Tips for Investors
South Africa has long been considered on of the easiest places to set up a business. But reports from the World Bank and the IMF and domestic surveys indicate more can be done to attract investment. An IFC survey of 155 countries on the ease of doing business rated South Africa 28th. Pretty good but the number of procedures and days involved in registering, licensing and starting a business in South Africa is far greater than in Australia, New Zealand and Canada.

A World Bank investment climate survey showed South Africa to have a very good and improving investment climate but lagging well behind Thailand and Malaysia in both growth and fixed investment. Why? According to South African businesses polled: lack of worker skills, labour costs, rigid labour regulation, crime and a highly concentrated economy that imposes high entry costs.

Responses to these problems include reduction of red tape, more support for small business, and a review of labour legislation, among other measures. Perhaps most important is a sustained macroeconomic program that has delivered lower taxes, lower interest rates, lower inflation, a strong and stable currency and the longest upward business cycle in South Africa’s history. In addition, the best infrastructure in Africa is getting a R230 billion boost over the next five years to improve rails, roads, ports and municipal infrastructure.

South Africa gets high credit ratings and the business environment has been described by international rating firms as positive, with “low political and security risk”. South Africa is also an ideal place to outsource debt recovery, being only marginally more expensive (US$14/hour) than India (US$12) but substantially less expensive than Canada, Ireland and the US. SA has the advantage of an already well-developed call centre infrastructure.

Although, doing business is less complicated than in most countries, the wise investor will want to obtain professional guidance from South Africa’s world class legal, accounting and management communities. Rules and legislation governing labour and black empowerment (see below), for example, are complicated and unique to the South African business landscape.

Regulatory Framework
Doing business in South Africa is much like doing business in Europe, the United States and other OEDC countries. Commerce is regulated by laws relating to business practices, labour relations, patents, copyrights, minerals exploitation, transport, taxes, intellectual property, disputes and banking, among other subjects. Importantly, sanctity of contracts and equitable protection are ensured by law.

Mediation and arbitration are routinely used to resolve disputes. Damages are compensatory, not punitive. Freehold ownership of property by foreigners is allowed and dividends are freely remittable.

Unlike many emerging countries, South Africa boasts legal and financial services, management and labour consulting and accounting firms of international standard (see Business Services and Labour sections).

Major legislation that affects the setting up and running of a business in South Africa includes:

- Companies Act
- Banks Act
- Income Tax and Value Added Tax Acts
- Broad Based Black Economic Empowerment Act
- Competition Act
- Preferential Procurement Act
- Minerals Act
- Labour Relations Act
- Basic Conditions of Employment Act
- Employment Equity Act
- Skills Development Act
- Promotion of Equality and Prevention of Unfair Discrimination Act
- Occupational Health and Safety Act
- Compensation for Occupational Injuries and Diseases Act
- Unemployment Insurance Act
- Environmental Conservation Act
- Laws pertaining to intellectual property

The National Economic Development and Labour Council (NEDLAC) and the Commission for Conciliation, Mediation and Arbitration (CCMA) provide effective forums for negotiation and settlement of disputes.

Government PolicyIn a nutshell, government seeks, through sound macroeconomic management, to create an environment conducive for doing business. A decade of effective fiscal and monetary policy has brought the longest continuous positive economic growth in history while substantially lowering taxes, inflation, interest rates, government debt and the budget deficit. The currency has doubled in value against the US Dollar over the past few years so that business can operate in an environment of political and currency stability.

South Africa is an active member of both the World Trade Organisation and GATT and has concluded a number of trade agreements, with more in the pipeline. Double taxation treaties have been concluded with more than 50 countries. Labour laws have been amended to provide more flexibility in hiring and firing practices. Foreign exchange controls have been all but eliminated.

Spatial Development Initiatives (SDIs) and Industrial Development Zones (IDZs) are now getting off the ground and offer a wide variety of business and investment opportunities - from agro-processing and manufacturing to infrastructure development and minerals beneficiation, trade and tourism.

The National Industrial Participation Programme (NIPP), managed by the Department of Trade and Industry, requires an offset programme for any government tender with US$10 million import content.

Business Environment
Sound economic policy, fiscal discipline and political stability have resulted in a strong, stable currency. The rand, which plummeted against the US dollar in 2001, has rebounded in style. It has been trading in a range of between six and seven rand to the dollar for the past two years. Along with lower interest rates, inflation and taxes, both business and consumer confidence are high. Despite the strong currency, South Africa is still one of the least expensive places in the world to set up and run a business.

