Limitation rarely solves problems

During the 2020 budget speech, Minister Mboweni proposed that there would be a restriction on the carry forward of assessed losses to be set off against taxable income with impact on years of assessment commencing on or after 1 January 2021.

The proposed limitation sought to be enacted, provided that assessed losses incurred by corporate taxpayers in previous years of assessment would be limited to 80% of that entity’s taxable income.

The announcement was made prior to South Africa experiencing the impact of Covid-19. The impact of Covid-19 on the South African economy forced South Africa and that of the world to come to a grinding halt with fewer enterprises having disposable income or an income at all. Many enterprises were forced to incur expenses in order to keep their trade afloat with no prospects of the generation a profitable trade in the foreseeable future.

During the latter of 2020, National Treasury did not elaborate on their intention to implement the proposal leaving taxpayers seeking guidance from the Draft Taxation Laws Amendment Bill published in July 2020.

The Draft Taxation Laws Amendment Bill remained silent on the proposed limitation of assessed losses leaving taxpayers breathing a sigh of relief in respect of not having to forego the resultant financial losses suffered by small, medium and large enterprises as a result of Covid-19.

From the 2021 Budget Speech it is clear that corporate taxpayers and their assessed losses are not out of the woods just yet. Minister Mboweni proposed that the corporate income tax rate be lowered to 27 per cent for corporate taxpayers with years of assessment commencing on or after 1 April 2022.

This proposal does not come without a sacrifice.

National Treasury plans to enact a lower corporate tax rate alongside a broadening of the corporate income tax base by limiting interest deductions and assessed losses.

Minister Mboweni has stated that consideration to further decrease the corporate tax rate will be undertaken to make South Africa’s tax system more attractive. This task will be established in a revenue-neutral manner engaging the Davis Tax Committee to ensure that the reform is rolled out correctly.

No further comment has been provided Minister Mboweni in the 2021 budget speech as to whether the assessed loss limitation will in fact be enacted in years of assessment commencing on or after 1 January 2021.

If the intention of National Treasury is to ensure that assessed losses are limited for years of assessment commencing on or after 1 January 2021, corporate taxpayers who have experienced their worst year of trade to date as a result of Covid-19 would be highly prejudiced.

The financial recovery time for corporate taxpayers cannot be predicted and therefore on this basis alone, National Treasury should allow corporate taxpayers to carry forward assessed losses incurred in respect of the 2021 year of assessment onwards.

In an already strained economy it cannot be seen to be beneficial from a tax perspective to lower the corporate tax rate by 1% but subsequently limit the carry forward of assessed losses and deductibility of interest.

Certain small, medium and micro enterprises are already enjoying preferential tax rates and the hindrance of the carry forward of assessed losses does not aid in the strategic support of the development and growth of these enterprises as envisaged by Government.

Perhaps the umbrella approach to limit assessed losses in respect of corporate taxpayers is not the best solution.

Further to the assessed loss prejudice anticipated by the corporate taxpayer, the limitation of interest deductibility proposed by Minister Mboweni, seeks to deter the dilution of taxable profit with the opposite effect of deterring capital investment, especially when these investments are leveraged through external funding.

If National Treasury’s strategy is to revitalize the economy, capital investments and the tax support thereof should be a fundamental consideration.

Only time will tell whether sense will prevail, compelling National Treasury to reconsider the position as to the implementation of the limitation of assessed losses and interest deductibility taking into account the financial effects of Covid-19 on the corporate taxpayer.

Read more BDO Insights