How global success of one-stop shops for investors can lift SA

Co-operation will spread the word about incentives and help ensure there are no problems after investment

12 OCTOBER 2017 - 05:48 DUANE NEWMAN AND MICHAEL HEWSON

 President Jacob Zuma. Picture: GCISPresident Jacob Zuma. Picture: GCIS

There was a fanfare for President Jacob Zuma when he was in Cape Town recently to launch a new one-stop shop for investors. The aim is simple: to gather together all those in the government who could slow down an investment decision and get them to work together to fast-track the process.

A similar initiative was launched earlier in 2017 by the president at the Department of Trade and Industry campus in Pretoria.

These are positive developments, in line with what has been done by those other countries that successfully stimulated growth and foreign direct investment. Leaders in Singapore and Hong Kong have made doing business in their countries considerably easier than it was in the past.

South Africans should not need to be reminded that when we work to attract investors, they often have a wide choice of locations to choose from and, if the barriers and red tape in our country are too onerous, can easily opt to place their new plant or other facilities elsewhere.

The president says the NDP is not sufficient anymore, and the Invest SA OSS makes it easy for an investor to get all the necessary services under one roof

The recent release of the Global Competitiveness Report showed SA sliding 14 places in the rankings to 61st, which should be worrying for business and the government. What is surprising, though, is that tax rates moved up to the fourth most problematic factor when doing business in SA.

From our experience, the key to the success of a one-stop shop initiative is the collaboration between the public and private sectors.

While these one-stops are important in attracting investment, it is also important they focus on getting up-front private sector input to ensure there are no problems after investment.

Take a relatively unknown Treasury tax offering known as the headquarter company regime. This offers tax and exchange control benefits and is designed to ensure that when a large company moves into Africa, it uses SA as its gateway to the continent, rather than other available entry points such as Kenya or Mauritius.

But how many companies have considered this tax break and exchange control relaxation mechanism? Very few. It is a good idea, which should bring more investment, but for various reasons, it hasn’t been used to the extent envisaged. Perhaps further engagement between the public and private sector is required to fine-tune and then market the initiative. It was introduced for a good reason, but can only be effective if it is better understood, and if more companies decide to sign up for it.

The same goes for a whole range of other tax incentives. Even if companies have heard of them, the incentives can often be complex and may be managed by more than one government department or have an effect on more than one tax.

In this age of robotics, it is often the component makers that can offer the most employment opportunities

Take special economic zones, which offer benefits involving reduced levels of income tax (15%), PAYE, customs and value-added tax (VAT). Some firms have decided to locate their businesses in these zones, but we would argue that this programme could, and should, be far more effective and better understood by business and the government.

All known administrative challenges should be fixed immediately.

Incentives can play a key role when large multinational enterprises evaluate the countries in which they want to set up their operations. For example, it was the automotive incentive programmes in SA that resulted in large global original-equipment manufacturers and their component suppliers using SA as one of their key manufacturing hubs, creating significant jobs in the process.

This programme is being revised to ensure that there is more focus on black economic empowerment (BEE) and on job creation, with a big drive to boost the local content in the vehicles that are assembled here.

In this age of robotics, it is often the component makers that can offer the most employment opportunities.

When evaluating the incentives offered in different countries, the degree of policy certainty in those countries may well be a key factor. What we mean by this is that companies need an assurance that if they do apply for various tax breaks and cash grants, which may tilt the balance in favour of an investment decision, this will not come back to bite them.

Does the fact that the incentive might come back to bite them sound absurd? Well, there are examples in Africa of companies that find themselves being penalised for latching on to tax breaks.

One good example is when investors are offered tax holidays — a period of low or zero tax to support them as they start up. There have been recent examples (outside SA) where companies have taken advantage of tax breaks and then found themselves being investigated because it is thought they are paying too little tax when this has been flagged during a transfer-pricing audit.

This can have major reputational repercussions, especially if it is assumed that they are paying little tax because of their transfer-pricing policies rather than understanding that it is because of their use of the incentives they were offered and granted by the government of the particular country as an inducement to operate there.

For companies that are aiming to grow and expand their operations, it is worth properly understanding the degree of policy certainty in each country, as well as the various incentives that may be available. It is also important to consider how these available incentives would affect their transfer-pricing policies.

While businesses may be aware of certain incentives, there may be others for which they could qualify and that could influence their decision to expand (further) in SA rather than abroad — or to use SA as a key part of their global expansion plan.

That is why it is hoped all the expertise that will be needed to market and implement these initiatives — including input from independent private sector experts — will be on the menu of the one-stop shops.

We have been involved in recent examples where this was not the case and proper VAT and customs advice was not obtained by a large investor setting up in a special economic zone, resulting in changes to engineering, procurement and construction contracts after the project was started. Rather embarrassing.

Those of us who monitor and advise industry on incentives, BEE and related issues daily know all too well that there are subtleties in the application of the rules that may not initially be easy to spot.

Seeking the right advice can make all the difference in ensuring that what seems to be an attractive shop window has no nasty hidden surprises. The real world of investment should not turn out like a Stephen King novel.

• Newman is a cofounder of Cova Advisory and Hewson the founder of Graphene Economics.