Media Statement 21 February NAACAM BUDGET ANALYSIS 2018 Compendium TABLE OF CONTENTS. Page Title 02 National Treasury Highlights

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1 Media Statement 21 February 2018 NAACAM BUDGET ANALYSIS 2018 Compendium TABLE OF CONTENTS Page Title 02 National Treasury Highlights 04 Budget The Band Aid Budget Deloitte 07 Budget Watch: Progression & Stability KPMG s 2018 Budget Summary 12 Reimagine the Possible: 2018 Budget Highlights PricewaterhouseCoopers 24 Budget 2018 Austerity, growth through Incentives and stimulus. Sasfi n Commercial Solutions (Pty) Ltd NAACAM appreciates the diffi cult circumstances under which the 2018 Budget was developed. In reviewing Minister Gigaba s maiden budget speech, National Association of Automotive Component and Allied Manufacturers (NAACAM) Executive Director, Renai Moothilal, highlighted that the budget is one that is looking to stop the bleeding caused by spiralling government debt levels. It is vital that the projection of a drop in the budget defi cit from 4.3% in 2017/18 to 3.6% in 2018/19 does materialise. The increased rates of taxation, whilst needed in the budgeting process, are an obvious concern. VAT has increased after many years in SA, and its impact will be felt by consumers. Similarly, the 2% increase in ad-valorem taxes will negatively impact the domestic vehicle sales outlook, which does not assist SA s case for higher levels of vehicle production. It may be an interesting scenario for policy makers to look at using rebates on such a tax increase to stimulate demand for domestically produced vehicles. This would be a growth enhancing measure which local component manufacturers could benefi t from. NAACAM is cautious about the impact of the still-to-be-fi nalised Carbon Tax Bill, which Minister Gigaba stated will be implemented from 1 January Our commitments to a cleaner environment are vital but industrial development should not be impacted by an overzealous regulatory regime. It would have been ideal if allocations for greater industrialisation incentives were announced, but Moothilal did note that measures such as the Minister s approval of six special economic zones (SEZs) for tax relief, as well as a streamlining of the R&D tax allowance, would be key in continuing to base SA s economic growth on positive movements in terms of industrialisation. The focus on using good governance rather than bailouts to stabilise state owned enterprises, is noteworthy in both the budget speech as well as last week s State of the Nation address by President Ramaphosa. These enterprises have a vital role to play in stimulating our domestic economy and driving an industrial agenda. All things considered, the budget for 2018 is not surprising and NAACAM now looks forward to the fi nalisation of a localisation strengthening of the SA Automotive Masterplan this year. It is expected that the incentive and policy certainty this will bring to the sector should be used as the basis for long term automotive manufacturing investment and production plans. Tel: +27 (0) /5748 Fax: +27 (0) director@naacam.co.za NAACAM First Floor, Kaymac House, 53 Harris Avenue, Isandovale, Gauteng

2 HIGHLIGHTS ISSUED BY: National Treasury Tel: (012) BUDGET FRAMEWORK The budget deficit is projected to narrow from 4.3 per cent of GDP in 2017/18 to 3.5 per cent in 2020/21. Main budget non-interest expenditure is projected to remain stable at 26.6 per cent of GDP between 2017/18 and 2020/21. Net debt is expected to stabilise at 53.2 per cent of GDP in 2023/24. Proposed tax measures will raise an additional R36 billion in 2018/19. The fiscal framework reflects two major changes that followed the 2017 MTBPS: mediumterm expenditure cuts identified by a Cabinet subcommittee amounting to R85 billion, and an additional allocation of R57 billion for fee-free higher education and training. Contingency reserves have been revised upwards to R26 billion over the next three years. Real growth in non-interest expenditure will average 1.8 per cent over the next three years. Post-school education and training is the fastest-growing category. MACROECONOMIC OUTLOOK - SUMMARY Percentage change Estimate Forecast Household consumption Gross fixed - capital formation Exports Imports Gross domestic product CPI inflation Current account balance (% of GDP) SPENDING PROGRAMMES Over the next three years, government will spend: R528.4 billion on social grants. In total, R324 billion is provided for higher education and training, including R57 billion of new allocations for fee-free higher education and training. R792 billion on basic education, including R35 billion for infrastructure, and R15.3 billion for learner and teacher support materials, including ICT. R667.8 billion on health, with R66.4 billion on the HIV, AIDS and TB conditional grant. R123.3 billion on subsidised public housing. R125.8 billion on water infrastructure and services. R207.4 billion on transfers of the local government equitable share to provide basic services to poor households. R129.2 billion to support affordable public transport. CONSOLIDATED GOVERNMENT FISCAL FRAMEWORK R billion/percentage of GDP 2017/ / / /21 Revised estimate Medium-term estimates Revenue Percentage of GDP 28.8% 29.7% 29.9% 29.9% Expenditure Percentage of GDP 33.2% 33.3% 33.4% 33.4% Budget balance Percentage of GDP -4.3% -3.6% -3.6% -3.5% Gross domestic product TAX PROPOSALS In 2018/19: The VAT rate will increase from 14 to 15 per cent from 1 April R6.8 billion will be raised from partial relief for bracket creep. Increases in the general fuel levy and alcohol and tobacco excise duties will together raise revenue of R2.6 billion. Ad valorem excise duties for luxury goods, such as motor vehicles, will be increased. Estates above R30 million will now be taxed at a rate of 25 per cent. The plastic bag levy, motor vehicle emissions tax and the levy on incandescent light bulbs will be raised to promote eco-friendly choices. A health promotion levy, which taxes sugary beverages, will be implemented from 1 April R505.8 bn R348.1 bn TAX REVENUE 2018/19 R231.2 bn R97.4 bn Personal income tax VAT Corporate income tax Customs and excise duties CONSOLIDATED GOVERNMENT EXPENDITURE BY FUNCTION, 2017/ /21 R billion 2017/ / / /21 Revised estimate Medium-term estimates 2017/ /21 Average annual growth Learning and culture % Health % Social development % Community development Economic Development % % Peace and security % General public services % Payments for financial assets Allocated expenditure % Debt-service costs % R84.8 bn R 77.5 bn Other Fuel levies Contingency reserve Consolidated expenditure %

