Balancing today's demands with tomorrow's opportunities - Budget 2021/22 Pre-Budget Commentary South Africa - Deloitte
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Balancing today’s demands with tomorrow’s opportunities Budget 2021/22 Pre-Budget Commentary South Africa
Contents 01 National Budget: Tough decisions may be needed to deal with South Africa’s fiscal crisis 03 Economic outlook: South Africa’s difficult road to recovery 05 Prioritisation of the National Budget and healthcare 07 Personal taxes: Lingering pains for the golden tax goose 10 Increasing corporate income tax rate could negatively affect revenue collections 11 SARS’ shift to the digital era: No short cuts to true digital transformation 14 Finding a balance in trying times 16 VAT obligations for non-residents - The complexities of the “enterprise” definition 18 Business incentives dwindle amid pandemic 19 Carbon tax: Will allowances, after 2022, be reduced or removed? 21 Advance Pricing Agreements: Greater urgency needed 23 Home office expenses – Claiming a tax deduction 25 Electronic services and VAT – More clarity on the horizon? 26 Oil and gas developments in South Africa 27 Foreign employees stuck in South Africa due to COVID-19? Beware of the tax implications 28 COVID-19 as an ‘event of force majeure’ in commercial agreements
National Budget:
Tough decisions may be needed to
deal with South Africa’s fiscal crisis
By Delia Ndlovu
Managing Director: Deloitte Africa Tax & Legal
South Africa needs to continue on a in light of signs that tax collections are
starting to improve as for the first time this
path of fiscal sustainability in order to fiscal year, the monthly revenue collections
in November and December showed an
accelerate economic growth, especially increase in collections from prior year. If
this trend continues, the amount of tax
in the wake of the COVID-19 pandemic. hikes required may be reduced.
South Africa is already heavily taxed, with
S
outh Africa was already facing a but to improve to a figure closer to 7.3% in a small percentage of the population
fiscal crisis before the COVID-19 2023/24. Debt is projected to stabilise at bearing a disproportionate share of the
pandemic. Stagnant economic 95.3% of GDP by 2025/26. country’s tax burden. Increasing tax rates
growth, mounting debt and unemployment would place the already overtaxed tax-base
have characterised recent years. The Government should be able to achieve under immense strain and could prove
government intends to close deficits in some savings due to winning a recent court counterproductive to the economy.
public finances and lower borrowings as case, which allows it not to implement the
stated in the MTBPS in October. We expect final year of the 2018 wage agreement. This Other ways to raise additional tax revenue
Finance Minister Tito Mboweni to highlight would start to contribute positively toward are being explored such as the once-off
the following themes in the upcoming reducing the public sector wage bill, which ‘solidarity tax’, or ‘wealth’ tax. In our view,
National Budget Speech, which is expected the Finance Minister mentioned in the there is a low probability of government
to be on 24 February: MTBPS. implementing these types of taxes to fund
the roll out of the vaccine. Other funding
Closing deficits in public finances and Increasing tax revenues options are likely to be explored first to
lowering borrowings avoid putting strain on the tax-base. At
Minister Mboweni has previously stated present details remain vague as to how
Closing deficits in public finances and that he is aiming to generate tax revenue of such a tax would be implemented. If this
lowering borrowings is likely to be one of R5 billion for the 2022 fiscal year and were to be implemented, it would likely
the biggest issues that the Finance Minister R40 billion over the next four years. only affect individuals in the top income tax
is grappling with. In the 2020 Medium Term Essentially, the main budget revenue to brackets and it would be more palatable if
Budget Policy Statement (MTBPS) outlined GDP ratio will improve from the current it is seen as temporary measure based on
in October last year, the Finance Minister 22.6% to 24.9% of GDP by fiscal year 2024. the social compact to limit the effects of
outlined that he intends to implement large COVID-19.
spending reductions of about R300 billion Although the MTBPS forecasted a large
in the next three years, combined with tax deficit in tax revenue collection of Increasing taxes/duties on alcohol and
increases. In the MTBPS, budget deficit R312.8 billion, and we are hopeful that this tobacco is another option. However,
was predicted to peak at 15.7% in 2020/21 shortfall will decrease by February. This the recent bans on alcohol and tobacco
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Balancing today’s demands with tomorrow’s opportunities | Budget 2021/22
has obviously negatively impacted tax be highlighted in the Minister’s upcoming Stabilising state-owned enterprises
collections and it will not be possible to Budget Speech. Funding options appear (SOEs)
recover the taxes foregone as a result to be limited to either further curbing and
of these bans. Any future bans would reprioritisation of spending or considering As SOEs will be primarily responsible
also impact tax collection, so relying a once off “solidarity” tax as a temporary for the successful rollout of the public
on increasing taxes in this area to drive measure. infrastructure programme, stabilising
revenue may be inadvisable, depending on them is one of government’s top priorities.
whether government will again ban alcohol Reducing spending across departments to In the 2020 financial year, a number of
if COVID numbers increase. reprioritise this spending to fund vaccines bailouts were made to struggling state
may, however, adversely affect economic owned entities. In the 2020 Budget Speech,
Preserving jobs and, if possible, creating growth and welfare over time. Eskom remained the top priority with a
employment, is an absolute imperative for stable electricity supply. Provisions to get
tax revenue collection. Tax on individuals Improving revenue collection Eskom back on track will require continued
is by far the biggest contributor to tax capabilities financial investment.
revenue. The second biggest contributor
is VAT – which mainly comprises consumer We believe that improving tax collection Conclusion
spending by individuals. Therefore, loss of methods rather than further burdening
employment impacts directly on both the compliant taxpayers will help to address Whilst we are hopeful for a better year
biggest and second biggest contributors to the contraction in tax revenue. Increasing ahead for South Africa, we still have a
our tax base. revenue collection capabilities should be an long road to travel on the path of fiscal
important focus point for the South African sustainability in order to accelerate
COVID-19 vaccine rollout Revenue Service (SARS). Leveraging digital economic growth.
technologies can assist with freeing-up
It is uncertain how the anticipated vaccine capacity in order to focus on areas where
rollout will be funded and this is likely to the tax system is being exploited.