Commercial and residential property is readily available and is open to purchase by foreigners. Prices by Tokyo, London and New York standards are reasonable. The infrastructure (see Resources and Infrastructure section) is on a par with Europe’s and the USA’s in terms of quality and performance. Capacity constraints that have developed are to be addressed through massive infrastructure investment projects over the next five years. Ports, roads, rail and communications will be upgraded to improve productivity.

Among the reasons that make South Africa a preferred investment destination:

- A stable political environment
- Sound macro-economic policy
- 100% ownership permitted
- A large, growing domestic market
- Modern transport and communications
- Access to African and Indian Ocean markets (see Trade section)
- Rich natural resources (see Economic Sectors)
- Self-sufficiency in agriculture (see Economic Sectors)
- Cheapest industrial electrical power in the world (see infrastructure)
- Modern banking and financial services (see Business Services)
- Liberal repatriation of profits
- Large-scale privatisation of public enterprises
- Excellent quality of life

The concerns expressed most frequently by the business community are about crime, exchange controls and the shortage of skilled professionals. After years of gradual liberalisation, the only remaining exchange controls are limits on what individuals and companies can invest offshore. Crime and the shortage of skills are problems that will take longer to correct but government has introduced incentives to encourage skills development and devoted more resources for crime prevention. New legislation simplifies the procedure for hiring skilled foreigners for occupations where there is a shortage of skills.

Investment opportunities exist across the economic landscape - communications, transport, financial services, tourism, automotive components and assembly, agro-processing, infrastructure development.

Registering a Business
Getting started is simple and straightforward and there is plenty of expertise available (see Business Services). International and domestic legal, banking, accounting and management consulting firms are supplemented by government offices, chambers of commerce, embassies and trade offices.

Several forms of business organisation that can be established:

- Sole proprietorship
- Partnership
- Close corporation
- Trust
- Company (public or private, including subsidiaries)
- Joint ventures
- Branch of a foreign company

Note: a subsidiary of a foreign company is treated as a South African company.

Business is regulated by the Companies Act or the Close Corporations Act, which stipulate accounting and reporting requirements. All businesses must register with:

- South African Revenue Service (SARS) for income tax, value-added tax (VAT) and employees tax (PAYE)
- Regional Services Council (RSC)
- Unemployment Insurance Fund (UIF)
- Workmen's Compensation commissioner
- Industrial Council (where applicable)

Foreign suppliers may sell through agents, distributors or established wholesalers and retailers. There are laws and regulations that deal with trademarks, patents, labelling and government procurement.

Taxes
Government revenue is derived primarily from a residence-based income tax on businesses, individuals and trusts and a 14% value added tax (VAT) on nearly all goods and services. There is a capital gains tax (CGT) which taxes individuals at their marginal rate on 25% of the gain and companies at the corporate tax rate of 29% on 50% of the gain. Small and medium enterprises meeting certain criteria pay a reduced tax rate of 15% on the first R150, 000 of profit and 30% on profits in excess of R150, 000.

Revenue is also raised through customs and excise duties, property transfer and estate duties and Regional Services Council levies (RSC levies are scheduled to be terminated in 20060. There is a Secondary Tax on Companies (STC) of 12.5% on the excess of dividends declared over dividend received. The effective tax rate on companies when 100% of taxed profit is distributed is 37.8%. Branches of foreign companies are taxed at 35%, but are not subject to the STC. Tax treaties have been concluded with over 50 countries.

Individuals are taxed on a sliding scale (see tables). Fringe benefits are taxable and husbands and wives are taxed separately. There are allowable deductions and a rebate for taxpayers over 65 years old. Individuals are not taxed on dividends received, including dividends received from South African companies based offshore.

There are no provincial or municipal income taxes on companies or individuals but rates and services (water, electricity, etc) are levied through municipal councils. The constitution provides for taxing authority to be delegated to the provinces but that is not likely to happen in the foreseeable future due to the shortage of financial management capacity at the provincial level.

Incentives There is a wide range of investment incentives available to South African-based companies, foreign and domestic. They are administered by the Department of Trade and Industry and are uniform throughout the country. Tax incentives are generally in the form of tax holidays, rebates and accelerated depreciation. Tax-free grants, relocation grants, export and other incentives are available under prescribed circumstances. Any of the legal, accounting or financial services firms or the DTI can provide detailed information on the full range of business incentives.

Exchange Controls Company dividends and profits are freely remittable and foreign currency is made available for imports (import licences are required for some goods). Foreign exchange cover is available for all foreign liabilities and expatriates may freely remit their savings abroad after paying taxes.

Exchange controls have been relaxed gradually over the past ten years. The only remaining controls are limits on the amount that individuals and companies may invest offshore but those limits have been raised substantially. It is the stated intention of government to remove the remaining controls as early as possible.

Pick up a copy of SA at a Glance at your local bookstore.