3 2018/19 BUDGET EXPENDITURE ISSUED BY: National Treasury Tel: (012) CONSOLIDATED GOVERNMENT EXPENDITURE SOCIAL R1.67 TRILLION R1.01 TRILLION SERVICES Economic regulation and infrastructure R97.9bn Basic education R230.4bn ECONOMIC DEVELOPMENT R200.1bn Industrialisation and exports Agriculture and rural development Job creation and labour affairs Innovation, science and technology R32.9bn R30.2bn R23.3bn R15.8bn LEARNING AND CULTURE R351.1bn University transfers National Student Financial Aid Scheme Skills development levy institutions Education administration Technical and vocational education and training R34.9bn R22.8bn R19.3bn R16.8bn R10.7bn Police services R99.1bn District health services R90.2bn Defence and state security R48.4bn Central hospital services R38.6bn Law courts and prisons R45.4bn Provincial hospital services R34.3bn Home affairs R7.9bn Other health services R33.8bn PEACE AND SECURITY R200.8bn HEALTH R205.4bn Facilities management and maintenance R8.5bn Public administration and fiscal affairs R40.4bn Municipal equitable share R62.7bn Executive and legislative organs R16.0bn Human settlements, water and electrification programmes R56.5bn GENERAL PUBLIC SERVICES R64bn External affairs R7.6bn COMMUNITY DEVELOPMENT R196.3bn Public transport Other human settlements and municipal infrastructure R38.6bn R38.5bn Old-age grant R70.5bn Social security funds R66bn Child-support grant R60.6bn Disability grant R22.1bn DEBT-SERVICE COSTS R180.1bn SOCIAL DEVELOPMENT R259.4bn Provincial social development Policy oversight and grant admin R20.6bn R9.8bn Other grants R9.7bn

4 Budget 2018 The Band Aid Budget By Nazrien Kader, Managing Partner Deloitte Africa Tax & Legal On Wednesday, 21 February, Honourable Minister Gigaba presented what he termed a tough but hopeful Budget, which took some hard decisions in order to put the country on a better fiscal trajectory. Our overall impression is that this is a Band-Aid Budget which aims to stop the financial bleeding, but which isn t enough, on its own, to deliver the growth prospects we need. For that, we ll be looking to President Ramaphosa s administration to set economic priorities and to deliver accordingly. The question remains whether the measures presented by Minister Gigaba will be enough to placate the ratings agencies which in turn influence South Africa s long-term economic prospects. There is some good news regarding South Africa s economic prospects. Growth in GDP is expected to increase from an estimated 1% for 2017, to 1.5% this year and hit 2.1% by This won t be enough to create the job growth we need, but it s a start, and an indication that the economy is looking up. At the same time, consumer inflation will remain steady at between 5.3 and 5.5% over the period. The Budget deficit will narrow from 4.3% of GDP in 2017/18 to 3.5% in 2020/21. On the tax collections side, tax proposals were designed to generate an additional R36 billion in revenue for 2018/19 - the most notable of which was the raising of the VAT rate to 15%, from 14% previously the first change in 25 years. And in a further blow to taxpayers, this year, there was no relief given for fiscal drag for individuals earning above R per year. For those below this threshold, only limited relief is given which does not fully account for the effects of inflation. Stealth taxes, such as the Carbon tax is expected to be implemented from 01 January 2019 and the plastic bag levy was increased by 50% to 12 cents per bag with effect from 01 April A raft of new tax proposals include higher duties on luxury goods such as cosmetics and cellphones, motorcars and of course increased sin taxes on tobacco and alcohol. The Minister also promised to make some very hard decisions on the expenditure side, in order to both cut overall spending while also funding free tertiary education for poor and working class students at a cost of R57 billion over three years. It is estimated that fiscal consolidation will see expenditure reductions of R85bn over the next three years, with funding for public transport and

5 roads and infrastructure grants all taking a hit. However, debt servicing costs are expected to rise to R592billion in the medium term. One of the pressing questions over the past year concerned the apparently never-ending bailout of state-owned enterprises (SOEs). Though this year s Budget makes no specific provision for bailouts, the government s contingency fund will increase by R10 billion. Minister Gigaba suggested that future bailouts could be funded by disposing of non-core assets, engaging in strategic equity partnerships or through direct capital injections. However, the emphasis on overall governance measures for SOEs is to be welcomed. Minister Gigaba will be judged on delivery. The outlook continues to look daunting.

6 4,26% 3,06% 4,03% 5,86% 24,57% 2,43% 17,92% 37,87% % Other Specific excise duties Customs duties Fuel levy Value Added Tax (VAT) Secondary tax on companies/dividends Tax Corporate income tax (CIT) Personal income tax (PIT) Estimate 2018 Secondary Tax on Companies/ Dividends Tax The overall mix between direct and indirect tax has fluctuated over time but on average comprises approximately 57 percent in direct taxes and 43 percent in indirect taxes. With the proposed increase in VAT, environmental taxes and fuel levies, the share contributed by indirect taxes is set to rise. CIT is a significant, but declining, revenue source. In the late 1970 s, it accounted for 41% of tax revenue versus a projected 17.9% in the 2018 fiscal year. Value-added tax rates VAT was originally introduced at 10% and then remained at 14% for a long period of time, a rate that was low by global standards. Although regressive in nature, VAT is regarded as an efficient form of tax collection and the upward adjustment to 15% with effect from 1 April 2018 was widely anticipated. 14% % 2018 After creeping up to a projected 4.3% of GDP in 2017/18, the budget deficit it is currently expected to improve to a deficit of 3.5% in 2020/21. Tax buoyancy (the ratio of tax revenue growth to nominal GDP growth) has declined over the last two years and is not expected to increase as quickly as previously thought. The gross debt-to-gdp level outlook has improved since the 2017 Medium Term Budget Policy Statement but is still pushing through the 50% level, with the expectation that it will stabilize at 56.2% of GDP in 2022/3. Sources of tax revenue 4,30% 3,20% 4,60% 4,10% 3,56% 3,23% 3,64% 3,98% 4,27% 3,56% 3,27% 4,82% 3,84% 3,95% 3,95% 5,11% 4,23% 3,42% 4,60% 4,93% 4,45% 3,49% 4,79% 4,97% 4,55% 3,23% 4,91% 4,85% 4,50% 3,28% 4,12% 4,91% 4,54% 3,28% 4,32% 5,20% 4,39% 3,13% 3,98% 5,49% 26,30% 24,69% 24,71% 27,23% 25,72% 26,42% 26,41% 26,49% 26,27% 25,28% 3,60% 3,20% 2,58% 2,55% 2,96% 2,43% 1,92% 2,15% 2,26% 2,76% 24,50% 26,48% 22,53% 19,71% 20,42% 19,57% 19,70% 18,75% 17,86% 17,87% 29,50% 31,22% 34,26% 33,66% 33,72% 33,89% 34,43% 35,79% 36,27% 37,11% Income tax rates for individuals Corporate income tax rates 40% % % After a sizable jump in 2017, the maximum marginal tax rate for individuals has been left unchanged at 45% for now. 40% 30% 20% 10% 35.45% 36.89% 34.55% 29% 28% 12.5% 10.0% 28% 15.0% The corporate tax rate has historically been fairly competitive relative to South Africa s peers. Globally, there is a trend of reducing corporate tax rates. Effective Corporate Income Tax (CIT) Driving progress Budget 2018/19 Tax in South Africa A 10 year Trajectory For information, contact Deloitte Touche Tohmatsu Limited Tax as a percentage of GDP Budget surplus/deficit percentage of GDP The South African Tax-to-GDP ratio showed a general upward trend during the past 20 years from a low of 21.9% in 1995/6 to projected 25.9% in 2017/18. This growth was largely driven by increased contributions from PIT and VAT. Although lower than the OECD average, the South African tax-to-gdp ratio is higher than many developing countries and is significantly high when one considers that South Africa does not have large social security levies Estimate 26% 26% 26% 23% 24% 24% 24% 25% 26% 26% 26% 26% Government is under increasing pressure to manage the budget deficit but this will prove challenging with only modest economic growth. 40% 30% 15% 5% -5% 30.8% 33.8% 31.9% 33.1% 32.7% 33.1% 32% 30.9% 31.4% 31.5% 27.8% 30.2% 27.3% 26.8% 28.5% 29.7% 27.2% 27.7% 27.3% 27.8% 28.3% 29.5% 29.2% 28.8% 1% 1.7% -1.1% -6.6% -4.3% -3.6% -4.1% -3.7% -3.6% -3.6% -3.5% -4.3% Expenditure Revenue Surplus/deficit Estimate 2018