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Balancing today’s demands with tomorrow’s opportunities | Budget 2021/22
Economic outlook:
South Africa’s difficult
road to recovery
By Hannah Marais
Associate Director: Insights Leader, Deloitte Africa
O
ver the past few years, South adjusted and annualised). Thereafter following the record contraction a few
Africa has struggled with weak was the transport sector, down 67.9% months earlier, although Q4 2020 and Q1
growth, rising unemployment quarter-on-quarter (seasonally adjusted 2021 are expected to see flatter growth,
and mounting public debt. Even before and annualised). The agricultural sector particularly with the onset of the second
the COVID-19 pandemic, recessionary was the only one that posted growth, albeit wave of infections and new, although less
pressures were acute, with the economy marginal.2 restrictive, lockdown measures in place
in a technical recession, given two since the latter part of December 2020.
consecutive quarters of negative growth in Household spending saw a similar
the latter half of 2019. slump given curfews and limitations on Despite this, the economic fallout for
movement, as well as lockdown restrictions 2020 is expected to be severe, with South
COVID-19 worsened the already challenging on retail, leisure, and travel sectors. The Africa’s National Treasury back in October
economic outlook, further exposing deep biggest spending knocks were seen in 2020 expecting a real GDP contraction of
structural divides in the economy. With semi-durable and durable goods.3 -7.8% in 2020.8 More recently published
strict lockdown restrictions in place since estimates by the South African Reserve
end-March 2020, South Africa prioritised Worker layoffs were another adverse result. Bank (SARB) are somewhat less pessimistic
its response to the health crisis by aiming South Africa’s unemployment rate (narrow – the bank revised the forecasted growth
to save as many lives as possible. This definition) increased to a record high of contraction upward, to -7.1%.9
saw the country face an almost unique 30.8% in Q3 2020, after a record total 2.2
situation in its history – economic activity million jobs lost between April and June
faced a system-wide shock from both 2020.4 “The most
supply and demand sides, coming to a
complete halt for a number of weeks in the While consumers regained some immediate
challenge now to
second quarter across many sectors. Real confidence in Q3 as parts of the economy
GDP dropped by 51% quarter-on-quarter opened up, consumer confidence
(seasonally adjusted and annualised) in Q2
of 2020, after a 1.8% quarter-on-quarter
remained in negative territory.5 Deloitte
research in December 2020 showed that
reviving economic
(seasonally adjusted and annualised)
contraction in Q1.1
South African consumers continue to
have concerns about making upcoming
activity in South
payments, are delaying large purchases or Africa is the access
According to data released by Statistics are worried about losing their job.6
South Africa, the economy-wide slowdown to funding and
distribution of
was most felt in the manufacturing sector – Nonetheless, some green shoots were
which contracted 74.9% quarter-on-quarter sprouting from the bleak economic
(seasonally adjusted and annualised)
and made the largest contribution to the
landscape in the second half of the year,
confirmed by data releases towards
vaccines.”
overall slowdown. The second-largest the end of the year. In Q3 2020, the
contribution stemmed from the trade and South African economy grew by 66.1%
accommodation sector, which contracted quarter-on-quarter (seasonally adjusted
by 67.6% quarter-on-quarter (seasonally and annualised) 7 – an encouraging sign
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Balancing today’s demands with tomorrow’s opportunities | Budget 2021/22
National Treasury’s October-released third and even fourth waves in the middle crowding out socio-economic spending.
projections to 2023 forecast a rebound to latter part of 2021. With debt-to-GDP previously expected
in GDP growth of 3.3% in 2021 from the to peak at 94.6% in 2025-26, additional
sharp contraction in 2020, with growth The most immediate challenge now to borrowing could see debt increase to
moderating thereafter (1.7% and 1.5% for reviving economic activity in South Africa unsustainable levels of above 100% of GDP,
2022 and 2023 respectively).10 The SARB’s is the access to funding and distribution and possibly force the country into a debt
more recent (January 2021) estimates also of vaccines. Although globally, vaccine trap.17 Government’s ability to reign in rising
continue to see a still muted yet marginally distribution, a low cost of capital and rising debt has already been curtailed by a sharp
more upbeat growth path for 2021 at 3.6%, commodity prices are tailwinds to growth,14 expected contraction in tax revenue due to
moderating to 2.4% in 2022.11 Deloitte’s Global Chief Economist, Dr Ira COVID-19, with wide consensus that raising
Kalish, recently emphasised that the path taxes amidst a shrinking tax base is unlikely
Given the magnitude of the expected of the pandemic and how it is managed, to bring in additional tax revenue.18 Raising
contraction in an already-weak economy, the vaccine and how it is rolled out, and taxes would thus be limited to possibly fuel
the need for concerted action to transition governments’ responses to this will levies or implementing a previously mooted
onto a path of economic recovery is urgent. continue to shape the global economy.15 wealth tax. Also, the reduction in spending
Policy tools, such as the government’s Locally, the current uncertainty around across departments to reprioritise
emergency fiscal stimulus and an easier the vaccine rollout, but also ongoing weak spending to fund vaccines may adversely
monetary policy stance, are likely to only business and consumer confidence and affect economic growth and welfare
cushion some of the worst impacts. other structural weaknesses, thus pose especially for the poorest households –
some of the biggest risks to the country’s arguably the most severely affected by the
Although National Treasury proposed immediate to short-term economic consequences of the pandemic – over time.
in its Medium-Term Budget Policy recovery.
