The introduction of certain rules to ensure neutrality for the fiscus with the reduction of the corporate income tax rate to 27% may come at a greater cost than initially anticipated.
Corporate tax experts warn that the recently-introduced corporate tax reforms have already impacted company decisions on new projects. Initial uncertainty about the interest deduction rule caused consternation and some projects were even canned on the back of this, says Enock Chivaura, senior manager at EY.
“It is quite significant that projects were cancelled because of a tax proposal,” he said during a session on the management of debt in a post-Covid economy at the annual Tax Indaba.
Government estimated that the rate reduction would cost the fiscus R2.6 billion. The introduction of the limitation on assessed loss rollover relief is estimated to generate R1.1 billion and interest deduction limitation will generate R1.5 billion, leaving the fiscus in a neutral position.
Companies are now only able to offset 80% of their assessed loss against taxable income, and the allowable interest deduction for related party financing is limited to 30%.
The new assessed loss rule applies to companies with taxable income exceeding R1 million.
Since only 80% of the assessed loss in a tax year can be carried forward, companies will have to ensure they have cash to pay the 20% tax liability.
Bowmans partner Yasmeen Suliman says certain companies are in an assessed loss position – not because they run their business poorly, but because they qualify for government allowances such as accelerated capital expenditure allowances.
A company that is ‘cash-flush’ and has a strong balance sheet will obviously be in a better position to pay the tax, but companies that are struggling will find it much harder.
“The irony is that the first year companies are able to make taxable income and drag themselves out of the deep hole they are in, they have to use their cash to pay tax,” says Suliman. “Most of these companies are cash-hungry.”
Project companies, set up for specific construction or property development purposes, are generally in an assessed loss position because of debt. However, when their income does flow at the tail-end of the project, they may not have sufficient time to offset all their assessed losses.
Suliman also laments the complexity of the new rules. Although SA has several “sophisticated” taxpayers there is also a large base of less sophisticated taxpayers who will be affected by these rules.
“It has come to the point where our tax system is too complex for the sophistication of our economy,” she says.
Government policies appear to be at war with each other, says Kristel van Rensburg, tax executive at ENSafrica.
She uses the example of companies involved in renewable energy projects.
South Africa is in desperate need of reliable and cheap electricity, yet companies involved in renewable energy projects must now seek expensive third party debt to fund their projects in order to qualify for a full interest deduction.
Government offers favourable capital expenditure allowances (a tax deduction on expenses) for companies involved in new renewable energy projects, but this is negated by the fact that the company must pay 20% tax despite having assessed losses.
Benjamin Mbana, head of the Allen & Overy tax practice, believes better-than-anticipated recovery post-Covid could result in a broader corporate tax collection base than National Treasury estimated.
Companies are starting to generate profits and this could translate into higher collections, despite the lower tax rate.
“I think there is going to be a significant increase in collections, particularly in the initial few years of recovery,” says Mbana. He believes corporate tax collections won’t “align” with the limitation rules. The result will be over-collections rather than neutrality.
Van Rensburg hopes Treasury will take note of comments and feedback on the impact, and reconsider its position should it collect more than anticipated instead of achieving a neutral tax position.
The experts also expressed doubt whether the drop of one percentage point in the tax rate will change foreign investors’ decision-making. The average tax rate of countries in the Organisation for Economic Cooperation and Development (OECD) is 23%.
“If South Africa dropped its rate by four percentage points the discussion may have been completely different,” says Van Rensburg.