South Africa has had mixed success with tax incentives, and at this point in its history it is crucial to consider which will be the most effective in getting the supply side of the economy going.
This year’s online Tax Indaba explored the use of business tax incentives to revive the country’s economic fortunes, especially in the aftermath of the destruction caused by Covid-19.
Government has indicated that it will review the incentives on offer over the medium term, and repeal or redesign those that are redundant, inefficient or inequitable.
According to figures from National Treasury quoted at the Tax Indaba, 4.5% of the R1.3 trillion tax revenue is foregone in the form of incentives.
Duane Newman, director of Cova Advisory, said around R12 billion is foregone in the form of corporate income tax incentives, R35 billion to customs and excise (mainly for the automotive industry) and R55 billion for Vat on zero-rated items such as basic food.
He said the general view is that incentives create distortions in the economy and attract “rent seekers” who follow incentives but leave when the incentive expires.
Newman, who chairs the business incentive and grants work group of the South African Institute of Tax Professionals (Sait), considered the role of incentives in the automotive, call centre and film industries.
Where would they be without these incentives, and has government picked some industry “winners”?
Kyle Mandy, technical tax director at PwC, said the support given to the automotive industry has been one of South Africa’s incentive success stories. Government has picked a winner, but it has done so successfully.
It is a costly incentive, but the economic and employment benefits that come with it, as well as the multiplier effect in terms of the entire value chain supplying the country’s original equipment manufacturers is significant.
“It is one of the few incentives where the cost actually makes sense,” he added.
‘Horrific’ type of incentive
Tax holidays offered to companies when investing in a designated location, on the other hand, have been “horrific”. This form of incentive has been scrapped.
Mandy says the incentive attracted investments, but as soon as the tax holiday was over, companies “upped and left”. Several rural towns, where manufacturing operations were set up with tax holidays, are now ghost towns.
Newman referred to government’s special economic zones (SEZ) incentive programme, which also requires investments in specific designated areas.
The incentives looked good on paper, but several anti-avoidance rules added after investments had been made doomed the programme to failure.
Mandy believes this is one of the incentives that will be scrapped.
“To be fair it would not be the wrong decision.” The incentive offers a flat corporate income tax rate of 15% compared to 28%, but the devil is in the detail.
When the SEZ regime was initially introduced there were no anti-avoidance rules. They were introduced at a later stage. Government effectively pulled the rug from under investors’ feet by changing the rules of the game, undermining the incentive.
Tax breaks aren’t the biggest motivator
Tax is however fairly low down the list of investment considerations. Fundamental factors affecting investment decisions include infrastructure, policy certainty and a flexible labour regime.
“Some things are binary when it comes to investments, and no tax incentive can correct the shortcomings of these factors. That is a mistake that SA has made on a number of incentives they have introduced over the last few years.”
Mandy says fiscal stability is crucial and when something undermines it, such as policy uncertainty, it does no one any favours.
“You may get the initial investments, but whether there will be any future investments in the incentives then becomes questionable.”