Statement (MTBPS) a number of options As the vaccine rollout commences, vital
to stimulate growth, including pro-growth Linked to South Africa’s anticipated vaccine focus areas that will require renewed
reforms, there is a shift of moving from rollout is the uncertainty of how this will be emphasis and consolidated efforts from
consumption-led toward investment-led funded, given an already-strained fiscus. both government and the private sector,
growth, with the cornerstone being This is expected to be addressed in the will include increasing spending on
infrastructure investment; a key focus also upcoming February 2021 Budget Speech. infrastructure investment, a reduction
was the urgent need to maintain fiscal Funding options are, however, limited to in wasteful expenditure and corruption,
consolidation given the fast-expanding reprioritising or cutting back further on unlocking efficiencies and opportunities
debt-to-GDP ratio and limited fiscal space.12 other spending, raising the expenditure presented by the digital economy, as well
ceiling and thus increasing an already high as a focus on implementation of outlined
While the proposed growth-supporting debt-to-GDP ratio, or raising taxes.16 urgent growth-enhancing structural
measures were aligned to the South African reforms. Whichever way, scripting the
Economic Reconstruction and Recovery Each of these options comes with its own recovery will require a coordinated and
Plan13 released in mid-October 2020, these shortcomings. Already, South Africa has proactive approach by all stakeholders to
measures are likely to face a number of been spending R2.1 billion per day on rebuild South Africa’s economy.
challenges in the immediate term, given borrowing costs – the fastest-growing
the second wave of infections and possible expenditure item in the medium term,
A previous version of this article was first
published by Deloitte Insights.
1. Stats SA, “Gross domestic product: Second quarter 2020”, September 8, 2020.
2. Ibid.
3. Ibid.
4. Stats SA, “Quarterly labour force survey—quarter 3: 2020”, November 12, 2020.
5. Reuters, “S.Africa consumer confidence improves in third quarter as lockdown eases,” September 7, 2020.
6. Deloitte, “Deloitte State of the Consumer Tracker”, January 6, 2021.
7. Stats SA, “Gross domestic product: Third quarter 2020”, December 8, 2020.
8. National Treasury, Republic of South Africa, “Medium term budget policy statement,” October 28, 2020.
9. South African Reserve Bank, “Statement of the Monetary Policy Committee”, January 21, 2021
10. National Treasury, Republic of South Africa, “Medium term budget policy statement,” October 28, 2020.
11. South African Reserve Bank, “Statement of the Monetary Policy Committee”, January 21, 2021
12. National Treasury, Republic of South Africa, “Medium term budget policy statement,” October 28, 2020.
13. South African Government, “President Cyril Ramaphosa: South Africa’s economic reconstruction and recovery plan,” October
15, 2020.
14. South African Reserve Bank, “Statement of the Monetary Policy Committee”, January 21, 2021
15. Engineering News, “Pandemic management, vaccine to shape economies in 2021”, January 21, 2021
16. News 24, “Wage freeze, tax hikes or borrowing - how will Treasury ‘make sure’ there is money for vaccines?”, January 18, 2021
17. National Treasury, “Medium term budget policy statement.”
18. Riana de Lange, “Too much tax can be a killer,” News24, January 30, 2019.
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Balancing today’s demands with tomorrow’s opportunities | Budget 2021/22
Prioritisation of the National
Budget and healthcare
By Ashleigh Theophanides
Director: Actuarial and Analytics Solutions
Leader and Deloitte Africa Life Sciences and
Healthcare Industry Leader
T “The public health
he 2021 National Budget is expected manner of containing the COVID-19 virus
to result in pressures across all and giving South Africa the best possible
departments as South Africa
continues to require fiscal resources
chance to get back on the road to recovery.
impact of COVID-19
to respond to the COVID-19 pandemic The Supplementary Budget Review 2020 goes far beyond
with both pharmaceutical and non- noted that a “total of R21.5 billion has been
pharmaceutical interventions. Previous reprioritised to public health services”, the numbers of
COVID-19 cases
public interest in the budget and matters bringing the health sector’s share of
relating to health initiatives have been consolidated expenditure by function to
centred around National Health Insurance
(NHI) and the implementation thereof.
12.1% (compared to 11.8% in the February
2020 Budget). This reprioritisation was
and related
Now, the focus has shifted to initiatives
in response to the COVID-19 pandemic.
meant to help prepare the health sector
for “a rising number of cases, including
deaths, with the
Standing on the other side of 2020 expanding capacity and ensuring personnel full repercussions
affords us the opportunity to understand are protected”.
the fiscal requirements underlying a only to be fully
understood and
successful response. The 2021 Budget has Unavoidably, the focus of the health budget
implications far beyond the single financial has shifted towards COVID-19 rather than
year ahead, and correctly prioritising the
budget is of paramount importance.
NHI, and this will continue to be so for the
next couple of years. The failings seen in
quantified in years
There are some difficult choices that need
both the public sector and private sector in
responding to COVID-19 through not having
to come. From
to be made. On the one hand, the South effective consolidated data and systems an economic
African economy is in the midst of a low for the country, have further highlighted
growth trap, facing a unique combination the need for an effective consolidated perspective, the
damage has been
of both supply and demand-side shocks, healthcare system. COVID-19 has likely
not to mention structural factors, such reinforced the idea of a National Health
as electricity-supply constraints, policy
uncertainty and record unemployment
system, although the current crisis means
that priorities and timing of the NHI rollout,
severe.”
rates. On the other hand, the budget must as well as the form and level of cover
provide financing for not only COVID-19 (related to cost) are likely to shift compared
vaccines, but also the swift and efficient to a pre-COVID world view. population immunity by vaccinating 67%
rollout of the vaccination programme – not of the population, estimated at a cost
only to ensure the safety of the population, Amongst the many priority initiatives that of R20.6 billion for obtaining vaccines.
but also to protect the economy from need to be addressed, the budget will need Costs pertaining to the rollout of the
pandemic-driven stoppages, which has to make provision for the procurement of vaccination programme are not included
proven to be vastly detrimental to the COVID-19 vaccines and the subsequent in this estimate, which will likely not be
economy. To prioritise the vaccination implementation of the rollout thereof. insignificant (government estimates range
programme is by far the most effective South Africa is targeting to achieve from R64 to R270 per vaccine).
