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12-I TAX INCENTIVE

Cobs Pillay

Deputy Director: Green Economy

Investment Promotion and Interdepartmental Clearing House

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• Overview

• Strategic Investment Programme (Sec 12G or SIP)

• 12-I Tax Allowance (Industrial Policy Projects or IPP)

• What was the rationale?

• What are the requirements?

• What are the benefits?

• What is considered to evaluate projects?

• Approval process and monitoring

• Contact details

CONTENTS

OVERVIEW: SEC 12G (SIP)

• Commenced on 01 August 2001 applications closed 31 July 2005

• Programme duration: 5 years

• R3bn tax forgone (R10bn tax allowance)

• SIP has supported 41 projects, 20 projects within chemical sector, 10

projects within metals and 6 projects within the paper and pulp with

total investment of R13 billion.

• These projects created 6600 direct job and 67 000 indirect jobs,

• R340 million has been spent on infrastructure and

• R3 billion worth of small medium and micro enterprise procurement.3

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OVERVIEW- SEC 12I

• Budget speech 2008 R5,6 billion over the next 5 years tax incentives to support industrial policy objectives

• R5.6bn tax foregone

• R20billion aggregate tax allowance

• To accelerate economic growth and to support the industrial policy objectives by:

– Diversify South Africa’s industrial output,

– Support a knowledge-based economy, and

– Nurturing labour intensive industries.

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RATIONALE

MARKET FAILURE

• Low labour productivity due to shortage of skills

• Low capital productivity due to outdated/inefficient capital equipment

• Low investment in manufacturing sector

OBJECTIVES

• Encourage more investment in the manufacturing sector

• Improve investment in skills

• Improve capital stock in manufacturing sector (technology)

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• Greenfield projects with minimum investment of R50m in new & unused assets

• Brownfield projects: Upgrades and Expansion projects with an additionalinvestment of at least R30m or the lesser of R200m or 25% of existing industrialassets (R30m up to R120m existing assets, 25% between R120m – R800m existingassets & a minimum of R200m additional investment required if existing assets areR800m or higher)

• Manufacturing sector (SIC 3), excl tobacco, alcoholic beverages, arms ammunition,etc.

• Projects that result in 10% energy demand reduction in the year that investment isrealised relative to base year for Brownfields (expansions/upgrades) and relative toindustry benchmark energy consumption for Greenfields.

• Projects that spend minimum 2% of wage bill on training

• Tax Allowance (Sec 12I) - (1) Investment allowance (2) Training allowance

REQUIREMENTS

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BENEFITSAdditional Investment Allowance

Status Preferred status

55% of QA or 100% if

in SEZ

Qualifying Status

35% of QA or 75% if in

SEZ

Greenfields Maximum R900m Maximum R550m

Expansions & Upgrades Maximum R550m Maximum R350m

Status Preferred status

Annual Cost

Qualifying Status

Annual Cost

Greenfields & Brownfields Overall maximum R30m Overall maximum R20m

Maximum per employee R36 000 over 6 years R36 000 over 6 years

Additional Training Allowance

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PROJECT EVALUATION

POINT SCORING CRITERIA

• Improved energy efficiency for expansion and upgrading projects

• Impact on downstream and upstream manufacturing sectors (business linkages / import replacement)

• Location in IDZ/SEZs

• Procurement from small business

• Training expenditure

• Cleaner production technology

PROGRAMME DURATION

• Effective from July 2010 & available for 5 years extended until December 2017

Special Economic Zones (SEZS)

• Government has identified Special Economic Zones as a mechanism

that will contribute towards the realisation of its economic growth and

development goals;

• And is committed to support and facilitate the designation, regulation

and development of Special Economic Zones in South Africa;

• Special Economic Zones will be designated in areas to promote

targeted economic activities, supported through special arrangements;

• and support systems including incentives, business support services,

streamlined approval processes and infrastructure.

Special Economic Zones (SEZs) are geographically designated areas of a country set aside for specifically targeted economic activities to promote rapid industrial development.

Zones are supported through special arrangements and support systems to attract and retain targeted industrial investors.

SEZ

Create new employment opportunities

Increase exports of

value added products

Attract FDI, LDI &

Technology

Increase beneficiation & localised

value chains

Improve local socio-

economic conditions

Special Economic Zones

Incentives Strategy

i) 15% Corporate Tax

ii) Building Allowance

iii) Employment Incentive

iv) CCA

v) 12i Tax Allowance

SEZ Value Proposition

SEZ Support Measures

Funding Strategy

i) SEZ Fund

ii) Mix of funding instruments

iii) PPPs

Infrastructure Strategy

i) Bulk infrastructure by government through SEZ Fund

ii) SEZ Locations

iii)Various stakeholders roles in providing infrastructure in and out of zone

Skills & Supplier Development

i) Skills dev. Strategies for SEZs

ii) Supplier development programmes to develop our local businesses

iii) Continuous training of civil servants

OSS Strategy

i) To reduce info search & transaction cost

ii) Facilitate permits & licences for investors

iii) Eliminate steps in approvals

iv) After care

Proposed SEZS In South Africa

Case specific lower corporate tax rate (15 %)

Employment incentive for

low salary workers

Accelerated depreciation for 11 years

Customs controlled area

– VAT exemptions and

duties

12 I tax allowance -

100 % to 75%

All other dtifinancial support

incentives

Dti Funding for all bulk and connecting

infrastructure

Physical links to strategic initiatives

One stop support

services portal (OSS)

Value Proposition

Holistic

industrial

investor

incentives and

support

measures

Support across the supply chain for i.e. tooling engineering supplier development etc.

