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South Africa Tax Reform Committee Issues Final Report

by Lorys Charalambous,, Cyprus

29 August 2016

The Davis Tax Committee (DTC) has found that South Africa's tax system is "slightly" progressive overall, but is more regressive than similarly sized emerging economies.

This was one of the main conclusions of the final report of the DTC's "macro analysis" of the South African tax regime, published on August 24. The aim of the report was to "articulate a set of overarching principles of a good tax system" to guide current tax policy and future tax reform.

The report concluded that, as a mechanism for redistributing income from the wealthy to the poorest in South African society, the tax system is largely effective, although equivalent economies tend to have more progressive tax regimes.

"Overall, the tax system is slightly progressive, with progressive direct taxes compensating for more regressive indirect taxes," the report said. "However, the South African tax system is less progressive than countries such as Brazil and Mexico, indicating that there may be some room for more progressivity in the tax system."

However, the report also acknowledged that the Government has little room for maneuver in this regard, because raising rates of tax on personal and corporate income would likely encourage tax avoidance and damage South Africa's international competitiveness. What's more, increasing the 14 percent value-added tax would be a regressive tax increase, the DTC observed.

The Committee also concluded that for the most part, the tax regime raises revenue efficiently and is largely transparent. However, it noted concerns that high marginal personal income tax rates tend to disincentivize labor supply and have the potential to reduce labor mobility, especially among highly skilled workers.

The report also found South Africa's corporate tax to be "economically inefficient" and "non-neutral."

"[I]t is non-neutral in the sense that it may induce taxpayers to alter their behaviors in ways unrelated to underlying economic fundamentals (the relative costs of production, access to markets, and sound infrastructure) solely as a result of the tax system and also might not minimize the deadweight welfare losses as a result of distorting the underlying allocation of resources in the economy to given revenue adequacy objectives," the report said.

South Africa's array of corporate tax incentives came in for particular criticism, with the DTC suggesting that the proliferation of incentives has made the system more complex. It also doubted whether the incentives were achieving the Government's aims of encouraging investment and employment.

"The increasing complexity of corporate tax legislation (often influenced by international developments) has rendered the system more open to interpretation, less certain, and less transparent," the report said.

The Davis Tax Committee was set up by the Ministry of Finance on July 17, 2013, to review South Africa's tax policy framework and the role it can play in achieving inclusive growth, employment, development, and fiscal sustainability. It has also studied a number of specific taxes and areas of the the tax regime, including VAT, estate duty, property tax, the taxation of mining operations, and tax rules on small businesses.

TAGS: South Africa | Finance | tax | investment | value added tax (VAT) | property tax | tax avoidance | tax incentives | corporation tax | Mexico | legislation | tax rates | Brazil | tax reform | individual income tax | Africa | Tax

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