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Announcement of tax increases in 2014 budget ‘unlikely’

Photo by Bloomberg
Finance Minister Pravin Gordhan

18th February 2014

By: Natalie Greve
Creamer Media Contributing Editor Online

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In prebudget analysis heavily informed by the fact that 2014 is an election year, legal practice Norton Rose Fulbright says it is improbable that Finance Minister Pravin Gordhan will announce any changes to the tax rates during the delivery of the National Budget next week.

While acknowledging the likelihood of “obvious” adjustments to tax bracket “creep” to counter the effects of inflation, the firm’s head of tax in South Africa Andrew Wellsted said the upping of the marginal tax rate or value-added tax (VAT) rate was unlikely.

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“This is largely owing to 2014 being an election year and the fact that any increase would be unpopular with tax payers in the country.

“This prediction also considers the recent proliferation of new taxes [and surcharges] such as the e-toll system,” he noted at a budget prediction breakfast on Tuesday.

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In contrast, sin taxes were, as always, a “certainty”.

Wellsted said he hoped Gordhan, who was expected to deliver his National Budget speech to Parliament on February 26, would reiterate his mid-term budget message, which called for extensive curtailing of national spending by government, its departments and agencies.

“Instead of increasing tax rates, spending should be reduced, which we hope will be the case. The emphasis should be on responsible government spending and on the [commitments around] corruption made by President Jacob Zuma during his State of the Nation address,” he said.

SOCIAL REFORM POLICIES

Commenting on the envisaged National Health Insurance (NHI) programme, on which the Department of Health released a Green Paper in 2011, Norton Rose Fulbright director Dale Cridlan added that it was likely that government would reiterate its commitment to the programme, but he doubted that further clarification would be forthcoming in the budget.

“There could possibly be a White Paper released on this, but Treasury will probably hold off on providing detail around how it will be funded until the findings of the Davis Tax Committee (DTC) are released,” he held.

The DTC was formed by Gordhan in February last year to initiate a tax review and assess [the country’s] tax policy framework and its role in supporting the objectives of inclusive growth, employment, development and fiscal sustainability.

“In fact, the Minister is likely to delay making announcements around all issues that the DTC is currently looking at,” Cridlan noted.

Among these was the proposed National Social Security Fund (NSSF), which had appeared in Treasury’s 2010 Budget Review and aimed at providing minimum retirement and assurance risk benefits to most employed individuals.

Norton Rose Fulbright associate Dylan Buttrick noted that, much like the NHI, no clarification on the potential funding sources of the NSSF had been disclosed.

“However, in an election year, [a progression] of the fund would be popular with the potential beneficiaries of the fund, but unpopular with the [small] tax base. As such, we expect no hard conclusions in next week’s budget,” he said.

Wellsted added that it was unclear as to whether or not the social reform programmes would be funded from the current tax base through the imposition of new taxes or through the redirection of existing funding streams.

“Given that we don’t expect new taxes and there’s nowhere really from which funds can be [re]directed, we don’t know how these programmes will be funded,” he said.

GREEN TAX

Commenting on a policy paper released in May last year on possible green taxes, which was “lurking around and causing uncertainty”, Norton Rose Fulbright tax consultant Ross Robertson noted that, while the paper had outlined research underpinning the proposed carbon tax, there had been no clarity on how this would be legislated.

However, in light of the growing overall budget deficit, he cautioned that an environmental tax would need to be revenue-neutral.

“If the tax is going to be implemented, we need to see the environmental reasons for this legislation rather than it just bolstering the fiscus. [In Gordhan’s budget], we expect to see a clarification of this tax as well as the release of draft legislation before the end of the 2014 calendar year.

“However, there’s no conceivable way that this tax can be put in place by early next year, as originally envisaged,” Robertson noted.

TRADE CONTROLS

Further expanding on the firm’s predictions for the National Budget, Wellsted said there was unlikely to be an abolishment of the country’s contentious exchange controls, which restricted the free export of assets out of the country.

However, these regulations may be “tweaked” to encourage foreign direct investment.

Moreover, he stated that, while the firm did not expect an increase to VAT, it anticipated a substantiation of South Africa’s stance that foreign suppliers of e-commerce products should be taxed equally to local e-commerce service providers.

However, clarification on this regulation would likely come from the South African Revenue Service rather than Treasury.

ANTI-AVOIDANCE PROVISIONS

While also remaining dependent on the findings of the DTC, anti-avoidance legislation, which Wellsted described as “a big, big issue”, was unlikely to “go away” this fiscal year.

He said the introduction of this legislation in the last six years had created an administrative burden owing to the introduction of complex and specialised rules that could be applied to only one scenario or transaction.

Wellsted described Treasury’s approach to tax avoidance as “bordering on paranoia”.

“If you draft or introduce things too quickly, you create uncertainty. While we’re extremely grateful for it, it’s a huge drag on the economy and, while its not going to go away, we don’t expect any more of this legislation this year,” he said.

Wellsted further called for the consolidation of recent anti-avoidance legislation, citing complicated rules with “glaring” [shortcomings].

“We [look forward] to more considered legislation on the back of the DTC,” he concluded.

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