Page 1131 - SAIT Compendium 2016 Volume2

EXPLANATORY MEMORANDUM ON THE TAXATION LAWS AMENDMENT BILL, 2015
II. Reason for Change
Currently, the legislation only allows municipalities with a population of more than two million people to demarcate two areas as UDZs. The amalgamation of various municipalities over the years has highlighted the need to extend the demarcation of more UDZ areas per municipality.
III. Proposal
In order to make the UDZ incentive more accessible, it is proposed that municipalities that have a population of at least one million persons or more should be allowed to demarcate more than one UDZ area. Where a municipality has a population of less than one million persons, the Minister of Finance will have discretion by notice in the Gazette to approve a municipality to demarcate more than one UDZ area. Municipalities using this provision will at a minimum still be subject to the demarcation criteria as set out in section 13quat.
IV. Effective Date
The proposed amendments will come into operation on 1 January 2016.
4.2 EXTENDING THE WINDOW PERIOD AND INTRODUCING A COMPLIANCE PERIOD FOR THE INDUSTRIAL POLICY PROJECT TAX INCENTIVE REGIME
[Applicable provision: Section 12I]
I. Background
In 2008, the Industrial Policy Project (IPP) tax incentive was introduced to support investment in manufacturing assets that would improve the productivity of the manufacturing sector. The incentive is fully available for new industrial policy projects as well as expansion or upgrading of existing projects. The incentive takes the form of an immediate additional allowance for an industrial policy project as determined according to the type (green eld or brown eld) and status (qualifying or preferred). The incentive offers support for both capital investment and training, with quali cation for the incentive based on regulatory criteria reviewed by an adjudication committee constituted in terms of section 12I.
The qualifying criteria for industrial policy projects are stipulated in sections 12I(7) to (10). These criteria will determine whether projects will signi cantly contribute to South Africa’s Industrial Policy Programme. Section 12I (10) makes provision for the qualifying criteria to be determined by regulations. These regulations may be issued by the Minister of Finance in consultation with the Minister of Trade and Industry. Approved industrial policy projects are also required to report annually to the adjudication committee on the progress of the IPP in terms of the qualifying criteria. A project/company must also report on the progress of spending on training as a percentage of the project’s annual wage bill for a six year period starting from the date of project approval.
Since its inception in 2008, there has been a signi cant uptake for the programme. Data from the Department of Trade and Industry (DTI) indicates that by the end of March 2015, a cumulative 52 projects have been supported and approved with an investment value of R48 billion. In 2014, changes were made in the Income Tax Act to reduce the monetary threshold for green eld projects from R200 million to R50 million in order to give small businesses opportunity to partake in the programme.
II. Reason for change
Engagement with relevant stakeholders has revealed that there is uncertainty regarding the timeframes with respect to compliance with all the requirements of section 12I (speci cally the scoring criteria), the end date for annual progress reports in terms of section 12I(11) and the additional training allowance bene t period contained in sections 12I(4) and (5). The current provisions of section 12I compel approved industrial policy projects to comply with all qualifying criteria in every year of the stipulated timeframe. Few, if any, projects are able to comply with all the criteria in every year of assessment. Amendments are therefore necessary to re ect that compliance with the scoring criteria will be assessed only at the end of the compliance period. Subsection (7)(a)(iv) referring to skills development and improved energy ef ciency will be deleted as it is duplicated in subsection (8). Skills development and improved energy ef ciency remain prerequisites of industrial policy projects for the purposes of section 12I, as re ected in the requirements of subsection (8) and the prescribed regulations [Regulation No. R. 639 (Government Gazette No. 33385 – 23 July 2010)]. In addition, requiring reporting on the training expenditure incurred for six years arguably places an onerous compliance burden on qualifying projects.
After consultation with the DTI and other stakeholders, it was decided to extend the 12I window period to align it to the window period of the Manufacturing Competitiveness Enhancement Programme (MCEP). These two programmes are seen as being complementary, with MCEP for investments up to R50 million and 12I catering for projects above R50 million. With the programmes running concurrently up to 2017, this would avoid periods where there is no incentive available for larger investors.
III. Proposal
In order to address the above-mentioned issues, the following is proposed:
A. Compliance Period
It is proposed that the inclusion of a speci c period to allow projects time to comply with the requirements of section 12I, called a ‘Compliance Period’, would resolve the issues highlighted above. The Compliance Period means the period commencing from the year of assessment following the year in which assets have been brought into use, and ends in the third year of assessment. It thus allows a full three year period for the project/company to comply with the section 12I requirements, and annual progress reports must be submitted from the date of approval until the end of the Compliance Period. It should be clear that compliance with the section 12I requirements will therefore only be evaluated at the end of the Compliance Period. The compliance period will be aligned with the additional training allowance bene t period so as to reduce the compliance burden in terms of reporting. The training allowance could then be claimed from when the assets are brought into use and would end (along with the reporting requirement) at the end of the Compliance Period.
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