Question NW1028 to the Minister of Finance

Reply:

The phenomenon of mobile higher-income earners is well-documented and known across tax jurisdictions – beyond South Africa. Indeed, “increased tax competition” of highly skilled, but mobile labour was identified as a key risk to inclusive tax policies as far back as 2018 (see Tax policies for inclusive growth in a changing world (oecd.org)).

Our highly unequal distribution of income coupled with very progressive marginal tax rates necessarily means that we collect a high proportion of our revenue from upper income groups – more so than many of peer countries. This is due to (1) a relatively high personal income tax exemption threshold and (2) high upper income tax rates (see Inchauste et al for a comparison to other developing countries).

1. The latest Tax Statistics includes an analysis of changes in residence (on pg 44) along with a new table regarding taxpayers that changed residence (Table A2.1.10 on pg 79). It indicates that 32 831individuals changed tax residence in the period between the 2017 and 2021 tax years. Of those individuals, 2 788 earned taxable income greater than R500 000 p.a. A total of 1 125 earned more than R1 million p.a., equating to R1.3 billion in taxed assessed during 2021. While any loss in revenue is important to track and understand, it is useful to indicate the scale of the phenomenon relative to our revenue raising capacity. As indicated in Ch. 4 of the Budget Review, we expect to raise R280.6 billion in 2023/24 from taxpayers with taxable income greater than R1 million p.a.

2. It is not clear that the country will be losing or gaining future revenue from PIT. The most important contribution that National Treasury can make at this point is to fight corruption and promote tax morality and confidence in the country, and to ensure that public finances stabilize, in order to lay the foundation for strong inclusive growth. Restoring growth is the most reliable determinant of increased tax bases.

Over the Medium-Term National Treasury aims to:

• Restore value-for-money in public expenditure, particularly through spending reviews.

• Make it as simple and as easy as possible to comply with tax requirements, as SARS did with automatic assessments over the last years.

• Increase the probability of detection of non-compliance, which is one of the main reasons behind rebuilding SARS and an increase in their budget allocation, and

• Broaden tax bases to lower tax rates, as high tax rates offer a strong incentive not to comply.

National Treasury is not currently considering any specific taxes to compensate for fluctuations in the tax base. Moreover, there are no new policy announcements or proposals that aim to prohibit or discourage taxpayers from leaving. Indeed, exchange controls have been relaxed over the last 2 years – to enhance South Africa’s position as an investment destination and to lower the cost of business. From a policy perspective, we are trying to reconcile our provisions with the commercial reality of more globalised operations and careers that include stints in numerous tax jurisdictions – notwithstanding the challenges posed by Covid 19. From a tax perspective, the objective is to ensure that the appropriate tax is paid for any assets that are transferred abroad. Some of the measures that had been in placed have become outdated as a result of exchange control reforms. As a result, the tax provisions regarding foreign remunerative work and pre-retirement pension withdrawals on cessation of tax residence have undergone significant reform in the last 5 years.