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Balancing today’s demands with tomorrow’s opportunities | Budget 2021/22
The public health impact of COVID-19 of economic recovery, which is expected
goes far beyond the numbers of COVID-19 to be seen at a global level as economies
cases and related deaths, with the full start to bounce back from the recessions
repercussions only to be fully understood and contractions seen during 2020. If
and quantified in years to come. From an an adequate vaccine supply (and rollout
economic perspective, the damage has thereof) is not properly budgeted for, then
been severe. Economic activity came to it is likely that South Africa will see further
a complete halt for a number of weeks waves of infections. Each wave will mean
in the second quarter of 2020 across economic restrictions renewed, with the
many sectors, with real GDP shrinking accompanying economic consequences
by 51% quarter-on-quarter (seasonally thereof in each iteration.
adjusted and annualised) in Q2 of
2020. Furthermore, the pandemic and Prioritisation of the national budget to
subsequent economic lockdown have had streamline a COVID-19 vaccination effort
a devastating effect on employment. South is the surest manner in which to fast-track
Africa’s unemployment rate increased to a an economic recovery. As President
record high of 30.8% in Q3 2020, following Ramaphosa told the nation when first
a record total 2.2 million jobs lost between announcing the economic lockdown in
April and June 2020. The largest job losses 2020, “As we walk this road together, as we
recorded in a single quarter before this was struggle to defeat this pandemic, we remain
in Q3 2009 (527 000 job losses), in the wake strong and united and resolved. Much is
of the global financial crisis. being asked of you, far more than should
ever be asked. But we know that this is a
A successful and comprehensive matter of survival, and we dare not fail.”
vaccination programme will support South
Africa in catching the much-needed wave
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Balancing today’s demands with tomorrow’s opportunities | Budget 2021/22
Personal taxes:
Lingering pains for the golden tax goose
Claudia Gravenorst
By Anthea Scholtz
Senior Manager:
Director:
Global Employer Services,
Deloitte Africa Tax & Legal
Deloitte Africa Tax & Legal
A
s we embark on 2021, many South incomes and the South African Revenue Whilst these statistics should be viewed
African taxpayers eagerly await the Service (SARS) 2020 Tax Statistics report within the context of South Africa’s
delivery of the 2021/22 National (which was published during December progressive income tax system (where the
Budget Speech. All eyes will be on the 2020) again highlights the continued wealthy contributes a greater proportion
Minister of Finance, who this year again will fragility of the South African revenue towards supporting the state than the
need to walk a tightrope, as he seeks to collection ecosystem. Our country remains poor, and hence the more you earn, the
navigate the country’s treacherous tax and heavily reliant on a relatively small base of higher tax you should pay), these taxpayers
spending landscape in order to stimulate taxpayers to generate the majority of the seem to be bearing a disproportionate
inclusive economic growth; while at the country’s revenue collections. share of the country’s tax burden, in return
same time ensuring that already over- for limited services from the state, which is
burdened South African taxpayers are not Overall, the report showed that the not a sustainable position.
unduly burdened with further tax hikes to 2019/20 fiscal year recorded the largest
boost tax collections. revenue shortfall to budget estimates A solidarity tax?
since 2009/10, and of the R1 355.8 billion
Whilst a gross revenue collection shortfall revenue collected, personal income taxes Against this backdrop, it would seem
of more than R300 billion was forecasted continue to be the main contributor to our unlikely, given the current economic
for this fiscal year, based on recent country’s tax coffers, contributing a total of environment and the small tax base, that
information, we are hopeful that this 39% of the total tax revenues. the maximum marginal tax rate would be
shortfall will decrease – at a time when further increased (it was increased from
South Africa is in desperate need of a Notably, whilst 6.3 million taxpayers were 41% to 45% for the 2018 tax year). This
buoyant revenue base to meet its many expected to submit tax returns for the 2019 would also be in line with findings that
challenges. tax year, only 4.3 million (approximately an increase in the top marginal tax rate
68%) had been assessed (based on data would not yield substantial additional tax
The COVID-19 pandemic has certainly available at the end of October 2020). revenues for the country.
placed the importance of tax collections Of this 4.3 million individuals, 1.8 million
and specifically the role of tax authorities individuals earned taxable income in excess That said, this does not rule out the
and tax policy makers firmly in the of R350 000 (and 1.1 million earned taxable possibility that alternative measures could
spotlight, as the lockdowns compelled income in excess of R500 000 - the taxable be introduced to generate additional
governments across the continent to not income threshold for submission of tax revenue for the fiscal coffers in order to
only implement a range of fiscal relief returns). These individuals contributed 78% combat the impact of the pandemic. There
measures to support its citizens and of the total personal income tax collected. has been widespread speculation that a
businesses, but also to expand its future once off wealth tax, in the form of a so-
role in looking for sound, alternative These statistics again confirm that a very called “solidarity tax” may be introduced
avenues to increase tax collections. small percentage of the South African for a limited period of time on high income
population is financing the country’s tax bill earners to assist with increasing revenue
The golden goose and that the “man-on-the-street” is paying collections.
a significant amount of tax (both direct
In South Africa, taxpayers continue to feel taxes, such as personal income tax as well The possible introduction of a wealth tax
the lingering fiscal pains on their disposable as indirect taxes, such as VAT). has been mooted for many years in South
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Balancing today’s demands with tomorrow’s opportunities | Budget 2021/22
“One avenue available to increase tax with unquestionable integrity, trusted and
admired”.
collections in South Africa, would be for The plan sets out a strategic intent “to
SARS to conduct regular lifestyle audits follow the internationally recognized
approach of Voluntary Compliance” and
on the tax affairs of individuals who are in translates this intent into a list of strategic
the tax net (and those who are not).”
objectives, including:
• modernising SARS’ systems to provide
digital and streamlined online services,
Africa, and whilst globally many countries level of filing compliance by high net worth thereby making it easy for taxpayers to
have moved away from the idea of a wealth individuals in South Africa was very high. comply with their tax obligations – making
tax (for various reasons), recently it seems it easy for taxpayers to understand
to have gained popularity as a tax policy The obvious advantages of introducing a what tax to pay, when to pay and
again, notably in the United States and wealth tax in South Africa are that it will how to pay it, combined with making
United Kingdom. increase fiscal revenue and, at the same non-compliance difficult and costly to
time, it would be seen as a measure to taxpayers would have a direct impact on
One of the main issues underlying the reduce the inequality in income levels revenue collections. The self-assessment
wealth tax debate in South Africa is the between the rich and the poor (a key process that was recently introduced by
significant inequality in the income levels discourse currently in South Africa). SARS goes a long way to achieving the
between the rich and the poor. The ultimate goal of voluntary compliance by
South African debate is further fuelled by The challenge in South Africa of imposing a taxpayers.
