Finance minister Pravin Gordhan tabled a budget on 26 February that focuses largely on reducing the national debt. Many had hoped that the finance minister’s 2016 Budget Speech would also set out clear measures to increase revenues.
The minister has kept the “powder dry” as the measures announced focus more on keeping government’s spending in check, rather than expanding South Africa’s tax base.
As part of the budget setting process for this year, the minister targeted other means of raising tax revenue rather than raising personal income tax rates, or considering an increase in VAT or corporate income tax.
While the minister did make a positive attempt to expand the tax base by introducing a sugar tax and tyre tax, these are unlikely to be large-scale revenue earners and more could have been done to broaden South Africa’s tax base, and to protect and foster local South African industry in the face of rising competition from global companies.
Examples of opportunities that were missed include levying corporate income tax on foreign suppliers of electronic services who currently do not pay South African income tax, unlike local entities.
Treasury has stated that more work needs to be done to develop the reach of South Africa’s tax legislation to ensure that those who are doing business in South Africa, but are not taxed in South Africa, should also pay their fair share of taxes.
Another missed opportunity is introducing VAT on electronic advertising services supplied from offshore. This market is forecast to reach R4.4bn by 2018, according to PwC’s Entertainment and Media Outlook Report, 2014–2018.
Currently, electronic advertising supplied from foreign entities is not subject to VAT or corporate income tax and leaves the South African industry at a disadvantage.
Such measures would be a welcome expansion to South Africa’s tax base, and would better align our tax system with those of more developed countries. These measures would also present an opportunity to better protect local industry against larger multinationals by ensuring a more even playing field.
There should be continuous efforts to ensure effective implementation and collection of consumption taxes and while South Africa has made significant strides by expanding the scope of VAT to cover certain electronic supplies made by foreign suppliers, other opportunities to further broaden the tax base and protect local industry exist.
Despite being just under two years old, the current legislation dealing with electronic services supplied by foreigners already appears “dated” due to the rapid advancement of technology.
While it was stated in the 2015 Budget Review that the provisions governing electronic services in South Africa would be broadened to include the supply of other services (for example software), Treasury did not take the opportunity to provide further details on this change and other developments which could further broaden the base.
It is disappointing that the 2016 Budget Review missed out on some key opportunities for industry. Treasury should have regard for current global tax trends in the electronic services arena and consider implementing effective and efficient tax measures to ensure that South Africa aligns itself with other international jurisdictions, and in particular ensures that local players are not disadvantaged while foreign businesses continue to operate in the SA market without paying tax.
*Charles de Wet, Head of Indirect Tax for PwC Africa.