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SOUTH AFRICA
LINKS IN THIS SECTION
INTRODUCTION
INDUSTRIAL DEVELOPMENT ZONES
SME DEVELOPMENT PROGRAMME
INCENTIVES FOR MANUFACTURING
STRATEGIC INVESTMENT PROJECTS
ENTERPRISE INVESTMENT PROGRAMME
OTHER INVESTMENT INCENTIVES
RELATED INFORMATION


South African Fiscal Incentives


Introduction

The South African government, understandably enough after decades of international isolation, is very keen to encourage foreign direct investment (FDI) into South Africa, and offers a range of taxation and other incentives in order to entice international (and in some cases domestic) investors. Here we will be looking at some of the major initiatives set up by the new regime: Industrial Development Zones (IDZ) and the Small and Medium Enterprise Development Programme (SMEDP), and a range of incentives offered for manufacturing start-ups. The Enterprise Investment Programme was launched by the government in July 2008, to provide sector-specific financing in order to encourage growth in key areas.

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Industrial Development Zones

Industrial Development Zones (IDZs) are purpose-built industrial estates providing facilities and services tailored for export-oriented industries. They are linked to international airports or ports, and run along similar lines to Export Processing Zones, which fall outside of domestic customs zones, and so are able to import items free of customs and trade restrictions, add value, and then export. Sites already earmarked for, or actually being used as IDZs include Richmond, East London, Durban, Coega, Saldanha, and the Johannesburg international airport.

New investments locating in an IDZ can expect several benefits:

  • Attractive regulatory regime and investment facilitation services provided by zone operators;
  • Duty free imports of capital goods and inputs, plus VAT exemption for exports;
  • Access to the government's incentive mechanism;
  • Effective infrastructure

IDZs usually consist of two zones of operation:

  • Customs Secured Area (CSA). A delimited area with entrance and exit points controlled by customs personnel, and a dedicated customs office providing rapid inspection and clearance.
  • Industries and Services Corridor (ISC) Adjacent to the CSA, and occupied by service providers to the export-oriented enterprises located in the Customs Secured Area.

On January, 23, 2012, a Special Economics Zone Policy and Bill were gazetted by the Minister for Trade and Industry, inviting the public to comment on the proposal with a deadline of March, 22, 2012.

The proposals specifically target the creation of Sepcial Economic Zones (SEZ) in the underdeveloped regions in the country. Under the proposals, an IDZ will be classed as a type of SEZ and regulated by an SEZ board instead of via the Manufacturing Development Act. The Bill further aims to provide for the designation, development, promotion and management of SEZs, the regulation of applications and permits and the establishing of an SEZ fund.

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Small and Medium Enterprise Development Programme (SMEDP)

N.B. The SMEDP was suspended on August 31, 2006. No applications for the SMEDP programme were accepted after this date and existing guidelines apply only to applicants accepted into the scheme prior to August 31, 2006.

The SMEDP is a programme designed to generate employment, and create opportunities for the introduction of new and advanced skills to South Africa, as well as to encourage foreign investment in the country. One of the programmes it offers provides incentives for those planning to expand existing South African based enterprises, or to start new projects in a range of sectors, including manufacturing, tourism, business services, information and communications, technology, and high value agricultural projects.

Eligible projects can claim an annual tax free cash grant of up to 10% of the qualifying investment cost, paid over two or three years if a labour usage criteria is met. The rates for assistance are as follows:

- First R5 million ($630,000 approx) investment 10% per annum
- Next R10 million ($1.26m approx) investment 6% per annum
- Next R15 million ($1.89m approx) investment 4% per annum
- Next R20 million ($2.52m approx) investment 3% per annum
- Next R25 million ($3,15m approx) investment 2% per annum
- Next R25 million investment 1% per annum

Another incentive, offered to businesses with approved training programmes, is the Skills Support Programme, which can be accessed simultaneously with any other investment or competitiveness programmes. The SSP offers a three-year grant to the value of up to 50% of the cost of training new staff as the result of an expansion or new project. It also offers a capital grant for training equipment and course materials.

The government is also very keen to stimulate domestic investment, as it believes that this is the key to foreign investment, as international investors, to a certain degree, follow the sentiment and mood of their domestic counterparts. To this end, a number of Spatial Development initiatives (SDIs or 'Investment Corridors') have been set in place to establish conditions that will be attractive to both domestic and international investors. SDIs have tended to be established outside the major industrial centres, and offer private/public partnerships designed to encourage economic growth, and create jobs in areas such as tourism and agriculture. However, the incentives offered to investors in these initiatives are 'soft' incentives, for example links with local suppliers, red tape reduction, etc, and as such will probably appeal more to domestic enterprises than international investors.

