TAX

Tax-based incentives offered by Government to businesses operating in South Africa

Ever wondered what the list of tax-based incentives offered by Government to businesses operating in South Africa may be? Below is a list for your use. The inner workings of such incentives are often very intricate and tax advice should be sought when undertaking such ventures.

Covered in this first article (of two):

Employment tax incentive
Customs and excise incentive
Value-added tax incentives
Foreign tax credit
Research and development (R&D)
Headquarter company regime

Covered in the second article of this series (next week):

Industrial policy projects
Special Economic Zones (SEZs)
Energy efficiency savings incentive
International shipping incentive
Venture capital companies

Employment tax incentive

The employment tax incentive (ETI) is an existing tax incentive designed to encourage the employment of young persons. It allows employers hiring people 18 to 29 years old to reduce the amount of employees’ tax paid on behalf of their employees whilst leaving the wage received by the employee unaffected. Effectively this creates a cost-sharing mechanism between employers and Government in respect of employee wages.

The ETI is made more attractive for employers operating their businesses within an SEZ, as there is no hiring age limitation applicable; that is, the ETI applies regardless of the age of the relevant employee. Whilst the current legislation excludes employers located within an SEZ from this age limitation, only employers, approved by the Minister of Finance in the Government Gazette, located within an SEZ can avail themselves of the age exemption.

Qualifying employers may claim this incentive on a monthly basis by claiming it on the monthly employer declaration form which is available from SARS.

Customs and excise incentive

Goods imported into a customs controlled area (CCA) situated in an SEZ are relieved from applicable import customs, excise duties and economic restrictions whilst stored and undergoing manufacturing (which includes processing, cleaning and repair) within the CCA.

Goods manufactured in the CCA and subsequently supplied to the local domestic market are subject to the payment of the import customs and excise duties that were relieved at time of importation on the imported goods (raw materials). The liability for customs and excise duties, which enjoyed relief on imported goods used in manufacturing in the CCA, cease upon subsequent export.

Only enterprises located within a CCA of an SEZ are eligible for the relief from import customs and excise duties on goods imported into the CCA. The relief amounts to a full rebate of import customs and excise duties on all goods imported into a CCA by a CCA enterprise.

This means that the payment of customs and excise duties on any goods imported into a CCA in an SEZ would be suspended, translating to a significant cash flow benefit for any.

A CCA enterprise that intends to import and export goods must register with SARS as an importer and exporter. A CCA enterprise that intends to utilise rebate item 498.01 must also register with SARS as a rebate user. Application for the registration as a rebate user may be done simultaneously with the application for registration as an importer or exporter.

Application for registration must be made on Form DA 185 and its relevant annexures.

Value-added tax incentives

The value-added tax (VAT) regime was amended to allow for goods and services that are acquired from the domestic market to be charged with VAT at the 0% and to allow the import of goods to be exempt from VAT.
These incentives are available to a business that is situated in a CCA of an SEZ or the operator of the SEZ operator for purposes of developing the CCA within the SEZ.

Importantly, the VAT incentive applies only in the CCA of the SEZ and not to other areas within the SEZ.

Consequently, the SEZ operator must obtain approval from SARS: Customs and Excise as discussed above for an area to be designated as a CCA and any business that intends operating in the CCA must also obtain approval from SARS: Customs and Excise to be designated as a customs controlled area enterprise (CCAE). Further, the CCAE must also be registered as an importer for customs purpose, under the applicable rebate item. Once registration is obtained, then only will the CCAE be able to access the VAT incentive.

The VAT incentives include:

Goods and services supplied by a VAT-registered vendor into the CCA, for the CCAE or the SEZ operator, will carry a zero VAT charge, instead of a 15% VAT charge;
Goods imported into the CCA, by the CCAE for purposes of the CCA, will carry no VAT charge (being an exemption from VAT upon importation), instead of carrying a VAT charge of 15%. However goods sold by the CCAE into the domestic market will carry a VAT charge of 15%; and
If the import is from a non Botswana, Namibia, Lesotho and Swaziland country, the upliftment of 10% on the value of the import, is also not applicable.

For a detailed explanation of how the VAT incentive operates, please consult VAT Interpretation Note 40 (Issue 3) on the SARS website.

In order for SARS to properly manage the VAT incentive, the CCAE, and the VAT-registered vendor making the supply into the CCA are required to obtain, complete and retain a VAT267 form.

Foreign tax credit

The South African Income Tax Act makes provision for a rebate against CIT in respect of foreign taxes paid on foreign-sourced income or a deduction against income of foreign taxes paid on SA-sourced income. In both instances, the taxpayer must be an SA resident, the income must be included in taxable income, and that income must have been subject to a foreign tax that is not recoverable. The rebate is limited to the total normal tax payable calculated by applying the ratio of the total taxable income attributable to the foreign tax to the total taxable income. The deduction, however, may not exceed the income on which the foreign tax was levied.

Research and development (R&D)

The current costs related to certain R&D activities carried on in South Africa are 150% deductible, subject to pre-approval by a government-appointed approval committee. The cost of machinery and other capital assets acquired for the purposes of R&D may be depreciated 40% in the first year of use, 20% in the second, 20% in the third year, and 20% in the fourth year. Buildings used in the process of R&D may be written-off over a 20-year period.

Headquarter company regime

A ‘headquarter company’ regime encourages the use of South Africa as a location for intermediate holding companies.

The main benefits offered to a headquarter company are:

Exemption from South Africa’s CFC (controlled foreign company) rules.
Exemptions from dividend WHT on the headquarter company’s dividend distributions.
Exemption from the WHT (dividend witholding tax) on interest in certain circumstances.
Exemption from South Africa’s transfer pricing rules on back-to-back loans, outbound loans, back-to-back intellectual property (IP) licensing arrangements, and outbound IP licensing arrangements.
The participation exemption for dividends received from, or gains derived on the disposal of, foreign qualifying holdings (these exemptions are not specific to headquarter companies but are available generally to SA-resident shareholders).

The requirements for a headquarter company are as follows:

The headquarter company must be SA resident.
Each shareholder in the headquarter company must hold at least 10% of the headquarter company’s equity shares and voting rights. This means that a headquarter company can never have more than ten shareholders.
At least 80% of the headquarter company’s assets (measured on a ‘cost’ basis and excluding cash and certain bank deposits) must be comprised of certain assets related to the foreign companies in which the headquarter company holds at least 10% of the equity shares and voting rights.

Specifically, these assets must be:

The equity shares in those companies
Loans to those companies, and
IP licensed to those companies.
At least 50% of the headquarter company’s gross income must be comprised of dividends, interest, royalties, rentals, service fees, or proceeds from the sale of equity shares or IP from its 10%-plus holdings, where the gross income exceeds ZAR 5 million.

Covered in the second article of this series (part two of two next week):

Industrial policy projects
Special Economic Zones (SEZs)
Energy efficiency savings incentive
International shipping incentive
Venture capital companies

Author Craig Tonkin

Leave a Reply

Your email address will not be published. Required fields are marked *