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Tax News - October 20122

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Contents

In this issue... .............................................................................................................................1

Professional Profile: Patrick Earlam .............................................................................................2

Attractive tax deductions and allowances available to manufacturers in South Africa ...............3

VAT implications arising from “Contract Manufacturing” ...........................................................5

Toll manufacturing versus contract manufacturing .....................................................................8

MCEP - Broadening the incentive horizon for R&D activities in the manufacturing sector ...........11

Protectionism versus the reduction of customs duty, a balancing act .........................................12

Automotive industry: Gearing up for the APDP ..........................................................................14

Spreadsheets for Tax Professional - Are You Exposed? ................................................................18

The Deloitte School of Tax ..........................................................................................................20

Contacts .....................................................................................................................................22


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In this issue...

In this edition of Tax News, we look at some issues that are relevant to many corporate taxpayers in South Africa but that will be of particular interest to those involved in the manufacturing industry, including the incentives and tax allowances available to manufacturers, income tax and VAT issues relating to contract and toll manufacturing arrangements, and the Department of Trade and Industry’s new Automotive Production and Development Programme (APDP).

We consider the research and development (R&D) tax allowance claimable under section 11D of the Income Tax Act and the cash grant that is available to manufacturers under the Manufacturing Competitiveness Enhancement Programme (MCEP), and we examine the relief that businesses can obtain against the threat of cheap imports and customs duty by way of tariff lobbying with the International Trade Administration Commission of South Africa (ITAC).

This edition also contains a thought-provoking article that outlines the significant risks that tax and finance departments face by using spreadsheets and how these issues can properly be addressed, and we provide an update on the curriculum of our tax training solution, the Deloitte School of Tax.

In our personality slot, we profile Patrick Earlam, who heads up our Manufacturing group for the South African tax practice.

We trust that you will enjoy and benefit from the content in thispublication.

Please feel free to provide us with your feedback via e-mail:

Mark Silver: [email protected] Wilson: [email protected]



Professional Profile: Patrick Earlam

Patrick heads up the Manufacturing, Automotive and Construction industry Tax Team within Deloitte Southern Africa. He specializes in South African corporate income tax.

Patrick joined Deloitte in 1990, and completed his articles with the Audit practice, before joining the Tax department. He was appointed to the partnership in March 1999.

Over the years Patrick has lead the Johannesburg Corporate tax team, spent three years as a Tax Director in the Deloitte Pretoria office, was the Staff Director for the South African Tax practice, and has a number of years’ experience in the Black Economic Empowerment, cultural diversity and internal transformation initiatives in the South African tax practice, as well as Learning processes and methodologies.

In addition to the Tax Manufacturing team, Patrick currently leads the Chemicals sub-industry for Deloitte Southern Africa, as well as the Tax Risk Management, and Compliance and Reporting Services Tax Signature Solutions.

Patrick consults to various listed and large clients in manufacturing and other industries, including AECI, Nampak, Murray and Roberts, Crowie, Weir, Transnet, Neotel, Samsung, Adcorp, Tsebo and Tourvest.

Patrick Earlam Director - TaxChemical and Tax Manufacturing leader

Tel +27 (0)11 806 5691Cell: +27 (0)82 556 9464 [email protected]



Attractive tax deductions and allowances available to manufacturers in South Africa Investors are often pleasantly surprised to hear about the generous tax allowances available to South African taxpayers involved in the business of manufacture or a process similar to manufacture. In this article, we will briefly touch on some of the more relevant deductions and allowances in this regard.

Based on case law, for a process to be one of “manufacture”, it has to produce an article essentially different from the article as it existed before under-going the process. A process of manufacture, or a process similar to manufacture, is further clarified in Practice Note No. 42 issued by the South African Revenue Service (“SARS”) by way of 127 examples provided.

A process of manufacture for tax purposes would, for example, include anything from shoe repairing and baking bread to the construction of buildings and roads. However, certain processes are specifically excluded from constituting “manufacturing”, such as vacuum packing, storage freezing facilities and the erection of transmission line towers on site. This Practice Note was issued in 1995 and one wonders if it is not time for SARS to update the publication with recent technology and new manufacturing processes developed during the past 17 years. The Practice Note does not, for example, cater for processes such as water bottling, purification, etc. Nevertheless, taxpayers conducting manufacturing processes can qualify for allowances of up to 40% (40% in the first year, and 20% for each of the next 3 years) in respect of certain qualifying equipment,1 and 10% (each year for 10 years) in respect of buildings or improvements2 used in a process of manufacture. These allowances may even be available to lessors who rent out such equipment or buildings to persons involved in a process of manufacture or a process similar to manufacture.

It is not always clear whether an expense incurred by a manufacturer is of an income or capital nature. The principal test is whether the expense is regarded as part of the manufacturer’s income-earning operations (in which case, it will be revenue in nature) or enhancing the manufacturer’s income earning structure (in which case, it will be capital in nature).

• In the New State Areas case3, it was held that sewers constructed on a taxpayer’s property formed part of the taxpayer’s income-producing structure (capital in nature) but that sewers constructed off the taxpayer’s land did not form part of its income-producing structure and therefore represented expenditure of a revenue nature.

