Covered in part 2 of Tax-based Incentives
Industrial policy projects
Special Economic Zones (SEZs)
Energy efficiency savings incentive
International shipping incentive
Venture capital companies
Industrial policy projects
In 2008, a ZAR 20 billion incentive package for investors in energy efficient projects was announced. The incentive is available for industrial projects participating in the manufacturing sector (other than alcohol or alcohol-related products, tobacco or tobacco-related products, arms and ammunition, and biofuels, which have a negative impact on food security). Companies are divided into those with a qualifying status and those with a preferred status. The status is determined in terms of a point system.
The proposed project must either be a ‘brownfield project’ (expansion or upgrade of an existing industrial project) or a ‘greenfield project’ (a wholly new industrial project, which uses new and unused manufacturing assets). Approved projects may be granted a tax allowance known as an additional investment allowance equal to 55% (100% if located in an industrial development zone) of the cost of any manufacturing asset used in an industrial policy project with preferred status or 35% (75% if located in an industrial development zone) of the cost of any manufacturing asset used in any other approved industrial policy project.
The additional investment allowance may not exceed R 900 million in the case of any greenfield project with a preferred status, R 550 million in the case of any other greenfield project, R 550 million in the case of any brownfield project with a preferred status, or R 350 million in the case of any other brownfield project.
In addition to the above, a company may also claim a deduction known as an additional training allowance.
Special Economic Zones (SEZs)
An SEZ incentive has been introduced for companies carrying on business in an SEZ comprising of a reduced corporate tax rate of 15% as well as a 10% allowance in respect of the cost of new and unused buildings owned by a qualifying company or any new or unused improvements to any building owned by a qualifying company.
In addition, employment incentives have also been introduced for employers carrying on a trade in an SEZ that will allow for an employees’ tax reduction for the employer in respect of qualifying employees, up to a prescribed monthly amount.
Most South African companies are subject to an annual income tax charge of 28% on their taxable income. In simplified terms, the taxable income of a company consists of a company’s annual earned income excluding certain exempt income and less permissible expenses and allowances.
In February 2016, two types of special income tax incentives came into operation for qualifying companies carrying on business within an SEZ:
Companies carrying on business within an SEZ are subject to an annual income tax rate of 15%. This lower income tax rate is very attractive as it is almost half of the normal corporate income tax rate.
Qualifying companies are able to reduce their taxable income by means of a special allowance which is related to expenditure incurred on the cost of any new or unused building or improvement to such building. This allowance may be claimed at a rate of 10% per annum on the cost of such building or improvement.
Qualifying taxpayers may access these incentives by claiming them in the appropriate fields of their annual corporate income tax return.
Energy efficiency savings
The energy efficiency savings incentive provides an income tax deduction to qualifying taxpayers. The deduction equates to ZAR 0.95 for each kilowatt hour (or equivalent) saved by the taxpayer during the relevant year of assessment against a baseline from the beginning of the year.
International shipping incentive
Income from international shipping of a resident company that holds a share in a South African flagged ship is exempt from income tax. Qualifying shipping companies can also use a currency other than the rand as their functional currency.
Venture capital companies
In order to assist small and medium-sized businesses to raise capital to finance businesses, a tax incentive for investors in small and medium-sized enterprises through venture capital companies was introduced.
A deduction is allowed from the income of a taxpayer in respect of expenditures actually incurred by that person in respect of shares issued to that person by a venture capital company.
Author Craig Tonkin