THERE is a new tax package on the way for special economic zones to replace the old industrial development zone package. It promises a preferential tax rate of 15% and enhanced building-tax allowances. Companies also stand to benefit from the employment tax incentive, regardless of the age of the employee.

But please note that to qualify for the allowances, 90% of the taxpayer's economic activity has to be from a fixed place of business in an special economic zone area identified by the Department of Trade and Industry and the minister of finance.

Be assured that Sandton and the V&A Waterfront will not be on the list.

The new special economic zone programme will last for 10 years, subject to review after five years. Therein lies the question: Do tax incentives actually work?

Sure, Mauritius attracts huge business by offering a tax incentive of negligible tax rates for holding companies. That is just dandy for Mauritius with its population of only 1.3 million and an unemployment rate of 8.7%. The collateral damage to the tax collections of other African countries with far larger populations amounts to billions.

Possibly, the recent initiatives of the Organisation for Economic Co-operation and Development against base erosion and profit shifting will contain the damage caused by tax-haven incentives. But it will take time and will not do much to encourage growth in South Africa.

South Africa's tax concessions amount to about 10% of the national budget. Personal tax fiscal drag adjustments and the VAT zero rating of basic foodstuffs and fuel account for the lion's share.

The motor industry government customs subsidies amount to more than R20bn a year and did much to save the sector during the tough times since 2009.

Perhaps the problem is South Africa's overreliance on corporate tax collections. Even with the reduced corporate tax rate of 28%, South Africa budgets to collect R170bn from companies out of a total budget of R895bn — 19%. The OECD average is below 10%.

Why invest in South Africa? Trade and industry will have to offer something far more imaginative than a tax package to provide the answer.

By Matthew Lester

Lester is a professor at the Rhodes Business School, Grahamstown

This article was first published in Sunday Times: Business Times

Source: Business Day