Wealth tax unlikely, says accounting agency EY

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Rough road for taxpayers with audits, tougher enforcement, says the author. Image: Shutterstock

The South African 2021 budget, due on Wednesday, is unlikely to introduce a wealth tax or other significant tax hike, but rather more steps to ensure tax enforcement and collection.

Read: Promising Collective Signs Reduce Pressure For Tax Hikes

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The budget trend since 2019 has mainly been to equip the South Africa Revenue Service (Sars) to improve tax enforcement and improve tax collection. We do not expect any significant deviation from this focus in this month’s budget.

However, EY continues to believe that a gradual, but unpopular, cut in corporate tax rates could help boost South Africa’s trade, economic reform and competitiveness.

The corporate tax rate cut is a matter of when. In the wake of the pandemic, it is also particularly important to help companies in South Africa restore their finances and thus reduce the risk of further job losses.

While the introduction of a wealth tax appears politically attractive, the jury is not sure whether such a tax would achieve its goal better than other alternatives.

A wealth tax that efficiently generates significant tax revenues should be welcomed, but only if it is also fair and difficult to avoid.

Because of the complexity of designing and managing such a tax, it is not a political direction that the SA should rush into without a more extensive public consultation process.

Tax loophole

Despite a lack of clarity about how much additional enforcement capacity currently exists in Sars, some taxpayers can expect a controversial relationship with Sars as they pull out all their power to enforce compliance to bridge the “tax gap”. The tax gap is the difference between the actual amount of tax owed in a given tax year and the amount that is paid on time.

We expect an increase in audits and a stricter application and interpretation of tax law. This will inevitably lead to more disputes as compliance behavior is central.

Taxpayers should prepare for more regular settlement negotiations with Sars and a greater willingness to go to court.

A poorly coordinated or overly aggressive enforcement program by Sars can undermine remaining trust and collaboration between compliant taxpayers and the tax administration.

Ekow Eghan is EY’s South African tax officer.