OPINION: Dealing with questions relating to linking CIT and BEE


August 9, 2018 5:30 pm Published by Leave your thoughts

Yashodan Naidoo. Photo: Supplied
Yashodan Naidoo. Photo: Supplied

File Photo: IOL
File Photo: IOL

JOHANNESBURG – At the heart of the idea of justice is quite simply the desire to create fairness. Fairness is so entrenched in the creation of the democratic version of our country that you will find the topic of fairness and equality littered throughout our Constitution. Take a look at Chapter 2, Section 9 of our Constitution where it discusses the right to equality and you will see that it states that: “equality includes the full and equal enjoyment of all rights and freedoms”. This right to equality includes the right of all South Africans to participate fully in the economy of the country.

It was with that in mind that last week I wrote about linking the Broad-based Black Economic Empowerment Act: Codes of Good Practice (BEE Codes) with corporate income tax (CIT). The essence of this idea is that companies with very high levels of transformation (ie those companies with a BEE level 1 or level 2) continue to pay a normal CIT rate of 28 percent, and those with worse levels of transformation pay progressively higher CIT rates, depending on how poor the state of their transformation is. The BEE Codes have not been able to significantly advance transformation without an adequately large lever to motivate companies. Tax, something that is very hard to escape, is that lever. 

Today I’m going to address some of the issues that have been brought to my attention by people who have concerns and fears around the possible negative side effects that could result because of this type of legislative change. While the net outcome of this change would be positive, it’s important to discuss all of these issues. 

The first issue raised was: “Businesses need time to transform.” My response is that it’s been more than two decades since the constitution was enacted and more than a decade since the first BEE legislation was passed, signaling to business the need to transform. Additionally, and as with most legislation, a grace period (potentially between 12 to 18 months) should exist between approval of this legislation and its application, to allow for companies to make the needed changes. 

The second issue raised was: “Small and medium businesses will struggle to comply, and increased CIT will be a burden on these businesses.” The BEE Codes create specific allowances for “exempt micro-enterprises” (companies that generate less than R10 million a year in revenue) and “qualifying small enterprises” (companies that generate less than R50m a year in revenue) that make it easier for these sizes of businesses to achieve good BEE levels. It’s worth stating the obvious too, in that the additional tax only impacts profits, not revenue. This means that companies with smaller profits would feel a smaller impact, and only those companies that are highly profitable and refuse to transform would feel a noticeable impact. 

The third issue: “Companies will pass the cost of the additional tax on to consumers.” This isn’t a blanket tax, evenly applied to all companies, so individual companies that push up prices will lose market share to more transformed competitors, who are exempt from added tax and maintain prices at a more acceptable market rate. 

The fourth issue: “Businesses will retrench staff to recover the lost profits from the added tax.” Similar to the point above, because the tax is not uniformly applied, it allows for competition. Reducing your company’s workforce, in response to this tax change, would reduce total productive output, which in turn reduces competitiveness and would lead to a loss of market share to other, more competitive businesses. 

The fifth issue: “Businesses cannot afford the cost of complying with the codes.” Businesses require education on the various already existing, cost-effective options available to effectively increase their BEE rating, as well as practical guidance on how to structure and execute these initiatives. Something as straightforward as a website with simple explanations on the various practical ways businesses in various sectors can increase their BEE level, can be created and popularised. 

And the sixth issue: “Net foreign direct investment and investment from multinational corporations will reduce.” While multinational companies do take the tax rate of the jurisdiction they are considering entering – or remaining in ­– into account, it is only one component of such a decision. The other major considerations relate to the current level of profitability (which relates to existing multinationals operating within South Africa), and what growth prospects exist for any multinational entering the country, or looking to expand. Growth in South Africa is tepid, but for most companies, what matters most is growth of demand within the particular sector or sectors they operate in. Sectoral growth and gross domestic product (GDP), can vary widely depending on the sector, with a number of sectors within South Africa showing much higher growth than national average GDP. 

Another important thing to bear in mind is that while foreign direct investment is important, it is a much smaller contribution to capital inflows than foreign portfolio investment (which relates to foreign capital flowing into the country to purchase sovereign and corporate debt, and to a lesser extent, equities). 

For most people, change is something that causes fear, because of the uncertainty that the upcoming change would not necessarily be positive. What I’ve addressed in today’s column isn’t a fully comprehensive list of all the possible fears related to this kind of legislative change, along with the reasons why those fears should be put to rest, but it is a start. One thing that all people can get behind is that in the long run, building a country that has greater fairness in it is going to benefit all parties.

Yashodan Naidoo is chief executive of Precium Investments. It invests in agribusiness, property and financial services sectors. He is also the founder of the Forum for Radical and Practical Change, an incubator for social impact initiatives.

The views expressed here are not necessarily those of Independent Media.

– BUSINESS REPORT 

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