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Incentives For Manufacturing Start-Ups

A company which incorporated on or after October 1, 1996 contemplating carrying on a manufacturing project as its sole business, may be awarded a tax holiday, up to a maximum of six years, if the project meets certain conditions. The project may consist of one or more of three components, namely a spatial component, an industry component and a human resource component.

The company must apply to the Regional Industrial Development Board for the approval of its project before it will be granted the tax holiday status. Such status consisting of a zero rate being applied to taxable income.

For each component certified by the board, the company will be entitled to the tax holiday status for two consecutive years. The tax holiday status will commence in the first year in which the company has a taxable income and will lapse ten years after the project was approved.

Existing entities will not qualify for the tax holiday. Additional information may be obtained from the:

The Department of Trade and Industry (DTI)
Private Bag X 86
Pretoria
0001
Tel: (012) 394 9500
Fax: (012) 394 9501

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Strategic Investment Projects

The Strategic Investment Project program offers a tax allowance of up to 100 percent (a maximum allowance of R600 million (app. $100 million) per project) on the cost of buildings, plant and machinery, for strategic investments of at least R50 million (app. $85 million).

Although there was a delay in implementing the scheme, the trade and industry department announced in April 2002 that the R3-billion Strategic Investment Projects (SIP) incentive scheme had come on stream after finalising the criteria for the evaluation of projects. The incentive was broadly welcomed by investment analysts and consultants.

The Department of Trade and Industry said at the time: "The incentive represents an innovative step by government to attract private sector investment in profitable and wealth-creating entitities into SA, from both local and foreign entrepreneurs. The SIP will support industrial projects investing at least R50m in qualifying industrial assets. These projects are expected to increase production within the SA industry and have a potential for long-term sustainability."

The SIP incentive programme provides tax credits equal to between 50% and 100% of the cost of qualifying projects, with a points system being used to assess the value of individual projects.

The SIP incentive is accessible to industrial projects participating within the following sectors:

  • Manufacturing of products: all listed manufacturing activities excluding tobacco and tobacco related products;
  • Computer and computer related activities: hardware consultancy, software consultancy and supply, data processing (excluding standard secretarial services), and database activities;
  • Research and development activities: research and experimental development on natural sciences and engineering

The proposed project should:

  • Comprise investment in new qualifying assets equal to or exceeding R50 million;
  • Increase annual production of the relevant industry sector within South Africa;
  • Not substantially displace products or jobs in the relevant sectors;
  • Demonstrate long term commercial viability;
  • Promote employment and production in the same economic sector in which the project is to be established;
  • Not concurrently be benefiting from certain other schemes as per the relevant legislation.

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The Enterprise Investment Programme

The Enterprise Investment Programme was launched by the government in July 2008, to provide sector-specific financing in order to encourage growth in key areas.

The scheme currently operates under two sub-programmes – the Manufacturing Investment Programme (MIP) and the Tourism Support Programme (TSP – though further sub-programmes are expected to be added in the future to address the needs of other specific sectors.

The EIP works through an investment grant of between 15% and 30% towards qualifying investment in plant, machinery and equipment and customised vehicles required for establishing new or expanding existing production facilities or upgrading production capability in existing clothing and textiles operations.

The MIP is designed to stimulate investment into the manufacturing and related services sectors as part of the government’s efforts to create further employment and ensure sustained growth within the industry.

The programme aims to encourage further investment into the industry by providing a grant of up to 30% towards qualifying investment below R200m in plant, machinery and equipment and commercial vehicles required for establishing new and expansions of existing operations.

Although the MIP can be accessed by a range of sectors in the manufacturing industry, the government is focusing on four key sectors that it has identified as having the most potential for achieving its growth objectives: Metal fabrication, Capital and Transport equipment; Automotive and components; Chemicals, plastic fabrication and pharmaceuticals; and Furniture sectors.

The aim of the TSP is to specifically promote sustainable job creation outside of the traditional tourism destinations of Durban, Cape Town and Johannesburg, as well as encouraging greater transformation in the sector.

The government has chosen to support the tourism sector as it remains vital to the South African economy, contributing close to R100bn to GDP, and has relatively low entry barriers providing real potential to grow the SMME segment.

Whilst many SMMEs have entered the tourism sector, particularly ahead of 2010, most remain small and do not expand into medium sized businesses, thereby limiting their job creation capacity.

