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IMF Backs Up South African Government's Capital Gains Tax Plans

Amanda Banks, Tax-news.com, London

29 January 2001

The International Monetary Fund (IMF) has confirmed its support of the South African government's controversial proposal to introduce a capital gains tax. According to the South African news service, Business Day, the IMF says it would 'rectify a deep weakness of the South African tax system' and it is 'particularly urgent' that South Africa implement the tax due to the inequality in the country and the sophistication of its financial markets.

It appears that the campaign organised by South Africa's Chamber of Business (SACOB) urging the government to scrap plans for the tax will fall on deaf ears. SACOB has argued that the tax will deter direct investment into the country, saying the tax 'has a notorious reputation for its low yield and high opportunity costs arising from distortions it creates in the economy' ... [it is] a notoriously inefficient generator of net revenue. Capital gains tax has become a discredited tax, both as a revenue-collection mechanism and as an economic instrument. Many countries would not introduce [it] if they had the luxury of tax redesign.'

Sacob, representing over 40,000 South African businesses, predicted that the tax is likely to result in a 'locking-in effect' which means that the realisation of assets would be held off indefinitely thus affecting the flow of capital and reducing the country's fiscal revenue.

In addition the organisation argues that the introduction of capital gains tax will have an immobilising effect on entrepreneurship and ultimately, stifle employment opportunities. Sacob cites countries such as France, Germany, Holland and Italy which offer entrepreneurs exemption from paying the tax on the sale of shares in their businesses and claims that a capital gains tax-free country has a competitive advantage for entrepreneurs looking to set up business.

The IMF said introduction of the tax would help to eliminate tax avoidance strategies, promote better equity and make certain that the most wealthy people paid their fair share of taxes. Furthermore, it would have little impact on private savings and foreign investors would not be affected. The organisation stated: 'By expanding the tax base it will facilitate the general programme of rate reduction under way and would improve the efficiency of resource allocation.'

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