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Tips for Trevor: The Skills Disincentive Project

South Africa has a dire shortage of experienced people in the technical, IT and engineering fields. With the country approaching last place in Africa for the quality and cost effectiveness of its communications infrastructure, it makes sense to go for broke and simply be the most undeveloped country in the world.

Countries like the Netherlands offer significant tax discounts and readily available work permits in an effort to attract professional skills to that country, and these efforts are very successful. What if South Africa did the exact opposite: A tax disincentive program that penalises professionals wanting to build technology startups in the country? I think that just might work. Last place here we come.

So here's what I suggest be done.

With professionals there is a trend to form startup companies that use consulting income to fund the operations of the company. As a company the professional has a greater likelihood of attracting larger clients as customers with a corresponding increase in turnover, and this additional budget helps junior interns get hired and gain valuable experience. All of these serve to increase the pool of skills available to the country, which is exactly what we are trying to avoid. How can this be prevented?

The proposed solution is really simple - pass tax legislation that forces the consultant's clients to treat the consulting company as a normal employee. If clients were to deduct Pay As You Earn from the company's invoices, the resulting drop in turnover could kill the company. There would be no budget to pay for interns or skills development, and consultants would be driven to seek opportunities elsewhere.

This solution does have one small snag: The money accumulated as Pay As You Earn will be claimed back in the tax return at the end of the company's tax year, however there is a big advantage to this. As the company could not spend the money withheld, this money will be declared profit, and will therefore be taxed at the ruling rate. So not only are consulting companies withheld their full amount due, but they will lose a percentage of that money to tax for the betterment of tax collection.

As the final nail in the coffin, if a way was found to tax such companies at a higher rate than other companies, say at a premium of 5% over and above normal tax obligations, it would be even better.

Anybody wanting to run any kind of professional consulting business in an environment like that would be certifiably crazy to do so.

How would a government get away with a policy like this one? Surely such a policy will come under critical fire from those affected? One very viable solution to this problem would be to offer special exemption certificates to qualifying companies. Then add hidden requirements, ensuring that virtually nobody qualifies. A great criterion to base the exemption on is to exclude all contracts where a particular consultant is specified by name. As no client would be stupid enough not to specify the consultant by name in the contract (leaving the consulting company able to swap out consultants at will taking their project knowledge with them) that pretty much ensures as few companies qualify as possible.

Now that's foolproof.

Oh dear, I do believe the South African Treasury have already had this idea, and have been implementing it since around 2000.

And there I thought I was being original.


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Tip for Graham: Why don't you just actually send this to Trevor's suggestion thingy?

They'll ignore you, yes. But that doesn't bother me. Cause I'll prob. leave the country soon to go practice my trade elsewhere. Too bad, I've wanted to start my own thing for years. Heck, as we speak I have a buddy in NEW ZEALAND who's going to be the "body" of a business I want to start, while I apply my knowledge from here (for now).

My boss pointed out to me about 2 weeks ago that C++ talent in this country is scarce as all heck, and he'd hate to lose me. But I have to look out for #1.

He's given up on hiring C++ dev's in SA, and is in the process of outsourcing most of our C++ work to India. So much for keeping money in the country. (I think this is an abysmal idea, for the record)

When I was still in varsity a Business Management lecturer pointed out exactly what you're saying. Starting any small business in this coutry is almost impossible due to red tape, excessive fees and taxing. We worked this out to anihilating almost 100% of all a small business' profit. And sometimes pulling the company into a loss (!!)

In my naive varsity spirit I thought the authorities would adress this "soon". Sigh, I've become much more jaded since then. They don't give a crap. They'd rather go on exotic vacations on your, and my, dime.

The purpose of the article was for submission to South African finance minister Trevor Manuel's "Tips for Trevor" email channel, it's already been sent. :)

For the record, if anyone wants to comment on South African fiscal policy, send email to tipsfortrevor@treasury.gov.za, or visit the website at http://www.treasury.gov.za/tipsfortrevor.htm.

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