| South
African Fiscal Incentives |
Introduction
The South African
government, understandably enough after decades of international
isolation, is very keen to encourage foreign direct investment
(FDI) into South Africa, and offers a range of taxation and
other incentives in order to entice international (and in
some cases domestic) investors. Here we will be looking at
some of the major initiatives set up by the new regime: Industrial
Development Zones (IDZ) and the Small and Medium Enterprise
Development Programme (SMEDP), and a range of incentives offered
for manufacturing start-ups. The
Enterprise Investment Programme was launched by the government
in July 2008, to provide sector-specific financing in order
to encourage growth in key areas.
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Industrial
Development Zones
Industrial Development
Zones (IDZs) are purpose-built industrial estates providing
facilities and services tailored for export-oriented industries.
They are linked to international airports or ports, and run
along similar lines to Export Processing Zones, which fall
outside of domestic customs zones, and so are able to import
items free of customs and trade restrictions, add value, and
then export. Sites already earmarked for, or actually being
used as IDZs include Richmond, East London, Durban, Coega,
Saldanha, and the Johannesburg international airport.
New investments
locating in an IDZ can expect several benefits:
- Attractive
regulatory regime and investment facilitation services provided
by zone operators;
- Duty free
imports of capital goods and inputs, plus VAT exemption
for exports;
- Access to
the government's incentive mechanism;
- Effective
infrastructure
IDZs usually
consist of two zones of operation:
- Customs Secured
Area (CSA). A delimited area with entrance and exit points
controlled by customs personnel, and a dedicated customs
office providing rapid inspection and clearance.
- Industries
and Services Corridor (ISC) Adjacent to the CSA, and occupied
by service providers to the export-oriented enterprises
located in the Customs Secured Area.
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Small and Medium Enterprise Development Programme
(SMEDP)
The SMEDP is
a programme designed to generate employment, and create opportunities
for the introduction of new and advanced skills to South Africa,
as well as to encourage foreign investment in the country.
One of the programmes it offers provides incentives for those
planning to expand existing South African based enterprises,
or to start new projects in a range of sectors, including
manufacturing, tourism, business services, information and
communications, technology, and high value agricultural projects.
Eligible projects
can claim an annual tax free cash grant of up to 10% of the
qualifying investment cost, paid over two or three years if
a labour usage criteria is met. The rates for assistance are
as follows:
- First R5
million ($630,000 approx) investment 10% per annum
- Next R10
million ($1.26m approx) investment 6% per annum
- Next R15
million ($1.89m approx) investment 4% per annum
- Next R20
million ($2.52m approx) investment 3% per annum
- Next R25
million ($3,15m approx) investment 2% per annum
- Next R25
million investment 1% per annum
Another incentive,
offered to businesses with approved training programmes, is
the Skills Support Programme, which can be accessed simultaneously
with any other investment or competitiveness programmes. The
SSP offers a three-year grant to the value of up to 50% of
the cost of training new staff as the result of an expansion
or new project. It also offers a capital grant for training
equipment and course materials.
The government
is also very keen to stimulate domestic investment, as it
believes that this is the key to foreign investment, as international
investors, to a certain degree, follow the sentiment and mood
of their domestic counterparts. To this end, a number of Spatial
Development initiatives (SDIs or 'Investment Corridors') have
been set in place to establish conditions that will be attractive
to both domestic and international investors. SDIs have tended
to be established outside the major industrial centres, and
offer private/public partnerships designed to encourage economic
growth, and create jobs in areas such as tourism and agriculture.
However, the incentives offered to investors in these initiatives
are 'soft' incentives, for example links with local suppliers,
red tape reduction, etc, and as such will probably appeal
more to domestic enterprises than international investors.
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Incentives For Manufacturing Start-Ups
A company which
incorporated on or after October 1, 1996 contemplating carrying
on a manufacturing project as its sole business, may be awarded
a tax holiday, up to a maximum of six years, if the project
meets certain conditions. The project may consist of one or
more of three components, namely a spatial component, an industry
component and a human resource component.
The company must
apply to the Regional Industrial Development Board for the
approval of its project before it will be granted the tax
holiday status. Such status consisting of a zero rate being
applied to taxable income.
For each component
certified by the board, the company will be entitled to the
tax holiday status for two consecutive years. The tax holiday
status will commence in the first year in which the company
has a taxable income and will lapse ten years after the project
was approved.
