Global Corporate Tax Reform and Sin Taxes
The latest OECD report, "Tax Policy Reforms 2024," reveals significant shifts in corporate tax and excise tax trends. After two decades of steady reductions, average statutory corporate income tax (CIT) rates increased in 2023, with more jurisdictions opting for tax hikes rather than cuts. This reversal, the first since 2015, is driven by rising fiscal deficits and the need for increased government revenue. The average global CIT rate increased from 20% to over 21% last year, in stark contrast to the 28.2% rate two decades ago.
South Africa has also reduced its CIT rate over the years, from 30% in 2000 to 27% in 2022. However, the current rate is still above the international average, potentially impacting the country’s competitiveness in attracting foreign investment. The OECD report highlighted that increased corporate tax revenues were largely driven by heightened profits in the energy and agriculture sectors—key contributors to South Africa's economy—suggesting a similar opportunity for increased tax revenue domestically.
Shifting Tax Burdens and “Sin Taxes”
In addition to corporate tax changes, the OECD report noted that many countries have reformed their tax systems to reduce the burden on low- and middle-income households. In South Africa, individuals face a relatively heavy tax burden, with a top marginal PIT rate of 45%, and personal income tax accounting for R649.7 billion of total tax collections in the 2023/24 tax year. This is significantly higher than the R301 billion collected from CIT and the R445 billion from VAT. There may be opportunities for South Africa to reform its tax structure, reducing reliance on PIT and encouraging more competitive CIT rates.
The report also provided insights into "sin taxes"—excise duties on products like alcohol and tobacco. Four countries (Iceland, the Netherlands, the UK, and Canada) have taken steps to reduce excise taxes on alcoholic beverages to support businesses and boost economic activity in sectors like small breweries. By contrast, South Africa has seen steady increases in excise duties, often exceeding inflation. In the 2024 February budget, excise duties on alcoholic beverages increased by 6.7% to 7.2%, while tobacco excise duties rose by 4.7% for cigarettes and 8.2% for pipe tobacco and cigars. These hikes are expected to add an additional R800 million to the national coffers.
However, South Africa's experience with "sin taxes" during the COVID-19 pandemic, including the ban on the sale of alcohol and cigarettes, led to significant losses in excise revenue and an increase in illicit trade, particularly in the tobacco sector. As the government continues to rely on excise duties as a revenue source, it will need to balance tax increases with the potential risks of fostering illegal markets and negatively impacting the economy.
Takeaway for South African Accountants
These global tax trends suggest a need for South Africa to carefully evaluate its tax policies. There may be opportunities to lower the PIT burden on individuals, consider more globally competitive corporate tax rates, and review excise tax strategies to minimize unintended economic consequences. Accountants will play a key role in advising businesses and individuals on navigating these changing tax landscapes effectively.
