The tax benefits of a special economic zone

In his State of the Nation address, President Ramaphosa announced that South Africa would be looking into the possibility of creating more special economic zones, says Daniel Baines, author of How to Get a SARS Refund, and tax consultant at Mazars.

A special economic zone is a distinct demarcated area that has been earmarked for economic development and which provides tax incentives to attract investment to the area. The tax incentives are available to certain types of companies operating within that special economic zone (SEZ).

The main tax benefit available to a qualifying company within a special economic zone is the reduced corporate tax rate from 28% (the standard corporate tax rate) to 15%.

The following example illustrates the benefit of this reduced rate:

  • Example 1 – 28% tax rate
  • Taxable income of business – R500 000
  • Tax payable – R140 000 (R500 000 x 28%)
  • Example 2 – 15% reduced tax rate
  • Taxable income of business – R500 000
  • Tax payable – R75 000 (R500 000 x 15%)
  • Reduction in tax payable – R65 000

In order to qualify for this reduction in tax rate, the qualifying company must meet the following primary requirements (there are also other requirements that need to be met):

1. The company must be incorporated in South Africa or have its place of effective management in South Africa;
2. The company must carry on the trade within the special economic zone;
3. Not less than 90% of the company’s income must be derived from carrying on the trade within the special economic zone; and
4. The trade must be carried on from a fixed place of business within a special economic zone.

Even if a company does qualify per the above, certain types of manufacturing industries are specifically excluded from obtaining the 15% exemption and certain non-manufacturing industries are also specifically excluded. For example, a company that operates a retail trade will be specifically excluded from obtaining the 15% tax rate. Please note that the list of types of businesses that are excluded is quite wide and each company must determine whether they would be entitled to potentially obtain the 15% tax rate.

As mentioned earlier, in order to obtain these tax benefits, the company must be situated within a special economic zone.

At the moment, there are currently nine special economic zones in South Africa. These are as follows:

1. Coega IDZ (Eastern Cape)
2. Richards Bay IDZ (Kwa-Zulu Natal)
3. East London IDZ (Eastern Cape)
4. Saldanha Bay IDZ (Western Cape)
5. Dube TradePort SEZ (Kwa-Zulu Natal)
6. Maluti-a-Phofung SEZ (Free State)
7. OR Tambo IDZ (Gauteng)
8. Musina/Makhado SEZ (Limpopo)
9. Atlantis SEZ (Western Cape)

Besides from the reduction in corporate tax rates, there are also certain VAT, Employment Tax Incentive (ETI), customs benefits that are available to a company operating within a special economic zone provided that certain stringent requirements are met.

Read: Have you left South Africa and need to access your retirement?

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