Existing entities
will not qualify for the tax holiday. Additional information
may be obtained from the:
Board for Regional
Industrial Development (now the Department of Trade and Industry
or DTI)
Private Bag X 86
Pretoria
0001
Tel: (012) 312 8911
Fax: (012) 325 5268
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Strategic Investment Projects
The
Strategic Investment Project program offers a tax allowance
of up to 100 percent (a maximum allowance of R600 million
(app. $100 million) per project) on the cost of buildings,
plant and machinery, for strategic investments of at least
R50 million (app. $85 million).
Although
there was a delay in implementing the scheme, the trade and
industry department announced in April 2002 that the R3-billion
Strategic Investment Projects (SIP) incentive scheme had come
on stream after finalising the criteria for the evaluation
of projects. The incentive was broadly welcomed by investment
analysts and consultants.
The
Department of Trade and Industry said at the time: "The
incentive represents an innovative step by government to attract
private sector investment in profitable and wealth-creating
entitities into SA, from both local and foreign entrepreneurs.
The SIP will support industrial projects investing at least
R50m in qualifying industrial assets. These projects are expected
to increase production within the SA industry and have a potential
for long-term sustainability."
The
SIP incentive programme provides tax credits equal to between
50% and 100% of the cost of qualifying projects, with a points
system being used to assess the value of individual projects.
The SIP incentive is accessible to industrial projects participating
within the following sectors:
- Manufacturing
of products: all listed manufacturing activities excluding
tobacco and tobacco related products;
-
Computer and computer related activities: hardware consultancy,
software consultancy and supply, data processing (excluding
standard secretarial services), and database activities;
-
Research and development activities: research and experimental
development on natural sciences and engineering
The proposed project should:
-
Comprise investment in new qualifying assets equal to or
exceeding R50 million;
-
Increase annual production of the relevant industry sector
within South Africa;
-
Not substantially displace products or jobs in the relevant
sectors;
- Demonstrate
long term commercial viability;
-
Promote employment and production in the same economic sector
in which the project is to be established;
-
Not concurrently be benefiting from certain other schemes
as per the relevant legislation.
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The Enterprise Investment Programme
The
Enterprise Investment Programme was launched by the government
in July 2008, to provide sector-specific financing in order
to encourage growth in key areas.
The
scheme currently operates under two sub-programmes –
the Manufacturing Investment Programme (MIP) and the Tourism
Support Programme (TSP – though further sub-programmes
are expected to be added in the future to address the needs
of other specific sectors.
The
EIP works through an investment grant of between 15% and 30%
towards qualifying investment in plant, machinery and equipment
and customised vehicles required for establishing new or expanding
existing production facilities or upgrading production capability
in existing clothing and textiles operations.
The
MIP is designed to stimulate investment into the manufacturing
and related services sectors as part of the government’s
efforts to create further employment and ensure sustained
growth within the industry.
The
programme aims to encourage further investment into the industry
by providing a grant of up to 30% towards qualifying investment
below R200m in plant, machinery and equipment and commercial
vehicles required for establishing new and expansions of existing
operations.
Although
the MIP can be accessed by a range of sectors in the manufacturing
industry, the government is focusing on four key sectors that
it has identified as having the most potential for achieving
its growth objectives: Metal fabrication, Capital and Transport
equipment; Automotive and components; Chemicals, plastic fabrication
and pharmaceuticals; and Furniture sectors.
The
aim of the TSP is to specifically promote sustainable job
creation outside of the traditional tourism destinations of
Durban, Cape Town and Johannesburg, as well as encouraging
greater transformation in the sector.
The
government has chosen to support the tourism sector as it
remains vital to the South African economy, contributing close
to R100bn to GDP, and has relatively low entry barriers providing
real potential to grow the SMME segment.
Whilst
many SMMEs have entered the tourism sector, particularly ahead
of 2010, most remain small and do not expand into medium sized
businesses, thereby limiting their job creation capacity.
The
TSP offers a grant of up to 30% of qualifying capital investment
by enterprises investing below R200m, provided the enterprises
are located outside the three established tourism areas.
The
grant can be used by applicants as part of their equity contribution
when approaching third party partners and may also be used
to access further loans from banks.
