July 24th, 2012
1 person liked this article
South Africa’s call to companies around the world to help develop its lagging renewable energy sector has piqued the interest of major global players – and is resulting in billions of rands worth of investments into the country. Companies based in Europe, China and Saudi Arabia, among others, have already joined SA’s renewable energy programme.
As part of its Renewable Energy Independent Power Production (REIPP) programme, the South African government is hoping that 3 750 megawatts of power will come from renewable sources (Biofuel, Hydro-Power, Solar-Power, Wind-Power, Hybrid Systems and Tradable Renewables) by 2016. This is expected to lure around R70-billion worth of investment into the sector. To date, government has approved 47 preferred bidders, with construction on some of these projects expected to start soon.
Deloitte Western Cape Tax Director, Le Roux Roelofse, says government’s requirements have encouraged international groups to partner with local outfits. “Many of these foreign companies have either incorporated a local company, or have bought a local company, to be used as a vehicle in which their South African operations are to be conducted.”
According to Roelofse, if a company is incorporated in South Africa and managed here, it will be considered a tax resident in South Africa, and will have to pay South African tax on its worldwide income. He says, “The South African Revenue Service (SARS) assesses a company’s residency differently from the OECD Model Tax Convention. While the OECD Model places emphasis on identifying where strategic decisions and policies are taken to decide a company’s residency, SARS looks at where the company’s decisions and policies are executed and implemented.” He says SARS is now reviewing this approach to align itself with the OECD Model, although this has not been changed yet.
Companies should also take note of withholding taxes. SARS will levy a 15 percent withholding tax on dividends, interest or royalties paid by the SA subsidiary to its foreign holding company. However, he says the company may enjoy reductions if South Africa has a double tax agreement with the country in which the foreign holding company is tax resident.
Lance Collop, Tax Manager at Deloitte in the Western Cape, says companies involved in the renewable energy sector should pay particular attention to two specific sections in the Income Tax Act.
“Establishing a renewable energy project would under normal circumstances be of a capital nature, and would therefore not qualify for tax deductions. But, of particular interest for companies in this sector are the tax allowances specified in sections 12B and 12D of the act. These provisions provide for special deductions in respect of renewable energy projects.”
According to Collop, Section 12B contains a special deduction for machinery, plant, implements and articles used in the production of renewable energy, but only if these have been brought into use for the first time by the company, and are used solely for the generation of renewable power.
Section 12D allows for a special reduction when new or unused lines or cables for the transmission of power are bought. Collop says, “An allowance can be claimed in terms of this section in respect of the cost of transmission lines, which includes earthworks or supporting structures that form part of the transmission lines.” It is important to note that the taxpayer must own the assets for this section to apply.
Exit taxes are also applicable to foreign companies operating in South Africa. Roelofse says capital gains made by non-residents when they sell their South African assets will be subject to capital gains tax if these assets constitute immovable property, or an interest in immovable property in South Africa.
However, South Africa’s double tax agreements with certain countries provide relief from capital gains tax on the disposal of an interest in immovable property if the seller is tax resident in one of the countries covered by the agreement. “Where this is the case, capital gains made on the disposal of shares by the non-resident holding company will not be subject to capital gains tax in South Africa.”
Roelofse advises foreign companies working through a South African outfit in the sector to see an expert to determine tax implications and opportunities. “While this highlights some of the generic corporate tax issues, there are a number of factors to bear in mind when operating here.
It may be of significant benefit in the long run to better understand South Africa’s tax regime in general, and that of tax around renewable energy companies in particular,” he said.