the perception that there seems to be a wealth tax (or once off solidarity tax) is that • working with stakeholders to improve the
number of very wealthy individuals in South we already have a small and fragile tax base tax ecosystem and compliance. SARS has
Africa, and the question is whether these of high net worth South Africans, and the many valuable data points on taxpayers
individuals are paying their fair share of introduction of such a tax may well provide and these could be mined using digital
taxes in the country? further impetus to increasing the number technologies and by leveraging off
of individuals emigrating from South Africa. stakeholders to detect non-compliance
In the World Wealth report issued last and increase compliance amongst all
year, it was noted that the size of the high One avenue available to increase tax taxpayers; from the taxpayer who has
net worth individual population in Africa collections in South Africa, would be for simple tax affairs to those who have
increased by 6.1% in 2019, while wealth SARS to conduct regular lifestyle audits on sophisticated tax schemes.
increased by 6.5% to US$ 1.7 trillion. South the tax affairs of individuals who are in the
• rebuilding staff and system capacities.
Africa leads the charge on the continent, tax net (and those who are not).
The taxpayer’s user experience in dealing
having the highest number of high net
with their tax affairs and ensuring they
worth individuals. Last year an organisation “Millionaires
are tax compliant can be improved
for humanity” issued an open letter to
(not only when dealing with SARS via
Encouragingly, the SARS tax statistics governments across the world (signed by
e-filing, but also when dealing with SARS
report does however show that the 83 members), calling on governments to
telephonically or in person).
personal income tax concentration curves raise taxes on wealthy millionaires, such
(which measures the degree of inequality as themselves (“Immediately, Substantially • building public trust and confidence
in the tax base over time) for taxable and Permanently”) in order to help in the tax administration system.
income for the tax periods 2016 and 2019 the world recover from the pandemic. SARS was once the crown jewel of
(based on assessed taxpayers), depict Whilst an altruistic and noble gesture, revenue authorities on the continent.
an improvement in the distribution of implementation of such a request will Tax administration and governance
taxable income amongst SA taxpayers. present its own challenges. issues at SARS in the past resulted in
This is largely due to tax policy measures below-target revenue collections as
that were implemented to broaden the tax All is not lost though, as there are indeed well as inefficiencies. SARS is now slowly
base and increase the progressivity of the various other measures available to our tax emerging from this dark cloud, but much
personal income tax system. authority to raise revenues – a key measure must still be done to improve public
being enhancing SARS’ digital capabilities confidence and taxpayer morality.
Nonetheless, it remains a key priority for to increase revenue collections – and it has
The vigorous pursuit of the above
our fiscus that high net worth individuals already made many meaningful strides on
objectives will go a long way in assisting
bring all their income (local and offshore, its digital transformation journey.
SARS to generate the additional revenue
in particular income routed via offshore
needed to meet its revenue collection
trusts) into the South African tax net and SARS recently presented its strategic
targets.
that they pay their fair share of taxes. That plan for 2020/21 – 2024/25, which notes
said, it has previously been noted that the a vision to build “a smart modern SARS,
8
Balancing today’s demands with tomorrow’s opportunities | Budget 2021/22The World Economic Forum’s 2021 Davos
Great Reset Initiative amongst others, calls
for governments to improve coordination
(for example in tax, regulatory, and fiscal
policy) and to implement reforms that
promote more equitable outcomes. SARS
is well-positioned to play a key role in this
regard. It can leverage its many data points
on taxpayers (subject to safeguarding
data security and taxpayer confidentiality),
and collaborate with other stakeholders
and government departments; such as
for example the Department of Social
Development, the Department of Health,
the Department of Employment & Labour
etc. to assist them with more meaningful
decision-making for the benefit of all South
Africans.
Conclusion
A budget that supports South Africa’s
future, should go further than just tax
increases. Whilst the main component
of our revenue base will always be tax
revenues, tax is certainly not the only
solution. Key parts of the solution must
also include enhancing and leveraging
SARS digital capabilities, expenditure
cuts, curbing the size of the civil service,
reducing policy uncertainty, creating jobs
and focusing on state-owned entities. No
doubt, the fiscal pain continues to linger for
South Africa’s golden goose.
9
Balancing today’s demands with tomorrow’s opportunities | Budget 2021/22Increasing corporate income
tax rate could negatively affect
revenue collections
By Le Roux Roelofse
Director: Global Business Tax Services and National
Technical Council Leader, Deloitte Africa Tax & Legal
T “The three key
he COVID-19 pandemic has resulted economic growth which ultimately is the
in a massive shortfall in revenue real key to unlocking a sustained increase
collections and has created a
desperate need to raise additional taxes.
in revenue collections (together with
strengthening the South African Revenue
revenue-raising
How best to do this without causing further Service’s capacity to collect taxes). It is taxes are income
damage to the economy is a matter of also worth noting that increased taxation
intense debate. over the recent past has led to increasingly taxes on individuals,
income taxes on
lower revenue collections – further tax
The three key revenue-raising taxes are increases are likely to exacerbate this trend.
income taxes on individuals, income taxes
on companies and value-added tax (VAT). For these reasons, we believe that it is
companies and
Nearly everyone agrees that individuals
are overtaxed and raising the VAT rate
highly unlikely that National Treasury
would increase corporate tax rates at this
value-added tax
is politically fraught given its regressive time, however psychologically soothing it (VAT).”
nature. This raises the obvious question may be for some people. On the contrary,
whether the corporate income tax rate, if anything, National Treasury may be
which is currently at 28%, should not be tempted to reduce the corporate rate. That
increased? In fact, that may not be a good would be a bold and imaginative step!
idea because raising the corporate rate
may paradoxically negatively affect revenue
collections. In this regard, it should be
noted that South Africa’s corporate tax rate
is significantly higher than the corporate
rate of a number of its important trading
partners - raising the rate could only
make us even more uncompetitive and
may encourage undesirable practices like
transfer pricing insofar as it heightens the
risk of multinationals trying to “shift” their
tax burden from South Africa to lower
taxed foreign jurisdictions by pricing intra-
group transactions between South Africa,
and such lower taxed foreign jurisdictions
in the foreign jurisdictions’ favour.