7 Budget Watch: Progression & Stability KPMG s 2018 Budget Summary Finance Minister Malusi Gigaba delivered his maiden National Budget address on 21 February Over the last few years we have predicted an increase in the VAT rate, and the key tax proposal in this Budget was that, for the first time since 1993, South Africa will increase its VAT rate. Yesterday, the Minister of Finance, Malusi Gigaba delivered this year s Budget Speech. In the face of needing to balance the revenue gap of R48.2 billion with the required economic growth to reduce unemployment and encourage investment, this year s budget was certainly a tough balancing act. For the automotive sector, very little is mentioned in respect of government incentives or tax incentive schemes specifically pertaining to the automotive industry. To get to this, you have to dig into the underlying annexures issued by National Treasury and commentary is found ticked away at the end of Annexure B. We discuss this further below, and at the outset we note that the following tax proposals will have an impact on the sector: Below is an excerpt from Table B.1 of Annexure B (Tax Expenditure Statement) released by National Treasury, that reflects a 17% share of total support as at 2015/16*. This percentage share of support remains unchanged from the previous year, after seeing an increase in support for the last 3 years. Expenditure related to the Automotive Production Development Programme is currently the largest tax expenditure item. Tax Expenditure Estimates Motor Vehicles *(includes MIDP/APDP including IRCC s) Total Tax Expenditure (Revenue forgone by NT) Motor industry support as % of Total tax foregone by NT 2012/ / / /16 R15.8 billion R18.4 billion R23.5 billion R 26.9 billion R123.1 billion R135.1 billion R145.5 billion R159.3 billion 13% 14% 17% 17% *2015/16 is the latest figures available to report on by NT. In 2017, reviews into the tax incentives began to assess their effect on investment, job creation and growth. The evaluation is still under way, and focuses on both tax and non-tax financial incentives, such as subsidies. This review extends to the Automotive Production Development Programme, which is being evaluated by the Department of Trade and Industry to assess to what extent the programme has met its intended objectives, and produce recommendations on how it should be amended. The amendment will come in the form of the new Automotive Masterplan, which will be implemented in 2021, and will run until 2035.

8 Below is a summary of the tax proposals in general. Whilst the budget speech had some highlights, the main tax proposals were to be found in the accompanying budget annexures released by National Treasury (NT). Whilst we have set out below all of the main proposed tax changes, not all of these may be directly applicable to your particular circumstances the devil always lies in the detail! Do feel free to contact us on any area that may be of interest to you and to your business. Key highlights National Treasury aims to bring in an additional R36 billion of tax revenue through the following key tax proposals: An increase in the VAT rate from 14% to 15% (an estimated R22.9 billion of additional tax revenue). A below-inflation increase in the personal income tax rebates and brackets, with greater relief for those in the lower income tax brackets (an estimated R6.8 billion of additional tax revenue). An increase in the ad-valorem excise duty rate on luxury goods from 7% to 9% (an estimated R1 billion of additional tax revenue). A higher estate duty tax rate of 25% for estates greater than R30 million (an estimated R0.2 billion of additional tax revenue). A higher donations tax rate of 25% for donations exceeding R30 million in one tax year. Increases in fuel levies and sin taxes (an estimated R2.5 billion of additional tax revenue). Value-Added Tax proposals VAT rate: The VAT rate increase from 14% to 15% will be effective 1 April Electronic fiscal devices: SARS will release a discussion paper on the potential use of electronic fiscal devices, also known as electronic cash registers, to help revenue administration by monitoring business transactions. Foreign electronic service entities: Draft regulations broadening the ambit of foreign electronic services subject to VAT have been issued and will become effective on 1 October Debts sold or ceded: A VAT vendor is permitted to claim a deduction for VAT on taxable supplies that were provided on credit, and later have to be written off as irrecoverable. Where the debts are sold or ceded on a non-recourse basis, a double VAT deduction is made in some circumstances by both the transferor and transferee of such debt. An amendment will be made to avoid a double VAT deduction in these circumstances. Correction of tax invoices: The proposed amendment seeks to facilitate the correction of tax invoices which contain incorrect information in other words, a vendor will be able to cancel the incorrect invoice and reissue the tax invoice with the corrected information. Credit notes for supplies after sale of an enterprise as a going concern: It is proposed that a purchaser of an enterprise be allowed to issue credit notes in respect of goods that were supplied by the seller but subsequently returned to the purchaser. Separate treatment of branches or divisions of a corporate entity for VAT debtcollection purposes: An amendment is proposed to provide legal certainty that the provisions for collecting VAT debt will apply across all branches and divisions of a corporate entity, despite such branches or divisions being separately registered as VAT enterprises. Extension of joint and several liability for VAT to members of a joint venture: An amendment is proposed to provide legal certainty that the members of a joint venture may also be jointly and severally liable for the VAT debts of that venture.

