Economist Dawie Roodt suggested that South African companies should pay a 15% corporate income tax (CIT), as other countries are reducing their CIT rates to attract investments from businesses.

As other countries reduce their CIT rates, South Africa’s 27% looks increasingly unattractive, warding off potential investment that would boost economic growth.

Moreover, the tax bill imposed on companies is often passed on to consumers in the form of higher prices, meaning that individuals ultimately foot the bill.

Roodt, who is the chief economist at the Efficient Group, recently told Daily Investor why South Africa should reduce its CIT rate.

He explained that South Africa is over the Laffer Curve with regard to CIT, with any increase likely to result in less tax revenue as companies close down or look to minimise their tax liabilities.

Inversely, a reduction in CIT is likely to result in increased revenue from this source as companies grow, invest, and new businesses are formed.

South Africa has one of the most concentrated CIT bases in the world, with only 1,051 companies covering 72.3% of the state’s revenue from this source.

This translates into 0.1% of all companies paying 72.3% of CIT in the country. These are companies classified by SARS as generating taxable income greater than R100 million annually.

SARS outlines this data in its annual Tax Statistics, with the most recent edition being published in December 2024.

It showed that South Africa has a highly concentrated CIT tax base, despite over one million businesses being registered for tax in the 2023/24 financial year.

Of these companies, 287,802 made a loss and 637,435 had no taxable income. There were 198,695 companies which made a profit of up to R1 million and paid R7.4 billion in company income tax.

Another 41,709 had a taxable income of R1 million to R100 million and paid R82.5 billion in tax. They accounted for 25.5% of all company income tax.

72.3% of company income tax was paid by companies with taxable incomes of more than R100 million, and 66.5% by large companies with taxable incomes of more than R200 million.

South Africa’s over the curve

Roodt said this shows South Africa is over the Laffer Curve with regard to CIT, with a small number of companies being squeezed for most of the revenue.

The Laffer Curve depicts the relationship between tax rates and revenue, according to a theory by economist Arthur Laffer.

It suggests that taxes could be too low or too high to produce maximum revenue and that both a 0% income tax rate and a 100% income tax rate generate no revenue.

As such, the ideal tax rate, at which the maximum revenue is generated, is somewhere in between. Roodt thinks South Africa has strayed over the edge of the curve, with a CIT rate higher than the ideal.

More worryingly for Roodt, companies tend to pass this tax on to consumers through higher prices, putting strained South Africans under more financial pressure.

“Corporates don’t pay taxes. They shift the CIT burden down to individuals. So, we have to reduce corporate taxes quite dramatically as well, and I would try to aim for 15%,” Roodt said.

“Another reason why I say this is because it seems that this is the lever where corporate taxes are heading internationally.”

South Africa appears to be heading this way, at a very slow pace. The CIT rate was reduced from 28% to 27% on 31 March 2023, providing some relief to companies.

In contrast, the average rate for members of the Organisation for Economic Co-operation and Development is 23.2%.

This means that South Africa is fundamentally uncompetitive globally, and its elevated CIT rate prevents companies from setting up operations in the country.

Foreign companies and investors would rather allocate their capital towards countries where they can pay a lower rate, keep more of the profits, and have a business that generates more cash to reinvest and grow.