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OECD Proposes South African Tax Revenue Increases

by Lorys Charalambous, Tax-News.com, Cyprus

21 July 2015


In its annual survey of the South African economy, the Organisation for Economic Co-operation and Development (OECD) has recommended measures to increase tax revenue and meet the country's requirement for higher public spending on infrastructure and welfare.

At the presentation of the survey, OECD Secretary-General Angel Gurria said that "more tax revenues will also be needed to fund investments for a stronger more inclusive economy. … Fortunately, South Africa's starting point is a relatively well balanced and efficient tax system that performs particularly well given the narrow base on which taxes are raised."

The survey points out that taxes on personal and corporate income represent half of all tax revenues, but they are levied on narrow tax bases. For example, only 6.5m individuals paid income tax in 2013/14 out of an estimated working-age population of 35m.

It is recommended that deductions and allowances, such as the allowance for interest income, should be scaled back. The OECD notes that, "as they are more often conferred to higher income earners, such a scaling back would increase tax progressivity."

The OECD also suggests that base broadening should be the focus for corporate tax, as "effective tax rates are reduced by numerous tax incentives, many of which appear to be used for industrial policy with little cost-benefit analysis and contribute to large differences in marginal effective tax rates on investment across industries."

"Each incentive scheme should be examined and those which are not cost effective should be removed," it states. "The simplified tax regimes for small businesses and microbusinesses are also considered ineffective."

With regard to value added tax (VAT), it is recommended that the thrust of reforms should be concentrated on base broadening, together with increased compliance. It is pointed out that "VAT zero-rates and exemptions are not well-targeted as the associated tax savings disproportionately accrue to better-off households." Additional consumption tax revenues could be raised via higher excise duties on items like alcohol and tobacco.

Finally, the OECD urges the Government to proceed with the planned introduction of a carbon tax in 2016, although with "its current design and relatively modest effective tax rate, it is alone unlikely to achieve targeted emission reductions. While its effectiveness could be enhanced, the introduction of this instrument is an important step towards a more sustainable growth path."

In his comments following the release of the survey, Finance Minister Nhlanhla Nene confirmed that taxes on middle- and high-income earners were raised in the 2015/16 National Budget delivered in February, but indicated that further higher taxation should be structured so as not penalize economic growth.

"On taxation issues," he added, "we have identified the need for reviewing our taxation framework. The work of the Davis Tax Committee is expected to make proposals that can enhance the contribution of tax policy to growth, employment and fiscal sustainability."

TAGS: individuals | South Africa | compliance | tax | small business | business | value added tax (VAT) | tax incentives | Organisation for Economic Co-operation and Development (OECD) | corporation tax | excise duty | carbon tax | tax breaks | individual income tax | Africa | Tax

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