Furthermore, increased corporate taxes
may have a detrimental effect on boosting
10
Balancing today’s demands with tomorrow’s opportunities | Budget 2021/22SARS’ shift to the digital era:
No short cuts to true digital
transformation
By Tumi Malgas
Director: Tax Management Consulting and
Tax Technology Specialist, Deloitte Africa Tax & Legal
A
mid the loss of revenue, now When management consultants and digital With the above in mind, determine how this
exacerbated by the COVID-19 gurus say “technology is an enabler”, it foundation should look, and then make it
pandemic, the South African means one needs to get a well-rounded come alive by assessing which of the new
Revenue Service (SARS) needs to find view of everything else (goals/aspirations, technologies are best suited to make the
ways to close the widening deficit hole culture, people, processes and data) to end-to-end process work more efficiently.
more than ever before. We are now in understand what needs to change overall
the fourth industrial revolution, and one and how; and then look at what technology New Zealand’s Inland Revenue
cannot help but think about how digital can enable them to exponentially reach Commissioner, Naomi Ferguson, said, “It
innovation could be leveraged to help plug their goals. It is similar to putting in place (the need for technology change) was the
the hole. We believe that this will happen, building blocks - you need to have a stable starting point. But I think once you started
although maybe not in the current year. foundation. Some technologies assist thinking about changing 20-year old
However, when done right, the benefits you to put in place that foundation, some technology, you realise that actually some
could be incredible and the results will support the foundation and some draw of the customer’s needs were different,
work for the revenue authority and the on the foundation to make the processes customer experiences were different,
people it serves. Revenue authorities in work. business processes that were built 25 years
some countries have been working on their ago don’t suit today’s world.”
digital transformation journey for longer In establishing this foundation, it is
and have introduced initiatives such as important to look at the revenue authority It is common for revenue authorities to
fiscalisation, real-time reporting, electronic environment holistically considering: undertake “after the fact” verification, by
invoicing, etc. However, learning from performing a number of time-consuming
the best on various approaches to digital • main business goals for the audits. The Deloitte revenue administration
transformation and new technologies, our transformation. playbook advises that this can be reduced
revenue authority could leapfrog into the by shifting the focus of regulation from
• its work force.
4th industrial revolution. the returns submitted to the underlying
• taxpayers. process as well as relying on the data
Many revenue authorities across the consumed and produced by the process.
• ever changing business models for
world are only now digitalising, or carrying
organisations.
out limited digital innovation, and are We already see this shift in many countries,
yet to move to being truly digital. Being • all tax types. where revenue authorities are rethinking
digital is not just about technology, as the entire process (albeit for a particular
• data availability and data quality across
many organisations are fast realising after tax type only) and inserting themselves into
all tax types.
investing in technology projects that have the taxpayer process. When invoices are
not helped them move into the fourth • connected ecosystems such as other being generated, for instance, the revenue
industrial revolution in a meaningful way. government agencies, etc. authority will issue out the invoices to
11
Balancing today’s demands with tomorrow’s opportunities | Budget 2021/22the taxpayer’s suppliers in a standard digital core and that this will require a cannot result in true digital transformation.
format from the authority’s systems. multipronged approach that can include It starts with an ambitious digital
Direct application programming interfaces automating tax submission review transformation aspiration (that aligns
(APIs) from organisations to the revenue workflows and adopting modular, flexible with its overall mission/mandate) and an
authority facilitate this process change approaches to systems architecture to all-encompassing, well-thought-out digital
and enable real-time access to information respond to changing policy mandates. transformation plan that has measurable
by the revenue authority. Many say this outputs and - more importantly - that
is moving us to a world where there is no SARS is already on the journey of digital can be implemented timeously. This plan
tax return, where tax “just happens” and transformation. Finance Minister Tito needs to incorporate the future of work,
processes can be relied upon to produce Mboweni and SARS Commissioner in other words, the impact of disruptive
the correct tax outcomes. SARS has made Edward Kieswetter, have made comments technologies on traditional ways of
some recent strides in this area when it indicating how important digital solutions working; as well as how to embark on this
comes to auto-populating individuals’ tax are to making the revenue authority digitisation programme while still being
returns with third-party data. achieve some of its goals and to move very clear on the protection of taxpayer
forward into the new era. Innovations in data and data secrecy requirements.
Ronnie Nielson, Deloitte Tax Thought terms of auto-populating the tax returns
Leader (Denmark), explains that many tax with third-party data, improving the e-filing As we grapple with what future the
agencies have taken a piecemeal approach portal and SARS app functionality as well as coronavirus pandemic is leading us into,
to digital-based operations, building the chat bot on the mobile SARS app, are and how do we get digital transformation
stand-alone digital products atop legacy some of the recent milestones achieved by right, let us take some advice from what
foundations, which has challenges related SARS. Abraham Lincoln said, “The best way to
to cost, ease-of-use, and incompatibility predict the future is to create it”.
with emerging technologies. He explains However, digital solutions in disparate
further that it is important to build a truly small pockets across the revenue authority
12
Balancing today’s demands with tomorrow’s opportunities | Budget 2021/22Committed to the success of your business
Regulatory change, increased transparency, technology advancements—everything about
the way tax departments operate is in flux. At the same time, tax leaders are still held to
traditional expectations of planning and reporting tax, managing controversy and risk—
and doing it all for “less”.
By focusing on process, technology, resources and governance, Deloitte helps you build a
strong foundation for, and lead, an effective tax operating model. Our goal is improvement
and insight.
We help you achieve the control and confidence you need to lead through uncertainty.
Confidence to lead through uncertainty
www.deloitte.com/za/tax
© 2021. For information, contact Deloitte Touche Tohmatsu Limited. Tax & Legal
13
Balancing today’s demands with tomorrow’s opportunities | Budget 2021/22Finding a balance
in trying times
By Gaba Tabane
Director and Government and Public Services
Industry Leader, Deloitte Africa
F
inance Minister Tito Mboweni’s stated programme, with added support from the Public infrastructure spending to
message for the 2020 Budget Speech private sector with regards to distribution boost economic development
was Consolidation, Reform and and administration of the vaccine.
