Call for dti to revise SEZ tax incentives

There are strong calls for the Department of Trade and Industry (dti) to revise some of its special economic zone (SEZ) incentives and rethink the conditions which “could limit investment potential”, according to consulting firm Cova Advisory. This follows news that Minister of Trade and Industry, Dr Rob Davies, plans to double the rand value of operational investments into SEZs from R11.6 to R23 billion by the end of the year. Davies hopes to leverage this off the introduction of SEZ Tax incentives, which include the reduced 15% Corporate Tax Incentive, Employment Tax Incentives, Customs and Excise incentive, and the Accelerated Depreciation of Building. Duane Newman, joint MD for Cova Advisory, explained to FTW that companies investing in an SEZ saw their tax contribution waived for 10 years. “However, the dti counts this from the date of investment. It takes about six or seven years for a new investment to become fully operational and only then is the company liable for tax,” he said. This essentially means that the company only receives the tax benefit for three or four years, not 10. “We’re therefore trying to get the dti to change the tax benefit to the date of operation,” said Newman. While he understood the dti’s reasons for focusing incentives around SEZs, some of the conditions set for investors could be perceived as barriers rather than incentives, he added. “One of the other big concerns with the SEZ incentives is that investors in an SEZ are prohibited from procuring more than 20% of products or services from a so-called ‘connected party’,” Newman said. He pointed out that this for example meant that if a citrus producer wanted to invest in an agro-processing plant in an SEZ, he would have to procure 80% of his product from another producer. “That just doesn’t make commercial sense for a farmer to then invest in an SEZ.” Newman emphasised that it was therefore vitally important for investors in an SEZ to ensure they followed, and understood, the process 100% correctly to ensure they met the criteria for the incentives. “We are currently assisting a client who was exposed to a value-added tax (VAT) leakage at the Coega SEZ in the Eastern Cape because the contract was drawn up incorrectly. On a R140-million investment, the company stands to lose over a million rand – something any new investor can ill afford,” cautioned Newman. Despite these concerns, a case can be made for investing in an SEZ – particularly those connected to strong logistics hubs such as Dube Trade Port and Coega – but Newman suggested potential investors did their homework and ensured they properly understood the terms and conditions and potential pitfalls before investing.