The opportunity to rid the current special economic zone (SEZ) regime of concerns raised by tax and manufacturing experts seems to have been lost.
Proposed anti-avoidance measures introduced in the draft Taxation Laws Amendment Bill were described as unrealistic and unreasonable.
Although some of the proposals by National Treasury have been removed in the subsequent draft response document, concerns will only be addressed in the next legislative cycle.
The changes were aimed at ensuring that only companies whose expansions result in a 100% increase in turnover will be eligible for the beneficial tax benefits (15% instead of 28%) of a SEZ. It is also proposed that only newly established businesses qualify for the tax benefits.
President Cyril Ramaphosa singled out the role of SEZs during his address at this year’s South Africa Investment Conference held earlier this month.
He referred to the establishment of an automotive SEZ, a partnership between the Department of Trade and Industry, the Gauteng Provincial Government, the City of Tshwane and Ford Motor Company of Southern Africa.
“This will entail an investment of around R3.6 billion and the creation of 6 700 direct jobs, consolidating South Africa’s position as the auto hub of the African continent,” he said at the opening of the conference.
Treasury regards SEZs as “an economic tool that can be used to promote national economic growth, the exportation of goods and a way of attracting targeted foreign and domestic investments and technology”.
Government has already established ten special economic zones in strategic locations around the country where investors are able to produce and export value-added products.
Christo Engelbrecht, director at Catalyst Solutions and a member of the incentive tax committee at the South African Institute of Tax Professionals (Sait), says the announcement of a SEZ for the automotive industry is encouraging.
However, it is not necessarily because of any new initiatives by government but rather because of historic commitments made by companies in the industry.
Duane Newman, joint MD at Cova Advisory, says it is concerning that Treasury does not seem to be listening to business and SEZ operators’ call to revise the rules of the incentive to ensure that it meets its policy objectives.
He describes the latest proposal to tighten the anti-avoidance measure to deal with profit shifting between companies trying to benefit from the lower tax rate of 15% as flawed – and has welcomed the decision to withdraw it.
However, the all-or-nothing rule will now continue and new proposals will only be made in the next legislative cycle.
The all-or-nothing rule wholly disqualifies a qualifying company from claiming any of the SEZ income tax benefits if they fall foul of the 20% limit of doing business with connected parties outside the SEZ.
Newman says the SEZ regime is supposed to be one of the flagship programmes aimed at attracting investments, and it is vital that all stakeholders sit around the table to find each other.
He said the investment conference offered the “ideal opportunity” for government to hear the concerns and ensure they are acted upon.
“It would be concerning if promises are made to SEZ investors which are not effectively honoured because of tax technicalities.”
Philippa Rodseth, executive director of the Manufacturing Circle, reiterated the association’s position on SEZs. They are not the silver bullet for industrialisation, she says. There are also concerns about geographic and economic distortions because of the establishment of SEZs.
“It does provide an advantage to new entrants and greenfield operations, but we remain concerned about the allocation of resources and what that does to existing investments in infrastructure and networks.”
She says it remains a tool in the overall industrial policy. However, it is not the only industrialisation tool available.
The country has significant existing infrastructure that needs urgent upgrading, with many established industrial areas requiring attention. They should not be neglected. Focusing on SEZs at the expense of such areas will be shortsighted.
“We need to see where in our policy space can we work smartly with the limited resources we have,” she adds.