9 General income tax proposals Collateral lending arrangements: It is proposed that the legislation be amended to prevent foreign shareholders from reducing the applicable dividends tax rate to zero in respect of listed shares acquired in a collateral lending arrangement with a South African resident company. Excessive debt financing: A discussion document, for public consultation, will be issued regarding potential tax abuse of interest-bearing finance structures. Share buy-backs and dividend stripping: It is proposed to review the legislation relating to share buy-backs and dividend stripping, to ensure legitimate transactions are not negatively impacted. Doubtful debts allowance: In order to avoid uncertainty, the criteria for determining the doubtful debt allowance will be included in the tax legislation. Electronic communications cabling: Due to recent capital outlays on fiber optic cabling by the telecommunications industry, government will consider accelerating the existing 15-year write-off period, and clarify who is entitled to the allowance, given the complexities of ownership and right of use of such cables. Amendments to tax incentives: Employment tax incentive (ETI): While the ETI has had a positive impact on smaller firms, it has had a low or negative impact on larger firms. This will be reviewed before the ETI s expiry on 28 February Special Economic Zones (SEZs): Six SEZs will be approved to encourage investment in manufacturing. The benefits to companies setting up business in a SEZ will include a lower corporate tax rate and an extension of the ETI to employees of all ages. Research and Development (R&D): Legislative complexities in respect of the current section 11D R&D incentive programme will be reviewed by the Department of Trade and Industry to ensure applications are reviewed and approved timeously. Automotive Production Development Programme (APDP): A review of the incentive programme will be performed to ensure alignment with policy objectives, and the success of the programme given the costs incurred. Venture capital regime: Despite an uptake of the incentive with a positive effect on the growth of small businesses, further legislative tweaks will be considered in order to further increase the appeal of this incentive. Industrial policy project incentive: The industrial policy project incentive has been extended from 31 December 2017 to 31 March Cross-border income tax proposals Controlled foreign companies (CFCs): High tax exemption: As a result of a global trend towards a lower corporate tax rate, the current exemption from taxation for CFCs operating in countries with a tax rate of more than 75% of what the South African tax rate would be, will be reviewed. A reduction in the 75% threshold may be warranted. Revisiting distributions from foreign trusts and foundations: Linking in to the changes to CFC rules in 2017, legislation was proposed to render distributions by foreign trusts fully taxable in the hands of the recipient beneficiary. This will again be considered in the 2018 legislative cycle. Exemption in respect of international shipping income: Income derived from the conveyance of passengers or goods by a South African ship that is engaged in international traffic is generally exempt from income tax. It is proposed that the exemption be extended to also apply, under certain circumstances, where a South African shipping company temporarily uses a ship that is registered in a jurisdiction other than South Africa. Foreign denominated receivables disposed of at a loss: The legislation will be amended to clarify the tax treatment of foreign exchange gains or losses recognised in respect of a foreign denominated receivable which is disposed of at a loss due to market forces. Interest withholding tax: In respect of interest paid to foreign beneficiaries of a trust, it will be clarified who is responsible for withholding the tax, once vesting of the interest in the foreign beneficiary occurs.

10 Income tax proposals specific to financial services Short term insurers: It is proposed that tax legislation applicable to short-term insurers, which currently apply only to residents, be extended to apply to non-residents operating in South Africa. This is to align with the Insurance Act (2017) which allows foreign reinsurers to operate businesses in South Africa. Long-term insurers: The applicable effective date of the tax legislation associated with the introduction of the solvency assessment and management framework, will be amended to also apply to the risk policy fund. Collective investment schemes (CISs): Amounts (other than capital amounts) that accrue to any CIS (other than a CIS in property) are taxable in the CIS, unless distributed to participatory interest holders within 12 months of accrual. The current rules are open to abuse, as it is not always clear when profits are capital in nature. The rules are to be clarified to provide certainty on the treatment of revenue profits in this context. Individuals and employment tax proposals Estate duty rate increase: With effect from 1 March 2018, the estate duty rate will increase from 20% to 25% of the taxable value of a deceased estate that exceeds R30 million. Donations tax rate increase: Donations in excess of R30 million in one tax year will be taxed at 25%, instead of 20%, effective 1 March Medical tax credits: Increase: Medical tax credits will increase from R303 to R310 per month for the first two beneficiaries, and from R204 to R209 per month for the remaining beneficiaries. Splitting of medical fees credits: A taxpayer qualifies for medical tax credits, if he/she pays medical aid contributions or expenses. This is effectively a rebate against his/her tax liability. Some taxpayers also contribute to the medical aid contributions or costs of another person, such as an elderly parent, and are arguably benefitting excessively from the rebate. To curb this, where medical contributions or costs are shared among certain taxpayers, it is proposed that the medical tax credit is apportioned between the various contributors. Personal income tax: The personal income tax tables have been adjusted by increasing the bottom three tax brackets below inflation. The top four tax brackets have not changed and no relief is therefore provided for fiscal drag. The rebates have increased as follows: - Primary R to R Secondary R7 479 to R Tertiary R2 493 to R2 574 The tax thresholds have increased as follows: - Below age 65 R to R Age 65 and over R to R Age 75 and over R to R Low-cost housing loans at preferential rates: Fringe benefit tax will not be imposed on housing loans up to R , granted at preferential interest rates, by employers to employees who earn remuneration of less than R Retirement reforms: Contributions to retirement funds outside South Africa: Retirement benefits from a foreign fund, in respect of employment rendered outside South Africa, is currently exempt. This will be reviewed to ensure deductible contributions are only allowed where benefits are taxable. Allowing transfers to pension and provident preservation funds after retirement: The tax treatment of transfers by individuals after their retirement to pension preservation and provident preservation funds, are to be legislated. The 2017 legislative amendments already provide for postretirement transfers to retirement annuity funds.

11 Rectifying anomalies on the transfer of retirement funds: The transfer of amounts between funds at the same employer has inadvertently led to a tax liability for members due to the current wording of the legislation. The legislation will be amended retrospectively to correct these unintended tax liabilities. Tax treatment of retirement fund withdrawals upon emigration: When an individual formally emigrates from South Africa, he/she is able to withdraw the full value of his/her retirement annuity (after payment of applicable taxes). It is proposed that the tax treatment for other types of retirement fund withdrawals on emigration be aligned. Administrative proposals Dividends tax returns: The legislation will be amended to provide that no dividend tax return needs to be submitted by a person/entity receiving an exempt dividend. Notification of audit: In a welcome move, it has been proposed that SARS will be obliged to notify taxpayers of the start of a tax audit. Customs and excise duty proposals Customs and excise rate increases: Specific excise duties: Effective 21 February 2018, specific customs and excise duties are increased. On most alcoholic beverages the rate increased by between 6% and 10%, (excluding traditional African beer and beer powder, which remain unchanged). The rate of duty on tobacco products and cigars increased by 8.5%. General Fuel Levy and Road Accident Fund Levy: The General Fuel Levy is increased by 22c/li to 337c/li and 322c/li for petrol and diesel, respectively. The Road Accident Fund Levy will increase by 30c/li to 193c/li. These increases will take effect on 4 April Ad valorem excise duties: Government proposes an increase in the ad valorem excise duties on certain luxury goods. Proposals include a maximum increase in ad valorem excise duty for motor vehicles from 25% to 30%. Inclusion of smart phones in the classification of cellular telephones is also proposed to attract ad valorem excise duties. The ad valorem excise duty rate, currently on 5% and 7%, will be increased to 7% and 9%. Government will also consult on a proposal to replace the flat rate for cell phones with a progressive rate structure, based on the value of the phone. Forestalling : Government proposes to introduce amendments to prevent forestalling, a practice through which abnormal volumes of products are moved from warehouses into the market to avoid increases in excise duty rates. Fiscal markers : Government proposes to introduce amendments to extend the use of fiscal markers, which are required under the tracking and tracing obligations of the World Health Organisation s Protocol to Eliminate Illicit Trade in Tobacco Products. Diesel refund system: Following a comprehensive review of the administration of the diesel refund system, which requires delinking the diesel refund from the VAT system and the creation of a stand-alone diesel refund administration, National Treasury and SARS will engage with affected industries and other role players as a next step in the reform process. The legislative amendments giving effect to the separation will be developed following public consultations. Environmental tax proposals Carbon Tax: The Carbon Tax is proposed to be implemented from 1 January Carbon Dioxide Emissions Tax: From 1 April 2018, the carbon dioxide emissions tax is R110 for every gram above 120gCO²/km for passenger vehicles and R150 for every gram above 175gCO²/km for double cabs. Plastic Bag Levy: Effective 1 April 2018, the environmental levy payable in respect of plastic bags (shopping bags) is 12 cents per bag. Electric Filament Lamps Levy: From 1 April 2018, the environmental levy payable in respect of electric filament lamps is R8 per globe.