Growth. In the fiscal year to end February Over the Medium Term Expenditure
2021, the State’s revenue is projected to State-owned enterprises (SOEs) Framework (MTEF) period, R815 billion has
grow by 4.9% to R1.58 trillion (29.2% of bailouts been allocated to infrastructure spending.
GDP) with expenditure at R1.95 trillion SOEs continue to be the largest contributor
(36%). This means a consolidated budget SOEs play a crucial role within South to capital investment, spending a projected
deficit of R370.5 billion, or 6.8% of GDP. In Africa’s economy. In the 2020 financial R314 billion over the next three years. In
this environment of fiscal constraint due to year, a number of bailouts were made to the face of wide-ranging cuts to public
rising government debt, poor growth levels, struggling state owned entities including sector spending, the National Treasury
low revenues and rising public expenditure, South African Airways (SAA) and Eskom. In is still committed to capital spending to
further compounded by the onset of the the 2020 Budget Speech, Eskom remained drive the Government’s Infrastructure
COVID-19 pandemic which has further the top priority with a stable electricity programme. During his State of the
strained the fiscus; the Finance Minister will supply. The Finance Minister cited this as Nation Address, President Ramaphosa
have to perform a delicate balancing act “our number one task.” The beginning of reported that the Infrastructure Fund
to ensure that the 2021 Budget speaks to the 2021 calendar year has been met with implementation team had finalised a
the national priorities of the country. Key a new rollout of managed load shedding list of “shovel-ready” projects, with a
amongst these are: by Eskom. Provisions to get Eskom back potential investment of R700 billion over
on track have required continued financial ten years. In addition, Minister Mboweni
Tackling the COVID-19 pandemic investment by the government in the entity. also announced that over the next three
Over the next three years the State will years, the Development Bank of Southern
Significant resources will be budgeted transfer R112 billion to Eskom, compared Africa (DBSA) will package blended-finance
to fight the pandemic. South Africa has with the anticipated R69 billion previously mega-projects to the value of at least
started the first phase of acquiring the budgeted. The State has committed to R200 billion – in line with the President’s
vaccine for COVID-19. An initial payment of inject R23 billion annually into Eskom for announcement. Despite heavy cuts across
R283 million was paid in December 2020 the following seven years. Since 2008, SAA the 2020 budget, infrastructure spending
as a deposit to secure the vaccine. With has incurred losses of R32 billion, and has been allocated at over R800 billion
the aim of vaccinating nearly 67% of the will receive a further R16.4 billion from for the next three years. This allocation
population to attain herd immunity, we can taxpayers in the next three years, which should help overcome social and economic
expect the bulk of the budget allocation has been put aside to settle the airline’s infrastructure backlogs (energy, housing,
to go towards the health cluster, which will liabilities and interest. Stabilising our roads and transportation).
drive the national rollout of the vaccine SOEs has become one of government’s
programme. In addition to acquiring the top priorities as they will be primarily Cutting public spending
vaccine, a massive public rollout of the responsible for the successful rollout of the
vaccine is also anticipated. Government state’s public infrastructure programme. In the last Budget Speech, the Finance
is expected to centralise this rollout Minister outlined several cuts aimed
14
Balancing today’s demands with tomorrow’s opportunities | Budget 2021/22at reducing public spending, with the
largest reductions applied to the human
settlements and public transport sectors.
The need to direct constrained resources
to areas that have a high social impact
and the largest economic multiplier, while
outlining measures to deal with wasteful
expenditure; is of great importance. Cuts in
the public sector wage bill have also been
announced. A recent freezing of public
sector salary increases has been met by
resistance from the public sector unions.
Recent announcements from the unions
suggested a protracted legal battle with the
government and possible industrial action
by the unions could be a possibility.
15
Balancing today’s demands with tomorrow’s opportunities | Budget 2021/22VAT obligations for non-residents -
The complexities of the “enterprise”
definition
Nicole Perumal
By Severus Smuts Assistant Manager:
Director: Indirect Tax Leader, Indirect Tax,
Deloitte Africa Tax & Legal Deloitte Africa Tax & Legal
G
rowing anticipation is placed on which deemed the branch and main branch may register for VAT in South
whether or not further changes business to be regarded as separate Africa, and provided it meets certain
can be expected for the definition persons for VAT purposes, in order to requirements, will be regarded as a
of “enterprise”. Over the years, a number deem whether supplies between the person separate from its main business
of amendments or publications have local enterprise and the foreign main for VAT purposes. The effect of this is
been issued or proposed to clarify the business are taxable, and thus unlocking that any supplies made by the South
intent of legislature; including those input tax deductions. The wording of the African branch to its main business will
changes for electronic services, passive legislation indicates that the supplies be deemed to be taxable and any VAT
income, insurance contracts and made by a branch be treated the same incurred in making these supplies will be
telecommunications services. as if the foreign business incorporated a deductible.
subsidiary in South Africa.
Complexities surrounding the This treatment seems contrary to the
definition In recent times, there has been some intention of the definition of “enterprise”
doubt as to whether a foreign business since the VAT treatment will depend on
For various reasons, it is important to with a branch in South Africa that the legal structure adopted by a foreign
determine whether an activity performed performs certain functions for its main business. We don’t think the structure
by a business may constitute an business outside of South Africa, may adopted should impact the entitlement
“enterprise” in South Africa. The definition register as an enterprise for VAT. A VAT to register for VAT or the ability to
of “enterprise” is not dependent on place registration means that the transfer deduct input tax.
