by Dylan Jessup

The automotive industry is very well aware of the benefits which have been on offer through the Automotive Production and Development Programme (APDP) and now through its successor, the Automotive Production and Development Programme Phase 2 (APDP2) and the Automotive Investment Scheme (AIS). These benefits have been around since 2013 and there are no hidden secrets.

However, the government’s assistance is not limited to these two programmes. There are many more opportunities for support which seem to go unnoticed. These other available benefits do not always get the airtime they deserve.

The programmes can be categorised as follows:
• Research and Development;
• Energy Efficiency and Carbon Credit Offsets;
• Supplier Development; and
• Employment.

Research and Development
Europe is the largest export market for the South African automotive sector, and the news that Europe will be expediting the introduction of electric vehicles (EV) and battery electric vehicles (BEV) has effectively sounded the death knell for the future export of internal combustion engine (ICE) powered vehicles. The local automotive sector which has been built on the back of assembling ICE powered vehicles now finds itself in a precarious position.

How does the sector transform from its traditional ICE activities to EV and BEV manufacturing? How does it innovate and re-invent itself?

Fortunately, government is aware of this conundrum and has created some sweeteners to help industry players to innovate and adapt to new market demands.

The government can provide support to fund innovation through the Section 11D (S11D) Research and Development as an additional tax allowance, and the Support Programme for Industrial Innovation (SPII) which is a cash incentive.These two programmes are a hidden treasure trove of opportunities to leverage their innovation budgets.

The South African Automotive Masterplan (SAAM), which has provided the roadmap for the automotive industry until 2035 and the basis upon which automotive specific government support has been developed, has, as one of its primary objectives, to “deepen value-addition in the local automotive value chain” through increased research and development. S11D and SPII could go a long way in helping players in the automotive supply chain to achieve access to the keys to this treasure trove, helping them to fulfil the objective of transforming the manufacturing platform.

S11D offers an additional 50% taxable allowance on approved research and development expenditure i.e. 150% taxable allowance as opposed to the 100% allowance; focusing specifically on applied research, while SPII offers up to R5 million in cash to support the development and commercialisation of an innovative product or process.

Energy and Carbon Efficiency
The cost of energy, specifically electricity - on which all businesses are so dependent - continues to soar and has a significant impact on any industry with fine and narrow profit margins. In 2013 the government introduced the Section 12L (S12L) tax allowance incentive. This tax allowance incentive offers a benefit of 95c/kWh equivalent for demonstrated energy efficiency savings. The improvement in energy efficiency is determined by using a bespoke calculated baseline model and is adjusted for production volumes. The S12L tax allowance is administered by SANEDI (South African National Energy Development Institute), which evaluates each S12L application and issues a tax certificate to successful applicants on proof of the energy efficiency savings. The certificate can then be used to reduce the company’s annual tax liability. The S12L tool can be used for retrospective claims, provided that historic energy and production data is available and can be credibly validated.

There is an incentive for carbon emission reduction and Carbon Credits. There is a striking similarity between Carbon Credits and the APDP’s Production Rebate Credit Certificates, in that both have a tangible value and can be converted into cash as they are negotiable instruments. Carbon Credits can be either used to offset your Carbon Tax liability - provided that the carbon offset project falls outside of the company’s Carbon Tax boundary, or can be sold to willing buyers both locally or internationally. There is a healthy market for Carbon Credits with very willing buyers, especially in international markets which are dollar denominated.

Although the process of claiming Carbon Credits can be rather complex and onerous - there is an annual monitoring and evaluation requirement - the benefits window can be as long as 21 years, which makes for a compelling business case. When considering Carbon Credit generating projects, it is important to undertake a cost benefit analysis, to determine when the project will become cash positive.

Supplier Development
The topic of Enterprise and Supplier Development (ESD) is becoming increasingly important to the automotive sector. The enhanced AIS2 B-BBEE compliance requirements for component manufacturers of Level 6 in 2022, and Level 4 in 2023, mean that more focus needs to be directed to the B-BBEE scorecard. This cannot be an afterthought, something you only look at annually when you have to renew your B-BBEE certificate. It requires careful planning and execution.
Fortunately, there is the Strategic Partnership Programme (SPP), which offers support for the development and nurturing of small and medium-sized enterprises. The SPP objective fits hand-in-glove with the Masterplan’s objective of seeking to broaden the participation of emerging black-owned enterprises. The SPP offers a maximum grant of R15 million per annum over three years, on a 50:50 cost-sharing basis between the approved applicant and the dtic. Wouldn’t this be a wonderful way to enhance your ESD spend, using this support to scale up your ESD objectives?

Employment Incentives
Continuing with the topic of B-BBEE improvement, there is always YES! (Youth Employment Service) which aims to give experience to work-seekers through internships. The benefit of component manufacturers becoming involved with YES! is that it can result in a promotion of two levels on the B-BBEE scorecard if the programme is optimally deployed. This is a departure from the typical stick approach of discounting levels to punish poor performance. Instead, YES! provides a genuine carrot to companies to improve their overall B-BBEE rating. YES! offers additional B-BBEE scorecard points for the absorption of YES! interns. This does not necessarily have to be within your own business but could entail the placement of job seekers at another company. Then, as a double whammy, the absorbed interns could then migrate from Yes! to the Employee Tax Incentive (ETI).

This ETI is available to companies that are registered for Employees’ Tax, or PAYE (Pay As You Earn). It allows enterprises to claim reductions in PAYE without impacting the net earnings of the employee. There is an upper age limit of 29 for employees to qualify for the ETI. However, this age limit does not apply to enterprises located within a Special Economic Zone (SEZ).

There is a similar incentive related to employment and skills development, which is Section 12H of the Income Tax Act. This provides benefits to companies whose employees are involved in learnerships and provides another way for enterprises to secure points on the B-BBEE scorecard for existing initiatives.

B-BBEE is becoming a critical qualifying criterion for companies hoping to access the Automotive Investment Scheme (AIS), the APDP2, and other benefi ts offered by the government. The incentives mentioned here provide an attractive solution to companies who otherwise might not have been able to gain the necessary B-BBEE rating to maximise the support which they can claim.

The incentive programmes discussed so far are a snapshot of what is on offer. There are many other options available that need to be explored to optimise the support you can claim, and you need to comprehensively explore of all that is on offer to maximise government support for your company.

Cova Advisory