• Manufacturers should therefore always first determine whether an expense which may appear to be capital in nature on face value, could not potentially be claimed as a revenue expense. This was the case in Phalabora Mining Co Ltd4, where the taxpayer constructed a dam for the Phalabora Water Board to secure a water supply for the start-up of its plant. The court held that the taxpayer’s loss in respect of the construction of the dam was of a revenue nature as the sole purpose of the expense was to accelerate the earning of the taxpayer’s profits and was closely linked to the taxpayer’s income-earning profits.

• It often happens that tax deductible expenditure, such as repairs and maintenance, is capitalised to the cost of equipment for accounting purposes. These expenses may comprise tax deductible expenditure5 that should be claimed during the year in which the expense is incurred. However, these expenses should be excluded from the costs of the assets on which tax allowances are claimed.

1 Section 12C of the Income Tax Act2 Section 13 of the Income Tax Act3 1946 AD 610, 14 SATC 1554 1973(3) SA819, 35 SATC 1595 Section 11(d) of the Income Tax Act



• Manufacturers typically receive income in advance to finance expenditure in respect of bigger projects. In this situation, section 24C of the Income Tax Act provides for an allowance (to be claimed against such income), which is based on the taxpayer’s future expenditure with regard to a contract. Although this allowance needs to be added back in the taxpayer’s following year of assessment, it provides significant cash flow relief as the taxpayer is effectively only taxed on the gross margin of a contract during the year in which the advance income is received.

• Where income is recorded for accounting purposes but is subject to certification, it is important to note that such income will only accrue for tax purposes where there is unconditional entitlement to such income i.e. upon certification. It is also worthwhile to note that accounting income in respect of retentions may be excluded for tax purposes on the basis that the income has not yet accrued to the taxpayer. The above brief overview of potential tax deductions and allowances available to taxpayers operating in the manufacturing industry highlights the fact that it is important that taxpayers in this sector ensure that they make full use of the tax relief available.

Article contributed by:

Hildegarde CronjeAssociate Director - TaxTax Construction leader

Tel: +27 (0)11 806 5345Cell: +27 (0)82 824 [email protected]



VAT implications arising from “Contract Manufacturing” Manufacturing is defined as the making of “(something) on a large scale using machinery”6. Invariably, it is far more intricate a process than that suggested in the simple definition provided and it will often vary in form according to the industry within which it takes place. However, regardless of the nature of the industry and specific goods produced, manufacturing may be found to occur in two types of circumstances: manufacturing and contract manufacturing. Herein lie VAT complications and understanding the difference between these two different types of manufacturing often leads to confusion and incorrect VAT treatment.

In this article, we examine manufacturing and contract manufacturing further, with the aim of highlighting some of the relevant VAT issues and how these issues may impact on South African and foreign businesses.

Manufacturing (as opposed to contract manufacturing) may be explained as the manufacturing of goods or components which are owned by the manufacturer. Contract manufacturing, on the other hand, has been defined as the “[p]roduction of goods by one firm, under the label or brand of another firm. Contract manufacturers provide such service to several (even competing) firms based on their own or the customers’ designs, formulas, and/or specifications. Also called private label manufacturing.”7

[See also the definition provided in the article “Toll manufacturing versus contract manufacturing” that follows] In this context (i.e. contract manufacturing), the components used in the production process remain the property of the “customers” and do not become the property of the contract manufacturer. Similarly, the finished goods would be the property of the customer. Upon completion of the manufacturing process, the

contract manufacturer may deliver the goods to their customer or may be required to deliver directly to recipients of their customers. Specific difficulties arise when the customers or recipients of customers are foreign companies and components used in the production process have to be imported into South Africa and are subsequently exported upon completion of the manufacturing. The following simple example places these specific difficulties into context:• A foreign company, situated outside of South Africa and which is not

registered for VAT in South Africa, contracts with a manufacturing company in South Africa. In terms of the contract, the foreign company will send stock, on consignment, to the South African contract manufacturer.

• The South African contract manufacturer imports the necessary components, pays the VAT and customs duties upon importation and then claims an input tax credit for VAT on the components imported.

• The components are then used in the manufacturing process in order to produce an end product.

• The South African contract manufacturer then exports the completed products (either the full production line or a certain percentage) to various countries as designated by the foreign company. To this extent, the South African contract manufacturer zero rates the exports for VAT purposes.

• The contract manufacturer charges a manufacturing service fee for the manufacturing process.

6 Oxford English Dictionary (Third Edition) Oxford University Press (2010)7 BusinessDictionary.com Contract Manufacturing. Available at http://wwwbusinessdictionary. com/definition/contractmanufacturing.html [Accessed 13/10/2012]



While the above may appear straight forward, it is important to note that issues may arise in respect of the following:1. input tax deductions claimed by the South African contract

manufacturer on imported components, 2. the VAT treatment on the export of the manufactured goods, and 3. zero-rating the contract manufacturer’s service fee

to the foreign company.