12 Acid Mine Drainage Levy: Government will publish a discussion document outlining design options for the proposed acid mine drainage levy to charge polluters for the cost of environmental damages, and to help fund the treatment of acid mine water. Environmental fiscal reform policy: An environmental fiscal reform policy brief is proposed by government to examine fiscal and regulatory options to improve water resource management, mitigate the emission of pollutants and reduce waste. Health Promotion Levy: From 1 April 2018, a health promotion levy which taxes sugary beverages will be implemented. Government will publish a policy brief on the use of taxes to encourage healthy choices. Exchange control proposals Reforming loop structures: Outward investments that involve the creation of unintended loop structures require prior approval from the Financial Surveillance Department (FSD). As an exception, South African companies are, on application to their Authorised Dealer, permitted to acquire 10% to 20% participation rights in a foreign target entity, which in turn hold investments (including loans) in a CMA country. Thus, this dispensation does not apply to foreign direct investments where South African companies collectively hold more than 20% participation rights in the foreign entity. This 20% threshold is to be increased to 40% for bona fide business investment, growth and expansion transactions. The minimum 10% requirement is to be abolished. Treasury management companies: South African entities may establish one subsidiary as a holding company for its offshore operations, subject to certain conditions. These conditions are to be relaxed and allowable transfers by parent companies to holding entities will be increased from R2 billion to R3 billion for listed companies, and from R1 billion to R2 billion for unlisted companies. Prudential limit: To increase investment in diverse assets, the offshore limit for funds under management by institutional investors is increased by 5% for all categories, including the African allowance. Approval of cross-border transactions: To support cross-border investment and increase transparency, a policy framework for the review and approval of complex cross-border transactions will be released later this year. Inward listings: The inward listing policy is aimed at deepening South Africa s capital markets, but may be creating distortions. A comprehensive inward listings review paper will be released in Cryptocurrencies: The Reserve Bank, together with the other domestic financial sector regulators, intends to publish a position paper in 2018 on the evolving uses of cryptocurrencies. Contact Us Johannesburg and Pretoria: Mohammed Jada Head of Corporate Tax T: E: mohammed.jada@kpmg.co.za Andre M eyburgh Head of Indirect Tax T: E: andre.m eyburgh@kpm g.co.za Venter Labuschagne Head of Customs and Excise T: E: vent er.labuschagne@kpm g.co.za Johan Heydenrych Head of Tax M anagement Services T: E: johan.heydenrych@kpm g.co.za Natasha Vaidanis Head of International Tax and Transfer Pricing T: E: nat asha.vaidanis@kpm g.co.za Carolyn Chambers Head of Global M obility Services & Employment Tax Advisory T: E: carolyn.cham bers@kpm g.co.za Cape Tow n: Di Hurworth Partner, Corporate and International Tax T: E: di.hurworth@kpmg.co.za Durban: Yasmeen Suliman Partner, Corporate and International Tax T: E: yasmeen.suliman@kpmg.co.za Port Elizabeth: Tanette Nell Associate Director, Corporate Tax T: E: tanette.nell@kpmg.co.za 2018 KPMG Services Proprietary Limited, a South African company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in South Africa MC The KPMG name and logo are registered trademarks or trademarks of KPMG International. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it w ill continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

13 Reimagine the xxx xxx possible 2018 budget highlights

14 Major announcements 1% VAT increase to 15% The Minister of Finance announced in his Budget speech that the VAT rate will be increased by 1 % to 15% with effect from 1 April This increase is expected to raise additional revenue of 22.billion. This will result in additional costs for consumers as they will now have to pay an additional VAT on any purchases of goods or services from VAT vendors. This will have a major impact on households already tight budget. The implementation of the VAT increase for certain business will also be complex, and the implementation date of 1 April does not leave much time to allow businesses to effect the necessary system changes and enhancements. This is the correct approach as we see further reliance on indirect taxes. This raises large amounts of revenue with relatively small increases in rates due to its broad base and economic efficiency. The effect that there is no amended list of zero rated foodstuffs is positive as it maintains the integrity and efficiency of the South African VAT system. Lesley O Connell, PwC VAT partner Extensive reform for E-Services In a nutshell, the draft Regulation effectively repeals the current Regulation that sets out those services that are regarded as electronic services. It is proposed to expand the current ambit of Electronic services to include any services supplied by means of an electronic agent, electronic communication or the internet for any consideration. The result is that non-resident suppliers of electronic services, except telecommunication services and educational services supplied by a person regulated by an educational authority in a foreign country, are required to register for VAT in SA where the value of the sales exceeds R in any consecutive 12-month period. In light of the fact that SA has not implemented the B2B and B2C distinction in line with current international best practice, the impact will in all likelihood be substantial for foreign suppliers who supply any services electronically. It is however pleasing to note that amendments are proposed for intermediaries and platforms to register as vendors and to account for the VAT on sales made through such platforms provided that the platform/intermediary facilitates the supply and is responsible for issuing the invoice and collection of the payment. These amendments are proposed to come into effect on 1 October. Public comments on the draft amendments must be submitted by 22 March Charles de Wet, Head of Indirect Tax, PwC Africa 2 PwC 2018 budget highlights

