Don’t panic, help is on the way: Incentives for electric vehicles

Climate change has been a hot topic for many years now. It is, therefore, probably understood by most (if not all) that the effects of climate change will worsen as long as greenhouse gases are added to the atmosphere. With no positive action to counteract or reduce the amount of greenhouse gas emissions, climate change extremities will worsen. As such, there is an urgent need to reduce greenhouse gas emissions and combat climate change globally.

21 Feb 2024 6 min read Special Edition Budget Speech Alert 2024 Article

Automotive industry and climate change in the global context

At a global level, the transport sector accounts for more than a third of greenhouse gas emissions. This has meant that the sector is amongst those that are prioritised for reducing emissions.

As such, many countries are setting pathways for reducing emissions for the various modes of transportation. In terms of road transport, policy announcements have been made by countries like the UK and political and economic blocks like the European Union (EU) for the effective ban on the sale of internal combustion energy (ICE) vehicles by 2035. Other countries have introduced carbon taxes which are set to increase over time and will contribute to achieving price parity between ICE vehicles and electric vehicles (EVs) over time.

Worldwide, incentives are playing an important role in the initial adoption of EVs and in supporting the growth of the EV manufacturing and battery industries. Other important measures being used include purchase subsidies, registration taxes, and tax rebates. Countries like Norway (1990s), the US (2008), and China (2014) were among the first to offer such measures.

Across the rest of Africa, some notable progression in EV policies have also been initiated. Morocco, for example, has introduced custom duty exemptions for EVs and VAT exemptions for importers and distributors of EVs. On the production side, EVs qualify for the standard automotive incentives, which include corporate tax exemptions for up to five years, VAT exemptions and withholding tax exemptions for dividends.

The automotive industry and climate change in South Africa

In South Africa, some studies indicate that the transport industry is South Africa’s third largest source of emissions, accounting for about 11% of the total emissions. Road transport specifically, contributes 91,2% of transport emissions from the combustion of petrol and diesel.

In terms of the Green Transport Strategy (2018–2050) published by the Department of Transport, South Africa has an ambitious goal of a 5% reduction of emissions in the transport sector by 2050.

In response, South Africa’s Just Energy Transition Investment Plan (JET IP, 2022) for the initial period of five years (2023–2027) identifies key areas of investment in the transport space for the transition to a greener economy, which includes improved and more accessible public transport, manufacturing, and EV-related charging infrastructure.

South Africa’s automotive manufacturing industry

South Africa’s automotive manufacturing industry contributes significantly to the South African economy; it is the fourth largest in terms of output across all manufacturing sectors and contributes materially to export revenues. In 2022, the industry contributed 2,9% to South Africa’s GDP and approximately 10% to the country’s manufacturing output.

As South Africa exports approximately 63% (2022) of the vehicles it produces, the country cannot ignore global developments. The announcements by key export markets such as the EU and the UK of the effective bans on the sale of ICE vehicles by 2035, coupled with incentives aimed at increasing the uptake of EVs in these markets and a general consumer trend towards climate-friendly modes of transportation will inevitably reduce demand for many of the ICE vehicles currently produced in South Africa.

This could be catastrophic for the country’s economy as the automotive industry’s direct jobs account for 8% of manufacturing employment and 0,8% of total employment in South Africa. Further, the automotive industry is responsible for attracting a substantial amount of foreign investment. Between 2021 and 2022 it accounted for a total of R26,1 billion in green and brownfield investment.

In this context, it is important for South Africa to keep up with global trends and introduce policies and incentives now that will support investment in the domestic production of EVs.

Actions to drive investment in automotive manufacturing

While existing policies like the Automotive Production Development Programme (APDP) and the Automotive Investment Scheme (AIS) provide a good framework for developing EV productive capacity, including in assembly and component manufacture, additional action is required, and it needs to be implemented as soon as possible.

The Minister of Trade, Industry and Competition issued the Electric Vehicles White Paper (White Paper) in December 2023 which outlines South Africa’s strategy to transition towards greater EV production and consumption in South Africa. The strategy looks to move the automotive industry from primarily producing ICE vehicles to a dual platform that includes EVs by 2035.

The White Paper identifies 10 actions in support of the development of cost-competitive EV productive capacity in South Africa. From a tax perspective these actions include:

  • the introduction of a temporary reduction on import duties for batteries in vehicles produced and sold in the domestic market, to improve cost competitiveness;
  • securing or maintaining duty-free export market access for vehicles and components produced in South Africa to support the resilience of the industry; and
  • leveraging research and development tax incentives to deepen domestic value addition.

To further encourage the production of EVs in South Africa, in the Budget the Minister has proposed the introduction of an investment allowance for new investments in the production of EVs from 1 March 2026.

Research and development incentive

Research and development (R&D) is crucial for the sustainability of the automotive industry in the evolving technological space of EVs. Deepening South Africa’s participation in the value chain will require technology adoption, adaptation and innovation. All these processes require ongoing investment in R&D.

The South African Government already provides a tax incentive to companies that incur expenditure related to R&D. The incentive is provided for in section 11D of the ITA and is currently based on a pre-approval system. In this context, companies intending to conduct R&D activities in South Africa need to apply to the Department of Science and Innovation for pre-approval, showing that the proposed activities will fall within the definition of R&D as set out in section 11D.

Once approved, companies can benefit from the incentive, which allows for a deduction of an amount equal to 150% of expenditure incurred by the taxpayer on R&D carried out in South Africa. This translates into a benefit of 13,5 cents per rand spent on R&D, at a corporate tax rate of 27%. Importantly, the section 11D R&D incentive has been extended to 31 December 2033.

A new incentive focused on electric vehicles

Similar to the R&D allowance, the proposed investment allowance will permit producers to claim 150% of qualifying investment spending on EVs and hydrogen-powered vehicles in the first year.

Unfortunately, there is not a lot of guidance on how a taxpayer will qualify for the allowance or what will constitute “qualifying investment spending”. Although the incentive is a welcome proposal, especially considering the global trends, it is notable that the allowance will only be available from 1 March 2026.

Importantly, the Minister of Trade, Industry and Competition recognised in the White Paper that the pace at which the transition to EVs needs to take place must be swift given the speed at which markets are developing. This is even more important due to the long lead times for investment decisions. It is hoped that the Minister is providing the automotive industry and potential investors with enough time to ensure that the incentive is impactful.

As noted in the Budget, the tax expenditure related to the incentive is estimated to amount to R500 million for 2026/27. With current spending pressures and there already being a deficit in revenue collection, it is essential that the incentive not only work to maintain tax revenues in the industry, but also potentially grow them in the future.

Those in the automotive manufacturing industry are therefore encouraged to take part in the consultations and discussions in anticipation of the enactment of the incentive.

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