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South Africa: Proposed special economic zones (SEZs) amendments; possible tax challenges

South Africa: Proposed SEZs amendments

The 2019 Draft Taxation Laws Amendment Bill (issued for public comment in July 2019) includes proposed amendments to section 12R of the Income Tax Act No. 58 of 1962 concerning special economic zones (SEZs).


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Of these proposed amendments, one would add a new requirement for companies operating in SEZs before 9 February 2016. To qualify for the SEZ benefits, expansions by these companies to their operations or trade would have to result in a 100% increase in gross income compared with the highest gross income derived in respect of that trade during any of the three years of assessment immediately preceding 9 February 2016. This is referred to as the “additionality requirement.” South Africa’s Treasury has proposed that this change would apply for years of assessment ending on or after 1 January 2019.

Background of the SEZ regime

The SEZ regime (which came into effect in 2016) replaced the previous industrial development zone (IDZ) regime. The tax benefits offered to new and expanding businesses located within IDZs included exempting certain imported production-related raw materials (including machinery and assets used in production) from import duties, as well as value added tax (VAT) zero-rating certain supplies procured in South Africa. These benefits were introduced to promote the export of goods and promote growth of the domestic economy.

The underlying intention of the IDZ regime was transferred over to the current SEZ incentive regime. Additional income tax benefits—such as a reduced 15% corporate tax rate and an accelerated depreciation allowance on capital structures (buildings) and improvements—were also introduced.

The main goal of the SEZ incentive regime is to use SEZs as a strategic and effective instrument to promote national and regional industrial policy objectives (such as economic growth and the exportation of goods and technology). The SEZ regime is intended to attract targeted foreign and domestic investment to South Africa.  Currently, there are six geographic areas that are approved SEZs: Coega (Eastern Cape); Dube Tradeport (KwaZulu-Natal); East London (Eastern Cape); Maluti-A-Phofung (Free State); Richards Bay (KwaZulu-Natal); and Saldanha Bay (Western Cape).

Since coming into effect, there has been steady growth of the SEZ regime from 70 investors with an estimated investment of R9.6 billion at the end of the 2016/2017 financial year, to 88 investors with an estimated investment of R15.5 billion at the end of the 2017/2018 financial year. 

Possible implications of the proposed “additionality requirement”

The perceived success of the SEZs could be affected if the proposed amendments to the “additionality” criteria for expanding business are implemented. 

There are concerns about the additionality requirement’s proposed 100% increase in gross income standard. A further concern is how the proposed effective date of 1 January 2019 would be applied for purposes of submission of tax returns. For instance, a company with a February year-end could be a “qualifying company” prior to 1 January 2019 (and therefore have claimed the reduced 15% corporate tax rate in determining its provisional tax payments), but does not meet the 100% increase in gross income requirement (and would not have been aware that any such requirement would exist). This company would then have to apply a 28% corporate tax rate from 1 January 2019. If the draft legislation were to be enacted in its current form, it appears that the company would have to pay tax at 28% for its entire 2019 year of assessment. 

These proposed changes are not final (and may or may not change).

The draft bill is currently open for comment and will be finalised once all consultations have been concluded. The final bill could possibly be published in October 2019, with enactment to follow in December 2019 or January 2020.

Read a September 2019 report [PDF 115 KB] prepared by the KPMG member firm in South Africa

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