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  • Greater Incentives Needed to Make SA Compelling Gateway to Africa

Greater Incentives Needed to Make SA Compelling Gateway to Africa

19 January 2016

Roxanna Nyiri, BDO South Africa- Head of Transfer Pricing

Johannesburg. 20 January 2016 - Five years ago, the South African government introduced legislation to incentivise companies to set up their holding companies in South Africa, and establish it as the gateway to investing in Africa. Since then, the take-up by companies has been nominal and countries such as Mauritius and Rwanda remain the more competitive options for routing non-South-African business activities into the rest of Africa, writes Roxana Nyiri, Head of Transfer Pricing at BDO South Africa.

The South Africa Headquarter Company regime offers companies various incentives to set up their headquarters in SA. Some of these include treatment as a non-resident for tax purposes, with no potential exchange control requirements, exemption from dividends tax, and no controlled foreign company rules in certain instances.

The legislation has arguably not been competitive enough to attract a significant number of companies to route their business through South Africa. Today, many continue to structure their African operations via Mauritius. Mauritius is currently ranked 1st in sub-Saharan Africa on the World Bank’s Ease of Doing Business 2016 index and is number 32 of 189 globally. Rwanda’s legislation to encourage foreign direct investment spiralled them to the second spot in the 2016 World Bank Ease of Doing Business Index and is rated one of the least corrupt countries in Africa, according to the 2014 Corruption Perceptions Index.

This does not mean that setting up business in Mauritius is without challenges. For instance, the effective management of the business and key decision making processes need to happen on Mauritian soil. South African entities that establish operations on the island must therefore have the capital, infrastructure and resources to support the revenue generated there. If the economic substance and business purpose cannot be supported their profits earned abroad may be taxed in South Africa.

So it begs the question whether South Africa should up its game to become a preferred investment destination, and if so, how?

Ranked 4th on the World Bank’s Ease of Doing Business index in sub-Saharan Africa and 73rd globally, South Africa may need to take bolder steps to make it more desirable as a holding company destination. In addition to creating a stable economy and a strong currency which reflects a sound and encouraging political environment, amendments to the country’s tax and exchange control laws would be required to enhance South Africa’s competitiveness.

South Africa’s skills shortage necessitates the employment of expatriates in certain sectors. Whilst employing expatriates can often be expensive, they often provide critical skills to local entities and multinationals. Expatriates can also provide the required transfer of scarce skills. Without sufficient tax incentives, the burden of the expense to employers increase, which acts as a disincentive.

Typically, the two main expenses for someone living in South Africa are housing and transport. Currently, expatriates can, in certain circumstances, receive employer provided tax free housing in South Africa for a maximum of 2 years from date of arrival. As many projects outlive 2 years, this benefit then becomes subject to tax. In recognition of this, the Department of Home affairs extended intra-company transfer work permits to 4 years. The Fiscus has not extended to 4 years yet.

Employers and expatriate employees also often experience challenges in obtaining work visas. Although this area has seen abuse in the past, the process needs to be simplified and fast-tracked.

Research and development (R&D) and other incentives also present their own challenges. Although South Africa provides a spectrum of R&D and other incentives, in practice they are often difficult to qualify for and to obtain. There are several criteria that need to be complied with and the application process can in certain instances be seen to be onerous. This impacts the ease of doing business and overcomplicates the processes.

South Africa would need to establish a firm policy on whether and the extent to which it wants to use the tax system and other means to attract foreign direct investment. Various studies have been done which address the pro’s and con’s of using the tax system as an economic stimulus. To this extent South Africa would need to assess the global trends and perspectives, especially those of the various international development agencies, the IMF, and the World Bank. Considering the international treatment of attracting foreign direct investment should be a critical component is such a study. The successes (albeit questionable in certain instances) of the Asian countries and select European countries such as Ireland, Luxembourg, and the Netherlands to attract foreign direct investment need to be considered. A classic success story that should never be lost sight of is the re-emerging of the German economy post World War II. Rwanda’s story is equally inspiring. Following its devastating civil war, the government made the decision to create an environment that is beneficial to conducting business and identified priority sectors for investment such as ICT, tourism, energy and agriculture.

South Africa can capitalise more on its status as the, or one of the, most sophisticated markets in Africa. South Africa, for example, offers incentives to establish in industrial zones, but the actual success of these zones has not been fully unpacked. South Africa can also, for example, consider incentivising manufacturing or financial services with a preferential tax treatment. These and other incentives can be used to expand the activities of foreign companies in South Africa and can also be used to attract the creation of licensing and IP on South African shores. The benefits of these measures will trickle down to most if not all of the corner stones of a sound economy, such as growth in GDP, the balance of payments, employment, exchange rates, monetary policy, etc.

Creating a prosperous South African economy cannot be done by focusing on one or a limited number of fundamentals. Government would have to revisit their various growth initiatives and plans and take due cogniscance of monetary and fiscal policy measures to assist in these. Focusing purely on tax or fiscal incentives to fuel economic growth without ensuring that the economic fundamentals are adequately addressed will not be the answer.