The TSP offers a grant of up to 30% of qualifying capital investment by enterprises investing below R200m, provided the enterprises are located outside the three established tourism areas.

The grant can be used by applicants as part of their equity contribution when approaching third party partners and may also be used to access further loans from banks.

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Other Investment Incentive Schemes

The South African government has introduced a number of other schemes designed to encourage investment in certain industries, including:

Critical Infrastructure Programme (CIP)

This programme provides subsidised support for economic infrastructure required for committed productive investments, including new or expanding existing projects. It also assists companies with a top-up grant, with funding ranging from 10% to 30% of the qualifying development costs.

The scheme aims to:

  • Improve the competitiveness of South African industries;
  • Achieve economic growth and create employment;
  • Support the development of industrial activities tat have strategic economic
    advantage for South Africa;
  • Achieve a geographical spread of economic activities within South Africa
    and prioritise rural and economically depressed areas.

Private sector enterprises, private /public partnerships, industrial development project operators, strategic Investment programme applications and investors in strategic economic projects may apply for assistance under the scheme. The following qualifying costs may be claimed for:

  • Costs incurred directly in the installation, construction and erection of infrastructure;
  • Remuneration costs incurred by the applicant for payment of employees
    undertaking project work;
  • Costs of materials directly consumed during the installation, construction and erection of the infrastructure;
  • Cost of new capital items, e.g. test equipment.

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Technology and Human Resources For Industry Programme (THRIP)

The Technology and Human Resources for Industry Programme (THRIP) is a partnership programme, which challenges companies to match government funding for innovative research and development in South Africa. Managed by the National Research Foundation (NRF) on behalf of the Department of Trade and Industry (the dti), THRIP focuses on projects that specifically promote and facilitate scientific research, technology development and technology diffusion,
or any combination of these.

All projects funded by THRIP must include human resource development, but
the choice of technological focus is left to the industrial participants and their partners. The industry and the dti share the costs – and therefore the risk – of developing commercial technology on a R2 to R1 basis (industry: the dti). the dti’s support may be doubled if a project supports certain THRIP priorities.

Funding takes place in the following ways:

  • Firms and THRIP invest jointly in research projects where project leaders are on the academic staff of South African Higher Education Institutions (HEIs)
  • THRIP matches investment by industry in projects where researchers/experts from Science, Engineering and Technology Institutions (SETIs) serve as project leaders and students are trained through the projects
  • Technology Innovation Promotion through the Transfer Of People (TIPTOP) schemes promote the mobility of researchers and students between the industrial participants, HEIs, and SETIs involved in joint projects. Four TIPTOP schemes are available, namely:
    • The exchange of researchers and technology managers between HEIs, SETIs and industry.
    • The placement of SET graduates in firms, while they are working towards a higher degree on a joint research project.
    • The placement of SET graduates in small, medium and micro enterprises (SMMEs).
    • The placement of SET skilled company employees within HEIs or SETIs.

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Support Programme for Industrial Innovation (SPII)

The programme, administered by the Industrial Development Corporation of South Africa, promotes technology development in the manufacturing and IT industry through innovation of new products and processes. All private sector firms and commercialised state owned companies, which incur direct costs in the development of innovative new products/processes qualify for the funding.
The SPII is focussed specifically on the phase that begins at the conclusion of basic research (at the stage of proof of concept) and ends at the point where a pre-production prototype has been produced.

Support is provided in the form of product process development, a matching scheme and a Partnership Scheme:

  • Product process development: Financial assistance is provided for small, very small and micro enterprises in the form of a grant of between 65% and 85% of the qualifying cost incurred during the technical development stage with a maximum grant amount of half a million Rand (R500,000) per
    project. For enterprises with more than 25% black shareholding, the grant is 65%, for enterprises with between 25% and 50% black shareholding, the grant amount is 75%, and for enterprises with black shareholding of more than 50%, the grant amount is 85%.
  • Matching scheme: This is a conditional grant that is repaid by means of levy sales. Financial assistance is provided to SMEs with more than 200 employees, a turnover of more than R51 million, and assets less than R19 million, in the form of a grant of up to 50% of the qualifying cost incurred during the technical development stage up to a maximum grant amount
    of one and a half million Rand (R1,500,000) per project.
  • Partnership scheme: Financial assistance is provided in the form of a conditionally repayable grant of 50% of the qualifying cost incurred during development activity, with a minimum grant amount of one and a half million Rand (R1,500,000) per project, repayable on successful commercialisation of the project. In considering support for a project under SPII, there should be a clear indication of the causality (additionality) that will follow from the support.

