BEE tax warning for South African businesses

The Finance Minister is likely to impose a new Black Economic Empowerment (BEE) levy to fund the new R100 billion Transformation Fund touted by President Cyril Ramaphosa. 

This is feedback from Old Mutual’s head of tax, Nazrien Kader, who outlined her expectations for the minister’s Budget Speech on 19 February. 

While the speech will occur in a much better economic climate than in previous editions, the Finance Minister still has a very difficult job of limiting spending growth while trying to stimulate economic activity. 

This will prove challenging as the government continues pursuing ambitious plans to set up the National Health Insurance scheme, implement a Basic Income Grant, and now implement the new Transformation Fund. 

Minister of Trade, Industry and Competition Parks Tau first announced plans to create such a fund towards the end of January during his department’s annual performance plan presentation. 

The R100 billion fund, administered by the National Empowerment Fund (NEF), will issue funding only in line with BBBEE regulations.

To capitalise the fund, Tau proposed a plan to get South African businesses to pay 3% of annual net profit after tax. 

Tau said the money for the fund would be raised according to the BBBEE codes of good practice and through the participation of the Competition Commission in the public interest.

“Entities are obliged under the BBBEE codes of good practice to contribute an equivalent of 3% of annual net profit after tax for the development of black suppliers,” Tau said.

“Entities will be required to contribute to the transformation fund for compliance with the enterprise and supplier development element.”

President Cyril Ramaphosa weighed in on the fund’s creation during his State of the Nation Address to Parliament at the beginning of February. 

Ramaphosa made reference during his speech to setting up a Transformation Fund worth R20 billion a year over the next five years to fund black-owned and small business enterprises.  

Shrugging off criticism, Ramaphsoa promoted the fund during his speech. “We will set up a transformation fund worth R20 billion a year over the next five years to fund black-owned and small enterprises,” he said.

Tau has clarified these plans, saying that no new tax would be implemented but rather the fund would get its capital by repurposing existing enterprise and supply development funding.

Under existing rules, companies contribute 3% of their annual after-tax profit to the development of Black suppliers through various initiatives.

“The transformation fund is not intended to be a new source of revenue, as alleged, by introducing an additional tax. It certainly is not,” Tau said.

“It is looking at current equity-equivalent funding, it is looking at enterprise and supply development funding and other sources of funding.”

Kader said Tau’s plan will not be insufficient to create a R100 billion fund, with a new BEE levy likely necessary to finance it. 

“In setting up the fund, we urge the government to give due consideration by way of credits for existing expenditure on Enterprise and Supplier Development programmes implemented by business,” Kader said. 

“If business is simply required to redirect the funds to a BEE levy, this could contribute towards the collapse of black economic empowered business and small enterprises.”

These businesses form part of the current Enterprise and Supplier Development Programmes, which could lead to large-scale closure of these businesses with consequential job losses in a worst-case scenario.

Apart from the job losses, this would result in the opposite effect the government intends to have with the new Transformation Fund. 

The Democratic Alliance (DA) has voiced strong opposition to the creation of the fund, warning that it risks being a slush fund and is open to abuse by politicians. 

DA spokesperson on trade, industry, and competition, Toby Chance, first raised the alarm about the fund, comparing it to the country’s R500 billion pandemic relief fund, which was plagued with corruption. 

“Not only does the DA reject race-based legislation, but BBBEE has proven counterproductive in closing our inequality gap,” Chance said.

He added that the majority of funding is missing the mark in terms of stimulating high-growth enterprises in South Africa.