Mboweni faces tax problem as skilled and wealthy people leave South Africa

South Africa’s loss of skilled and high earners could limit room to raise income taxes as the Treasury seeks to plug a budget shortfall that’s above wartime levels.

A fourth-quarter estate agent survey by FirstRand Ltd’s First National Bank shows a more than fifth of all houses valued at R2.6 million ($176,939) or more that were put on the market by the end of last year was because people planned to move abroad.

This could further erode the tax base in a country where fewer than 14 million individuals in a working-age population of 39 million are registered taxpayers and where those earning more than R1 million a year pay 40.2% of all personal income levies.

For every high-net worth person who emigrates, an average of R1.2 million in income taxes disappears from the system and the spending, value-added tax and economic activity they generate is also lost, said Bernard Sacks, a partner at Mazars LLP in Cape Town.

The small tax base is a symptom of South Africa’s extreme inequality, a legacy of the apartheid system of racial discrimination that disadvantaged the black majority and ended in 1994.

Today, chief executives and top lawyers make as much as R20 million a year while the official minimum wage is just over R20 an hour.

“The increasing number of high-earning emigrants has eroded South Africa’s tax base. The latest tax amendments may help to slow the decline, but it is unlikely to completely stem the outflow, posing persistent risks to the fiscus,” said Boingotlo Gasealahwe, Bloomberg economist.

High-income South Africans are finding homes abroad through residency and citizenship programs.

A family of four must donate $200,000 or invest $320,000, including administration fees, in a government-approved real-estate project to qualify to become citizens in the Caribbean island nation of Grenada, which is very popular at the moment, said Nadia Read Thaele, founder and managing director of LIO Global, a residency and citizenship consultancy.

The statistics office stopped collecting data on self-declared emigrants in 2004.

Finance minister Tito Mboweni will present the 2021-2022 budget on February 24 and emigration could complicate plans to raise an additional R40 billion in revenue over the next four years.

In last year’s budget, the Treasury increased the exemption threshold on foreign income in a bid to prevent people from moving their tax residency abroad.

A wealth tax has been mooted several times in the past 2 1/2 decades to boost the standard of living of the country’s poor. Last year, an advisory panel appointed by president Cyril Ramaphosa said a three-year “solidarity tax” that would raise income tax for higher earners should be considered.

While a World Inequality Lab study shows a wealth tax on the net worth of South Africa’s richest could raise as much as R160 billion annually, it may push more high-income earners to leave.

The Treasury said in October recent tax increases generated less revenue than expected and evidence suggested they can have large negative effects on economic growth.

“Their choices are limited and it does point to the possibility of more borrowing and unfortunately that borrowing would happen at the time when the size of our economy is shrinking,” said Siphamandla Mkhwanazi, an economist at FNB.

The government should rather enforce laws aimed at bolstering tax compliance and invest in rebuilding capacity at the South African Revenue Service, according to Nazrien Kader, head of tax at Old Mutual Ltd.

A commission found the body suffered a “massive failure of governance and integrity” under former head Tom Moyane from 2014.

Edward Kieswetter, the former chief executive officer of the country’s largest insurance and retirement-fund adviser Alexander Forbes, was appointed commissioner in 2019.

Read: South Africa could look at taxing townships and the informal economy

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Mboweni faces tax problem as skilled and wealthy people leave South Africa