Over the last several years, the government has taken significant steps to improve the competitiveness of the tax system for South African businesses. However, unlike many other countries, South Africa does not have a formal system to consolidate the tax reporting of a group of companies or to offset the profits and losses of the members of a group of companies. Currently, the tax system in South Africa taxes companies on a stand-alone basis and therefore the introduction of a system of group taxation would constitute a fundamental change to the South African corporate tax system.
The introduction of a group taxation regime as part of the tax system in South Africa, could offer some tangible benefits to companies in South Africa. However, in order to achieve such benefits, careful planning is required in formulating the correct group taxation regime for South Africa.
A formalized system of group taxation or some form of consolidated group reporting could improve the functioning of the current tax system in South Africa and provide significant benefits for companies within a group. A system of group taxation would for example, lead to increased economic efficiency by better aligning the unit of taxation with the economic reality of economically integrated companies within a group and it would reduce compliance costs for taxpayers and the cost the government incurs in administering the tax system. Although, at the same time, a system of group taxation would introduce new rules and consequential changes to ensure the integrity of the tax system, which could further increase the complexity of an already complex tax system and it would also result in additional compliance costs and obligations being imposed.
It is clear that many decisions would need to be made in South Africa before the implementation of a group taxation regime. For example, which model would be most appropriate? What would constitute a group? Under what circumstances would a group qualify for election? It would also need to be decided whether it would apply only to group companies within South Africa, or whether foreign group companies would fall within the regime and whether companies which form part of the same group should be jointly and severally liable for all taxation of the group?
If the government were to introduce a formal system of group taxation, an important consideration would be what to do about the existing approach to the utilisation of losses. The existing corporate rules do not provide companies within a group with any flexibility to transfer losses. A group taxation system should ensure that all groups have access to at least some form of loss utilisation.
It is suggested that the government embark of a process of consulting with relevant stakeholders in respect of the implementation of a system of group taxation in South Africa and use the responses from this consultation process to evaluate whether group taxation has the potential to broadly address the concerns of the government, stakeholders and the business community. The responses will help the government to gauge the importance of various issues and the amount of support for a new system of group taxation, to better define the key issues identified, such as the type of group taxation system favoured and to increase the understanding of some of the possible implications of the introduction of a system of group taxation in South Africa.