South African Minister of Finance Trevor Manuel has reduced the country's corporate income tax by 1%, from 30% to 29%, effective from April 1, a move that is expected to see total national tax revenue decrease by some R2-billion.

Announcing the country's 2005 national budget in Parliament yesterday, Manuel said corporate income tax reduction is based on an emerging international trend towards reduced taxation, or increased tax exemption levels, for business income.

Government acknowledged that corporate tax rate reductions in many countries have been motivated by the imperative of competing for scarce foreign direct investment, minimising incentives for tax avoidance and reducing distortions resulting from the imposition of high taxes.

International practice is also informed by increasing evidence that a lower corporate rate, together with a robust tax structure, is fiscally more sustainable than the erosion of effective rates through a proliferation of special tax allowance.

Manuel's corporate income tax reduction has also necessitated corresponding changes to other taxes linked to this rate.

Therefore, the tax rate for South African branches or agencies of a foreign company will be reduced from 35% to 34%, while rates for company policyholder fund and corporate funds of long-term insurers will be dropped from 30% to 29%.

In the case of gold-mining companies not exempt from STC, the new formula for gold-mining income will be Y = 35-175/x (formerly Y = 37-185/x); while in the case of gold mining companies opting to be exempt from the STC, the new formula will be Y = 45-225/x (formerly Y = 46-230/x). The rate for nonmining income will be reduced from 38% to 37%.

The tax rate for employment companies will be decreased from 35% to 34%.

Tax relief of R1,4-billion is targeted for small businesses to make resources available for growth and investment.

“This includes the extension of relief to a broader range of service companies, and raising the turnover limit for eligibility from R5-million to R6-million,” Manuel explained.

Meanwhile, South Africa's strategic industrial projects programme, which provided R10-billion in special tax allowances for qualifying investments, subject to their implementation within a period of four years, will lapse at the end of July this year.

Manuel announced that an interdepartmental task team would review the lessons learnt from this programme. This year's business income tax proposals, together with the already enacted 40:20:20:20 tax depreciation regime for manufacturing assets, will provide significant impetus for fixed capital formation without the uncertainty of an adjudication process.

“Since its announcement, a more favourable depreciation regime for manufacturing assets has been introduced and a more direct programme of government investments in critical infrastructure is under way,” Manuel stated.

This year's budget also sees the introduction of a tonnage tax regime for the country's shipping industry, which will tax shipping companies at fixed rates according to the size of their ships, and not according to the companies' business income results, which will lower the effective tax paid by such companies.

This is a bid to make the South African tax environment more competitive, as the country is primarily dependent on maritime trade, with more than 90% of exports and imports conducted via international shipping routes.

Government argues that tonnage tax regimes have been successfully introduced in India and several European countries, with almost immediate positive results in terms of related business activities.

This initiative forms part of a coordinated transport strategy led by the Department of Transport, which is aiming to revive the country's flagging maritime industry.