Deloitte welcomes SEZ draft laws but looks for more clarity
Johannesburg, 5 August 2013 - The inclusion of Special Economic Zones (SEZ) in the Draft Taxation Laws Amendment Bill has been welcomed by professional services firm Deloitte. Intended to attract foreign direct investment into South Africa, as well as promote economic growth and employment, SEZs are specifically designated areas where businesses will be able to qualify for tax and other incentives.
“The most exciting aspect of this legislation is the proposal to reduce the corporate tax rate from 28% to 15% for qualifying companies,” notes Deloitte Tax Director Izak Swart. “This is a significant concession and will be certain to attract investment.”
However, to qualify for the concessionary tax rate, companies will need to comply with strict criteria, notably they will need to undertake business in the specific field as identified for each of the SEZs. “Even for companies that don’t qualify for the 15% tax rate,” adds Tumi Marivate, Associate Director in Taxation Services at Deloitte, “there will be some incentives to locate in the new SEZs, such as employment incentives: an Employment Incentive Bill is anticipated later this year.”
Swart sounds a warning, though, that each SEZ risks an overconcentration of businesses within the identified qualifying sectors. His concern surrounds the lack of diversification within each SEZ and the appropriateness of the sectors chosen for each SEZ. In Gauteng, for example, the Nasrec area is cited for the development of Agro-processing and logistics which is incongruous, given that Gauteng is not an agricultural hub, although Nasrec is near City Deep, the world’s largest fresh produce market and container terminal.
The ten identified SEZs each have a narrow focus of industry activity which companies must engage in, in order to qualify for the tax benefits. The downside risks of concentration are enormous, not least the heavy reliance on a single industry for employment in a region. Any downturn in that particular industry would have negative implications for the region. A topical example is the dependence of the US city of Detroit on motor manufacturing, leading to the eventual insolvency of the city as the global motor manufacturing hub has moved to the Far East in recent years. “We are also concerned that, should the criteria be inflexible, only those companies that qualify for all the benefits would opt to locate in the SEZs. This could, potentially, limit the number of companies in the SEZs and, perversely, reduce the number of participants rather than raise them, and thus affect the success of the initiative,” explains Swart.
André Pottas, Corporate Finance Advisory Leader at Deloitte, echoes this view, citing the Dube Trade Port as an example. “One of the initial ten SEZs, the Tradeport SEZ has been earmarked for promoting agro-processing. However, the Tradeport has a much wider development strategy than just Agro-processing. While there is a large Agro-processing component, there is also a large cargo terminal, facilities for commercial, information technology and manufacturing businesses and a freight-oriented trade zone. If the tax advantage means that only agri-businesses are attracted to the region, the balance of the facilities may prove unproductive.”
While the consultative process has been finalised, the guidelines containing the qualifying criteria remain to be published. Once the Bill has been signed into law, the guidelines will become available, creating greater certainty regarding the implementation of the SEZs.
The existing Industrial development Zones (IDZs) – launched in 2001 and also targeting foreign investment as well as economic development – are to be converted into SEZs, a process which may take several years to complete. The IDZs have had only modest success in terms of the primary aim of attracting foreign investment into South Africa. “A key reason for their limited success was the lack of compelling incentives, so the expected foreign investment did not materialise. Sound infrastructure was put in place, but an attractive tax rate was never part of the incentive package,” explains Pottas.
The SEZs are identified through a process of feasibility studies, with ten having been listed initially, spread throughout the provinces. “Further zones are to be determined through additional feasibility studies, although the criteria to determine these zones are also unclear at this stage,” notes Marivate. “Although the private sector will in theory be able to motivate for additional SEZs to be created, we feel that the legislators have missed an opportunity to bring the private sector into play. Our experience in other countries shows that much of the SEZ developments are private sector led, China being an excellent example. The South African model could be enhanced by allowing for a parallel process to look at the feasibility of other areas.”
“While government is key for laying the policy framework and facilitating SEZs, private sector involvement in the development and management is key to their success,” elaborates Marivate.
Given the tax incentives proposed, SEZs have the potential to leverage significant domestic and foreign direct investment and create much-needed employment. However, the criteria used to evaluate SEZs need to be transparent and well-defined in order to have the desired impact.