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Observations of the South African grants and tax incentives landscape

19 November 2015   (0 Comments)
Posted by: Authors: Dov Paluch and Christo Engelbrecht
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Authors: Dov Paluch and Christo Engelbrecht (Catalyst Solutions)

Grants and incentives are part of the national policy framework that supports productive investment.

In order for an economy to achieve optimum economic growth it is important to foster an investment climate supporting sustainable investment by providing certainty to private investors within a coordinated national policy framework that supports productive investment.

Grants and incentives in South Africa are generally managed by national government departments and other governmental development finance institutions. Incentive programmes come in the form of cash grants, tax incentives or subsidised financing mechanisms. These can be categorised under the following main categories: capital investment to stimulate economic development, job creation, increased competitiveness, energy efficiency, industry specific, and research and development (R&D) incentives.

Research and econometric analyses by the World Bank, the International Monetary Fund (IMF) and the Organisation for Economic Cooperation and Development (OECD) all conclude that countries with an unappealing investment climate will not effectively address imbalances by offering fiscal incentives. Their studies found that tax incentives were far more effective in economies with a stronger investment climate.

It is acknowledged that the South African government can do a lot more to strengthen and improve the current investment climate, but the authors' view is that South Africa currently has competitive incentive programmes in place when compared to global benchmarks.

Below, we briefly set out some observations in terms of grants and tax incentives for investment and R&D respectively in terms of the South African context. 

Investment grants and tax incentives

The South African Department of Trade and Industry (dti) announced in June 2015 that it aims to attract R45 billion worth of investments in 2015/16 and R50 billion in 2016/17, and had outlined a cumulative target over the three-year period of R135 billion.

Throughout the world governments attempt to promote investment into certain priority areas or to address systematic or structural weaknesses in specific sectors of an economy by offering grants and tax incentives. The objective of the incentives is to make certain private sector strategic investments possible by, for example, reducing the initial cost of capital for investment projects, reducing project risk and/ or increasing the private investor’s bottom line profitability.

Even though competitive programmes are currently in place we have set out below some of our observations on the South African investment incentives landscape:

  • A large sum of government revenues are set aside to fund incentives (both grants and fiscal incentives). However, a relatively small number of companies make use of the available incentives due to limited expertise, a lack of awareness or, in certain cases, due to the stringent compliance and detailed application and claiming processes.
  • In general, the more focussed industry-specific incentives (such as programmes applicable to the automotive, business process services, textile, and film production sectors) are well managed and generally achieve the programme objectives due to a combination of grant support and other industry-specific supporting mechanisms and initiatives driven by government support structures and industry associations.
  • Other niche-focussed incentives programmes (such as the section 12I tax incentive for Industrial Policy Projects) are well managed and create certainty to investors, assisting in their investment decision-making process.
  • Some of the more high-volume generic incentive programmes such as the Manufacturing Competitiveness Enhancement Programme (MCEP) are experiencing major backlogs due to the large number of applications being submitted to the incentive administration department. The over subscription is mainly due to the "non-targeted” structure and focus of the incentive programme. Also, there is a lack of certainty and lack of transparency in terms of the incentive guidelines as a result thereof.
  • Certain incentive programmes have a high cost of compliance in terms of changes to Broad-Based Black Economic Empowerment (BBBEE) regulatory requirements, external audit compliance fees, measurement and verification processes required for energy projects, and management time required to access and claim the incentive benefits, among others.

Research and development 

Many countries offer incentives to encourage the private sector to increase R&D as this is known to increase a country’s competitive edge.

Currently, the South African R&D spend as a percentage of GDP is sitting at 0.76 per cent. The Minister for Science and Technology has stated that, "The South African Government’s medium-term strategic framework includes a policy target for increasing research and development expenditure to 1.5 per cent of GDP.”  The government is trying to achieve these goals through the implementation of various incentives.Currently, the South African R&D spend as a percentage of GDP is sitting at 0.76 per cent. The Minister for Science and Technology has stated that, "The South African Government’s medium-term strategic framework includes a policy target for increasing research and development expenditure to 1.5 per cent of GDP.”  The government is trying to achieve these goals through the implementation of various incentives.

The R&D Tax Incentive is the government’s flagship innovation incentive which provides for additional tax deductions on qualifying R&D. This incentive was introduced in 2007 and the fact remains that R&D expenditure as a percentage of GDP in South Africa has been on the decline since 2009, when it reached its peak of 0.92 per cent.

While being competitive with similar global offerings in terms of the incentive, it appears as though the R&D Tax Incentive has not been as effective as its global counterparts in providing sufficient encouragement to the private sector to increase R&D spending. There are a number of reasons for this, including the move to a pre-approval system, which has led to uncertainty in the incentive for many taxpayers.

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This article first appeared on the November/December 2015 edition on Tax Talk. 


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