Of relevance to the first issue, is that the word “acquire”, as contained in the definition of “input tax” in the VAT Act, may be interpreted in a broad or narrow manner. Thus, claiming an input tax deduction in the circumstances described is subject to some debate and contract manufacturers should seek advice in such situations to ensure that the importation of the foreign customers’ goods is dealt with correctly from a VAT perspective.

In the context of the second issue, the contract manufacturer, who is not the legal owner of the goods manufactured, may effectively be acting as ‘agent’, in many respects, for the foreign customers. ‘Agent’, which is not specifically defined in the VAT Act, is defined elsewhere as “a person who acts on behalf of another, in particular… a person or company that provides a particular service, typically one that involves organizing transactions between two other parties…”.8 Whilst the word ‘agent’ is not specifically defined in the VAT Act, the VAT Act does set out clear rules and provisions that are applicable where a VAT vendor acts as agent for another.

In terms of the VAT Act, an agent, who is a VAT registered vendor, may issue a tax invoice on behalf of the principal as if the agent were in fact the principal but, in these circumstances, both the agent and the principal must be registered VAT vendors in South Africa. A contract manufacturer may not issue a tax invoice for manufactured goods which are exported as no supply is made between the manufacturer and the foreign company since the foreign company at all times remains the owner of the goods.

Furthermore, since the export does not constitute a “sale” by the contract manufacturer and, as such, the contract manufacturer may not apply VAT at the rate of zero percent, declosing these as exports in the VAT return, will lead to further issues if SARS requests a reconciliation of the contract manufacturer’s income tax records to its VAT returns in terms of the new IT14SD reconciliation.

8 Oxford English Dictionary (Third Edition) Oxford University Press (2010)



There may be various scenarios, other than invoicing, where a contract manufacturer acts as “agent” for its foreign customer/s with respect to goods received, manufactured and re-exported. Various rules must be adhered to and complied with for VAT purposes, and often a local contract manufacturer does not satisfy such provisions when the principal is a non-resident and not registered for VAT in South Africa. It is, therefore, crucial that, in relevant circumstances, the VAT implications of the proposed transactions be considered carefully.

The question of whether a contract manufacturer can levy VAT at the zero rate on its service to the foreign customer should also be considered carefully. There is a possibility that services rendered to the foreign customer, especially with respect to any goods which may remain in South Africa or which are not subject to export as defined in the VAT Act, may not be zero rated. To the extent that zero rating is permitted, there are various technical, documentary and timing requirements that have to be adhered to in this regard, prior to such zero-rating.

Where the contract manufacturer delivers to a customer’s local recipient, an additional consideration would be to determine whether the foreign customer has a liability to register for VAT in South Africa.


Anne BardopoulosAssistant Manager - Tax Tax Industrial Products leader

Tel: +27 (0)11 209 8671Cell: +27 (0)82 960 4800 [email protected]

Suzanne van der MerweDirector - Tax

Tel: +27 (0)11 209 6779 Cell: +27 (0)76 769 5930 [email protected]



Toll manufacturing versus contract manufacturing1. Meaning of the terms toll manufacturing and contract manufacturingWhen advising multi-national groups, one is often confronted with the terms “toll manufacturing” and “contract manufacturing”. These two concepts are closely related but also have different meanings. The difference is very important and plays a vital role in the various tax consequences that have to be considered.

The essential attribute of toll manufacturing is that ownership of the goods remains with the client throughout the entire manufacturin process.

This could be illustrated as follows: • Company X is in the electronic appliance business and sources

electronic television parts locally in South Africa, after which these are exported to Company Y, situated in China.

• In terms of an agreement entered into between Company X and Company Y, Company Y undertakes to assemble the television sets and export the final products back to Company X in South Africa.

• At no stage of the supply chain is ownership transferred to Company Y and no risk is carried by Company Y in respect of the assembly process. Therefore, for example, if the ship transporting the completed television sets sinks, the resultant loss would be borne by Company X. The same principles would apply if something were to happen to Company Y’s factory (for example, if it were to burn down). Therefore, it is Company X’s responsibility to insure the components and the completed sets.

The term contract manufacturing is slightly looser and sometimes includes toll manufacturing as already described [in this regard, refer to the preceding article in this publication on VAT issues relating to ‘contract manufacturing’]. However, the more usual meaning (and the one that applies for purposes

of this article) involves a transaction in terms of which the input parts are sold by the client to the manufacturer (i.e. transferring ownership); the manufacturer will assemble the final product and then re-sell the final product (i.e. transferring ownership) to the client.

This could be illustrated as follows: • Company X, which is incorporated in Germany and is in the motor

vehicle industry, sources motor vehicle parts locally and sells these to Company Y, situated in South Africa.

• Company Y then assembles the final motor vehicle and re-sells it to Company X for sale to potential customers (often in countries which also have right-hand-drive vehicles, like Australia).

• In terms of the manufacturing agreement entered into between Company X and Company Y, Company Y will not only have ownership of the goods, but also carries the insurable risk in respect of the goods (components and completed vehicles still in their possession) in South Africa.

2. Tax considerationsFrom an income tax point of view, there are two main issues to beconsidered. The first of these is whether, where the toll or contract manufacturer is situated in a different country from the client, the arrangement gives rise to a taxable presence (also called a “permanent establishment”) for the client in the country where the toll or contract manufacturer is situated. The second issue is the transfer pricing implications of the arrangement – and specifically what economic return should be earned by the manufacturing entity.



