Planned tax reforms spook private sector

MBONGENI MGUNI
Staff Writer | Friday June 11, 2010 00:00

 

In his Budget Speech last February, the Minister of Finance, Kenneth Matambo, announced plans to discard the current two-tier system and replace it with a single corporate tax of 25 percent. This change would also include halving withholding tax on dividends to 7.5 percent.

While Matambo planned to have the changes in place by July 1 - the beginning of the tax year - this week all indicators suggest that the planned reforms will be put forward.

BusinessWeek investigations indicate that an 18-month long consultative process between Government and the private sector is yet to produce a concrete resolution on how to handle tax credits earned by businesses in line with the current tax laws. It is understood this and other burning issues have been discussed frequently at BOCCIM, the High Level Consultative Council and most recently at Cabinet level, which was reportedly briefed on the dilemma last week.

At the heart of the matter is the credits companies receive against Additional Companies Tax (ACT) of 10 percent. According to the law, companies pay 10 percent ACT to BURS against which they are able to offset 15 percent withholding tax on dividends whenever they declare them.

Thus, companies effectively retain the 15 percent withholding tax whenever they declare dividends, as it is set against ACT held by BURS. The system works in sets of five years, defining the duration within which the withholding tax can be set against ACT. Should a company fail to declare dividends within five years, ACT falls away from the first year, denying the company the right to offset withholding tax against it.

Private sector players fear that millions of ACT held by BURS will fall through the woodwork on July 1 because it is unclear how the credit system will work when the two-tier system is abandoned.

The new system unifies and sets corporate tax at 25 percent while withholding tax on dividends is reduced to 7.5 percent.'We were extensively involved in the review of this and we raised these concerns, saying this is an effective increase in tax,' says BOCCIM Executive Director, Maria Machailo-Ellis. 'What we know now is that the new reforms are to start on July 1, but it's not clear whether they will actually come into play.' This week, BURS' officials said nothing was final on the proposed tax reforms. The officials explained that the issue of ACT was the major stumbling block to ushering in the new unified tax system.

'The big issue is how do we change corporate tax to get rid of the two-tier system and make it a single rate of 25 percent but also factor in the additional tax that has been accruing for the past five years?' one BURS' official said at Tourism Pitso 2010 this week.'Government has to make a decision on what will happen to this additional tax, and that's why the proposed reforms have taken this long.'

Authoritative finance ministry insiders say the latest indicators are that the proposed reforms will miss the July 1 deadline. 'The proposed reforms will have to be drafted as amendments to the Income Tax Act and set before Parliament, which sits some time in July,' said one insider. 'The process of bringing them into law - including gazetting - would take about a month.

'Also, it would be a world-first that tax reforms are ushered in after July 1. While technically, the Minister can always bring them in at any time after July 1, traditionally, the practice is that tax law changes take effect at the beginning of the tax year, to guide planning and expectations. It would be awkward, but not impossible or illegal.'

According to ministry sources, the reforms follow the most extensive consultation ever done by Government on tax reform. 'That has been part of the issue,' said another insider. 'In the past, there was a Tax Review Committee comprising several ministries that could take these decisions faster.

'This process has taken about 18 months and is still ongoing. In terms of democracy, the process is good. But in terms of guiding expectations, there's uncertainty in the private sector about whether these reforms will come to pass.'

In February, Matambo said the proposed reforms were to simplify the current tax regime which he described as 'unnecessarily complicated'. The Minister also noted that the reforms dated back to the late finance minister Baledzi Gaolathe's tenure and were informed by a recommendation from the Economic Advisory Council.

The simpler tax laws are expected to improve the investment climate and the economy's competitiveness, while also contributing five percent to the nation's coffers in non-mineral income tax.