In the current pandemic effected economic climate, the announcement in the 2021 Budget (Budget) of
the reduction in corporate income tax (CIT) from the current rate of 28% provides some relief to companies
feeling the pinch of the economic downturn. CIT will be lowered to 27% for companies with years of assessment
commencing on or after 1 April 2022 with a view to further CIT rate decreases over the medium term.
Whilst still high compared to the global average CIT rate of 23,6%, the reduction seeks to drive growth and encourage investment in the country. In order to implement the reduction in CIT, government intends on reducing the number of tax incentives, expenditure deductions and assessed loss offsets currently available to companies in order to broaden the CIT base. The proposals by the Minister of Finance (Minister) relating to the limitation of assessed losses and excessive interest deductions have been postponed to 2022 given the economic restrictions imposed during the pandemic.
In addition to facilitating a more competitive and attractive economic environment for investment, the reduction in CIT seeks to ensure that South African companies are able to financially recover from the economic challenges experienced during the pandemic, whilst preserving jobs and preventing further job losses.
This change should be welcomed by companies in South Africa and indirectly, it is hoped that the reduced rate will have a positive effect on wages and employment. If the current capital gains tax (CGT) inclusion rate of 80% for companies is also not increased when the CIT reduction takes effect, the effective CGT rate for companies will also be reduced. The announcement of potential further reduction in CIT may also be key in stimulating inbound investment over the next few years.
Author: Keshen Govindsamy.