A significant advantage of contract manufacturing as opposed to toll manufacturing is that a taxable presence is usually avoided. This is because, in the case of the former, the arrangement generally involves the sale of components and thereafter the sale back of completed items. However, during a toll manufacturing arrangement, the manufacturer is rendering a service to the client in respect of goods which are the client’s property. Therefore, there is a much greater risk that these activities will give rise to a taxable presence for the client.

During the toll manufacturing process, the potential risk of creating a taxable presence (a permanent establishment) in the country in which manufacturing will be taking place is very low, if all the actions taken are limited to assembly/manufacture only. A“permanent establishment” is a tax treaty term and, if created in a country, will result in all the profits attributable to the permanent establishment being taxable in that country. In most instances, a tax treaty will deem, inter alia, a factory, a branch and a workshop to constitute a permanent establishment, but if these premises are only utilised for processing by another enterprise, this is usually specifically excluded from the definition of a permanent establishment.

However, the risk of a permanent establishment increases significantly when the client considers also selling some of the finished goods in the particular country in which manufacturing is taking place and the toll manufacturing entity sells on the client’s behalf. This selling activity will cause the activities taking place in the country of manufacture to exceed the ambit of the exemption of processing by another enterprise in the permanent establishment definition.

The selling activities undertaken in the country of manufacture will usually take place under an agency agreement, which is specifically included in the definition of a permanent establishment. If an agent, of dependent status,

has the authority to conclude contracts on behalf of its principal and regularly does so, the activities will be deemed to constitute a permanent establishment.

These additional selling activities are therefore likely to create a permanent establishment for the client in the country of manufacture and result in all the profits attributable to the permanent establishment being taxable in that particular country. This will require the principal to register for income tax and to follow what may be a cumbersome compliance process in that country.

Indirect taxes (such as VAT and Customs duty) should also not be overlooked as these are impacted upon by the transaction flow of the proposed manufacturing type embarked on.

From a transfer pricing point of view, both contract and toll manufacturing arrangements usually form part of so-called “limited risk” structures within multi-national groups. These structures are often (although not always) designed to try to ensure that significant group profits are earned in a location with a favourable tax rate. The manufacturing entity (often situated in a relatively highly taxed location) earns a limited but more-or-less guaranteed return, while the client (ideally situated in a lower tax location) carries the bulk of the risks (and therefore earns the lion’s share of the profits or losses from the value chain). The practical implementation of these arrangements usually varies.

A toll manufacturing arrangement usually involves the manufacturing entity being paid a fee for its services. Such a fee is often calculated on a cost-plus basis. In other words, the relevant costs of the manufacturer are determined and an appropriate margin or mark-up is added to these costs in order to ensure that the manufacturer earns a profit.



As regards contract manufacturing arrangements, these can also involve the payment of a contract manufacturing fee. In other words:• The components are sold to the manufacturer by the client (usually at

cost)• The completed goods are sold by the manufacturer to the

client – also at cost• The manufacturer charges the client a separate contract manufacturing

fee (calculated in the same manner as for a toll manufacturer)

However, this version of the arrangement tends to run into difficulties when a portion of the manufactured goods are not exported to the client but are retained for re-sale in the local market. For example, as mentioned earlier in this publication, in terms of South African VAT law, there are difficulties with zero rating that portion of the contract manufacturing fee which relates to the goods to be retained in South Africa. Therefore, in practice, it is much more common for the contract manufacturer’s return to be built into the price at which the completed goods are sold back to the client. 3. ConclusionBoth of these types of manufacturing activity (toll manufacturing and contract manufacturing) have important tax considerations that have to be considered carefully. This article has dealt mainly with the income tax aspects but the customs duty and VAT implications, which can be equally complex, also warrant careful consideration.

Our specialised team at Deloitte has extensive experience in this area and we are able to assist you to ensure that these arrangements are carefully researched and implemented.


Billy JoubertDirector - Tax Transfer Pricing leader


Louise VoslooDirector - TaxInternational Tax leader




MCEP - Broadening the incentive horizon for R&D activities in the manufacturing sectorCompanies that rely on a technology-and/or science-rich backbone for their products and processes to compete in the market, receive assistance for research and development (R&D) by way of a supercharged tax incentive (section 11D of the Income Tax Act) that essentially allows for an after tax benefit of 14% for all qualifying R&D related expenses at an uncapped value.

At the time of implementation in 2007, this tax incentive was primarily directed towards the discovery and development of novel information related to the field of science and technology, but the incentive has subsequently (as recently as 1 October 2012) been adapted to also provide assistance for the development and improvement of available intellectual property (IP) that would lead to enhanced functionality, performance, reliability or quality. The incentive is meant to encourage companies to carry out R&D activities in South Africa, and ultimately establish and strengthen the knowledge-based economy of the country.

The incentive has, however, not come without its challenges. Apart from businesses being unaware of the incentive, the uncertainty as to what qualifies for the incentive, and the often complex motivation required in order to substantiate the investigative and experimental activities executed by these companies, has meant that the incentive has not been as accessible as desired.

