Income tax act offers some BBBEE compliance relief

BBBEE has also become a business imperative, and with the updating of the Codes of Good Practice currently underway, is likely to remain so for the foreseeable future.

While no tax incentives or legislation have been enacted to specifically provide relief for BBBEE compliance, various sections of the Income Tax Act can, actually, offer some relief, says Dirk Kotze, tax partner at global audit, tax and advisory firm Mazars, says in this month’s SmartProcurement.

For example, the management control, employment equity and preferential procurement requirements of the Generic Scorecard do not necessarily have to be catered for in tax legislation as the salaries and costs involved in appointing and training management, adhering to labour requirements and selecting appropriate suppliers should be automatically tax deductible.

The enterprise development leg of the scorecard, however, appears to be the odd one out, says Kotze, especially considering what the Codes of Good Practice regard as enterprise development. Apart from the early payment of BBBEE creditors or larger settlement discounts for BBBEE customers, many of the initiatives involve providing BBBEE enterprises with the financial means to grow their operations, i.e. cash grants made, loans granted on preferential terms (no or low interest, advantageous repayment terms), granting the use of business assets for no consideration etc.

“The question is whether the cost incurred is tax deductible in the hands of the person making the enterprise development contribution, especially where assets have been given to the BBBEE enterprise or where cash grants have been provided. Are the contributions capital in nature, are they in the production of income and can they potentially be regarded as donations?”

In the hands of the recipient, the question would be whether the benefit received would be gross income subject to tax? Would the acceptance of a cash grant be for services rendered although there are no strings attached, would the loan granted on beneficial terms be regarded as a capital gain, would the waiver of repayment of interest be a recoupment?

“Questions can also be asked about the VAT treatment in respect of assets provided by companies to BBBEE enterprises or what the VAT treatment is of a cash grant received by a BBBEE enterprise from another entity,” Kotze says.

SARS has issued various Binding Private and Binding Class rulings dealing with costs and expenditure incurred on various BBBEE initiatives, but none of these seems to address the enterprise development leg of the scorecard, either for income tax or VAT.

“It may, however, be counter productive to consider the costs non-deductible in the hands of the persons making the contributions or making it taxable in the hands of the BBBEE beneficiaries.”

Kotze says that until some clarity on these matters is provided by way of legislation or a SARS practice or class ruling, businesses entering into these initiatives would be well advised to carefully consider the tax and VAT implications at the outset.

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