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South Africa: Proposals to expand, extend tax incentives

South Africa: Proposals to expand, extend tax incentive

The Minister of Finance in a 31 October 2019 statement addressed the extension of tax incentives. Also on 31 October 2019, two bills concerning tax incentives were introduced.

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Nevertheless, there are questions concerning the support for tax incentive programmes.


Background

The Manufacturing Competitiveness Enhancement Programme (MCEP)—providing cash grant incentives—was suspended in 2015 due to the unavailability of funds. Although the sunset clause for the section 12I manufacturing allowance tax incentive is March 2020, no mention was made by the Finance Minister in his medium term budget policy statement (presented 31 October 2019) that this incentive may be extended.

This has caused some to wonder whether given the economic situation and with ever greater demands being placed on National Treasury by various sectors and stakeholders for a greater share of the fiscal pie, are the very tax incentives and cash grants that were designed to incentivise the economy for growth and job creation falling by the wayside?


Legislative proposals

In order to identify the possible future of such incentives (at least the government’s focus), refer to the annexures to the 2019/20 budget in conjunction with the “Taxation Laws Amendment Bill” (TLAB) and the “Rates and Monetary Amounts and Amendment of Revenue Laws Bills” that were released 31 October 2019.

Three key areas receiving attention are special economic zones (SEZs), the energy efficiency tax allowance, and the employment tax incentive.


SEZ requirements to qualify as “special”

Following extensive public consultation regarding various proposed amendments to section 12R (s12R) of the Income Tax Act No. 58 of 1962 (the Act) that concerns SEZs, the only amendment in the TLAB would be to expand the definition of “qualifying companies” thereby providing clarity with regard to companies that were already operating in SEZs prior to their designation as such.

Qualifying companies are now defined according to the following three categories:

1.    Companies “carrying on any trade before 1 January 2013 in a location that is subsequently approved” as an SEZ

2.    Companies that “commenced, on or after 1 January 2013 the carrying on, in a location that is approved or subsequently approved [as an SEZ], of any trade not previously carried on by that company or any connected person in relation to that company in the Republic”; or

3.    Companies that “commenced, on or after 1 January 2013 the carrying on, in a location that is approved or subsequently approved [as an SEZ] of any trade and that trade—

o   Comprises of the production of goods not previously produced by that company or any connected person in relation to that company in the Republic;

o   Utilizes the use of new technology in that company’s production processes; or

o   Represents an increase in the production capacity of that company in the Republic.”

[Emphasis added]

Currently, qualifying companies operating in the following six approved SEZs may claim the preferential tax treatment status afforded to them in terms of s12R, which includes a 15% corporate tax rate:

  • Coega (Eastern Cape)
  • Dube Tradeport (KwaZulu-Natal)
  • East London (Eastern Cape)
  • Maluti-A-Phofung (Free State)
  • Richards Bay (KwaZulu-Natal)
  • Saldanha Bay (Western Cape)


Energy efficiency tax incentive

Shortly before the promulgation of the Carbon Tax Act (effective from 1 June 2019), the Minister announced in the 2019/20 budget speech that the section 12L energy efficiency tax allowance, which was due to expire on 31 December 2019, would be extended until 31 December 2022. This extension is now reflected in the TLAB.

Under this incentive, taxpayers are entitled to a tax deduction of 95-cents per kilowatt hour or kilowatt hour equivalent of verified energy efficiency savings. However, this deduction only applies to non-renewable energy sources, and may not be claimed if the taxpayer receives any concurrent benefit in respect of energy savings.


Employment tax incentive

The eligible income bands for the employment tax incentive (ETI) that benefits young workers, was increased in the 2019/20 budget and has now been tabled in the TLAB. Beginning from 1 March 2019, employers would be able to claim the maximum value of R1,000 per month per employee earning up to R4,500 (previously R4,000) monthly, tapering to zero at the maximum monthly income of R6,500.

In addition, a provision in the TLAB would allow for qualifying companies operating within SEZs to claim the ETI, notwithstanding the age limitation that normally applies to the ETI.


KPMG observation

No further communication regarding the renewal or formal withdrawal of the MCEP has been made, and the future of manufacturing incentives beyond 31 March 2020 remains uncertain.

However, in his 2019/20 budget speech, the Minister acknowledged that the private sector is the key engine for job creation, and that expenditure must be shifted to investment. The exact direction that the shift in expenditure takes remains to be seen, and it is expected that taxpayers may only be provided with such clarity in the 2020/21 budget speech.

Read a November 2019 report [PDF 99 KB] prepared by the KPMG member firm in South Africa.

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