Late last year, President Cyril Ramaphosa signed the Taxation Laws Amendment Act No. 42 of 2024. This Act introduces a significant tax incentive aimed at promoting the production of battery electric and hydrogen-powered vehicles in South Africa.
The electric vehicle tax incentive demonstrates the South African government’s commitment to transforming the automotive manufacturing industry. The goal is to shift from primarily producing internal combustion engine vehicles to manufacturing battery electric and hydrogen-powered vehicles. This change aligns with the vision set out in the Electric Vehicles White Paper, which was published in November 2023.
Electric vehicle tax incentives in other African countries
Several African countries have already introduced tax incentives for battery electric vehicles. These countries include Togo, Ghana, Benin, Uganda, Tanzania and Zambia. These incentives aim to lower the cost of electric vehicles for consumers. They also seek to stimulate investments in the local manufacture of electric vehicles.
South Africa is now joining this group of African nations that have adopted electric vehicle tax incentive. However, manufacturers of battery electric and hydrogen-powered vehicles need to be aware of how the South African Revenue Service (SARS) will apply the electric vehicle tax incentive.
Details of the electric vehicle tax incentive
The incentive allows taxpayers to claim income tax allowances of 150% for the cost of the following:
- Any buildings (and improvements);
- New and unused plant and machinery, including the cost of installing any foundations or supporting structures designed for the plant and equipment;
- Any improvements to plant and machinery acquired by the taxpayer.
These assets must be primarily used in the production of battery electric or hydrogen-powered vehicles in South Africa.
Preventing electric vehicle tax incentive abuse
The incentive will apply for 10 years, starting from assets brought into use on 1 March 2026, and extending until 1 March 2036.
SARS has also introduced anti-abuse rules. These rules prevent taxpayers from inflating the cost of assets or improvements. Additionally, taxpayers cannot claim the allowance for assets sold under an installment credit agreement.
If a taxpayer sells an asset or stops using it mainly in the production of battery electric or hydrogen-powered vehicles within five years, the taxpayer will face a 50% recoupment of the asset’s cost. If the asset has been sold, this recoupment will be added to the normal recoupments as provided for in section 8(4)(a) of the Income Tax Act No. 58 of 1962. However, the recoupment will not exceed the allowances claimed for that asset.
Will multinational entities benefit from the incentive?
The full extent to which multinational corporations will benefit from the electric vehicle tax incentive remains uncertain. This uncertainty follows the enactment of the Global Minimum Tax Act No. 46 of 2024. The Act introduces a minimum tax rate of 15% through a Domestic Minimum Top-up Tax (DMTT) for companies in multinational groups with revenues exceeding EUR750 million.
The rules for calculating the DMTT are complex. They provide for some exclusions based on a taxpayer’s eligible payroll costs and tangible asset values.
The effects of the Section 12V allowance and the DMTT will need to be carefully modeled. This modeling will ensure that taxpayers investing in the production of battery electric or hydrogen-powered vehicles receive the full benefit of the Section 12V allowance.
The reality of electric vehicle manufacturing
While this tax incentive marks significant progress for battery electric and hydrogen-powered vehicle manufacturers, South Africa’s sustainability challenges may diminish the potential benefits of the incentive.
South Africa is heavily dependent on fossil fuel-based electricity. About 80-85% of the country’s electricity is generated from coal-fired power stations. This makes South Africa one of the most carbon-intensive nations in the world.
Although electric vehicles are marketed as having “zero tailpipe emissions”, the reality is different. Charging these vehicles will add further strain to the already carbon-heavy electricity grid.
When considering the full supply chain, electric vehicles may offer only marginally fewer greenhouse gas emissions. Therefore, vehicle manufacturers should explore a shift to renewable energy sources. For example, “off-grid solar-powered battery charging infrastructure” could reduce reliance on the national electricity grid.
The manufacturing process for electric and hydrogen-powered vehicles is energy-intensive. It also involves extracting rare earth metals such as lithium, cobalt, and nickel. Mining these materials often results in significant environmental and social consequences. This raises concerns about the sustainability of scaling up the production of electric and hydrogen-powered vehicles under the current incentive.
Additionally, the disposal and recycling of electric vehicle batteries at the end of their life cycle is an often-overlooked issue. South Africa currently lacks sufficient infrastructure to handle the safe recycling of lithium-ion batteries. These batteries pose environmental risks if not properly managed.
In conclusion
South Africa’s 150% tax incentive for electric vehicle manufacturers is a bold move. It aims to modernize the country’s automotive sector and align with global climate goals. However, the incentive faces challenges due to systemic issues. These include the country’s reliance on a coal-dependent national grid, the environmental impact of manufacturing electric vehicles, limited adoption, and the lack of sustainable waste management practices.
To ensure this incentive delivers real sustainability benefits, it must be paired with investments in renewable energy, equitable electric vehicle adoption strategies, and sustainable manufacturing and recycling practices. Additionally, emissions control must be integrated throughout the supply chain process.
Only then can South Africa truly drive toward a greener automotive future.
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| Kyle Fyfe | Director | mail me | | Janice Geel | Associate | mail me | | Reviewed by Natalie Scott | Head | Sustainability | mail me | |
| | Werksmans Attorneys | | ||
