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Davis Committee Reports On South African Tax System

by Lorys Charalambous,, Cyprus

09 June 2015

South Africa's Ministry of Finance has authorized release for public comment of the Davis Tax Committee's interim macro assessment of the country's tax system, which identifies priorities for reforms.

The Committee was set up in 2013 to comprehensively review the country's tax system. The interim report is intended to serve as a precursor of the Committee's other, more specialized reports. The closing date for comments is August 31, 2015.

The Government said the report "aims to assess the current South African tax system against the criteria for a good tax system. The focus is particularly on the role of the tax system in supporting inclusive growth, employment, development, equity, and fiscal sustainability in South Africa, and how it might be best structured to achieve these objectives."

For example, it says corporate tax in South Africa could be considered non-neutral, particularly in its bias towards debt-financing over equity and its vulnerability to transfer pricing practices. These matters are to be dealt with by the Committee's base erosion and profit shifting subcommittee.

The report also warns that support for certain industry sectors may be poorly targeted, resulting in higher than intended effective rates. The numerous tax breaks for capital investment may create unfair competition for labor-intensive industries, it adds. It also notes that gold mining is a declining industry, and questions whether the favorable tax treatment accorded to gold and uranium mining is still justified.

Overall, the tax system in South Africa is evaluated as "slightly progressive, with progressive direct taxes compensating for more regressive indirect taxes." The South African tax system is less progressive than countries like Brazil and Mexico however, indicating that "there may be some room for more progressivity in the tax system." The report also highlights that a great deal of redistribution occurs on the expenditure side of the budget.

Finally, given the current need for the Government to narrow the country's fiscal deficit, the Committee points out that, while "measures may be taken in the short term to raise additional revenue, these should not compromise the longer term objective... of stimulating inclusive growth."

TAGS: South Africa | tax | business | tax incentives | mining | fiscal policy | budget | corporation tax | ministry of finance | multinationals | transfer pricing | tax breaks | tax reform | Africa | Tax

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