An investigation of corporate income tax reform options in South Africa

by Seppo Kari, Hayley Reynolds, Kyle McNabb & Londiwe Khoza

According to a recent study (World Bank, 2015), the South African Corporate Income Tax includes elements that distort investment incentives across sectors, asset types and financing forms. A number of these distortions emanate from generous depreciation allowances and debt bias. In this study, we propose a number of reforms in order to tackle the aforementioned issues, namely the introduction of an equity allowance, interest limitation rules and an adjustment of tax depreciation rates in certain sectors. In particular, we consider the feasibility of introducing an allowance for corporate equity (ACE) which, whilst going some way toward tackling the debt bias issue, leads to sharp reductions in revenue for the government according to preliminary results. With regard to the depreciation allowances, we consider the effects of adjusting the mining allowance to mirror that currently found in the manufacturing sector.