Across the globe, many governments have been forced to lockdown their countries in an attempt to curb the spread of the COVID-19 pandemic. A number of African countries have adopted similar measures. This has stalled, if not brought to a halt, economic activity, resulting in loss of income for businesses, workers (both in formal and informal sectors) as well as the self-employed.
In response, governments worldwide have implemented economic and tax relief packages to help businesses and workers mitigate the impact of these measures.
The use of these tools varies across countries making direct comparisons difficult.
To provide some guidance, the Organisation for Economic Cooperation and Development (OECD) has developed useful design features based on examples from across the globe. Applicable to both developed and developing nations, they are:
- additional time for dealing with tax affairs;
- quicker refunds to taxpayers;
- temporary changes in audit policy and ways to provide quicker tax certainty; and
- enhanced taxpayer services and communication initiatives.
So which tax relief ideas are the best? Below I sift through the various options and identify ideas that could be useful examples to policy makers, including those in South Africa.
The first type of tax relief measure extends immediate financial aid to taxpayers by virtue of a cash payment from the revenue authority. It can take the form of a grant, subsidy or contribution from the government. A case in point is the recently enacted stimulus payments of the US.
President Donald Trump signed a massive $2 trillion economic relief package with the aim of easing the financial burden caused by COVID-19. Known as the Coronavirus Aid, Relief, and Economic Security (CARES) Act , the relief plan includes assistance to the unemployed, zero-interest loans, stimulus payments to individuals and more.
The stimulus payments will be administered by the Inland Revenue Service and are based on a person's adjusted gross income. These payments are essentially an advance on a tax credit and will be available for the whole year.
In Germany, a state-funded program dating from World War II and used to great effect during the 2008 financial crisis, is again being implemented. The principle of short-time work ( “Kurzarbeit” ) is aimed at helping companies navigate difficult periods without having to resort to large-scale layoffs, disrupt businesses and the economy.
The employer and employee reach an agreement to cut working hours in accordance with labour law provisions, with the Kurzarbeit covering 60% of lost wages. When the situation improves, working hours can be increased or returned to normal very quickly, without the company having to find and hire new workers.
It's a win-win for both the employer and employee.
A tax holiday is a period of time during which the collection of a tax is suspended, reduced or postponed. The UK , for example, waived business property taxes for retail, hospitality, leisure and nursery businesses for 12 months. Italy has extended tax deadlines for residents and companies in the so-called “red zones” of the country.
In the US, a 10% excise tax is usually levied on certain early withdrawals from retirement plans. The CARES Act waives this 10% penalty in respect of COVID-19 related distributions of up to $100 000. Above this amount, the recipient can avoid any income tax by repaying the distributed amount as a rollover within three years.
Spanish SMEs and self-employed people will be allowed to defer income, corporate and VAT tax obligations for six months, with the first three months not subject to interest. And in Austria, taxpayers can apply for a reduction of advance payments of personal income or corporate tax if they can demonstrate a loss of revenue as a result of Covid-19 up until 31 October 2020.
Other tax relief
Then there are other categories that can be loosely grouped together: reduced tax rates and tax credits (or rebates), which decrease the calculated tax liability, thus resulting in less tax owed to the revenue authority. For their part, exemptions, deductions and allowances all have the effect of reducing the taxable amount on which a tax is levied. Ultimately, it results in less tax paid, but this benefit may not be felt immediately.
These forms of tax relief don't put an instant strain on government funds. But they also don't offer the same speedy cash flow assistance to taxpayers.
In Italy, businesses will receive a 50% tax credit for sanitation expenditure, for example daily cleaning services, masks and other precautionary measures to curb the spread of the virus. New Zealand taxpayers can opt to receive refunds related to R&D tax credits one year early.
Many countries have reduced Value-added Tax (VAT) rates or introduced exemptions. For example, China has introduced a VAT exemption on “lifestyle services”. This includes medical, catering, accommodation and personal services (such as hairdressing). Norway has temporarily dropped its VAT rate from 12% to 8%, with VAT payments postponed. Greece has introduced a four-month suspension of VAT payments, and the UK three months. Greece has also lowered VAT on products related to the prevention of the spread of the virus.
Enhanced deductions or allowances serve as an incentive for companies to upscale capital investments. For instance, China allows a 100% deduction for investment in equipment to expand production capacity. Previously, only equipment valued up to $700 000 qualified.
South Africa's relief measures
South Africa's tax relief package contains four overarching proposals.
First, the existing Employment Tax Incentive regime is expanded by the introduction of a subsidy of up to R500 a month for the next four months. Certain categories of employees qualify. An estimated 4 million workers will benefit from this. The South African Revenue Service will accelerate employment tax incentive reimbursements from twice a year to monthly. This will help compliant employers with their cash flow.
The second and third proposals relate to employees' and provisional taxes. Tax compliant SMEs that meet certain criteria will be allowed to delay 20% of the employees' tax liabilities and a portion of their provisional tax payments without penalties and interest for a number of months. About 75 000 SMEs are expected to be assisted by this intervention.
The fourth proposal creates a special tax dispensation for funds established to assist with the COVID-19 disaster relief effort. These funds, which include the national Solidarity Response Fund , may be approved as public benefit organisations. As a result, donations made to such tax-approved funds qualify for the usual 10 percent income tax deduction.
As South Africa finalises its Disaster Management Tax Relief Bill , a couple of suggestions come to mind. These include allowing a full tax deduction for donations to approved COVID-19 disaster-relief funds and welfare efforts. Another is to grant zero-rated VAT on hand sanitisers and related medical supplies.
Perhaps the examples highlighted in this article could provide inspiration of what is possible in a time of crisis?
Dr Lee-Ann Steenkamp is affiliated with the South African Institute of Tax Professionals (SAIT).
By Dr Lee-Ann Steenkamp, Senior lecturer in taxation, University of Stellenbosch Business School (USB), Stellenbosch University