The Saldanha Bay Industrial Development Zone. Picture: HOME FRONT
The Saldanha Bay Industrial Development Zone. Picture: HOME FRONT

The Treasury plans to tighten up the tax incentives granted to companies which operate from special economic zones (SEZs), as well as for investments in venture-capital companies.

An amendment to section 12R of the Income Tax Act has been proposed in the draft Taxation Laws Amendment Bill that will allow qualifying SEZ companies to qualify for the 15% tax rate for only 20% of the business conducted with connected, SA-based firms. Any business with connected companies conducting more than 20% of their business will be subject to the normal corporate tax rate in SA of 28%.

The 15% will apply to all business with unconnected SA firms.

Currently, there is an all-or-nothing rule that if an SEZ company sells more than 20% of its output to connected SA-based businesses, they would lose out on the 15% tax rate altogether.

Treasury chief director of legal tax design Yanga Mputa briefed parliament’s two finance committees on Tuesday about the proposed amendment. She said some SEZ-based companies were producing goods for sale to connected companies in SA that were outside the SEZ.

Another proposed measure would define qualifying SEZ companies as those which make new investments or expansions in an SEZ rather than simply relocating their businesses to the SEZ to get the tax benefit.

“This defies the whole SEZ policy of export orientation and the anti-avoidance tax rules and also goes against the international minimum standards set by the Organisation for Economic Co-operation and Development (OECD) forum on harmful tax practices and the EU code of conduct on business tax,” Mputa said.

She noted that it had come to the government’s attention that some businesses are relocating into the SEZ to benefit from tax incentives but without making new investments or creating new jobs as was envisaged by the department of trade and industry in its SEZ policy.

Mputa also dealt with the proposed amendment to the venture-capital company tax incentive that has been criticised by the industry as an inhibitor to the growth of venture-capital companies. In terms of the amendment, which will come into effect in 2020, a cap of R2.5m will be placed on the tax deduction that can be made from taxable income by taxpayers investing in venture-capital companies.

Currently, the tax incentive regime allows taxpayers investing in venture-capital companies to get an upfront tax deduction — regardless of the amount — equivalent to the expenses incurred in acquiring shares in a venture-capital company.

However, Mputa said there has been too much uptake of the venture-capital company tax incentive, which is why it is necessary to introduce a cap.

“It came to the government’s attention that some taxpayers are attempting to further undermine the venture-capital company tax incentive regime to benefit from excessive tax deductions,” Mputa told MPs. “For example, a segment of ultra-high net worth individuals and family offices opt to invest disproportionately high amounts into venture-capital companies just before the tax year-end, thereby reducing their taxable income.”

The proposed amendment follows 2018’s amendment, which was also aimed at addressing abusive structures.

Mputa noted that the incentive for venture-capital companies, like all incentives, has a sunset clause and is due to come to an end in 2021. The proposed amendment takes this into account.