Budget 2020 Several tax reforms expected next year | 02 November 2019
By Marie-Anne Lepathy
Several reforms in the tax system are expected to come into force as from next year.
In January 2020, the government will amend the Business Tax Act for a reduction of business tax on residential dwelling from 15% to 3%. As a result, government is urging the private sector to pass on some of the benefits to the people renting their accommodations.
“As the government is doing its part on the reduction in taxation, the private sector needs to do its part as well,” the Minister for Finance, Trade, Investment and Economic Planning, Maurice Loustau-Lalanne has said.
Minister Loustau-Lalanne made these announcements when presenting the 2020 budget before the National Assembly on Thursday morning.
The minister stated that the ‘Pay As You Go’ specified business that certain businesses were liable to deduct 5% of their income at source, will no longer exist as from January 2020. These businesses are building contractor, maintenance contractor, mechanic, hirer or operator of plant and equipment, hirer of omnibus.
“As announced in the budget address last year, government initiated a business tax review this year with the aim of keeping it simple. The aim of this comprehensive tax policy review was to see to the possibility of enhancing the country’s business tax system to provide an independent, in-depth and comparative assessment of our business tax system and thereby provide a set of tailored policy recommendation.
“A series of business tax consultations were therefore initiated in July with the assistance of the Organisation for Economic Cooperation and Development (OECD). Several stakeholder dialogues were held with representatives from different associations, organisations, ministries, government agencies and the business community in general. In September 2019, a follow up mission was also carried out to discuss preliminary findings and initiate policy proposals with the Ministry of Finance as well as with the various stakeholders,” Minister Loustau-Lalanne explained.
He said in context, our Tax-to-GDP forecast shows a slight decline from 32.1% in 2018 to 32.3% in 2019 and to 31.6% in 2020. As highlighted by the OECD, this is the highest ratio across all of the African countries covered by the OECD Global Revenue Statistics Database and highest in comparison to other small and highly tourism-dependent island economies. On the other hand, with the graduation of Seychelles to a high income country, we now face many challenges in obtaining development assistance aid.
“We therefore need to improve and enhance our own domestic resources mobilisation capacity, as well as venture into innovative financing to compensate for this funding gap. The climate change, disaster risk reduction, infrastructure development gap, along with our ageing population, are crucial agendas that requires considerable attention and funding to ensure that the country remains resilient to shocks and ensure our stability, growth and development into the future. Strengthening our tax system will be very important as the scope to use other sources of financing is relatively limited.
“This means that any changes to our tax system need to be carefully assessed to ensure that these do not affect growth or create more unfairness in our regime, as well as create significant revenue loss to government that will affect funding requirement on the budget,” the minister pointed out.
He noted that in view of these challenges, the government has to consider a business tax reform that takes into consideration these factors and implement a regime that will simplify our corporate income tax regime, reduce tax planning and improve tax compliance.
Primarily, a major policy change will be to address issues at source rather than indirectly through the tax system.
He said for many years the tax system has been used as a means to address challenges in a particular sector. This has been in terms of preferential rates, exemptions or incentives that in the end only distorts the tax base. Incentives were also provided in the past to encourage foreign direct investment and attempt to stimulate certain sectors. This has served its purpose very well. However, it is now important that these are also reviewed to determine whether the same investment climate and challenges exist today.
The preliminary OECD report, confirms that the biggest issue with our business tax system lies in its imbalance. That is, some sectors and businesses contribute a lot, while most pay little because of the preferential tax rates and generous deductions they receive. From the 2017 data for instance, only 39% of companies under the Business Tax had a positive tax liability.
In addition, he noted that only 10% of companies accounted for 96% of the total business tax or alternatively only 30 companies accounted for 80% of total business tax paid. About half of total companies, that is 717 companies, reported a zero tax liability.
“This is because of the large tax deductions which reduce taxable income to negative values, which result in tax losses that can be carried forward.
“Wholesale and retail trade as well as accommodation and food services are two sectors with the highest percentages of companies reporting loses. For 2017, 77% of companies in wholesale and retail trade reported losses, while 66% in accommodation and food services,” the minister noted.
He said the report also confirms that the accommodation and food service activities, which account for 15% of value added and 41% of VAT collected, only account for 7% of total business tax revenues. This largely results from the tax preferences that the sector has received, as well as from tax avoidance practices by the largest operators in the tourism sector. For instance, 44 companies in the tourism sector reported depreciation deductions that exceed 50% of turnover and a zero tax liability. In addition, many companies in this sector report disproportionately high amounts of other operating expenses relative to their turnover levels.
