Growth, Growth, & More Growth!
South Africa’s current economic growth is sluggish. The Medium Term Budget Speech in 2016 cited a required increase of R28 billion in government revenue for the 2017/18 tax year to contain the current budget deficit. The latter does not bode well for government spending priorities, but resources have to be found somewhere to keep priority incentives in place.
With a projected economic growth of 1.3% for 2017(1) (2.1% in 2018 and 2.3% in 2019 (1)), and an increasing unemployment rate forecasted (from an already staggering 27.1% in the third quarter of 2016 (2)), government is likely to focus its spend on education and creating employment (especially with regards to the youth). Tax allowances are already in place for qualifying entities under the Employment Tax Incentive (ETI), Learnership Agreement Tax Incentive (Section 12H), and the Section 12I Tax Allowance Incentive for manufacturing projects.
Budget Constraints – The Australian Automotive Industry as a Case Study
With a range of incentive schemes offered in South Africa by government departments (most of which is housed within the DTI) through either through cash grant funding or tax relief, all are targeted at stimulating the growth of the economy, creating and sustaining jobs, improving competitiveness and encouraging investment.
The DTI has appealed to National Treasury for additional funding, but whether this comes to fruition is yet to be seen. With most incentive programmes drawing to an end in 2019/ 2020, the most significant incentive programme that has definitely been extended past 2020 lies within the Automotive sector. After coming into effect on 1 January 2013 and replacing the Motor Industry Development Programme (MIDP), the Automotive Production Development Programme (APDP) ends in 2020. A new automotive master plan is expected to be tabled in the first half of 2017, with the objective of running from 2021 to 2035, and hopefully providing long-term stability and certainty for the Automotive industry.
With this sector responsible for over 100 000 jobs (many of these supporting at least 3 – 4 people per job), South Africa certainly cannot afford OEMs pulling their manufacturing activities out of the country, as has happened in Australia. The removal of tariff protection and Australia’s government decision to terminate the Automotive Transformation Scheme, (the main assistance package to the industry) on 1 January 2018 were identified as one of the factors contributing to the announcement in 2013 and 2014 by all remaining Australian-based automotive manufacturers (Ford, Holden and Toyota) of their intention to cease production in Australia, the last of which is scheduled to close by the end of 2017.
Cash is King
Cash grants have found much more favour with taxpayers than tax incentives (as evidenced in the very strong uptake of the Manufacturing Competitiveness Enhancement Programme (MCEP) incentive which had approved projects worth about R28 billion and supports an estimated 200 000 jobs). With the MCEP repealed effective 28 October 2015 due to oversubscription to the scheme (3), manufacturing intensive companies are now looking to the section 12I tax allowance as an alternative incentive scheme. While The Critical Infrastructure Programme (CIP), also allows for a cash grant to manufacturing entities with regards to either new capital investments or expansions or upgrades to current investments, the scope of entities who may be eligible for this grant is very narrow.
Where to from here?
Given the above challenges, it may be more prudent to focus on implementing a range of tax incentives and reducing reliance on current cash grant focused incentives, due to the fact that tax incentives have a longer term funding requirement in contrast to an immediate cash outflow in relation to cash incentives.
It is not surprising that National Treasury has commissioned a review into the incentives landscape in South Africa which is intended to “assess performance, determine value for money, and analyse how the system as a whole supports the economy and job creation(4)”.
The reality in South Africa currently is that we are operating in a zero-sum game. Whichever sector of the economy government needs to validly incentivise has to be funded from an ever decreasing pool of taxpayer revenue. An obvious remedy is to reverse the growing unemployment trend. Stimulating growth is the clear solution, and a rebalancing of the incentive programmes in order to attain this growth is expected to be government’s top priority.
There are signs that the rest of Africa is steadily catching up with South Africa’s economy. In part, this has been driven by their increasing use of incentive programmes. A comprehensive and compelling South African incentive regime is essential in order to remain competitive, and to be an attractive destination for foreign direct investment. The question is not whether South Africa should have an incentive regime, but rather whether tax incentives, cash incentives or a mixture of both is the best instrument to use. Finding the optimal incentive balance is key for South Africa’s continued growth in an ever-increasing competitive environment.
(1) 2016 Medium Term Budget Speech: Chapter 3 – Fiscal Policy
(3) Notice on the Suspension of the Manufacturing Competitiveness Enhancement Programme (MCEP), www.dti.gov.za/medianewsroom
(4) Minister of Finance - Pravin Gordhan, 2016 Medium Term Budget Policy Statement
Written by By Nicole de Jager, Senior Manager, R&D Tax & Incentives, KPMG in South Africa