Budget analysis: Inflation is this year’s balancer
Prior to the speech yesterday, we all speculated as to where, or rather who the budgeted 9% tax hikes would fall upon this year – It really is quite a curious change, the shift in tax burdening in South Africa over the past six years. In the days of Trevor Manuel, focus was on placing higher percentages on the big money makers of the country (business) rather than on individuals. Now, after inflation, the latest budget has targeted South Africa's bigger pockets. Mike Dingley, National Head of Tax at Mazars offers his insights into the matter. – CH
By Mike Dingley
South Africa will be relying heavily on inflation, and not real growth in GDP, to help balance the national budget this tax year.
Before doing any adjustments for the new tax proposals, the Minister was budgeting for a 9% increase in tax revenue this coming year from the existing tax structure. In the Budget Review tabled in Parliament yesterday, his projected revenue increase was 10%. This indicates that in the Minister's view, 9% of the 10% increase would be from existing sources such as inflation and better tax collection in terms of the current tax regime and only 1% will come from new taxes.
Effectively, the Minister is saying that GDP will increase by 8-9%, including inflation, and with inflation projected at approximately 6% and real growth at approximately 2%, one can see where he's planning to get his revenue from.
In terms of the deficit, last year's deficit came in at 3.9% of GDP and Treasury is expecting the same rate for the coming year. To achieve this, with inflation, GDP will have to increase by 8%. Essentially, we are relying on inflation to do much of the work.
Fuel and electricity levies
When announcing the 2c/kW increase on the electricity levy, the Minister said that when the electricity supply is normalised this increase will be reversed. He didn't, however, tell the country what would happen if the oil price increases. Will the 80.5c increase in the fuel levy be reversed? In the Budget Review, Treasury states that the oil price is expected to start increasing in 2016, but makes no mention of what it will do regarding the fuel levy if this is the case.
Transfer pricing and foreign controlled companies
In the interim report of the Davis Tax Committee on BEPS (base erosion and profit shifting) published in December last year, the committee argued that multinationals are not paying their fair share of the tax burden and this sentiment was echoed in the 2015/16 Budget. As a result, far better transfer pricing documentation will be required, justifying the price of goods and services between connected companies.
This means that the IT14 form will, in effect, drive SARS' risk assessment of a company's transfer pricing policy.
The other big issue is controlled foreign companies, which is where an SA resident controls an offshore company. If the offshore company is an actual, operational business, SARS will not make it a target. However, if you're simply diverting income to a foreign controlled company, you can expect it to be taxed back in South Africa.
Burden of tax shifting
Former Finance Minister Trevor Manuel believed that company tax could, and would, account for a larger proportion of revenue than individual taxes. The financial crisis of 2009 put paid to that, however, and over the last few years the trend has reversed. Last year, 33% of tax revenue came from individuals, and 20% from companies, while this year Treasury is budgeting for 36% to come from individuals and 18% from companies.