The Manufacturing Competitiveness Enhancement Programme (MCEP), introduced by the Department of Trade and Industry (DTI) in May 2012, is not yet well known. This programme, although still in its infancy and in need of proving itself, could prove to be a worthwhile alternative incentive to explore for companies performing and/or applying the outcome of certain R&D in the manufacturing sector. The Enterprise-Level Competitiveness Improvement component of MCEP aims to improve the

competitiveness of enterprises through the enhancement of conformity assessments, and the improvement of processes, products and related skills development through the use of business development services (in essence, all those deliverables that a R&D division would also aim to achieve for its stakeholders).

The advantage offered by this incentive is that it is a cash grant (as opposed to a tax incentive, like section 11D). The grant is capped on a sliding inverse scale of between 7% and 15% of a company’s gross profit, depending on the historical cost of its assets and black shareholding. The cash grant will match the qualifying expenditure by 70%, 60% or 50% of the costs incurred, depending on the historical cost of assets.

Comparing the 50% cash grant on offer from MCEP to the additional 14% cash back on offer under section 11D, it might make sense to look at MCEP as a suitable incentive for your business. Although the MCEP grant may be taxed in terms of the proposed section 12P of the Income Tax Act, the MCEP represents an attractive incentive for manufacturers engaged in performing R&D activities.

Article contributed by: Barry DrotscheAssistant Manager - Tax


Izak SwartDirector - Tax




Protectionism versus the reduction of customs duty, a balancing act In these tough economic times, characterised by businesses struggling to remain competitive, an option open to industry is to apply for assistance against cheap imports or for customs duty savings opportunities by way of tariff lobbying with the International Trade Administration Commission of South Africa (“ITAC”).

ITAC is a government body that makes decisions on import tariffs for specific domestic industries. The decisions are made in line with the Department of Trade and Industry’s (“DTI”) policies and are finally decided on by the Minister of Finance.

The International Trade Administration Act 71 of 2002 (“ITA Act”), which came into effect on 1 June 2003, replaced the Board on Tariffs and Trade Act of 1986 and the Import and Control Act of 1963. The ITA Act forms the basis of the operations of ITAC.

ITAC’s role is to create and enable an environment of fair trade in the Southern African Customs Union (“SACU”), aligned to the objectives of the DTI, in order to contribute to economic growth, employment and equity in the region.

ITAC consist of three main pillars:

To date, ITAC has issued twelve reports on tariff investigations in 2012:

Type of application approved by ITAC:

Quantity:

Increase in the rate of customs duty

4

Anti dumping investigations 3

Sunset reviews 1

Creation of rebate provisions 3

Reduction of the customs duty

1

Table 1: ITAC reports issued during 2012

The abovementioned table shows the level of activity by industries in South Africa focused on the need for protectionism. Examples are in the agricultural industry, TV aerials and various products in the steel industry (eg steel sinks, lawn mower blades and fully threaded screws).

Trade protection is typically used by countries to protect new industries, normally in the manufacturing sector (for example, in the automotive and textile clothing industries that are labour sensitive) against cheap imports or specific dumping of products in the domestic market. This may result in protection but can also encourage un-competitiveness.

Customs duty rates should be seen as a temporary measure to protect an industry until it becomes competitive. In the current tough economic climate the time is right for manufacturing industries to make an assessment on whether tariff protection is required. An effective rate of protection could assist industries to become more competitive and it could lead to the creation of additional jobs, something that is urgently required in South Africa.

Tariff Investigations Trade RemediesImport and Export

Control



Many manufacturing companies in South Africa have to import raw materials used in a manufacturing process that are not available within SACU. In this context, ITAC provides various possibilities in the form of rebate provisions, reduction of the customs duty on specific products and, in some cases, additional tariff subheadings may be created for unique products imported.

In terms of government’s specific focus on infrastructure development, specific rebate provisions can be created for particular macro projects, for example, the “Gautrain Rapid Rail Link” project, where a rebate provision has been created for all goods of any description used in the construction of the infrastructure known as the “Gautrain Rapid Rail Link” (subject to a specific permit issued by ITAC).

Another specific rebate provision in the construction industry was created for all goods used in the construction of the multi-products pipeline for the transportation of petroleum products from Durban to Gauteng.A recent application for the reduction of the customs duty on generators has been approved by ITAC from 10% to free-of-customs duty. These generators will be used in the construction of infrastructure and also new buildings are often fitted with generators as a standard service.

Construction companies have to work out potential cost savings when determining their CAPEX for large projects and they should consider alternative methods for saving customs duties on imported raw material and products, relating to specific infrastructure projects. For example, a feature that many companies are not aware of (and that may prove useful in our current environment) is that there is a rebate provision for machinery and mechanical appliances and electrical machinery and equipment which is imported in more than one consignment as a result of strikes, shutouts or other causes beyond the control of the importer and the supplier, subject to the prior approval of the Commissioner.

A comprehensive analysis is needed, taking into account your particular situation as a company and what you currently need to be more competitive, to determine the most appropriate solutions and actions steps for your context.