15 Personal Income Tax When looking at the changes to personal income tax in isolation (i.e. ignoring the increase in the VAT rate and the usual increases in sin taxes ), the news in today s budget was probably as good as could have been expected. Prior to today, the most widely predicted changes in some quarters was that there would be an increase in the maximum marginal tax rate as well as the scrapping of the medical tax credit. Fortunately, neither of those have occurred. What has happened, however, is that the full effects of inflation have not been taken into account in making adjustments to the personal income tax rates or the medical tax credit. It is predicted that this will result in additional collections of R6.8 billion. Barry Knoetze, Associate Director, PwC Tax Regarding personal income tax rates, no adjustments have been made to the top four income tax brackets and below inflation adjustments have been made to the bottom three income tax brackets. In addition, the medical tax credit has been increased from R303 to R310 per month for the first two beneficiaries and from R204 to R209 per month for the remaining beneficiaries. The primary, secondary and tertiary rebates have also been adjusted, with the result that the tax threshold for taxpayers under 65 years of age increases from R75, 750 to R78, 150. The changes to the personal income tax rates will have the following effect at the various taxable income levels for taxpayers under 65: Taxable Income 2018/2019 Tax Due Change from 2017/2018 % Change R100,000 R3,933 -R % R200,000 R22,265 -R % R500,000 R113,807 -R2, % R1,000,000 R312,973 -R2, % R1,500,000 R517,973 -R2, % R2,000,000 R742,973 -R2, % In addition to the above, there has also been an announcement that the estate duty rate will increase from 20% to 25% for estates in excess of R30 million as well as an increase in the donations tax rate to 25% for donations in excess of R30 million in one tax year. Both of these increases will be effective from 1 March From an employer s perspective, it has been announced that there will be slight increases in the tax free subsistence allowances that can be paid to employees as well as in the taxfree reimbursement travel claim that can be paid to employees for business travel. It is also proposed that the official rate of interest applicable to soft loans to employees by employers will be amended to bring it closer to the prime rate rather than the current repo rate plus 1%. This latter change could have a negative impact on employees in receipt of soft loans from their employer since the rate at which fringe benefits will be determined could increase. On the positive side, however, it seems that for loans provided by employers to employees solely for housing purposes, relief from fringe benefits tax in respect of loans of less than R450, 000 will also be provided. Barry Knoetze, Associate Director, PwC Tax 3 PwC 2018 budget highlights

16 Corporate Tax Amendments to debt relief rules Taxpayers recently noted that the new debt relief rules introduced during 2017 result in adverse income tax implications. For example, where a taxpayer raises additional share capital and applies the funding so obtained to settle debt, such settlement of debt could result in an increased tax bill if the debt settled is not with a South African tax resident group company. This is specifically the case where a South African taxpayer wishes to settle debt with an offshore holding company or treasury company. In such a case, the taxpayer would be required to obtain external/third party funding to settle the debt if it does not want to fall foul of the current debt relief rules. In addition, any amendment to the terms of certain loans may also trigger adverse tax consequences. The Minister of Finance announced that the Government noted concerns about unintended consequences that may arise from the current debt relief rules and it is proposed that further amendments be made to address these concerns. Although it is uncertain which concerns the Minister referred to, a review of the debt relief rules would be welcomed by business as the legitimate restructure of debt may presently result in adverse income tax consequences which may impede business growth. Alwina Brand, Tax Partner PwC Clarity expected to bad debt allowances An amendment to the doubtful debts allowance under section 11(j) of the Income Tax Act was made in 2015, with the intention that the allowance would be claimed according to criteria set out in a public notice issued by the Commissioner. The criteria has nevertheless not been formulated and it is now proposed that the criteria for determining the allowance should instead be included in the Income Tax Act. A specific amendment to the Income Tax Act would result in more clarity to business and will be good news. Alwina Brand, Tax Partner PwC Tax rules affecting short-term insurers The much anticipated new Insurance Act (2017) permits foreign re-insurers to conduct reinsurance business in South Africa through a branch of an offshore company. A number of offshore insurance companies are considering opening up operations in South Africa under this new rule. However, the income tax treatment of such branches appeared to be a draw back as the Income Tax Act provisions regulating the taxation of short-term insurance apply only to short-term insurers resident in South Africa and not to foreign short-term insurers operating through a branch. This would result in an uneven playing field as South African insurers are allowed certain tax allowances in respect of technical insurance reserves which would not be available to the foreign insurers. It has nevertheless been announced that the income tax provisions applying to South African resident short-term insurance companies will be extended to apply to non-residents operating short-term insurance business through branches in South Africa. This announcement will create clarity with regard to the tax position of foreign reinsurers wishing to operate through branches in South Africa. It is not clear though whether the announcement in this regard would also extend to controlled foreign companies (so-called CFCs) of a South African resident who operate as licensed short-term insurers in their country of tax residency. At present, the legislation with regard to the income tax treatment of licensed short-term CFCs seems to have the unintended consequence of excluding these entities from claiming allowances in respect of technical insurance reserves. Alwina Brand, Tax Partner PwC 4 PwC 2018 budget highlights

17 Boost for electronic communication providers At present companies that provide telecommunications infrastructure are allowed to write off lines or cables used for the transmission of electronic communications over a period of 15 years under section 11D of the Income Tax Act. These entities will certainly welcome the announcement that the Government proposes reducing the period over which electronic communication lines and fiber optic cables are written off, in a bid to align the tax system with technological advances and international practice. A more beneficial tax allowance system would hopefully boost additional investment in fiber optic infrastructure which in turn would stimulate business growth. Alwina Brand, Tax Partner PwC Tax treatment of collective investment schemes It is proposed that the tax treatment of amounts realised by portfolios of collective investment schemes as a result of the trade in underlying assets may no longer purely be taxed as gains of a capital nature. National Treasury notes that some collective investment schemes are trading frequently and arguing, contrary to current case law, that the profits are of a capital nature. Investors are currently benefiting from this tax treatment as the overall return in respect of the collective investment scheme would be enhanced due to the lower effective tax rate. A move by National Treasury to tax regular trades in collective investment schemes as gains or a revenue nature, would therefore increase the overall tax bill of the collective investment scheme. Alwina Brand, Tax Partner, PwC International Tax South Africa has specific anti-tax avoidance legislation aimed at South African owned foreign companies. This so-called controlled foreign company tax legislation in essence aim to tax the notional taxable income of a foreign company in the hands of its South African shareholders. However an exemption is provided from such taxation if the foreign entity is regarded as sufficiently taxed abroad - the threshold is currently set at 75% of the tax that would have been due had the foreign company been a South African tax resident. The rationale for this exemption is that if the foreign company is sufficiently taxed abroad, no or little anti-tax avoidance risk should exist. In light of the global trend of lowering corporate tax rates, the Minister of Finance proposed that the current 75% high tax exemption threshold will be reconsidered. This proposal implicitly recognise that legitimate business may be conducted offshore whilst incurring significantly less foreign tax compared with South Africa. Although a lowering of the 75% threshold would be in line with the global trend, equally important is the manner in which the amount of taxes to be compared are calculated. South Africa s current high tax exemption is not consistent with the global norm (as advocated by the Organisation for Economic Cooperation and Development ( OECD )) and a simple threshold adjustment alone will have little practical impact in respect of foreign companies operating as part of a tax group. A threshold adjustment (lowering) may still result in the South African shareholders of a foreign company being subject to tax on the notional taxable income of the foreign companies, even though economically the foreign company is subjected to foreign taxes at an effective rate in excess of the high tax threshold. Cor Kraamwinkel, International Tax Partner, PwC 5 PwC 2018 budget highlights

