It is all about incentives: taking advantage of new legislative changes

Finance Minister Pravin Gordhan has introduced tax breaks designed to benefit the country’s investment attractiveness; and in the same vein, the Department of Trade and Industry has been actively making the case for why investment in South Africa is
good business.

According to a Business Day report following the release of the Taxation Laws Amendment Bill, businesses are set to receive important new tax incentives that will aid the development of skills and job creation.

The proposed changes to tax laws will boost the government’s New Growth Path objectives and are welcome news, according to Professor Osman Mollagee, a director for tax at PricewaterhouseCoopers.

“This is a big move on the part of the government. It may just do the trick to encourage investors to put their money into small businesses,” he notes.

However, macro-enterprises and large companies are strong under the spotlight.

As part of an effort to stimulate economic growth aimed at job creation, South Africa’s Industrial Development Corporation (IDC) has set up a five-year, R10-billion scheme that will provide businesses with loans at a rate of 3% below prime.

The government says existing businesses as well as new start-ups qualify for funding: “We want to encourage entrepreneurs,” says IDC chief executive office Geoffrey Qhena, who maintains that the corporation’s objective is to drive the creation of new industries.

Over and above the R10bn, R750 million was set aside to assist businesses affected by the recent floods and drought. Of this money, R500m was targeted to assist businesses that fell within the mandate of the IDC at prime less 3%.

Whether or not the move sends out a message that the government is willing to assist industry where possible, may still be up for debate – but the fundamental tax reform structures do appear to conform to recommended practices on attracting international investment when compared to studies by the World Bank’s “Doing Business” report and, to some degree, The Wall Street Journal Index of Economic Freedom.

An additional strategy aimed exclusively at foreign investment is a move announced by Minister of Trade and Industry Rob Davies, which will see South Africa vigorously working to get oversees business operations relocated to local shores. The plan aims to reduce operating costs by 20% through providing more flexibility and an easier administrative process for new companies.

The benefit to local investors is recognition that companies providing support services to facilitate oversees opportunities do stand to gain. After all, South Africa has the third-largest English-speaking talent pool among offshore destinations for Western countries.

An added graduated bonus incentive of up to 30%, which is available for investors who exceed certain job creation targets, has led to recent predictions that the total number of jobs created through companies offshoring to South Africa will hit 40 000.

The biggest boost to incentivise investors, however, may lie in manufacturing, where a new selling point under the Income Tax Act sees the government foregoing R5.6bn in revenue and extending R20bn in tax incentives. The move is aimed at reducing overhead costs in the form of compliance and tax regulations, providing more cash for companies to expand operations and increase profit margins.

South Africa is “providing allowances which will be measured in terms of the maximum, which will be deductable from the tax obligations of companies that qualify, which will be about R20 billion,” says Davies, who attended this year’s World Economic Forum on Africa, where Opportunity followed investor sentiment and government plans amid interaction from global business leaders and the representative of the country’s major trade partners.

To boost local skills development, companies are able to deduct R36 000 per employee as part of a training allowance, with a maximum training allowance for a single company standing between R20m and R30m.

The move, which seeks to combine skills acquisition with lower costs of doing business, was announced in the context of what Davies describes as the government understanding that there is a “need to improve capital investment in South African manufacturing”.

But perhaps one of the biggest incentives requiring attention, to boost investor confidence in new companies, provides one of the most profitable and socially important components of the country’s economic objectives: doing justice to new businesses.

According to Small Business South Africa, small, medium and micro enterprises (SMMEs) contribute around 40% of South Africa’s gross domestic profit and employ more than half of the private sector workforce. In the context of the fact that some estimates indicate as many as eight out of 10 jobs globally are created by small business, the importance of small and medium enterprises is overriding.

According to Mariam Isa, economics editor at Business Day, the attempt to promote small business through a bigger tax exemption is a step in the right direction, but does not address the problem of making it more attractive to start a business. “That’s where you should focus your energies,” she notes.

The possible easing of labour regulations to make it easier to remove unproductive employees has not yet officially been tabled, though some have suggested unions themselves may be considering that laws designed to protect existing workers may be having a negative effect on incentivising the creation of new jobs, in line with President Jacob Zuma’s own target of new employment for five million South Africans.

Reducing red tape, compliance costs and complexity over liability could very well lead to new jobs as more South Africans see starting a new enterprise as less costly and easier to stomach than is currently the case.

However, in addition to returns on investment driven by local businesses focusing on the South African consumer, the banking sector has gained significant ground on the continent as a whole, servicing the rising number of consumers with stronger purchasing power, as revealed in the recent McKinsey report on Africa.

There are two clear indications about the future of South African banks in Africa, according to analysis by TradeInvestSA.

For a start, South African banks are recognised as the leaders on the continent in terms of consumer perception and market sentiment. Secondly, South African banks want to entrench that position by expanding their services to more countries on the continent.

The banks are seen to hold a broader status as agents of social change, according to Louis von Zeuner, deputy CEO at Absa. “South Africa’s prominent role in the World Economic Forum for Africa as well as in SADC [Southern African Development Community] also means that South African banks have been challenged to help address some of the socio-economic issues facing the African continent,” he says.

As recently relayed by JP van der Merwe, a 2009 report compiled by the Financial Access Initiative indicates that 80% of the adult population in sub-Saharan Africa – or 325 million people – remains unserved, as compared to only 8% in high-income countries of the Organisation for Economic Co-operation and Development.

With South Africa as a base from which to co-ordinate the banking of the rest of the continent, local banks appear well aware of the potential. Evidently, all are actively taking a close look at how best practice can gain a foothold in the world’s final frontier for banking.

Garreth Bloor