South Africa's Finance Minister To Close Banks' Tax Loophole

Mandy Robinson, Tax-news.com, London

14 March 2001

Having completed extensive talks with South Africa's top banking executives, Finance Minister Trevor Manuel has announced that the government will raise the low tax rate of 6 per cent that is currently imposed on the country's banks as soon as possible.

The low tax rate, which is effectively a tax loophole, allows banks to defer their taxes by employing derivative financial products and structured asset-based finance deals. Thus South Africa's banks pay an average tax rate of 24 per cent (although analysts reckon it could be as low as 10 per cent for some banks) compared to the country's flat corporate tax rate of 30 percent.

Around 500 million rand (US$65 million) is paid by the banks each year in tax and this figure is expected to rise to 2.5 billion rand if the existing tax deferral mechanisms are abolished. Manuel told reporters: 'It cannot be correct that the tax receiver is at the end of the queue, that ...you structure deals in such a way that you minimise your tax paid to the level of absurdity.'

Just when the new tax rate will be implemented is unclear. Commissioner of the SA Revenue Service (SARS), Pravin Gordhan, has told reporters that it may take until the next budget before the new tax regime is enforced but Trevor Manuel insists that it is an urgent matter and will be addressed immediately, saying 'there is the desire to resolve these issues speedily.'

The Banking Council's Chief Executive, Bob Tucker, said that it was unacceptable for banks to continue paying a six per cent rate of tax. He explained: 'From the Banking Council's point of view we would be very disappointed if this took to the next budget to resolve. There is an atmosphere of uncertainty and it's in the interest of the banking industry to clear it up much sooner.'

Concerns over the tax rate were raised in Manuel's recent budget speech last month and banking shares dropped sharply when he raised his concerns over the low tax rate. But he has said that the matter was raised with banks last year and since then there have been two major sets of talks between the government and the banking officials.

It is expected that an increased rate of tax would result in only a minor negative impact upon the country's main banks. Most analysts say that closing the tax loophole will simply force the banks to pass on a higher cost of credit to their corporate clients which may lead to a slight fall in business take-up but would not significantly effect their earnings.

'Some of your smaller players might be in trouble, but for the leading banks all that will happen is that the deferred tax balance will start to unwind, there will be a gradual impact over time,' said Jacques Badenhorst, an analyst at JP Morgan.

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