Tax incentive reforms: Not only good on paper

Johannesburg, 23 February 2023 - Tax incentives are used by governments globally as a tool to drive spending in specific zones, on infrastructure, and to attract foreign investment while simultaneously supporting a country’s efforts to stimulate economic activity and job creation. To ensure their effective usage, it is important for a government to monitor and continually reassess whether the tax incentives implemented have the desired effect.

The review of tax incentives available to South African taxpayers has been on the government’s agenda for some time now and in recent periods, we have seen some incentives being discontinued, for example, the venture capital company and Industrial policy projects incentive. In the 2023 budget, over and above the highly anticipated but underwhelming energy-related incentives as announced by the finance minister, the budget also touched on other incentives that will be extended and are undergoing further refinement, for example, the Urban Development Zone and the Research & Development incentive.

From a business perspective, tax incentives can be a useful tool for effective tax planning and management and can influence a multinational corporation’s decision to set up operations in a specific location to keep effective taxes paid minimally. Amid growing pressure to curb base erosion and profit shifting by multinationals, the Organisation for Economic Co-operation and Development (OECD) has designed various action plans for governments to implement and these include the introduction of a global minimum tax of 15%, referred to as Pillar II of the OECD Two-Pillar solution to address base erosion. In the 2023 budget, South Africa, although not a member of the OECD but regularly participates and follows OECD guidelines, has indicated that draft legislation on Pillar II will be prepared for inclusion in the 2024 tax bill.

The introduction of a global minimum tax would mean that if a multinational is to benefit from reduced taxes via incentives in South Africa, their home country would seek to levy a top-up tax to bring their taxes back to the acceptable minimum of 15%. With this, the appeal of certain tax incentives will reduce and so will their effectiveness which will now be measured against global tax environments, and in fact, South Africa would be giving another jurisdiction a share of its tax base with no benefit for a taxpayer.

The ongoing exercise by the government to review tax incentives is an important one, otherwise, the tax incentives will only look good on paper while costing our government from an administrative perspective. There are some incentives and exclusions geared towards multinationals that will likely be impacted by this Pillar II including, for example, the Headquarter company regime, certain exclusions and participation exemptions given to multinationals, which the South African Revenue Service will need to assess whether South Africa will still derive any value from them. In a report by the OECD on tax incentives in a post-global minimum tax environment, the organisation has cautioned the impact of incentives in a post-Pillar II environment. The use of certain types of incentives, for example, reduced rates, tax holidays, and full exemptions of income, will likely be impacted, while incentives geared towards small to medium firms, or those that result in deferred payments like what we saw during COVID-19, would not be impacted.

Written by: Mikateko Mtsetweni, a member of SAICA’s Northern Region Tax Committee.

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