundrum is the steady drop in Corporate Income Tax contributions to the national budget; down from 24% of budgeted income in 2010 to 15.5% in 2021, as a result of the digitisation of the economy that has led to a reduction in the “classical corporate taxpayer” and has made many industries obsolete which in turn has further eroded the economy.

So, is there an end to this vicious cycle? The solution, according to Heydenrych, lies in addressing the lack of corporate tax contributions derived from the digital economy, stimulating foreign investment in “real” companies in SA, creating jobs, energising education, increasing personal income tax contributions, and addressing the high level of fruitless and wasteful expenditures at government level.

“I would like to see the public money being applied more efficiently and effectively with a focus on achieving economic activity. For many persons, it is simply too difficult to ‘do business’ in South Africa. Many concerns are labour-related. Their concerns are mainly driven by non-tax issues such as safety and security, reliable electricity and municipal infrastructure, and the nationalisation of resources.”

The full IIG Insights Session on Unmasking SA’s real tax rate is available on-demand here:

Heydenrych and his SA team have offered accounting, tax, audit, and financial consulting solutions for close to a century, and are plugged into the global Kreston network that has a global footprint spanning 125 countries. Kreston International celebrates its 50th anniversary this year.

17 July 2021