Regulations for South Africa's long-awaited R20-billion tax incentive for large-scale industrial projects have been published, potentially opening the way for significant new manufacturing sector investments.

The incentive will officially continue until December 31, 2014, but could be closed earlier should the R20-billion threshold be reached before that date.

The regulations, which were published in the Government Gazette of July 23, 2010, give effect to Section 12I (S12I) of the Income Tax Act, the legislation for which has been in place for more than a year.

The publication of the regulations was delayed to enable the Department of Trade and Industry (DTI) to align the incentive with the latest version of South Africa's industrial policy action plan, or Ipap2, which places greater emphasis on skills development and energy efficiency than was the case in an earlier version.

Deloitte tax director Duane Newman tells Engineering News that the regulations close a key gap in South Africa's prevailing business incentive regime, which has remained open ever since the Strategic Investment Project Programme, or SIPP, came to an end earlier in the decade.

Under S12I, investors in greenfield and brownfield projects involving capital of more than R200-million, but less than R1,6-billion, can apply for a tax allowance equal to between 35% and 55% of a project's value. Projects worth more than R1,6-billion will be considered, but the tax benefits arising would be limited to the maximum threshold of R1,6-billion.

In theory, a capital project worth R1-billion could receive a tax allowance of between R350-million and R550-million in addition to the usual write-offs for capital expenditure allowed under Section 12 C of the Income Tax Act.

"In other words, this is an additional tax allowance. That means you are getting either a 135% reduction, or a 155% reduction against the cost of the assets," Newman explains.

An adjudication committee, led by the DTI's Enterprise Organisation, but also involving officials from the South African Revenue Service and the National Treasury, will assess whether a project qualifies against a set of predetermined criteria, which are outlined in the regulations.

Projects seeking to be awarded the full 55% 'preferred project' allowance will need to earn eight points, out of a maximum of ten, against a scorecard that covers:
• The innovation of the manufacturing processes employed (one point).
• The project's energy efficiency (up to two points if savings of 15% can be demonstrated).
• Upstream and downstream business linkages (one point).
• Procurement of goods and services from small and medium-sized enterprises (up to two points if 15% of such goods and services are procured).
• Direct job creation (two points for projects able to generate one job for every R1-million invested, and a single point for those creating 0,5 jobs for every R1-million).
• And skills development (two points for investors spending 2,5% of their wage bill on skills development).

So-called 'qualifying projects' need to earn at least five points. However, projects will not be given consideration unless an investor commits a minimum of 2% of its yearly wage bill to skills development, and can prove energy savings of 10% against similar investments locally or abroad.

The task of certifying the energy savings will fall to the South African National Energy Development Institute.

A broad spectrum of value-adding activities will be covered by the incentive, from chemicals projects through to general manufacturing, but alcoholic beverage investments will not qualify. Further, projects that have received other State incentives will be disqualified, unless these incentives were relatively insignificant.

Newman, who is already preparing the first applications, anticipates that there will be significant appetite for the S12I incentive. But he cautions that businesses should be ready to set up comprehensive monitoring systems to ensure adherence to the requirements of the scheme.

He warns that a project can be disqualified should there be any questions about whether it is meeting the agreed criteria and that there could also be penalties for noncompliance.

The DTI is also placing emphasis on the principle of "additionality", whereby evidence will be sought to prove that a project would not have proceeded in the absence of the incentive.