Threats about tax incentives worrisome

/ 23 February 2017

Amanda Visser

Pretoria - Governments historic reluctance to offer tax incentives to attract investments was clearly demonstrated through the negative comments in the 2017 Budget Review, with a veiled threat that they may even be removed.

National Treasury stated in the review that corporate tax revenue can be increased by broadening the tax base. “This can involve removing tax incentives, and introducing measures to curb tax avoidance through loopholes and schemes.”

Cova Advisory director Duane Newman says government is reviewing the effectiveness of all the incentive programmes. “It is vital that this process be allowed to follow due process.”

He expressed concern about the silence on the future of a key incentive programme, the Manufacturing Competitiveness Enhancement Programme (MCEP) in Finance Minister Pravin Gordhan’s budget speech.

The programme has been suspended for two years while another key incentive which allows for additional tax allowances (the s12I Tax Incentive) will come to an end in December.

“The minister’s silence is worrisome on what it communicates to manufacturers on the level of support they can expect from the state in the near future.”

The MCEP was designed to support companies in the production sectors to weather very adverse market conditions, secure higher levels of investment, raise competitiveness and retain employment.

Although R1.3 billion has been allocated to the programme in the 2018-19 budget, it has been earmarked for a sector specific programme in the agro-processing and metals fabrication and generic manufacturing sectors.

The tax allowance incentive was designed to support new industrial projects as well as expansions or upgrades of existing industrial projects.

Newman, also chair of the incentives committee of the South African Institute of Tax Professionals (SAIT), says it seems that new major capital projects will have no incentive support going forward except for instances where approved projects are cancelled and some of the fully allocated budget becomes available again.

“The balancing of the budget has significantly influenced the overall incentive allocation” in the medium terms. …. Between 2016/17 and 2019/20 the total incentive budget will experience negative growth of 8.1 percent.”

Treasury says reviews of tax incentives should regularly assess their effect on investment, job creation and growth. “Where the costs outweigh the benefits, consideration should be given to removing these incentives.”

Treasury will also review the current tax incentive for qualifying industrial policy projects which comes to an end this year. Once the review is finalised a decision will be taken on the future of the incentive.

Newman says in terms of the “green economy” there is no clarity on the implementation date for the carbon tax. “As such, companies

should still operate under the assumption that the carbon tax will be introduced in January 2018,” he advises.

Lesley O’Connell, PwC tax partner, says a revised Carbon Tax Bill will be released this year, and is expected to be tabled in Parliament around June.

The latest developments around the implementation include that there will be no impact on the price of electricity during the first phase of the tax until 2020. A revised regulation for the carbon offset allowance will be published later this year.

SAIT CEO Keith Engel says it takes note of the plan to introduce the Carbon Tax Bill to Parliament for 2017. “This is the first time we are seeing a formal commitment from Finance Minister Pravin Gordhan.”

The sugar tax will be implemented as a levy and both intrinsic and added sugars will fall under the ambit of the tax.

Virusha Subban, partner specialising in customs, excise and international trade in Bowmans tax practice, says the tax will be implemented as soon as the necessary amendments to the Customs and Excise Act are legislated.

The proposed tax rate will be 2.1c/gram for sugar content in excess of 4g/100ml. Of this, 50 percent will apply to concentrated beverages.

“Notably, the July 2016 Policy Paper mentioned a higher rate of 2,29c/gram of sugar. The announced rate is lower with a proposed threshold presumably to cater for those products that will be caught in the net as a result of the inclusion of intrinsic sugars,” she says.

Treasury says its socio-economic impact assessment shows a “relatively small impact” on job losses, most of which can be prevented if companies reformulate their products.

Newman however, expects continued resistance to the implementation of this tax.