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. (NB
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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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