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National Industrial Participation Programme – NIPP

The programme seeks to leverage economic benefits and support the development of South African industry through government procurement. The programme is targeted at the South African industries, enterprises, and suppliers of goods and services to government/ parastatals, where the imported content
of goods and services equals to or exceeds US$10 million. The primary customer of NIPP is the South African industry that benefits through the NIPP business plans which, when implemented generate new or additional business activities through one or more of the following: investment, export opportunities, job creation, increased local sales, SMME and BEE promotion, research and development and technology transfer. The secondary customer of the NIPP is the foreign supplier who benefits from the programme through increased participation in the South African economy. In the case of foreign customers, the
imported content of the purchase or lease contract for goods and services must equal to or exceed US$10 million to qualify for participation. In the case of South African industries, participation is dependent on enterprise capability to satisfy the requirements of both the programme and the foreign supplier.

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Film incentives

A large Budget Film and Television Production Rebate Scheme has been
introduced where an eligible applicant will be rebated a sum totalling 15 percent for foreign productions, or 25 percent for qualifying South African Productions. This includes official co-productions of the Qualifying South Africa Production Expenditure (“QSAPE”) that the applicant has spent on an eligible film production.

The objective is to provide additional financial incentives for the production of both foreign and domestic large budget film and television projects in South Africa. In establishing the rebate, the government recognises that large budget film productions contribute to South Africa’s economic development and international profile by providing valuable economic, employment and skill development opportunities for the South African film production industry.

The rebate will ensure that South Africa remains competitive in attracting large budget film productions from abroad. A finite sum has been allocated over an
initial three-year period. The maximum rebate for each project will be R10 million in order to attract an optimum number of productions.

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Export Marketing & Investment Assistance Scheme (EMIA)

The EMIA Scheme partially compensates exporters and investors for costs incurred in respect of activities aimed at developing export markets, and assists with the facilitation of investments into South Africa. Any assistance provided under the EMIA Scheme is at the discretion of the CEO of Trade and Investment South Africa (TISA).

Eligible applicants for the scheme are:

  • South African based manufacturers of products including small, medium-sized and micro enterprises (SMMEs), previously disadvantaged individuals (PDIs) and other businesses
  • South African export trading houses
  • South African commission agents representing at least three SMMEs or
    previously disadvantaged individuals (PDI)-owned businesses; and
  • South African export councils, industry associations and joint action groups
    representing at least five South African entities.

Entities/divisions/subsidiaries forming part of a group, joint venture or partnership will qualify for EMIA assistance at the discretion of the EMIA Scheme.

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Large Industrial Investments

In July 2010, the South African Treasury gazetted regulations relating to tax incentives, as announced by Minister of Finance Trevor Manuel in the 2008 budget, in support of the government’s industrial policy strategy.

The regulations define the pre-requirements for an industrial policy project to qualify for the tax incentives and the point scoring system applicable to brownfield and greenfield projects. Prerequisites include energy efficiency, skills development and investment size requirements.

Under the points system, an industrial policy project will achieve “qualifying status” if it achieves at least five out of a total of 10 points and a “preferred status” if it achieves at least eight out of a total of 10 points. Qualifying status projects may deduct from their taxable income an additional 35% of the costs of the investment in manufacturing assets, up to a maximum of R550m (USD54m). Preferred status projects may deduct an additional 55% of the cost of the investment in manufacturing assets, up to a maximum of R900m. An additional training allowance of R36,000 per employee may be deducted from taxable income. The maximum total additional training allowance per project is R20m in the case of a qualifying project and R30m in the case of a preferred project.

To qualify for the incentives, investment projects must also adhere to minimum standards of energy efficiency and spend at least 2% of their total wage bill on training and skills development. There is a R200m ceiling on greenfield investments, and a R30m limit on brownfield investments (or the lesser of R200m or 25% of the value of existing assets).

Investors will not, however, be able to avail of these incentives if they are benefiting from other government programmes, such as the Enterprise Investment Programme.

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LINKS IN THIS SECTION
INTRODUCTION
INDUSTRIAL DEVELOPMENT ZONES
SME DEVELOPMENT PROGRAMME
INCENTIVES FOR MANUFACTURING
STRATEGIC INVESTMENT PROJECTS
ENTERPRISE INVESTMENT PROGRAMME
OTHER INVESTMENT INCENTIVES
RELATED INFORMATION

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