11 years @ 20 % in first year and 8 % thereafter

Green and brownfield investments of between 100 % and 75 % tax allowance

Incentive Licensee Operator Investor

1. Customs Duties & VAT (in CCA) √ √ √

2. Employment Incentive √ √ √

3. Building Allowance* √ √

4. 15% Corporate Tax* √

5. 12(i) Additional Benefits (points & %) √

6. SEZ Fund for CAPEX (Infrastructure) √ √

* Provided that the Minister of Finance has agreed to allow this benefit to the

SEZ, and that the company is involved in activities that have not been

excluded.

7. SEZ Management support, infrastructure, security, OSS

Summary: Incentives

INCENTIVE SCHEMES

CLUSTER INCENTIVE SCHEME

MANUFACTURING

INVESTMENT

•12i Tax Incentive

• Automotive Incentive Scheme (AIS)

• People-carrier Automotive Investment Scheme (P-AIS)

COMPETITIVENESS

INVESTMENT

•Manufacturing Competitiveness Enhancement Programme

(MCEP)

• Export Marketing & Investment Assistance (EMIA)

•Capital Projects Feasibility Programme (CPFP)

SERVICES

INVESTMENT

•Film & Television Production

• Business Process Services (BPS)

BROADENING

PARTICIPATION

•Black Business Supplier Development

Programme (BBSDP)

• Co-operative Incentive Scheme (CIS)

• Incubator Support Programme (ISP)

INFRASTRUCTURE

INVESTMENT

• Critical Infrastructure Programme (CIP)

POINT SCORING CRITERIA

• Innovation (max. 1 point)

• Improved Energy Efficiency / Cleaner production technology (max. 2 points)

• Business Linkages (import replacement / up & downstream impact (max. 1

point)

• SMME Procurement (Greenfield: max. 1 point Brownfield: max. 2 points)

• Skills Development (training of employees) (max. 2 points)

• Located in an IDZ (Greenfield: max. 1 point Brownfield: N/A)

Qualifying Status: 4, 5 or 6 points Preferred Status: 7 or 8 points

PROGRAMME DURATION

• Effective from July 2010 & available for 7 years until December 2017

PROJECT EVALUATION

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APPROVAL PROCESS

APPLICATIONACCEPTANCE &

DISCUSSION

OF APPLICATION

EVALUATION- CONDUCT SITE VISIT

- PREPARE EVALUATION REPORT

ADJUDICATION

COMMITTEE CONSISTING

OF MEMBERS FROM DTI,

NATIONAL TREASURY

& SARSEVALUATION AND

RECOMMENDATION TO

THE MINISTER FOR

APPROVAL OR REJECTION

MONITORINGANNUAL MONITORING

OF CLIENT DURING BENEFIT

PERIOD OF 4 YEARS

REPORTINGANNUAL REPORTING ON EG. TAX

FORGONE & ECONOMIC GROWTH &

EMPLOYMENT TO:

- PARLIAMENT

- AUDITOR-GENERAL

COMMUNICATION- INFORM CLIENT OF DECISION

- PROVIDE SARS WITH LIST OF APPROVED ALLOWANCES

- PUBLISH LIST OF ADJUDICATED PROJECTS IN GOVERNMENT GAZETTE

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CONTACT DETAILS

André Potgieter: Tel: 012 394 1427

e-mail: andre@thedti.gov.za

Crystal Papier: Tel: 012 394 1069

email: cpapier@thedti.gov.za

Mamaki Ngobeni: Tel: 012 394 1016

email: mngobeni@thedti.gov.za

Website: www.thedti.gov.za

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CIP

Critical Infrastructure Programme ( CIP)

Background:

The CIP aims to enhance investment by supporting critical

infrastructure, thus lowering the costs for investment. It is

available to approved eligible enterprises upon the completion

of the infrastructure project concerned. Infrastructure for which

the funds are required is deemed to bet “ critical” if the

investment would not take place without the said infrastructure

or the said investment would not operate optimally.

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CIP

Objectives of CIP:

The programme is primarily designed to leverage privateinvestment and also promote certain public sector investmentsthat create an enabling environment that leads to private sectorinvestments.

Eligible Enterprises:

Applicant must be a registered legal entity in South Africa

eg: Companies. Private investors and co-operatives.

Benefits:

The CIP offers a grant of a minimum of 10% to the maximum of30% of the total infrastructural development costs, based on thescore achieved in the Economic Benefit Criteria.

The maximum available grant will be capped R30 million perproject

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CIP

THANK YOU