South Africa’s government once gave companies a multi-year tax holiday

Between 1996 and 1999, South Africa’s government granted specific companies up to three two-year “tax holidays” to help the country achieve its industrial development goals.

During this holiday, qualifying companies did not pay any tax. This was intended to stimulate competitive and labour-absorbing industrial development in South Africa.

The Reserve Bank outlined this tax incentive in its recent Tax Chronology report, covering all the developments in South Africa’s tax system from 1979 to 2026.

One such development was “tax-holiday companies”, which referred to qualifying companies that enjoyed tax-holiday status in terms of section 37H of the Taxation Laws Amendment Act. 

This stemmed from then-Finance Minister Trevor Manuel’s Macro-Economic Strategy, introduced on 14 June 1996.

It formed a central pillar of the government’s Growth, Employment, and Redistribution (GEAR) strategy at the time.

Manuel’s strategy was aimed at promoting growth, employment and redistribution in South Africa, and was considered a radical move to jumpstart the post-apartheid economy.

One key element of this economic package was tax incentives to stimulate growth, including a “tax holiday” for certain companies.

The criteria to qualify were strict. In essence, it was awarded to a project that specifically addressed a manufacturing concern.

The project had to comprise one or more of three components: a spatial component, an industry component, and a human resource component.

A company incorporated on or after 1 October 1996, contemplating carrying on a project like this as its sole business, was allowed to apply to the Regional Industrial Development Board for the approval of its project. 

The board then considered the application and, if approved, the company became entitled to a two-year tax holiday for each component certified by the board.

Therefore, a qualifying company could become eligible for tax-holiday status for a maximum period of six years, i.e., two years for every qualifying component.

In addition, these companies could only qualify for approved projects applied for by 30 September 1999.

It is also important to note that the company’s sole object must have been the carrying on of only one qualifying project. The company may, therefore, not have carried on any other trade.

However, the reward was significant: if a company met all the criteria for all three components, it paid 0% corporate tax for up to six years.

‘Expensive, poorly targeted and ineffectual’

While certain companies continued to receive these tax benefits well into the 21st century, the government ended the programme in 1999, as planned.

It also shut down the idea of introducing it, or something similar, again in the future, due to the programme’s mixed success.

For example, while the tax-holiday scheme was often used by capital-intensive industries, labour-intensive ones were less common.

The project, therefore, did not do much to further job creation in South Africa, with the government concluding that the scheme was poorly targeted.

The Overseas Development Institute released a report titled ‘An Assessment of South Africa’s Investment Incentive Regime’ in 2005.

This report explained that incentives need to be carefully designed to achieve a specific policy goal, and that tax holiday schemes are among the least effective investment incentives.

“Poorly targeted tax incentives prove ineffective and expensive. Tax holidays, while being easy to administer, are a good example of a poorly targeted incentive,” it said.

“The government phased out the tax holiday scheme as early as 1999, following internal reviews showing it to be expensive, poorly targeted and ineffectual.”

The report suggested that moderate tax incentives that are targeted to new investment in machinery, equipment and research and development, and provide up-front incentives, are more likely to be cost-effective in stimulating desired investment. 

“These can have powerful signalling effects without significant loss of revenue. Investment tax credits and allowances provide specific and targeted policy tools to achieve this,” it said.

In addition, it said reducing corporate tax to a level comparable with other countries in the region is a sound tax incentive. 

However, the report warned that reductions beyond the level found in capital-exporting countries often bring about greater revenue losses than increases in investment.

“In situations where reducing unemployment is a major policy objective, it is important to bear in mind that many tax incentives can work in the opposite direction by favouring capital-intensive investments,” it said. 

“Incentives can be created, however, to explicitly encourage labour-intensive production.”