The DTI’s Special Economic Zones Tax Incentive Guide

The South African Government established the Industrial Development Zones (IDZs) programme in an effort to reposition itself in the world economy. The programme’s main focus was to attract foreign direct investment (FDI) and the export of value-added commodities. Although the IDZs recorded major achievements, there were weaknesses that led to the policy review and the new Special Economic Zones (SEZs) policy.

PURPOSE OF THE SEZ PROGRAMME

The new SEZ Policy provides a clear framework for the development, operation and management of SEZs and addresses the challenges of the IDZ Programme.

The purpose of the SEZ programme is to:

• Expand the focus of strategic industrialisation to cover diverse regional development needs and context;
• Provide a clear, predictable and systemic planning framework for the development of a wider array of SEZs to support industrial policy objectives, the Industrial Policy Action Plan (IPAP), NDP and the NGP;
• Clarify and strengthen governance arrangements, and expand the range and quality of support measures beyond the provision of infrastructure; and
• Provide a framework for predictable financing to enable long-term planning.

PROGRAMME DESCRIPTION

The SEZ Act No. 16 of 2014 provides for:

• The designation, promotion, development, operation and management of SEZs;
• The establishment of the SEZ Advisory Board and the SEZ Fund;
• The regulation of application, issuing, suspension, withdrawal and transfer of SEZ operator permits and the functions of SEZ operators;
• The transitioning of all current IDZs into SEZ status under specific guidelines;
• Determination of the SEZ Policy and Strategy;
• Enactment of regulatory measures and incentives for SEZs to attract domestic investment and FDI; and
• Establishment of a One-Stop-Shop (OSS) to deliver government services to investors within a zone.

SEZ TAX INCENTIVES

To complement the Department of Trade and Industry’s (the dti’s) SEZ strategy, a package of tax incentives will be available to qualifying companies locating in approved SEZs, subject to certain criteria.

The tax incentives for qualifying companies include: VAT and customs relief, if located within a Customs-Controlled Area (CCA); the employment tax incentive; building allowance; and reduced corporate income tax rate.

The design and eligibility criteria for each incentive seeks to strike a balance between achieving the objectives of higher levels of investment, growth and employment creation, and ensuring that incentives are appropriately targeted for efficiency purposes, while minimising any deadweight loss to the fiscus.

Qualifying businesses located within a CCA will qualify for VAT and customs relief (similar to that for the current IDZs). The employment tax incentive will be available to businesses located in any SEZ. Businesses operating within approved SEZs (approval granted by the Minister of Finance, after consultation with the Minister of Trade and Industry) will be eligible for two additional tax incentives. Firstly, all such businesses can claim accelerated depreciation allowances on capital structures (buildings) and, secondly, certain companies (carrying on qualifying activities within an approved SEZ) will benefit from a reduced corporate tax rate (i.e. 15% instead of 28%).

VAT and Customs Relief

Companies located within a CCA will be eligible for VAT and customs relief in accordance with the current VAT and customs legislation.

Characteristics of a CCA include:

• Import duty rebate and VAT exemption on imports of production-related raw materials, including machinery and assets, to be used in production with the aim of exporting the finished products;
• VAT suspension under specific conditions for supplies procured in South Africa; and
• Efficient and expedited customs administration

Employment Tax Incentive (ETI)

All employers employing low-salaried employees (below R60 000 per annum) in any SEZ will be entitled to the employment tax incentive. This is an incentive aimed at encouraging employers to hire young and less experienced work seekers. However, the employee age restriction will not apply for SEZs. It reduces an employer’s cost of hiring people through a cost-sharing mechanism with Government, while leaving the wage the employee receives unaffected. The employer can claim the ETI and reduce the amount of Pay-As-You-Earn (PAYE) tax payable by the amount of the total ETI calculated in respect of all qualifying employees.

Building Allowance

Qualifying businesses operating within approved SEZs (by the Minister of Finance, after consultation with the Minister of Trade and Industry) will be eligible for an accelerated depreciation allowance on capital structures (buildings). The special rate of capital (depreciation) allowances in lieu of normal allowances will be available for erecting or improving buildings and other fixed structures. This rate will equal 10% per annum over 10 years.