18 Indirect taxes Updated regulation for foreign electronic services The 2017 Budget Review announced that regulations prescribing foreign electronic services subject to VAT would be broadened to include cloud computing and other online services. Updated draft regulations prescribing foreign electronic services and supporting amendments to the VAT legislation are to be published on Budget Day for public comment. It is disappointing that the regulations dealing with foreign electronic services have not kept up with international best practice. Clarification on brown bread Following recent uncertainty regarding the zero-rating of basic food items, government proposes an amendment to reflect the original policy intent that only brown bread and whole wheat brown bread will be zero-rated, and will not extend to rye or low GI bread. Cryptocurrency The VAT and Income tax treatment of cryptocurrencies will be clarified. Insertion of the definition of face value of a debt transferred A VAT-registered vendor is permitted to claim a deduction for VAT on taxable supplies that have to be written off. If the vendor cedes or sells the debt that has been written off on a non-recourse basis for an amount that is less than the amount owing, then the sale of the debt is exempt from VAT and the vendor is not required to make any adjustments to the previous VAT deduction. Certain vendors that buy book debt then attempt to claim a further VAT deduction if they write off all or part of this debt in future. This results in a double VAT deduction, which is against the intention of the legislation. To prevent this double VAT deduction, it is proposed that the term face value of a debt transferred be defined in the VAT Act to take into account the policy rationale explained in the explanatory memorandum. Postponing the abolishment of the zero-rating of the supply of goods and services for the national housing programme In 2015, amendments were made to the VAT Act to abolish the zero-rating of the supply of goods and services for government s national housing programme, with effect from 1 April In 2017, the legislation was amended to postpone the abolishment date for a further two years to 1 April Due to budgetary constraints, it is now proposed to postpone the effective date for this amendment indefinitely. Charles de Wet, Head of Indirect Tax, PwC Africa 6 PwC 2018 budget highlights

19 Economic Commentary Commitment to fiscal consolidation likely enough to appease rating agencies Finance Minister Malusi Gigaba delivered his Budget Speech 2018 to Parliament on Wednesday, February 21st. South Africans had high expectations of the event following the tone set by President Cyril Ramaphosa s maiden State of the National Address (SONA) 2018, delivered less than a week earlier at the same venue. The SONA reflected President Ramaphosa s desire to turn around the South African economy, while Minister Gigaba s speech was expected to provide the hard numbers to realise these plans. Key takeaways 1 Upwardly revised economic growth projections of 1.5% and 1.8% in 2018 and 2019, respectively, as investor and business confidence improves 2 Budget deficit to decline from 4.3% of GDP in 2017/18 to 3.6% of GDP in 2018/19, with commitment to narrow the fiscal deficit further over time 3 Gross public debt to peak at 56.2% of GDP during 2022/23 after the medium-term budget (October 2017) failed to plan for a stabilisation 4 Exposure to contingent liabilities increased in 2017/18, with government planning a holistic reform programme for state-owned enterprises (SOEs) 5 Departmental budget cuts of R85.7bn over the next 3 years, with allocations to all layers of government 6 Added special economic zones (SEZs) and industrialisation incentives will boost investment in job-creating manufacturing and tradable services 7 Value-added tax (VAT) rate increased by one percentage point to 15% (still below the global average). The impact for consumers is partially offset by above-average increases in social grants. 8 Government revenue getting boost from health promotion levy ( sugar tax ), tax on carbon emissions and changes to medical aid tax credits 9 Biggest reallocation in expenditure will be R57 billion over three years for fee-free higher education, with first year students benefitting from 2018 PwC s interpretation of the Budget Speech of 2018 is that it should be enough to keep Moody s Investors Service from making another cut in South Africa s sovereign rating. Various rating agencies will likely welcome the improved economic growth projections, a narrowing fiscal deficit trajectory, and plans for a turnaround in public debt, which Minister Gigaba presented today. 7 PwC 2018 budget highlights

20 Improved outlook for economic growth The National Treasury is forecasting an improved economic outlook for the country, and has revised higher its projections for economic growth. The government now sees the South African economy growing by an average of 1.65% during compared to an estimate of only 1.3% reported some five months ago in the Medium-Term Budget Policy Statement (MTBPS). Similarly, the South African Reserve Bank (SARB) revised upward its economic growth projections to 1.5% for in its January monetary policy statement. These upward adjustments are premised partly on a perceived improvement in business and investor confidence over the past few months. Minister Gigaba is hoping that this growth performance will contribute towards the state s plans for radical socioeconomic transformation. Other measures include a planned R2.1 billion fund shared between several ministries and aimed at boosting small- and medium-sized enterprises (SMEs) during their start-up phase. This will add to some R1.4 billion in private sector commitments toward a business-led fund that will aim to support high-potential SMEs. In order to boost economic growth over the medium- to long-term, the finance minister has approved six special economic zones (SEZs) in order to encourage investment in manufacturing and tradable services; sectors that encourage exports, job creation and economic growth, Industrialisation incentives worth R18.8 billion over the medium term will also help in realising President Ramaphosa s desire to see the manufacturing sector lead the job creation agenda that he envisions over the next five years. A narrowing deficit path returns While drafting the medium-term plans that were released in October last year, the National Treasury was experiencing a challenging period both from an economic as well as political perspective. The outlook for both was uncertain towards the end of last year and the beginning of 2018, thereby constricting the ability of fiscal planners to plot a trajectory for the budget deficit. The results of the MTBPS were disappointing: the deficit was planned to plateau instead of shrink. National Treasury appeared to be in a holding pattern until there was more certainty about the country s political outlook. Moving to the present, the Budget Speech of 2018 was delivered in a much more constructive political environment and an improved outlook for the economy. As a result, Minister Gigaba and his team were able to reintroduce into their plans a long-held commitment to narrow the fiscal deficit over the next three years. From a large shortfall of R204.3 billion in the 2017/18 financial year, the deficit is planned to narrow to R180.5 billion in the coming 2018/19 year. This year s budget deficit is expected to reach an equivalent of 4.3% of GDP in line with the MTBPS statement. This will be followed by a notable decline to 3.6% of GDP in the 2018/19 and 2019/20 fiscal years. Both expenditure and revenue is expected to rise in these periods, in nominal terms and as percentage of GDP. 8 PwC 2018 budget highlights