Article contributed by: Wian de BruynAssociate Director - Tax


Jed MichaletosDirector - Tax Customs leader

Tel. +27 (0)11 806 5621Cell: +27 (0)83 630 4198 [email protected]



Automotive industry: Gearing up for the APDP

Manufacturers in the automotive industry are busy preparing themselves for the change from the current Motor Industry Development Programme (“MIDP”) to the Automotive Production and Development Programme (“APDP”), with effect from 1 January 2013. However, not everyone involved in the automotive industry is fully conversant with the mechanics of how the APDP will work.

The majority of traders involved in the automotive industry understand why there is a need to change from the MIDP to the APDP. Essentially, this change is necessary to align the South African model with the World Trade Organisation’s (“WTO”) agreement on subsidies and the countervailing measures under the 1994 General Agreement on Tariffs and Trade. Whereas MIDP is an export-based incentive, and therefore a WTO “prohibited” subsidy, the APDP is a production-focussed incentive. As such, it is supported by the WTO.

To understand the APDP, it is important to first have a high-level view of the various aspects of the APDP programme. In this connection, the APDP consists of four main pillars:

A light motor vehicle manufacturer (an “OEM”) has a liability for customs duty on the customs value of imported components and on the import content of locally-sourced components. These components might be used by the OEM in the manufacture of completely built-up light motor vehicles, or used to manufacture original equipment components for other OEMs, or as replacement or service parts. This customs duty liability is determined by an OEM on a quarterly basis and the dutiable value is taxed at the prevailing rate of customs duty (i.e. 20%).

APDP

ImportDuty

1

CustomsDuty Rebate Mechanism Cash

Grants

VolumeAssemblyAllowance

(VAA)

2

ProductionIncentive

(PI)

3

AutomotiveInvestment

Scheme(AIS)

4



The dutiable value of the components is first reduced by way of various “deductions”. These include “deductions” for components used by the OEM to manufacture original equipment components which are supplied to other OEMs, returned to overseas suppliers, exported, transferred to parts and accessories, used in the manufacture of light motor vehicles which are exported, as well as components which are destroyed under Customs supervision. The remaining customs value is then further reduced by way of any VAA and PI rebates, in order to arrive at the dutiable amount.

The Volume Assembly Allowance (“VAA”) is aimed at enabling OEMs who produce 50 000 or more vehicles annually (not by model) to receive an additional customs duty rebate, irrespective of the OEM’s market focus (i.e. local or foreign). The Production Incentive (“PI”) is a tradable duty credit based on production output. A successful applicant for a PI will receive a Production Rebate Credit Certificate (“PRCC”). The PRCC can be used to claim a customs duty rebate against future automotive component and light motor vehicle imports, or to claim a refund of customs duties paid on past component or motor vehicle imports. If a PRCC was issued for the production of automotive components and is then used to rebate the customs duties payable on the importation of motor vehicles, the value of the PRCC is reduced by 20%.

The Automotive Investment Scheme (“AIS”) is a business finance incentive, payable over three years in the form of a taxable cash grant of 20% of the value of qualifying investment in productive assets, designed to grow and develop the automotive industry through investment in technologically-advanced automotive production and investment.

A proposed amendment to the Income Tax Act might see this incentive being paid out “tax-free”, subject to a corresponding reduction in tax allowances on the productive assets acquired with the incentive. Manufacturers of automotive components can also qualify for the PI and AIS benefits. However, to qualify for the PI, an automotive component manufacturer must obtain an eligible production certificate and have at least 25% (or R10 million) of its automotive turnover coming from local and/or export sales to OEMs.

The governing legislation pertaining to the draft APDP legislation is contained in the Customs and Excise Act, 1964 (the Customs Act), read together with the Schedules thereto and the Regulations for the Administration of the APDP. The APDP Regulations should be read together with Rebate Item 317.03 and the information documents (“Info Docs”) issued by the International Trade Administration Commission of South Africa (“ITAC”).

The Info Docs explain the mechanics of the APDP. Set out below is a high level overview of what is contained in the various Info Docs and how it needs to be applied:



Info Doc A/2013

(Production Rebate Credit Certificates)

Info Doc B/2013

(Company Specific Percentage used to calculate the Volume Assembly Allowance)

Info Doc C/2013

(Declaration of Foreign Currency: Form C1)

Parties •Vehicle manufacturer can earn PRCCs•Component manufacturer can earn PRCCs

Only vehicle manufacturer to submit company specific percentage calculation for the purposes of determining a VAA

Component manufacturers supplying components to vehicle manufacturers (OEMs)

Documents •Submit an application to ITAC for a PRCC •Receive a PRCC from ITAC

No certificate Complete a Form C1 to declare the FOREX content of automotive components

Benefit •DA199 Account: Vehicle manufacturer to use PRCC’s to rebate the FOREX content of components used in the manufacture of specified motor vehicles

•SAD500: Vehicle manufacturer to use PRCC’s (reduced by 20% if the PRCC was earned from the production of automotive components) to rebate the duties on imported vehicles (rebate item 460.17)

•DA199 Account: Vehicle manufacturer to use VAA to rebate the duties on imported components

