Analysts Expecting South African Corporate Tax Cut

by Robert Lee, Tax-News.com, London

13 February 2008

Analysts and tax experts are expecting South African Finance Minister Trevor Manuel to cut the rate of corporate income tax in the government's 2008 budget, which is due to be announced on 20th February.

Speaking at the recent a recent conference hosted by the Gordon Institute of Business Science (GIBS) on the Economic Outlook for 2008, Billy Joubert, Tax Director at Deloitte, predicted that while Manuel would be likely to leave personal income tax rates on hold, he could announce a 1% reduction in corporate tax.

"As far as personal Income Tax rates are concerned, I do not expect any major changes to tax rates - we have not seen major cuts for a long time. If there were to be a tax rate cut I would predict that it might be to the corporate rate (to bring it down to 28% from the current 29%) rather than to the individual marginal rate of 40%," he forecast.

The South African corporate tax system is currently undergoing important reform to bring it more into line with that of its major trading partners, and Manuel is expected to announce further details of how a new withholding tax on dividends will operate after the current Secondary Tax on Companies (STC) is abolished.

Companies currently pay STC, which was reduced from 12.5% to 10% in October 2007, on the excess of dividends declared over dividends received. Branches of foreign companies are exempt from STC, but pay a higher ordinary corporate income tax rate. The government has announced measures to replace STC with a broader-based dividend tax, also to be charged at 10%.

"This is a more conventional kind of tax and would be familiar to prospective investors in South Africa," Joubert observed.

"The tax will formally be levied on the shareholder rather than the company distributing the dividends, though it will continue to be the company which withholds the tax when it pays out dividends and pays the tax over to SARS," he explained.

Joubert noted that some foreign shareholders will be able to claim full or partial relief from the new tax under the terms of South Africa's double taxation treaties. However, the government is concerned that it may lose out unduly on revenues during the changeover from STC to the dividend tax, and has indicated that it would have to renegotiate certain double tax agreements before STC was finally abolished.

"All corporate taxpayers will be interested to know what the progress is with this process. We are also hoping for more information regarding how the new tax will work. One key issue would be what will happen with unutilised STC credits," Joubert stated.

Taxpayers will also be waiting for Manuel to flesh out his proposals for a new royalty system for the mining industry in 2009, and the introduction of a social security tax in 2010, Joubert stated.

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