South Africa has built a modern economy primarily around the three sectors of manufacturing, mining and agriculture. the country provides a number of opportunities for enterprising investors and entrepreneurs
South Africa, located at the southern tip of the African continent is an emerging market with an abundant supply of natural resources. The financial, legal and commercial sectors are well developed and it has a stock exchange that is 17th largest in the world. Transport and communication is efficient and modern and supports an efficient distribution of goods to major urban centers throughout the region. The country has a sophisticated modern economy based primarily on three sectors: manufacturing, mining and agriculture. Industrial development has been centered on the largest cities, mainly Johannesburg, Durban and Cape Town.
Business environment
South Africa operates as a free market economy. South African entrepreneurs are generally highly educated, skilled and competitive. In general, a business person would be comfortable and familiar with financial, commercial and industrial standards and customs. The local business culture is predominantly western and the prevalent business language is English.
Investor confidence in the South African democracy continues to grow. Approximately 75 per cent of South Africa's economic activity takes place in its four primary metropolitan areas. Gauteng, where most of South Africa's gold mines are situated, is the financial and industrial centre of the country and accounts for 40 per cent of all economic activity. The inflation rate is currently within the government's target of three to six per cent. The prime interest rate is currently 12.5 per cent. The major challenge is the volatility of a wildly fluctuating currency.
South Africa's government is committed to a free-market economy. Government approval is generally not required for foreign investment and the form of foreign investment is virtually unrestricted. The government has specifically recognised the need to attract foreign investment to finance the levels of investment needed for job creation and is continuing with its privatisation initiatives.
Many government development agencies, such as, The Department of Trade and Industry ("DTI"), The Industrial Development Corporation ("IDC") of South Africa and The Small Business Development Corporation ("SBDC") provide advice and assistance to further economic development.
Incentive structure
South Africa welcomes foreign investment and virtually all business sectors are open to investors. No governmental approval is required and there are almost no restrictions on the form or extent of foreign investment. Incentives are largely targeted at manufacturing and key industrial areas. Specific incentives of a varying nature have been created to encourage the development of certain industries.
Exported goods are usually zero-rated for the purposes of value-added tax, and a full input credit is granted on the acquisition of capital and intermediate goods to be used in making VATable supplies. Income tax rates have been progressively reduced and are now competitive in international terms. Under local tax laws, specific tax incentives are aimed at stimulating investment in commercial buildings, machinery and plant or equipment.
Structure of business entities
A number of structures are possible. Private companies, with limited liability, are the most common form of business entity in South Africa.
1. Limited Liability Companies
These companies are characterised a restriction on the right to transfer its shares, a limitation on the number of shareholders to a maximum of 50 and a prohibition of a public offering of its shares or debentures. These companies are subject to less stringent rules than public companies. Generally, companies that do not qualify as private companies are considered public companies.
2. Close Corporations
A Close corporation is a common form of business entity for smaller businesses. In a close corporation, the members have the rights and obligations of both shareholders and directors. Members of a close corporation enjoy limited liability.
3. Partnerships and Sole Traders
Partnership and sole proprietors are subject to few statutory requirements, but the partners and the proprietors do not have the protection of limited liability. A partnership may not have more than 20 members and registrations are not required.
4. Branches of foreign companies
A foreign company that establishes a place of business in South Africa must register as an "external company" within 21 days. The company must appoint a South African resident as the representative of the company.
Structures used by foreign investors
The form most commonly used by foreign investors is the private company. Annual formalities are minimal, except for the requirements to prepare annual financial statements and to have them audited. Such financial statements are, however, not required to be filed with the Registrar of Companies, and consequently are not available for inspection by the public.
The establishment of a branch of a foreign company should be considered if the company would engage in less than a full operation in South Africa, such as through a representative office.
A company is formed by filing its memorandum of association and articles of association, together with certain specified forms, with the Registrar of Companies in Pretoria. Registration takes approximately three weeks with an additional week for approval of the company name. The cost of forming a company is not significant. No minimum capital requirements are imposed. After a company is established, it must register for certain tax and other purposes.
Tax implications
The corporate tax is 29 per cent. There is a further secondary tax on companies ("STC") of 12.5 per cent payable by the company on dividends distributed by that company. The local branch of foreign company is taxed at a rate of 34 per cent. There is no STC on dividends subsequently declared out of these after tax profits.
Where a foreign company has a presence in South Africa, the taxation of its income will depend on the nature of the income derived and whether a Double Tax Agreement (DTA) exists between South Africa and the country of residence of that company.
Withholding taxes
There is no withholding tax on dividends or on the remittance of after tax branch profits to a foreign head office. Non-residents, not carrying on business in South Africa, who receive royalties or similar payments from South Africa, are subject to a final withholding tax at a rate of 12 per cent. No withholding tax is levied on interest payable to individuals and companies that are not resident.
Individual income tax
Individual income tax is levied at progressive rates, with a maximum marginal rate of 40 per cent. Advance payments of normal tax are deducted from remuneration payable to employees under the Pay As You Earn ("PAYE") system.
Other taxes
The other significant taxes to be considered by the foreign investor include an invoice based VAT, transfer duty, skills development levy, donations tax, stamp duties, customs and excise duties and individual income tax.
Double tax agreement
The Double Tax Agreement between the Sultanate of Oman and the Republic of South Africa has been in force since 29 December 2003.
Labour availability
South Africa's labour market has undergone a transformation as the country's economy moves away from labour-intensive to capital-intensive operations. The labour market is characterised by an oversupply of unskilled workers and a shortage of skilled ones. High population growth constantly exceeds the growth in employment demands. South Africa's unemployment rate stands at about 24.3 per cent (2007 est.)
Social security
South Africa does not have a general social security system. Unemployment Insurance Fund ("UIF") contributions are required to be made for all employees, equally by the employer and the employee (at the rate of one per cent of the employee's earnings each) up to a threshold of ZAR 139 944 per annum. Employers must make contributions to the Occupational Injuries and Diseases Fund for employees earning up to ZAR 149,136.
Exchange control
The repatriation of funds from South Africa is governed by the exchange control regulations, implemented through the South African Reserve Bank (SARB) and authorised dealers. For example, the purchase of foreign exchange for imports and the remittance of interest and royalties to a non-resident require approvals. The government has publicly stated its intention to phase out exchange controls over a period of time and has abolished or eased a plethora of control measures.
Import regulations
South Africa is a member of the World Trade Organisation (WTO) and follows the Harmonised System (HS) of import classification. Traders are subject to exchange control approval, administered by the SARB. Most goods may be imported into South Africa without restrictions. Import permits are required only for specific categories of goods. In summary, South Africa, as an emerging economy provides a number of opportunities for Omani investors and exporters.
The author is a Tax Partner at Ernst & Young.
By Sridhar Sridharan
© Oman Economic Review 2009