•SAD500: Vehicle manufacturer to use excess VAA, reduced by 20%, to rebate the duties on imported vehicles listed in rebate item 460.17

Pay on the FOREX usage only

Products PIs can be claimed against the following products:

•Motor Vehicles of chapter 87•Automotive components of chapter 98

VAA can be used on the following products:

•Automotive components for parts and accessories•Specified motor vehicles

FOREX is determined on:

•Automotive components in the automotive supply chain

•Material in the automotive supply chain

Rebate Items Schedule No. 3 of the Customs Act and Rebate Item 317.03 Schedule No. 4 of the Customs Act and Rebate Item 460.17

No rebate item

Refunds •Specified motor vehicles: Schedule No. 5 of the Customs Act and Refund Item 537.03

•Automotive components: Schedule No. 5 of the Customs Act and Refund Item 538.00

Excess VAA carried over to the following quarter in the DA199 Account

None



The APDP programme, similar to the MIDP programme, is complex since it covers various customs aspects such as duty liability, storage requirements, rebates and refunds. It is therefore important that OEMs and component manufacturers view and manage their import, storage, manufacturing and export activities holistically in order to achieve full compliance and enjoy all of the benefits provided by the APDP.

Those involved in the automotive industry will agree that knowledge relating to the APDP is critical to have, although it will certainly require some work to achieve this. The end result of this programme is clear and is to be welcomed: the APDP is intended to create an environment that will enable OEMs to significantly grow production volumes and enable component manufacturers to significantly grow value addition so that they can provide cost competitive components to the OEMs and to international automotive supply chain markets via exports.


Peter Maxwell Director – TaxTax Automotive leader

Tel: +27 (0) 31 560 7067Cell: +27 (0)82 551 6434 [email protected]

Ronnie van Rooyen Associate Director - Tax

Tel: +27 (0) 31 560 7418Cell: +27 (0)83 653 6932 [email protected]



Spreadsheets for Tax Professionals- Are You Exposed?Any decent software application today progresses through the SDLC, well-known to anyone in the IT industry as the Software Development Life Cycle.

The SDLC is the cycle of an application involving many role players, generally beginning with the Analysis phase, moving through Design & Development, and ending with Testing & Implementation, before cycling back to Analysis for further enhancements.

Spreadsheets are also a form of software application but rarely follow the SDLC and often a spreadsheet user is simultaneously owner, developer, programmer, tester, and end user. While programmers are trained in structural analysis and programming methods, most spreadsheet users are not, and while most applications have application level-security, spreadsheets frequently do not. With no intrinsic audit trail, spreadsheets can be modified at any time, with no history kept of these modifications. Spreadsheet applications can also be an incubator for compounding issues, leading to a downward spiral of misinformation.

Some of the key advantages of spreadsheets, such as the ability to create quickly and the ability to share and modify the content, also pose the greatest risks. Spreadsheets are stand-alone files and are practically devoid of system-wide controls. Employees can create, access, manipulate and distribute spreadsheet data and consequently these employees can easily make a critical error while entering this data or configuring formulas. Seemingly innocuous errors, such as a bracket in the wrong place or an incorrectly structured nested IF statement, could have disastrous financial and tax consequences.

A Risk Intelligent approach to the most effective and streamlined spreadsheets has direct benefits for financial reporting and tax processes. In this regard, a Tax Manager should ask the following important questions:• During the tax reporting process, am I harnessing the power of Pivot

Tables, Pivot Charts, Slicers, Goal Seek and Sparklines, in addition to the many other advanced reporting features within Microsoft Excel?

• Am I following the best approach when consolidating spreadsheets from different branches/companies, or are there ways to automate the process and reduce errors?

• How many versions of a spreadsheet-based tax workpaper/schedule exist and where are these versions located (email, network share, hard drives, web-based repositories)? Which is the correct or most-recent version?

• When reviewing tax spreadsheets, am I spending more time reviewing formulas instead of the tax logic and tax principles?

• Are the links to the underlying supporting tax schedules accurate? Do these update in real-time into my spreadsheet, or rather via copy and paste?

• Who can see or modify data in the spreadsheet? Should they have this level of access?

• Does adequate documentation exist that describes how complex tax spreadsheets in my department obtain and process their data?



Nearly every corporate tax department has, usually over several years and by several people, developed spreadsheet models for computations such as tax return preparation, statutory tax reporting, payroll and tax asset registers.

In upcoming editions of this Tax News publication we will detail some Excel-based solutions (for example ,validation dashboards) that can help tax departments address many of the risks/weaknesses that are often inherent in their tax spreadsheets and, by doing so, lead to a more productive tax function.


Clinton Eidelman Associate Director – Tax Tax Technology leader




The Deloitte School of Tax

“One of the key challenges for organisations is sourcing and delivery of training which is sufficiently focussed on the organisation’s specific training needs.”

The Deloitte School of Tax offers a custom built and delivered tax training solution based on your organisation’s specific tax training needs. Our emphasis is on practical tax training delivered at the correct complexity, the correct time and to the correct level of staff.