This is in view that the Business Tax Act allows an accelerated depreciation rate on capital investment other than buildings that sums up to 145% in five years, to tourism related businesses as well as agriculture and fisheries, compared to other sectors. In addition, hotels enjoy a 20% depreciation rate in the first tax year and 10% in each subsequent tax year.
Secondly, the informal sector is also a challenge. As a result, addressing the informality and broadening the net of tax payers should be a priority in order to avoid overburdening the formal sector operators and prevent unfair competition.
“It is imperative that the formal sectors should not be subject to further increase in tax rates so as to raise revenues. Instead, there is a need to broaden our tax base by capturing the informal sector, while maintaining the tax burden on the formal sector at a reasonable level,” Minister Loustau-Lalanne highlighted.
He said government is therefore considering rebalancing the business tax burden. As recommended by the OECD, this can be achieved by lowering the tax burden on many operators, but increasing tax levels on those that currently contribute insufficiently to the collection of revenue.
In the short-term the following measures will be introduced:
- Introduce international corporate tax base protection measures, including transfer pricing rules, interest limitations rules and controlled foreign company (CFC) rules.
- Facilitate tax compliance and strengthen the tax administration’s verification capacity, in particular by:
- Encouraging and facilitating electronic tax filing
- Maintaining the Presumptive tax, as a simplified tax for micro, small and medium enterprises and require businesses that report under the presumptive tax to provide a minimum amount of information (on salaries, fuel use, etc.) so that the tax administration can verify whether businesses under-report their turnover
- Ensuring adequate staffing of the tax administration
- Introducing an automated risk-based auditing system
- Set up a multi-stakeholder group with representatives of different ministries, public bodies and representatives of the private sector with a view to adopting a strategy to address informality that exist particularly in some sectors such as tourism.
- Better target enhanced tax depreciation allowances by restricting their use to investments in specified productive assets and energy-efficient capital. For other assets, maintain accelerated depreciation but only up to 100% of the cost of the investment.
- Remove or at least scale back the remaining fuel tax exemptions (except for accommodation services providers that are not connected to the PUC grid)
- Introduce a fixed lump-sum annual fee for certain activities such as for fishermen and artists. That is, for employed persons in these two sectors instead of paying income tax, the workers will be liable to a flat annual fee. This will improve administration and compliance and facilitate payment from these particular sectors.
In the medium-term priorities:
- Start the process of renegotiating the 28 double tax treaties (DTAs) that insufficiently prevent base erosion
- Harmonise and lower business tax rates by introducing a new business tax rate schedule that applies to all businesses. This will also include all the businesses currently taxed under the regular business tax rates, such as the tourism sector, fisheries, CSPs; but excluding the ‘high-end’ sector, which would remain taxed under existing rates, initially. The high-end sector comprises the telecommunications service providers, banks, insurance companies, alcohol and tobacco manufacturers. Once the legislations are in place that allow us to broaden our tax base better, these categories would also be aligned.
The new harmonised business tax rates could for instance be as follows: 15% up to profits of R1 million; and 25% on profits above R1 million. The setting of new business tax rates should also take into account international tax developments.
Minister Loustau-Lalanne explained that to introduce a flat 15% business tax rate would represent a significant revenue loss to government. This would represent a loss of revenues of approximately 1.7% of our GDP or 0.8% revenue loss in terms of GDP if the high-end sector is excluded.
The analysis carried out therefore suggests complementing the 15% tax rate with a rate in the order of 25% levied on profits above R1 million threshold, which the reform would be more or less revenue neutral if implemented comprehensively.
The progressive rates also allow for businesses already paying 15% to not reduce their investment. In addition, it would entail a significant business tax rate reduction for many businesses and therefore create an incentive for investment. It would significantly reduce the tax rate on small businesses, which are currently taxed at a high rate when they are taxed under the normal regime.
- Extend the cash accounting limit for business tax purposes to R2 million, instead of the current R1 million threshold. That is, allow businesses with revenues up to R2 million with the option of reporting on a cash basis, which is a simplified manner to account on a business performance.
- Consider tax on capital income if the business tax rates are reduced and aligned so as to prevent distortion and reduce unfairness. This is in view as individual capital income is more lightly taxed than labour income.
- Make the Tourism Marketing Tax (TMT) and the Corporate Social Responsibility Tax (CSRT) creditable against business tax and then gradually phase these taxes out
- Improve the design of the Progressive Income Tax rate schedule
- Involve digital platforms in the collection of VAT on tourism-related services and in the collection of information related to the transactions they facilitate
The minister said government will continue to engage with the relevant stakeholders and aims to finalise this important reform next year. These reforms need to be phased in gradually with a comprehensive approach, as significant planning and preparation is required in implementing these major reforms.