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Tax incentives and the Budget Speech

25 February 2020
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While Government desperately needs to raise revenues, tax incentives that actively encourage investment in general, and those that result in job creation and solutions to the energy crisis in particular, could be an additional win-win solution.

South Africa currently has a number of tax incentives aimed at stimulating economic growth. These include, amongst others: the special economic zone (SEZ) incentive, the headquarter company regime, various incentives to encourage investment in renewable energy, as well as the venture capital company (VCC) regime in section 12J of the Income Tax Act. 

While it is generally accepted that the impact of tax incentives on foreign investment and consumer behavior (as well as the cost-effectiveness thereof) is empirically inconclusive, South Africa is under pressure to stabilize economic growth and boost job creation.

As President Cyril Ramaphosa remarked in his State of the Nation Address, “the rate of unemployment is deepening…[and]… [t]he recovery of our economy has stalled as persistent energy shortages have disrupted businesses and people’s lives.” 

He further announced that private companies will be allowed to produce their own electricity in excess of the current 1 megawatt limit. It will be interesting to see whether this will result in an adjustment to the existing capital allowance for movable assets used in the generation of renewable energy (section 12B of the Income Tax Act), which currently provides for a 100% deduction for solar energy below the 1 megawatt threshold and a 50-30-20 depreciation period in respect of solar energy in excess of 1 megawatt.

The SEZ initiative, which offers VAT and customs relief, employment tax incentives, building allowances and a reduced corporate income tax rate, has reportedly facilitated foreign direct investment, with current estimates of operational investments in existing SEZs at approximately ZAR19 billion and approximately ZAR43 billion secured but not yet operational).

In addition, the VCC regime, despite its late uptake in 2015, has contributed positively to South Africa’s economy. According to recent news articles, SMEs have benefitted from over ZAR3 billion in investments, while more than 27,000 jobs have been created. However, in response to perceived abuses of the regime, further amendments were effected by Treasury in recent years. As these amendments also apply to existing 12J structures, they had a very negative impact on investor certainty. In the hope that investor confidence in the regime will improve sufficiently to encourage further investment, it is imperative that the regime’s 2021 sunset clause is extended so that SMEs can reap the benefits of further investments from VCC investors.