The key benefits to this approach include:• Allowing a tailored approach to deal with an organisation’s

specific issues• Assisting your organisation to manage tax risk (training is identified as

one of the key controls in managing and mitigating tax risk) • Equipping your staff to perform their daily tax functions more efficiently• Providing measurable feedback on the competency levels of your staff

based on objective assessment• Linking training to the organisational “talent” objectives and key

performance areas

Our approach to defining and rolling out a structured tax training solution is as follows:

Step 1: Perform a Needs AnalysisIt is critically important to understand your needs relating to tax learning. As with any resource, we need to focus on areas where learning is required and where the most value will be derived. We are finding that many of our clients already have a very clear idea of what these learning needs are, but we are also able to assist with making this determination, making use of various methods, including specifically tailored online assessment tools.

Step 2: Design and Delivery We will work with you to develop a tailored learning solution to match your learning needs identified and which will ensure a credible tax training solution is implemented. The Deloitte School of Tax is equipped to deliver a unique learning solution which includes online pre and post assessment tools as well as class room based learning solutions. Our aim with delivery is to be as practical as possible and training is designed to be interactive and case study based. Where appropriate, we encourage our clients to be involved with the delivery of the training material developed.



Step 3: EvaluationIn today’s ever changing business, technology and regulatory environment, it is necessary to review training plans on a regular basis and incorporate change where appropriate. Critical analysis of the effectiveness of training delivered is fundamental. In this regard, we are also able to assist in performing post-assessment on staff who have attended training to determine the effectiveness of the training delivered.

National Training: Construction industry trainingWe are constantly looking to identify specific skills gaps in the market where we believe we can assist, and we have identified that tax and accounting issues in the construction industry create a specific set of training needs.

In this regard we plan to run training seminars in March 2013 which will address, inter alia, the following key areas relevant to the construction industry:

1. A revision and explanation of accounting for construction contracts – key accounting principles as outlined in IAS 11 “Construction Contracts”

2. Key income tax adjustments relating to construction contractsa. Gross income versus accounting recognition principles impacting on adjustments between accounting revenue and gross income, inclusive of principles applicable to retentionsb. Section 24C allowance in respect of future expenditure on contractsc. Section 22(2A) and 22(3A) – the closing stock add back for construction d. Section 24 – debtors allowance (or so-called ‘contingency development allowance’ for township developers)e. Expenditure incurred for tax but not yet recognised for accounting

3. We will also discuss the deferred tax implications due to the differences in tax and accounting treatment in this area, making use of illustrative examples

4. Discussion on the key VAT considerations in the construction industry5. Discussion on key infrastructure grants available6. Discussion on the tax research and development allowances – are you

aware of how and when you can claim?7. Manufacturing grants – do you know which of these are available and

the impact on ROI this will have on plans?

Course content will be practical and example-based wherever possible, allowing participants to walk away with an ability to implement key principles covered.

Please contact Chris Green more information on this session or the Deloitte School of Tax, or visit the website for further detail by clicking here.


Chris Green Associate Director – Tax DSOT and Tax Metals leader

Tel: +27 413 984 015Cell: +27 (0)82 780 8235 [email protected]

http://www.deloitte.com/view/en_ZA/za/services/taxservices/Deloitte-school-of-tax/index.htm



Tax Service Line LeaderNazrien Kader+27 (0)11 209 [email protected]

Regional Contacts

Gauteng Nazrien Kader+27 (0)11 209 [email protected]

Cape and NamibiaLuke Barlow+27 (0)21 427 [email protected]

KwaZulu NatalMark Freer+27 (0)31 560 [email protected]

Deloitte Tax services has specialist experience in the following key areas:

Before readers take any action, we recommend that specific questions on subjects covered in this publication be directed to your financial, tax and legal advisers. Deloitte accepts no responsibility for any errors this publication may contain, whether caused by negligence or otherwise, or for any losses, however caused, sustained by any person that relies on it.

Contacts

Editorial team:Managing Editor: Moray WilsonDesign & Layout: Zamani Ngubane

•Business Tax•Customs•Exchange Control•Financial Institutions•Global Employment Services•International Tax•Mergers and Acquisitions•Tax Management Consulting•Transfer Pricing•Value-Added Tax•Tax Technology

•Tax Risk Management•Compliance and Reporting Services

Manufacturing/Chemicals Automotive

Patrick EarlamDirector - Tax


Peter MaxwellDirector – Tax

Tel. +27 (0) 31 560 7067Cell: +27 (0)82 551 6434 [email protected]

Forestry, Pulp, Paper and Packaging Metals

Antoinette HutchesonAssociate Director – Tax

Tel: +27 (0)11 806 5989Cell: +27 (0)83 308 [email protected]

Chris GreenAssociate Director – Tax

Tel. +27 413 984 015Cell: +27 (0)82 780 8235 [email protected]

Industrial Products Aerospace and Defence

Anne BardopoulosAssistant Manager - Tax


Enos Barnard Senior Manager – Tax

Tel. +27 (0)12 482 0442Cell: +27 (0)82 928 [email protected]

Construction

Hildegarde CronjeAssociate Director - Tax

Tel. +27 (0)11 806 5345Cell: +27 (0)82 824 [email protected]

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