Legislative change aimed at preventing profit shifting, is having a negative impact on favourable tax regimes designed to attract foreign direct investment and support South Africa’s industrialisation efforts.
One such regime saw the introduction of special economic zones that offer a reduced corporate tax rate of 15% and an accelerated capital allowance to qualifying companies.
The Special Economic Zones (SEZ) Act was supposed to come into operation in 2014, but this only happened two years later, and the approval of specific SEZs was only published in 2018. Since then some changes have been introduced to prevent tax leakage.
Shifting goalposts led to situations where companies that, in 2014 made investment decisions to relocate their businesses to these special demarcated areas in SA, found themselves disqualified in 2020.
During the December virtual workshops hosted by National Treasury on technical proposals for the February 2023 budget, affected stakeholders and SEZ practitioners raised their concerns about the impact of anti-avoidance measures on the success of the regime.
One SEZ practitioner said although he understands the importance of protecting the fiscus against profit shifting, there are different ways to mitigate the risks.
In terms of the anti-avoidance rule, a company is disqualified from the reduced rate incentive if transactions with connected persons who are resident (or non-resident, but with the transactions attributable to a South African permanent establishment of the non-resident) give rise to more than 20% of its deductible expenditure incurred or more than 20% of its income received or accrued.
A representative from electronics company Samsung wanted to know whether companies that relocated their production operations to SA on the basis of the special tax regime – as Samsung did – will be compensated because the rules were changed.
Treasury found this request “weird” and noted that it should not be construed that the 15% rate was taken away.
When KwaZulu-Natal’s Dube Tradeport’s SEZ status was approved, Samsung became one the first companies to take up the offer – establishing its African manufacturing facility within the zone.
Its representative said although the company appreciates the fact that the 20% rule is an anti-avoidance measure, it is a “common type of business model” for separate legal entities to be set up for production or manufacturing and sales.
According to stakeholders the main focus of incentives such as the SEZ regime should be to attract investments that will introduce ‘additionality’ and new technology into the economy.
This is not achievable if government continues to change the rules of the game.
Companies have become wary
South Africa was able to attract a leading company like Samsung in 2014, but multinationals have become more wary because of uncertainty around the regime and how it may affect the way they conduct their business.
Currently the rules state that a qualifying company must be incorporated by law; have its place of effective management in South Africa and carry on a trade within a designated SEZ; have no more than 20% of expenditure that is deductible incurred with a connected person; and have no more than 20% of income received or accrued from a connected person.
During the workshop Treasury was urged to consider scrapping the 20% rule and to make use of other available anti-avoidance mechanisms and for the South African Revenue Service to increase its capabilities to monitor and detect profit shifting.
Government is in the process of reviewing the efficacy of several of its tax incentives and has made announcements about some of them that will not continue beyond their sunset dates.