Corporate excess profits tax a good idea

As South Africa tumbles haphazardly into the second year of the Covid-19 pandemic, with uncertainty about when
corruption will be curtailed, the criminals jailed, the zombie state-owned entities culled and the majority of citizens vaccinated, the only certainty is the steadily rising dam of debt.

Citizens are already being lumbered with more than their share of taxes, with VAT and fuel taxes being carried by even the very poor.

They have reached their taxation ceiling (indicated by the Laffer curve).

Filling the Covid-19 fiscal hole

There are global calls for post-Covid-19 fiscal policies to accelerate transformation, support the poor, and make those
who have done well pay more.

But the emphasis seems to be on taxing the so-called wealthy.

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A paper written by International Monetary Fund experts Ruud de Mooij, Ricardo Fenochietto, Shafik Hebous, Sébastien Leduc, and Carolina Osorio-Buitron, “Tax Policy for Inclusive Growth after the Pandemic”, raises valid policy considerations, particularly, “build administrative capacity to better enforce existing taxes”.

Further crucial suggestions include improve and simplify VAT and excises, protect income taxes better against avoidance and evasion, reduce discretionary tax incentives, enhance fiscal regimes for extractive industries, and better exploit taxes on property and pollution.

Company tax rates (1985 – present)

Over the last 30 years, company tax rates have been slowly coming down.

Between 1985 and 1991, the company tax rate was 50%. This was reduced to 48% for the next two years, and 40% for 1993-94.

READ MORE: Rising debt and taxes

In 1994-95, it was reduced to 35%, but a one-off transitional levy of 5% was introduced. In 1995, the tax rate was 35%; from 1996 to 2005 it was 30%.

It slowly came down and is now 28%.

Corporates have not suffered increases in recent years. Even the secondary tax on companies was passed on to individual shareholders when it was replaced with the dividend tax, effective April 2016.

One-off excess profits tax for companies

So why do companies not bear the addition of a Covid-19 tax?

A one-off excess profits tax, say 5%, can be levied on the “excess profits” of a company.

These could be calculated on the distributable reserves as at the end of the financial year, less capitalised interest and all unrealised profits such as the fair value adjustment to fixed assets (plant, machinery and equipment, land, and intellectual property), and less the dividends declared for the year.

The distributable reserves will include dividends received.

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The rationale for using distributable reserves as a base would mean companies that qualify for tax incentives (which will reduce the taxable income) could still be liable for the excess profits tax.

This tax should be limited to the larger companies, the threshold which would have to be determined if the tax was introduced.

It would also be easier to administer and apply as the audited figures would be readily available.

An advantage is that it will be automatic, and the SA Revenue Service (Sars) will not have to increase its workforce as opposed to a wealth tax on individuals, which is difficult to define and Sars does not have the resources to administer it.

This article first appeared on Moneyweb and was republished with permission

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