Investment Incentives in South Africa - By Caroline Maxwell, London
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 four of the major
initiatives set up by the new regime: Industrial Development
Zones (IDZ), the International Headquarter Company exemption,
the Small and Medium Enterprise Development Programme
(SMEDP), and the Strategic Investment Project (SIP)
programme. In
addition to these specific schemes, the Revenue Laws
Amendment Act, passed in 2002, introduced strategic
tax incentive measures to attract industrial investment
to South Africa and to promote employment-generating
projects in excess of R50m, by allowing those investing
in manufacturing and IT a tax deduction of up to 100%.
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:
| 1) |
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. |
| 2) |
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. |
Designation of IHCs as non-resident for taxation purposes
After
the proposal was announced, there was widespread concern
that residence-based taxation (introduced in January
of 2001), would deter companies from establishing their
international headquarters in South Africa. Sensitive
to this, the government decreed that any company qualifying
as an International Headquarter Company (IHC) would
be considered non-resident for taxation purposes. However,
the criteria for qualification are quite stringent,
and in order to qualify:
- All equity share capital must be held by non-residents;
The indirect interest of South African residents and trusts must not exceed 5% in aggregate of the company's total equity share capital;
- 90% of the value of the company's assets must represent interests in non South African resident subsidiaries in which the IHC holds beneficially at least 50%
However,
for qualifying international companies, the incentives
are substantial - income from foreign subsidiaries is
not be imputed to the IHC under the Controlled Foreign
Entity provisions, dividends received from foreign subsidiaries
and any other foreign-sourced income is not be liable
for South African taxation, and dividends declared are
not subject to the secondary company tax.
However
as an IHC, to all intents and purposes, falls outside
the South African income tax net, it is not able to
make use of the country's extensive network of double
taxation treaties, which may prove a problem when withholding
tax on profits is applied which might otherwise have
been reduced by the relevant treaty.
Largely
as a result of this last problem, the designation of
‘international headquarter company’ (IHC)
was removed effective for years of assessment commencing
on or after 1 June 2004.
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 (USD630,000 approx) investment 10% per annum
- Next R10 million (USD1.26m approx) investment 6% per
annum
- Next R15 million (USD1.89m approx) investment 4% per
annum
- Next R20 million (USD2.52m approx) investment 3% per
annum
- Next R25 million (USD3,15m 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.
Strategic Investment Projects
The
Strategic Investment Project program offers a tax allowance
of up to 100 percent (a maximum allowance of R600 million
(app. USD100 million) per project) on the cost of buildings,
plant and machinery, for strategic investments of at
least R50 million (app. USD85 million).
Although
there was a delay in implementing the scheme, the trade
and industry department announced in April 2002 that
the scheme had come on stream after finalising the criteria
for the evaluation of 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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