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Other Investment Incentive Schemes
The
South African government has introduced a number of other
schemes designed to encourage investment in certain industries,
including:
Critical
Infrastructure Programme (CIP)
This
programme provides subsidised support for economic infrastructure
required for committed productive investments, including new
or expanding existing projects. It also assists companies
with a top-up grant, with funding ranging from 10% to 30%
of the qualifying development costs.
The
scheme aims to:
- Improve
the competitiveness of South African industries;
- Achieve
economic growth and create employment;
- Support
the development of industrial activities tat have strategic
economic
advantage for South Africa;
- Achieve
a geographical spread of economic activities within South
Africa
and prioritise rural and economically depressed areas.
Private
sector enterprises, private /public partnerships, industrial
development project operators, strategic Investment programme
applications and investors in strategic economic projects
may apply for assistance under the scheme. The following qualifying
costs may be claimed for:
- Costs
incurred directly in the installation, construction and
erection of infrastructure;
- Remuneration
costs incurred by the applicant for payment of employees
undertaking project work;
- Costs
of materials directly consumed during the installation,
construction and erection of the infrastructure;
- Cost
of new capital items, e.g. test equipment.
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Technology
and Human Resources For Industry Programme (THRIP)
The
Technology and Human Resources for Industry Programme (THRIP)
is a partnership programme, which challenges companies to
match government funding for innovative research and development
in South Africa. Managed by the National Research Foundation
(NRF) on behalf of the Department of Trade and Industry (the
dti), THRIP focuses on projects that specifically promote
and facilitate scientific research, technology development
and technology diffusion,
or any combination of these.
All projects funded by THRIP must include human resource development,
but
the choice of technological focus is left to the industrial
participants and their partners. The industry and the dti
share the costs – and therefore the risk – of
developing commercial technology on a R2 to R1 basis (industry:
the dti). the dti’s support may be doubled if a project
supports certain THRIP priorities.
Funding
takes place in the following ways:
- Firms
and THRIP invest jointly in research projects where project
leaders are on the academic staff of South African Higher
Education Institutions (HEIs)
- THRIP
matches investment by industry in projects where researchers/experts
from Science, Engineering and Technology Institutions (SETIs)
serve as project leaders and students are trained through
the projects
- Technology
Innovation Promotion through the Transfer Of People (TIPTOP)
schemes promote the mobility of researchers and students
between the industrial participants, HEIs, and SETIs involved
in joint projects. Four TIPTOP schemes are available, namely:
- The
exchange of researchers and technology managers between
HEIs, SETIs and industry.
- The
placement of SET graduates in firms, while they are
working towards a higher degree on a joint research
project.
-
The placement of SET graduates in small, medium and
micro enterprises (SMMEs).
- The
placement of SET skilled company employees within HEIs
or SETIs.
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Support
Programme for Industrial Innovation (SPII)
The
programme, administered by the Industrial Development Corporation
of South Africa, promotes technology development in the manufacturing
and IT industry through innovation of new products and processes.
All private sector firms and commercialised state owned companies,
which incur direct costs in the development of innovative
new products/processes qualify for the funding.
The SPII is focussed specifically on the phase that begins
at the conclusion of basic research (at the stage of proof
of concept) and ends at the point where a pre-production prototype
has been produced.
Support
is provided in the form of product process development, a
matching scheme and a Partnership Scheme:
- Product
process development: Financial assistance is provided for
small, very small and micro enterprises in the form of a
grant of between 65% and 85% of the qualifying cost incurred
during the technical development stage with a maximum grant
amount of half a million Rand (R500,000) per
project. For enterprises with more than 25% black shareholding,
the grant is 65%, for enterprises with between 25% and 50%
black shareholding, the grant amount is 75%, and for enterprises
with black shareholding of more than 50%, the grant amount
is 85%.
- Matching
scheme: This is a conditional grant that is repaid by means
of levy sales. Financial assistance is provided to SMEs
with more than 200 employees, a turnover of more than R51
million, and assets less than R19 million, in the form of
a grant of up to 50% of the qualifying cost incurred during
the technical development stage up to a maximum grant amount
of one and a half million Rand (R1,500,000) per project.
- Partnership
scheme: Financial assistance is provided in the form of
a conditionally repayable grant of 50% of the qualifying
cost incurred during development activity, with a minimum
grant amount of one and a half million Rand (R1,500,000)
per project, repayable on successful commercialisation of
the project. In considering support for a project under
SPII, there should be a clear indication of the causality
(additionality) that will follow from the support.