of residence. Therefore, foreign businesses of goods or provision of services to or
must consider the impact of their activities for the purposes of the main business 2. The foreign business makes staff
in South Africa, whether a person is outside of South Africa, are deemed to available to the local operations in
conducting an enterprise in South Africa be taxable for supplies that qualify for South Africa
and what other requirements must be met. input tax deductions. Even if employees retain their home
country employment contracts, in some
How has this impacted foreign However, current experiences now cases, they can for the duration of their
businesses? suggest that there has been a change secondment, if under the control and
in policy where the branch in South supervision of the operations in South
1. The branch of a main business Africa only makes “supplies” to its Africa be regarded as employees for
wishes to register for value-added main business situated outside South the purposes of local Pay-As-You-Earn
tax (VAT) on the basis of certain Africa. Where this is the case, SARS is (PAYE) withholding requirements. Where
activities performed to or for the of the view that such a branch may not the employment costs are recharged to
benefit of its main business outside register for VAT as it is not conducting an the local business as an intercompany
of South Africa enterprise. cost, it is not clear that the foreign
An amendment was inserted as proviso business will be viewed as having
(ii) to the definition of “enterprise” Where the South African branch conducted an enterprise in South Africa.
and promulgated on 24 January 2005, supplies to third parties, such a
16
Balancing today’s demands with tomorrow’s opportunities | Budget 2021/22The debate centres around whether the The impact for foreign businesses is
seconded employees are furthering the the uncertainty of whether there is a
enterprise of the foreign business or requirement to register and account
that of its local operations. No guidelines for VAT in South Africa. Where it turns
are provided to clearly interpret who is out that there was a requirement to
responsible for accounting for VAT on register and therefore a requirement to
these transactions. substantiate its zero rated transactions,
it means that any retrospective
The added complexity to this issue is obligation of having to do so may result
that of whether an obligation to remit in assessment of tax, penalties and
VAT on imported services arises. This interest on the basis that the foreign
obligation falls away if the non-resident business will not be in a position to
business is required to register for VAT support the zero rate.
in South Africa. Therefore, any decision
not to remit VAT on imported services In this case, where it transpires that
must be supported by a conclusive there was a requirement to register, it
position that the foreign business was means that the non-resident vendor will
required to charge local VAT. effectively submit nil VAT returns with
the added responsibility of having to
3. Foreign business takes flash title rely on the documents obtained by the
of movable goods before they supplier to substantiate its entitlement
are immediately sold to another to apply the zero rate.
recipient outside of South Africa
Flash title occurs where a local What is the impact on local
supplier sells goods to a recipient and businesses?
ownership of the movable goods vests
for a moment, before the goods are Given the number of rulings in this specific
immediately sold to another recipient area, and challenges faced by foreign
outside of South Africa. businesses to ascertain whether or not
activities in South Africa have given rise to
Interpretation Note 30 (Issue 3) was an obligation to register, points to a vacuum
issued by the South African Revenue in the law and a need for certainty.
Service (SARS) and provides an example
of where both the supplier and first- In the interest of applying the rules equally
mentioned recipient are vendors and to all foreign businesses operating in South
permitted to zero rate the supply, Africa, clear guidelines or amendments
where the goods are acquired on a flash to the law may be needed to gain insight
title basis, and if the necessary export as to the intention of legislature. This will
documentary requirements are met. also provide much needed certainty as to
whether the non-resident business or local
It would appear – based on the current South African recipient should account for
policy - that where the recipient is a the VAT.
non-resident, there is an obligation to
register based purely on the fact that
a non-resident enters into a flash title
transaction before the goods leave
South Africa.
17
Balancing today’s demands with tomorrow’s opportunities | Budget 2021/22Business incentives dwindle
amid pandemic
By Tumelo Marivate
Director: Global Investment and
Innovation Incentives Leader,
Deloitte Africa Tax & Legal
T
o facilitate the management of considered to be the more employment plan also promises green economy
the COVID-19 pandemic in 2020, intensive sectors – tourism and agriculture, interventions, but we will have to wait for
government introduced temporary, as well as creating social employment the Budget Vote to see what this means in
targeted relief measures as an immediate opportunities. In terms of enabling real terms.
response to try and preserve the economy. private sector capital investment, the
To fund this, the government used surplus manufacturing sector, which traditionally, In an economy where the tax base cannot
funds from the Unemployment Insurance from our view, has taken the lion’s share afford to give a real economic stimulus
Fund as well as shifted funds from existing of financial incentives available for private to kick-start private sector investment
programmes; with the Department of enterprises, has had direct funding across different sectors in the economy,
Trade, Industry and Competition - the reduced by more than a third since 2017. the international donor agencies may be a
leading department for supporting private However, given the country’s Economic sensible door for government to knock on
sector development - losing 21% of funds Reconstruction and Recovery Plan’s for private sector support programmes to
previously allocated to support private focus on driving industrialisation through complement government’s drive to invest
enterprises to make new investments localisation, it is expected that allocations in public goods and social employment.
and create jobs. The intended second to programmes in the manufacturing
phase of this COVID response plan was sector will remain flat, although there may
to focus on economic recovery, through be pressure to revise these programmes in
stimulating investment and employment order to increase their impact and better “...the international
creation. However, the COVID-19 second support the inclusion of small and medium
wave and the associated constrained enterprises (SMEs) in various supply chains. donor agencies may
economic activity is likely to lead to an
even greater shrinkage in the tax base
Some of this funding for industrialisation
programmes is most likely to be directed at be a sensible door
than was anticipated at the time of the
Supplementary Budget delivered in June
Development Finance Institutions such as
the Industrial Development Corporation to
for government to
2020. The necessary COVID-19 health and
social spending, the choice to prioritise
support loan guarantees, loans and equity
injections in the industrial sector.
knock on for private
support for state-owned enterprises, and sector support
increased cost of debt funding, will mean The disruptive nature of COVID-19 has
the country is unlikely to emerge from the shone the spotlight on the potential of programmes
first phase of managing the pandemic, that
is, preserving the economy.
the information and communications
technology sector. Notwithstanding this, to complement
The elusive economic recovery and the
post the National Budget, we will likely
continue to lament the lack of support
government’s drive
requisite allocation of government budgets
to programmes that support sustained
for start-ups and SMEs to drive the digital
economy, although support for key
to invest in public
investment and job creation are likely to institutions that drive innovation, such as goods and social
mean, at best, protecting funding for public the Council for Scientific and Industrial
infrastructure investment and what are Research, will continue. The economic employment. ”
18
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