Tax Incentives To Encourage Growth In Sa’s Special Economic Zones
22 October 2013
Posted by: Author: Robert Gad & Warren Radloff
Author: Robert Gad & Warren Radloff (ENS)
Draft bills currently before Parliament suggest a framework for the development, operation and management of special economic zones in the country. Should this bill, the Special Economic Zones Bill, 2013 ("Bill”), be signed into law, special economic zones would receive the same Value-Added Tax and customs relief as the industrial development zones currently in place in East London, Coega and Richard’s Bay. In addition, the Minister for Trade and Industry also announced that ten sites had been identified for special economic zones and, subject to feasibility studies, there would be at least one in each province. This will have economic benefit for companies operating in special economic zones as they will do so at a lower tax cost.There are other considerations over and above tax incentives that will also have a bearing on this choice for investors, for example whether a business can be set up and licenced quickly, whether a business will have access to cheap and reliable electricity or whether the available labour is competitive by world standards.
Are they "special” enough? Tax incentives for special economic zones
A special economic zone is a geographical area designed to promote the export goods and facilitate the creation of jobs. South Africa has maintained one version of special economic zone, the industrial development zone, over the last ten years. The current industrial development zones are operational and have attracted approximately 42 investors between them.However, the Department of Trade and Industry indicated that while these three zones were beginning to gain traction, the concept had performed below expectation and was due for an overhaul, hence the introduction of the Bill.
The draft Taxation Laws Amendment Bill, 2013 ("Tax Bill”) gave a clear indication that the government was going to move beyond the custom duties rebates and Value-Added Tax exemptions afforded to industrial development zones.
Business activities within a special economic zone would be taxed at a reduced corporate tax rate of 15%, instead of the normal rate of 28%. A second boon was a capital allowance equal to 10% of the cost of any new and unused buildings owned within a special economic zone or new and unused improvements to such buildings. This allowance would be withheld from buildings used for residential accommodation and both tax incentives would be denied to companies in the alcohol, tobacco or firearms business. The Minister of Finance would also be afforded the means to gazette further exclusionary criteria at a later date. These tax incentives are only afforded to companies who met certain criteria, namely the company:
- Had to be incorporated or have its effective place of management in South Africa;
- Derived at least 90% of its income from the carrying on of business within a special economic zone;
- Must operate from a fixed place of business in one of the four categories of special economic zone (a free port, a free trade zone, an industrial development zone, a sector development zone), or must operate a type of business that may be located in a special economic zone. The latest version of the Bill provides that the Minister of Trade and Industry, in consultation with the Minister of Finance may prescribe the type of service and business that may be located in a special economic zone.
A business seeking to locate in a special economic zone must first seek approval from a special economic zone board. This is a board of directors set up to govern and manage the business affairs of each special economic zone. To reassure the existing investors in industrial development zones the Bill also confirmed that all the designated industrial development zones will become special economic zones.
Reduction in tax for employees working in special economic zones
The 2013 OECD Economic Survey of South Africa noted that South Africa’s employment rate is dismally low with just over 40% of the working-age population employed. One of the steps the government has taken to expand job opportunities in the private sector is the promulgation of the draft Employment Tax Incentive Bill, 2013 ("Employment Bill”). The provisions contained in the Tax Bill and the Employment Bill are proposed to come into effect on 1 January 2014.
The Employment Bill proposes that employers who are registered for tax will be able to decrease their Pay-As-You-Earn employees’ tax by hiring certain employees, namely those who have a South African identity document, receive a salary between the minimum wage and R6 000 per month and are between 19 and 29 years old. Where the employer has a fixed place of business within a special economic zone and that employee renders services mainly within that zone the age restrictions will not apply. The amount of the reduction in employees’ tax is as follows:
- for monthly wages of R2 000 or less the reduction is 50% of the wage;
- for monthly wages from R2 001 to R4 000 the reduction is R1 000 per month;
- for monthly wages between R4 001 and R6 000 the reduction is determined by a formula which tapers down from R1 000 to zero.
The value of the reduction in each case is halved for the second year of employment.
Although it is clear that local investors who establish companies within special economic zones will benefit from the above tax incentives, it remains to be seen whether the international investor will favour South African special economic zones above the many others across scattered the world. However, the proposals above may still be amended before being enacted as legislation.
In the 2013 budget vote debate in the National Council of Provinces, the Minister for Trade and Industry noted that "industrial policy must be a collaborative venture of government in all spheres”, the government will need to fully realise these words to ensure that special economic zones reach their full potential in South Africa.
This article was first published on ENS.co.za