Cova Advisory on Friday said the 2019 Budget, presented by Finance Minister Tito Mboweni on Wednesday, was “disappointing” with regard to support for manufacturing, with the manufacturing incentives budget of the Department of Trade and Industry (DTI) expected to be reduced over the next three years from R3.5-billion in 2018/19 to R2.7-billion in 2021/22.
Cova indicated that most of the new initiatives announced to support business in the budget were outside of the DTI’s areas of responsibility.
Particularly highlighted was the launch of the Small Business and Innovation Fund in 2019/20, which will receive R3.2-billion to lend to small business intermediaries, such as fund managers and incubators.
Cova also cited the allocation of a further R887-million over the medium term, in a blended finance model to support emerging black farmers under the Black Producer Commercialisation Programme.
Moreover, it also pointed to the extensions of the energy efficiency tax incentive to December 2022.
Cova was, however, pleased with the R1.1-billion allocated to the Jobs Fund over the next three years.
In terms of the Clothing and Textiles Competitiveness Programme, funding constitutes 38.7% of total spending in the Industrial Development Programme over the medium term expenditure framework period.
In the 2017/18 financial year, the Industrial Development Corporation had disbursed R15.4-billion in loans and investments, predominantly to black businesses. As with the previous year, Mboweni did not make any announcement on a grant budget for the Black Industrialists Scheme.
In 2010, the Section 121 incentive was implemented with a budget for allowances of R20-billion, with the window period extended to December 31, 2020, but no additional allowance was announced to increase the original budget.
As of March 31, 2017, 103 projects had been approved and R19.8-billion had been allocated in additional allowances. The DTI is currently reviewing applications for the incentive, however, Cova indicted that there have been very few approvals in the recent past owing to budgetary constraints, in line with its expectations.
In terms of research and development incentives, the Department of Science and Technology has been allocated a dedicated R23.8-billion to fund programmes that form the strategic foundation for scientific innovation.
Cova highlighted the one area that received increased finding in the DTI budget was the Special Economic Zones programmes, with this expected to increase from R900-million in 2018 to R1.6-billion in 2021.
Meanwhile, the Carbon Tax will be implemented on June 1 and is expected to generate revenue of R11-billion, constituting R2-billion from the carbon tax on fuels and R9-billion as previously collected from the environmental levy on electricity.
To encourage additional and continuous investment in energy efficiency, government has also proposed extending the Section 12L incentive, effected in November 2013, to December 31, 2022.
During 2019, government will review the design and administration of the incentive to improve its ease of use, effectiveness and economic impact.
Government is also considering a tax on single-use plastics.
Further, over the medium term, the Green Fund is expected to receive additional allocations from the economic competitiveness and support package of R111-million in 2019/20 and R117.1-million in 2021/21. No allocation is expected to be made in 2021/22.
The Clean Energy programme budget is expected to increase from R408.1-million in 2019/20 to R465.4-million in 2021/22.
INTERNATIONAL TAX AND TRANSFER PRICING
In terms of the controlled foreign company (CFC) regulations, proposals have been made to reduce the high tax exemption threshold from 75% to achieve alignment with the current global trend of decreasing corporate income tax rates.
Further, the current CFC regime will be amended to circumvent the practice by corporations of shifting products from South Africa to their connected parties in jurisdictions with more favourable tax rates.
Treasury has proposed expanding the current definition of “affected transactions” in the Income Tax Act, which identified transactions to which transfer pricing rules apply.
The proposed changes will align the definition of “connected parties” with the definition of “association enterprises” in the Organisation for Economic Cooperation and Development (OECD) Model Tax Convention.
It is proposed that the definitions of the “domestic treasury management company” is changed within the Income Tax Act to reintroduce the incorporation requirement. This is intended to align the definition to that of the Reserve Bank.
A review of the permanent establishment definition in the Income Tax Act has been proposed to limit its current definition to align it with the definition contained in Article 5 of the model Tax Convention of the OECD.