Companies engaged in the following activities, based on the Standard Industrial Classification (SIC) code issued by Statistics South Africa, will not qualify for the building allowance:
• Spirits and ethyl alcohol from fermented products and wine (SIC code 3051)
• Beer and other malt liquors and malt (SIC code 3052)
• Tobacco products (SIC code 3060)
• Arms and ammunition (SIC code 3577)
• Bio-fuels, if their manufacture negatively impacts food security in South Africa.

Reduced Corporate Income Tax Rate

Certain companies will qualify for a reduced corporate income tax rate of 15% for the period 2014-2024, instead of the current 28% headline rate. To qualify, the following conditions must be met:

• The company must be located in a SEZ that is approved by the Minister of Finance (in consultation with the Minister of Trade and Industry);
• It must be incorporated or effectively managed in South Africa;
• At least 90% of the income must be derived from the carrying on of business or provision of services within that SEZ; and

• The company must not be engaging in the following activities, based on the SIC code issued by Statistics South Africa:

  • Spirits and ethyl alcohol from fermented products and wine (SIC code 3051)
  • Beer and other malt liquors and malt (SIC code 3052)
  • Tobacco products (SIC code 3060)
  • Arms and ammunition (SIC code 3577)
  • Bio-fuels if that manufacture negatively impacts on food security in SA

MAJOR DIVISION 6: WHOLESALE AND RETAIL TRADE; REPAIR OF MOTOR VEHICLES, MOTOR CYCLES AND PERSONAL AND HOUSEHOLD GOODS; HOTELS AND RESTAURANTS

  • Division 61: Wholesale and commission trade, except of motor vehicles and motorcycles
  • Division 62: Retail trade, except of motor vehicles and motorcycles; repair of personal household goods
  • Division 63: Sale, maintenance and repair of motor vehicles and motorcycles; retail trade in automotive fuel
  • Division 64: Hotels and restaurants

MAJOR DIVISION 7: TRANSPORT, STORAGE AND COMMUNICATION

  • Division 71: Land transport; transport via pipelines
  • Division 72: Water transport
  • Division 73: Air transport
  • Division 74: Supporting and auxiliary transport activities; activities of travel agencies
  • Division 75: Post and telecommunications

MAJOR DIVISION 8: FINANCIAL INTERMEDIATION, INSURANCE, REAL ESTATE AND BUSINESS SERVICES

  • Division 81: Financial intermediation, except insurance and pension funding
  • Division 82: Insurance and pension funding, except compulsory social security
  • Division 83: Activities auxiliary to financial intermediation
  • Division 84: Real estate activities
  • Division 85: Renting of machinery and equipment, without operator, and of personal and household goods
  • Division 86: Computer and related activities
  • Division 87: Research and development
  • Division 88: Other business activities

OTHER BENEFITS OF INVESTING IN AN SEZ

12I Tax Allowance Incentive

The 12I Tax Allowance Incentive is designed to support Greenfield investments (i.e. new industrial projects that utilise only new and unused manufacturing assets) as well as Brownfield investments (i.e. expansions or upgrades of existing industrial projects). The new incentive offers support for both capital investment and training.

One-Stop-Shop Facility

the dti is currently in the process of rolling out a One-Stop-Shop concept to the existing IDZs in South African SEZs. In consultation with the key relevant national stakeholders,
the Minister of Trade and Industry will be entering into an Implementation Protocol for the successful co-ordination of these relevant functions.

The aim of the SEZ One-Stop-Shop Facility will be to:
• Facilitate access by investors to all required permits and licenses and other informational requirements in a timely manner;
• Eliminate steps in the approvals/administrative process and allow parallel rather than sequential approvals.

Key features of the One-Stop-Shop include:

• Physical Planning – Helps investors with planning of development of the zones;
• Licensing – Simplifies process of obtaining business licences;
• Utilities – Facilitates a single point access to basic utilities required for setting up operating industrial zone and other establishments;
• Industrial development incentives – Assists current and potential future tenants to understand and access the portfolio of sector-specific incentives
and support measures available;
• Financing – Facilitates access of investors to direct or indirect financial assistance to set up their business in the zones; and
• Environmental compliance – Assists in maintaining environmental standards and obtaining environmental approvals.

For further information, please consult the two links below.

https://fincor.co.za/clarifying-the-interaction-between-the-employment-tax-incentive-and-special-economic-zone-provisions/
https://fincor.co.za/sezs-or-special-economic-zones/

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