By: Tumelo Chipfupa - Partner at EY South Africa 

Motor Manufacturers

The National Treasury has published details of a proposed tax amendment (Section 12V) that will offer a 150% tax allowance to automotive Original Equipment Manufacturers (OEMs) for the cost of any buildings, new and unused machinery, plant, and equipment which will be used mainly in the production of electric and hydrogen-powered vehicles i.e. zero carbon emission vehicles.  

This is for investments brought into use after 1 March 2026 and before 1 March 2036.

The allowance will be in addition to the support that OEMs receive from the Automotive Investment Scheme (AIS) programme. The AIS is an existing reimbursable cash grant incentive designed to grow and develop the domestic automotive sector assembly and supply chains and is administered by the Department of Trade Industry and Competition (DTIC). It currently offers OEMs a cash grant of 20% of the value of a qualifying investment in buildings, new and used plant, machinery and equipment for the manufacture of vehicles.

The additional 150% tax allowance support will be provided only to OEMs investing in the manufacturing of battery-electric vehicles and hydrogen-powered vehicles. The tax allowance is not available for investment in the production of the various forms of hybrid technology vehicles that use drive trains that couple internal combustion engines with battery-electric propulsion.

Qualifying investment for internal combustion engine and hybrid technology vehicles such as mild hybrids, plug-in hybrid electric vehicles, etc, will continue to qualify for the AIS grant.

Component Manufacturers

On the other hand, the DITC has announced the introduction of an enhanced AIS cash grant of 35% of the value of the qualifying investment in buildings, new and used plant, machinery and equipment for component manufacturers, tooling manufacturers and battery assemblers supplying OEMs that assemble battery-electric vehicles and hydrogen-powered vehicles.   

Component manufacturers supplying OEMs which manufacture internal combustion engine and hybrid technology vehicles will still be able to qualify for a 25% reimbursable cash grant from the AIS for investments to support these drive train types. 

Details of any further support for these firms will be published by the DTIC in due course.

Rationale

The world is transitioning from internal combustion engine-propelled vehicles to new alternative vehicles and government policy wants to ensure that the South African automotive industry keeps up with this transition by altering the mix of drive trains of automobiles produced in South Africa.

The policy is given further impetus by the fact that a substantial volume of the vehicles that are produced in South Africa are exported to the EU and UK markets where these governments have announced sunset date for internal combustion engine drive trains. The South African government has therefore announced these measures to support the transition to newer drive train technologies, to preserve a foothold in those lucrative export markets.

The support is informed by the Electric Vehicles (EVs) White Paper, which was released in December 2023, and the objectives outlined in the South African Automotive Masterplan 2035 (SAAM). 

The enhanced AIS benefit for component manufacturers replaces the EV support stated in the AIS July 2021 guidelines.

Outstanding Concerns

Some components – such as seats, body parts and windows – can be used in both internal combustion engine and zero carbon emission drive train vehicles. The DTIC will need to specify in detail which components in the OEM supply chain will be included in the enhanced AIS grant and to identify those components that will be excluded. As both internal combustion engine and zero carbon emission drive train vehicles are expected to be produced in South Africa for the foreseeable future, the DTIC will need to confirm whether all components assembled onto a vehicle or only the components specific to zero carbon emission vehicle drive train will qualify.

The 150% additional allowance applies to assets acquired for use “mainly” for electric and hydrogen-powered vehicles - which effectively means the assets could be used for other internal combustion engine drive trains. This indicates potential tax uncertainty for OEMs. 

The EVs White Paper states that the South African government’s support is confined to manufacturers, and it is not currently envisaging any consumer demand support that would make zero carbon emission vehicles more affordable within its domestic market. It also states that support will be considered “into the future” - which is subject to the fiscus having the capacity to provide support. It does not specify in what form such support will be provided.

This provides the DTIC and the National Treasury with the wiggle room to determine what is affordable. However, the industry is pressing for consumer support to facilitate and expedite the local market transition away from internal combustion engine vehicles.