On 11 February 2022 the IMF issued a report and a selected issues paper following discussions with South Africa under Article IV of the IMF’s articles of agreement.
Economic growth was estimated at 4.6% in 2021 but is projected to reach only 1.9% in 2022. In the medium-term growth is expected to fall to around 1.4% owing to structural obstacles to investment, continuing policy uncertainty and high public debt. The IMF considers that challenges to the economy must be overcome by means of sound fiscal policy and reforms that can facilitate sustainable, green growth and greater equality. The budget for 2022/23 to be presented in February 2022 is an opportunity to set out concrete measures, including rationalisation of transfers to state owned enterprises (SOEs), streamlining of tax expenditures and better targeted education subsidies.
Measures to raise more tax revenue measures should aim at limiting tax expenditures, combating tax evasion and reducing carbon emissions. South Africa’s tax revenue relative to GDP is already one of the largest among the emerging market economies but could be increased further by broadening the tax base, in particular by removing tax exemptions for specific economic sectors and for the special economic zones, that have added little value to production.
South Africa could strengthen the tax administration by further measures to address base erosion and profit shifting, which could increase tax collection. The tax administration could be strengthened by improving the integrity of the registration database and correcting faults in the compliance risk management approach. The organisation of tax administration could be reformed so that roles and responsibilities in the organisation are not defined by type of tax, which has a fragmenting effect.
The IMF report considers that carbon and excise tax rates could be increased, and this would also help reduce carbon emissions to meet the government’s international commitments. The new carbon tax, which was introduced in June 2019, came into force only in October 2020. A number of exemptions and significant tax-free emissions allowances were made available, to ease the transition.
The South African government considers that some of the allowances on the carbon tax will be reduced over time, but it will be more difficult to reduce some tax expenditures, for example on the production of motor vehicles.
A streamlined regulatory environment would provide better support for start-up and growing businesses and allow them to compete on a level playing field. Policy uncertainty undermines business confidence and is a barrier to the creation of new companies, so the government should establish clear and stable rules. Industrial policy should be consistent with international obligations, including the commitments under the WTO agreements. The African Continental Free Trade Area (AfCFTA) agreement can improve competitiveness and further increase exports.
Technical cooperation with the IMF has included work on revenue administration, including a TADAT (Tax Administration Diagnostic Assessment Tool) assessment. Future cooperation between South Africa and the IMF will include further strengthening tax administration. This will involve restoring the large taxpayers’ unit and making it fully operational. Work will also be done on reducing tax base erosion and profit shifting, especially by multinational companies. The technical cooperation will also include updating the customs legislation.
