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South Africa's Tax Review Committee To Start Work

by Lorys Charalambous,, Cyprus

19 July 2013

The South African Minister of Finance, Pravin Gordhan, has announced the composition and terms of reference of the Tax Review Committee (TRC) that he first mentioned in February this year when tabling the country's 2013/14 Budget.

Gordhan had then said the Government would initiate a tax review in 2013 "to assess (South Africa's) tax policy framework and its role in supporting the objectives of inclusive growth, employment, development and fiscal sustainability."

"Given the pace of globalization, the relatively modest economic growth after the 2008/09 economic recession, and the significant social challenges such as persistent unemployment, poverty and inequality," the Government believes "there is a need to review what role the tax system can play as part of a coherent and effective fiscal policy framework in addressing these challenges."

The committee has therefore been constituted "to evaluate the South African tax system against international tax trends, principles and practices, as well as recent international initiatives to improve tax compliance and deal with tax base erosion."

It is expected that certain aspects of the tax system should receive specific attention from the committee, including an examination of the overall tax base and tax burden, including the appropriate tax mix between direct taxes, indirect taxes, provincial and local taxes.

In addition, there should be an analysis of the sustainability in the long-run of the overall tax-to-gross domestic product (GDP) ratio, and the tax-to-GDP ratio for each of the three major tax instruments – personal income tax, corporate income tax (CIT) and value added tax (VAT) should be undertaken – and, in particular, an assessment of whether the current tax structure is able to generate sufficient and sustainable revenues to fund government's current and future expenditure priorities.

The TRC will also examine the impact of the tax system in the promotion of small and medium sized enterprises, including an analysis of tax compliance costs, the possible further streamlining of tax administration and simplification of tax legislation; and a review of the corporate tax system with special reference to the efficiency of the CIT structure, tax avoidance (for example, base erosion, income splitting and profit shifting, including the tax bias in favor of debt financing), tax incentives to promote developmental objectives, and the average (and marginal) effective CIT rates in the various sectors of the economy.

As noted in the 2013 Budget Review, the committee will also consider whether the current mining tax regime is appropriate, taking account of, for example, its current contribution to tax revenues, and various elements of taxation within the financial sector – the taxation regime of long term insurers, hedge funds and various innovative financial instruments, and the VAT treatment of financial services.

VAT will also be looked at with specific reference to efficiency and equity, and the advisability and effectiveness of dual rates, zero rating, and exemptions, while the impact of e-commerce (especially the use of digital delivery of goods and services) upon the integrity of the tax base is to be considered, in particular upon VAT and CIT revenues.

The progressivity of the tax system and the role, and continued relevance of estate duty (and its interaction with capital gains tax) in that respect, is also mentioned, as is evaluation of proposals to fund, for example, the proposed National Health Insurance and long term infrastructure projects to boost the growth potential of this economy.

International competitiveness is also thought to be important, "although the tax system is not the main driver of international competitiveness ... We should guard against the 'race to the bottom' in our efforts to strive for a 'competitive' tax system."

The TRC is required to submit interim reports and a final report, which will be published on dates to be determined after consultation between it and the Minister of Finance, to whom the committee will make recommendations. It was emphasized that any tax proposals arising from those recommendations will be announced as part of the normal budget and legislative processes, and would then be subject to consultation and parliamentary oversight.

TAGS: individuals | capital gains tax (CGT) | inheritance tax | South Africa | compliance | Finance | Insurance | tax | economics | business | value added tax (VAT) | tax compliance | tax avoidance | tax incentives | mining | fiscal policy | commerce | financial services | budget | corporation tax | e-commerce | legislation | tax breaks | tax reform | individual income tax | services | Health Insurance | Africa

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