Special Tax Zones in South Africa Dr Craig West Associate Professor: University of Cape Town Postdoctoral Research Fellow: IBFD

Incentives in South Africa Many incentive programmes operated by the Department of Trade and Industry Incentive Zones are limited to Special Economic Zones Born from Industrial Development Zone (IDZ) programme Increase foreign direct investment (FDI) Export value-added commodities

IDZ v SEZ Focused only on coastal regions or regions with an international port No significant package of incentives Mainly just an incentive programme Focused on all regions with significant growth potential Competitive incentives package Focuses on the development of strong industrial eco-systems

Special Economic Zone (SEZ) Review of IDZ started in 2007 due to identified weaknesses Aims of SEZs: Expand the focus of strategic industrialisation to cover diverse regional development needs and context; Provide a clear, predictable and systemic planning framework for the development of a wider array of SEZs to support industrial policy objectives, the Industrial Policy Action Plan (IPAP), NDP and the NGP; Clarify and strengthen governance arrangements, and expand the range and quality of support measures beyond the provision of infrastructure; and Provide a framework for predictable financing to enable long-term planning

Special Economic Zone (SEZ) Partly in response to: developments in national economic policies and strategies, such as the National Industrial Policy Framework (NIPF), National Development Plan (NDP) and the New Growth Path (NGP), developments in the global economic environment, such as the formation of BRICS (Brazil, Russia, India, China and South Africa) Main focus for national industrial policy

The international investment in SEZs Two most established zones: COEGA – 33 investors on site – mostly SA, but also Belgium, China, France, Germany, India, Switzerland, UK, and USA ELIDZ – international footprint includes: South Africa, Belgium, China, Germany, Italy, Spain, Switzerland, Taiwan, UK and USA

Current impact of IDZ (now SEZ) NO. OF INVESTORS ON SITE EST. PRIVATE INVESTMENT VALUE OF OPERATIONAL INVESTORS(R’000) NO. OF SECURED INVESTORS(but not operational as yet) EST. PRIVATE VALUE OF SECURED BUT NOT YET OPERATIONAL INVESTMENT(R'000) DIRECT EMPLOYMENT CONSTRUCTION & INDIRECT JOBS TOTAL EMPLOYMENT COEGA 33 6 489 450 29 6 800 000 7174 37 448 44 622 ELIDZ 28 1 8000 000 4 1 200 000 1997 23 975 25 972 RBIDZ 2 820 000 9 10 020 000 300 3961 4 261 DTPIDZ 6 372 000 5 1 700 000 505 − TOTAL 69 9 479 450 47 19 720 000 9 976 65 384 75 360

Challenges and Goals of SEZ Capacity and resources for infrastructure development to unlock investments Fiscal constraints Acceleration of infrastructure development Human capital Land availability: becoming a major constraints in all regions Drawn from briefing to the Parliamentary Portfolio Committee for Trade and Industry (19 April 2016) on the implementation of SEZs

Challenges and Goals of SEZ Goal 1: Increase and diversify investments in designated zones Goal 2: Increase impact of SEZ investments on host regions and communities Goal 3: Improve sustainability Drawn from briefing to the Parliamentary Portfolio Committee for Trade and Industry (19 April 2016) on the implementation of SEZs

Programme expansion Four operational zones COEGA ELIDZ (East London Industrial Development Zone) RBIDZ (Richards Bay Industrial Development Zone) DTPIDZ (Dube Trade Port Industrial Developemtn Zone) Three zones approved but not operational OR Tambo Airport Maluti-a-Phofung Saldanha Bay Three zones in application stage Atlantis Bojanala Musina/Makhado

SEZ environment Legislation and regulations: SEZ Act now operational, and regulations on applications for designation, operator permit and funding in place SEZ Advisory Board: Appointed and operational Capacity Building Programme: Implemented in partnership with Chinese Government Inter-Departmental Coordination: Joint Task Team between the dti, National Treasury, SARS and ITAC established. Other departments and SOEs part of Project Steering Committees on needs basis Provincial support: All provinces supported to set up Project Management Units and undertake SEZ planning, development and management.

Infrastructure development Duty Free (Customs) and VAT Free SEZ Incentives Corporate tax rate: 15% Infrastructure development Additional investment and training allowances in respect of industrial policy projects Duty Free (Customs) and VAT Free

Tax incentives summary Preferential 15% Corporate Tax (standard corporate rate 28%) Businesses (prescribed in section 24(4) of the SEZ Act) that are located in a SEZ may be eligible for tax relief, including the reduced rate of corporate income taxation. In addition to satisfying the requirements of the SEZ Act, further criteria for some of the available tax incentives are in the Income Tax Act Building Allowance Businesses and Operators operating within a SEZ may be eligible for tax relief, including the building allowance, subject to requirements in the Income Tax Act (10% for new or unused buildings acquired in SEZ). Employment Incentive Businesses and Operators operating within a SEZ may be eligible for tax relief, including the employment tax incentive subject to requirements contained in the Employment Tax Incentive Act.

Tax incentives summary Customs Controlled Area Businesses and Operators located within a customs controlled area of a Special Economic Zone will be eligible for tax relief as per the Value-Added Tax Act, the Customs and Excise Act, the Customs Duty Act and the Customs Control Act. 12I Tax Allowance Greenfield investments (i.e. new industrial projects that utilise only new and unused manufacturing assets) – up to ZAR 900 million additional allowance Brownfield investments (i.e. expansions or upgrades of existing industrial projects) – up to ZAR 550 million additional allowance Training – up to ZAR 36,000 per employee up to a max of up to ZAR 30 million per project.

Other issues Zones remain subject to SA Constitution and all other laws Advantage (like large corporations) in having one-stop-shop No challenges against the SEZ