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National
Industrial Participation Programme – NIPP
The
programme seeks to leverage economic benefits and support
the development of South African industry through government
procurement. The programme is targeted at the South African
industries, enterprises, and suppliers of goods and services
to government/ parastatals, where the imported content of
goods and services equals to or exceeds US$10 million. The
primary customer of NIPP is the South African industry that
benefits through the NIPP business plans which, when implemented
generate new or additional business activities through one
or more of the following: investment, export opportunities,
job creation, increased local sales, SMME and BEE promotion,
research and development and technology transfer. The secondary
customer of the NIPP is the foreign supplier who benefits
from the programme through increased participation in the
South African economy. In the case of foreign customers, the
imported content of the purchase or lease contract for goods
and services must equal to or exceed US$10 million to qualify
for participation. In the case of South African industries,
participation is dependent on enterprise capability to satisfy
the requirements of both the programme and the foreign supplier.
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Film
incentives
A
large Budget Film and Television Production Rebate Scheme
has been
introduced where an eligible applicant will be rebated a sum
totalling 15 percent for foreign productions, or 25 percent
for qualifying South African Productions. This includes official
co-productions of the Qualifying South Africa Production Expenditure
(“QSAPE”) that the applicant has spent on an eligible
film production.
The objective is to provide additional financial incentives
for the production of both foreign and domestic large budget
film and television projects in South Africa. In establishing
the rebate, the government recognises that large budget film
productions contribute to South Africa’s economic development
and international profile by providing valuable economic,
employment and skill development opportunities for the South
African film production industry.
The rebate will ensure that South Africa remains competitive
in attracting large budget film productions from abroad. A
finite sum has been allocated over an initial three-year period.
The maximum rebate for each project will be R10 million in
order to attract an optimum number of productions.
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Export
Marketing & Investment Assistance Scheme (EMIA)
The EMIA Scheme partially compensates exporters and investors
for costs incurred in respect of activities aimed at developing
export markets, and assists with the facilitation of investments
into South Africa. Any assistance provided under the EMIA
Scheme is at the discretion of the CEO of Trade and Investment
South Africa (TISA).
Eligible applicants for the scheme are:
-
South African based manufacturers of products including
small, medium-sized and micro enterprises (SMMEs), previously
disadvantaged individuals (PDIs) and other businesses
- South
African export trading houses
- South
African commission agents representing at least three SMMEs
or
previously disadvantaged individuals (PDI)-owned businesses;
and
- South
African export councils, industry associations and joint
action groups
representing at least five South African entities.
Entities/divisions/subsidiaries
forming part of a group, joint venture or partnership will
qualify for EMIA assistance at the discretion of the EMIA
Scheme.
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Large
Industrial Investments
In
March 2009, the South African Treasury released for public
comment draft regulations relating to tax incentives, as announced
by Minister of Finance Trevor Manuel in the 2008 budget, in
support of the government’s industrial policy strategy.
The
draft regulations define the pre-requirements for an industrial
policy project to qualify for the tax incentives and the point
scoring system applicable to brownfield and greenfield projects.
Prerequisites include energy efficiency, skills development
and investment size requirements.
Under
the proposed points system, an industrial policy project will
achieve “qualifying status” if it achieves at
least five out of a total of 10 points and a “preferred
status” if it achieves at least eight out of a total
of 10 points. Qualifying status projects may deduct from their
taxable income an additional 35% of the costs of the investment
in manufacturing assets, up to a maximum of R550m (USD54m).
Preferred status projects may deduct an additional 55% of
the cost of the investment in manufacturing assets, up to
a maximum of R900m. An additional training allowance of R36,000
per employee may be deducted from taxable income. The maximum
total additional training allowance per project is R20m in
the case of a qualifying project and R30m in the case of a
preferred project.
To
qualify for the incentives, investment projects must also
adhere to minimum standards of energy efficiency and spend
at least 2% of their total wage bill on training and skills
development. There is a R200m ceiling on greenfield investments,
and a R30m limit on brownfield investments (or the lesser
of R200m or 25% of the value of existing assets).
The
Treasury set a deadline of March 31, 2009 for public comments.
Investors
will not, however, be able to avail of these incentives if
they are benefiting from other government programmes, such
as the Enterprise Investment Programme.
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