21 VAT and other tax increases to bolster revenues In order to fund these deficit-narrowing aspirations, the National Treasury has to make plans both on the income and expenditure sides of its responsibilities. Regarding revenues, it was widely expected that some tax rate increases would be announced in Budget Speech Indeed, the value-added tax (VAT) rate was increased by one percentage point to 15%, with zero-ratings continuing on essential food items. The regressive nature of this tax type has led National Treasury to postpone increases in VAT until now, after keeping the VAT rate stable for the last 25 years. Poorer households are more exposed to changes in the prices of consumption goods, like food. Low-income households will be compensated to a degree through above-average increases in social grants. The government considered alternatives to a VAT increase, for example higher personal income and capital gains taxes, but assessed that these would have greater negative consequences for growth and investment. The VAT rate has not been changed since 1993 despite significant changes elsewhere in the tax basket. A higher corporate tax rate would also be counter to global trends of easing corporate tax rates. South Africa s VAT rate will however still be below the global average of 15.7%, and will be at a similar level to the average of African countries at 14.8%. Elsewhere, the National Treasury is increasing the ad valorem excise duty rate on luxury goods from 7% to 9%, while a higher estate duty tax rate of 25% will be levied on estates greater than R30 million. These two components will have an impact on middle to high income earning households. Two additional revenue-raising measures will impact a wider spectrum of South Africans: a 52c/ liter increase in fuel levies and a 6%-10% increase in alcohol and tobacco excise duties. The normal inflation-related adjustments are also being made to personal income tax brackets, though with some drag at the bottom end to widen the coverage. Minister Gigaba believes that these and other measures will result in government revenue rising by 10% in 2018/19 to R1.491 trillion. Some R36 billion will come from the above-mentioned tax increases, with R22.9 billion expected from the higher VAT rate. The health promotion levy more commonly known as the sugar tax for being levied on sugar-sweetened beverages (SSBs) will be implemented from April this year. The levy will amount to 2.1 cents per gram of sugar in every 100ml, with the first 4 grams per 100ml being exempt from the tax. PwC estimations suggest the tax burden is approximately 10% given current levels of sugar content in popular SSBs. A tax on carbon emissions will also be effective from January 2019 while below-inflation increases in medical aid tax credits are also being implemented. Large reallocation of expenditure to higher education Government expenditure will increase by 7.3% in 2018/19 to R1.67 trillion. Apart from normal adjustments made to spending lines, the biggest reallocation in expenditure will be an additional R57 billion channelled to fee-free higher education over the medium term. From 2018, all first-year students at universities and Technical and Vocational Education Training (TVET) colleges from a household earning less than R per annum will be funded for the full cost of study. This will be rolled out in subsequent years until all academic years are covered. Post-school funding will be the fastest growing expenditure item over the medium term alongside the cost of servicing the state s debt obligations. Debt servicing costs will total R180 billion in 2018/19 and is expected to grow by an average of 9.4% per annum over the next three years. Healthcare spending will increase by an average of 7.8% per annum in coming years as the government allocates more money to the National Health Insurance (NHI). Some of this money will come from the amendment to medical aid tax credits. While Budget Review 2018 provided the usual information on healthcare spending, it gave very little in terms of new details about the NHI. Nuclear energy is absent from spending plans. 9 PwC 2018 budget highlights

22 State-owned enterprises (SOEs) still a heavy burden The SONA made an unequivocal commitment that government will intervene in turning around the deteriorating governance and finances of SOEs. Minister Gigaba underscored the progress to date, including key leadership appointments at South African Airways (SAA) and Eskom. He added that SOEs are expected to fund their own operations, but admitted that government recognises that the current business models of some SOEs are unsustainable. He indicated that a holistic reform programme will work to develop and implement robust turnaround plans for these troubled entities, but did not really provide any details. Reforms could include the participation of private entities in some build projects, e.g. port terminals. The burden of SOEs on the fiscus is a key challenge for the government due to the large volume of contingent liabilities - commitments by the state to cover the costs of financing of SOEs if these entities are unable to repay debt. On a positive note, government guarantees declined from R476 billion in 2016/17 to R466 billion in 2017/18. However, guarantees to troubled SOEs like Eskom and SAA did not decline, while total exposure to guarantees, that is, borrowing by SOEs against the guarantees, increased by 3.4% in 2017/18 to R300 billion. Some SOEs struggled over the past year to sell bonds due to hesitance amongst investors, thereby forcing them to resort to guaranteed loans. What will the rating agencies say? The MTBPS provided no answers to concerns over rising public debt levels apart from indicating that a ministerial committee would be established to develop proposals on how to stabilise national debt over the medium term. Thankfully, the Budget Review of 2018 showed progress in this area, with National Treasury planning for gross public debt as percentage of GDP to peak at 56.2% during the 2022/2023 financial year. This debt ratio will also rise more slowly over the next few years compared to recent history. The turnaround in public debt is facilitated by departmental budget cuts of R85.7bn over the next 3 years, with allocations to all layers of government. Minister Gigaba admitted that the income and expenditure measures needed to narrow the fiscal deficit and limit growth in public debt will cause economic discomfort, but they are necessary to protect the integrity of the public finances. Indeed, the decisions announced on February 21st are important steps towards improving the country s fiscal dynamics and, in turn, the sovereign s creditworthiness. Rating agencies will have to decide if the minister s view that we have made the tough calls and decisions holds true. These agencies are expected to welcome improved economic growth projections, a narrowing fiscal deficit trajectory, and plans for a turnaround in public debt. They would certainly have wanted more detail on the planned reform programme aimed at turning around SOEs. Nevertheless, their view of the required political will to make the necessary changes should also have improved over the past two months, and over the past week in particular. Overall, PwC believes that this year s Budget Speech should be enough to keep Moody s Investors Service from making another cut in its rating of the South African sovereign, with an evaluation due over the next few weeks. This is very good news: another downgrade would result in South Africa being excluded from the Citi World Global Aggregate Bond Index (WGBI). Exiting the WGBI could result in more than R100 billion in foreign money exiting the domestic capital market. The success of this budget will be very dependent on the positive political momentum currently being built by President Ramaphosa. His first two months as leader of the African National Congress (ANC) and first week as national president has engendered a hope that business, investor and consumer confidence will rise significantly during 2018 as he sets about making necessary changes to reignite the South African economy. His success will be critical in turning around the economic, fiscal and political decline seen in South Africa over the past several years. Christie Viljoen, Economist at PwC Lullu Krugel, Chief Economist and Partner at PwC Maura Feddersen, Economist at PwC 10 PwC 2018 budget highlights

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24 Budget 2018 Austerity, growth through Incentives and stimulus By: Bradley Mitchell, Head of Research, Sasfin Wealth and Dylan Jessup, Regional Manager, Sasfin Commercial Solutions Overview The election of Cyril Ramaphosa as the leader of the ruling party, followed by his appointment as President of South Africa, ushered in a wave of renewed optimism in the country s prospects among citizens and the global investment community. Swift leadership changes at embattled public institutions imply that crippling corruption should be materially stunted; while comments regarding the size of national government departments and moves to resolve matters like the controversial mining charter impasse, are expected to reduce bureaucratic inefficiencies, improve the economic growth trajectory and reduce unemployment. It is critical for Ramaphosa, and for the country, to capitalise on this re-found optimism, as National Treasury remains under significant pressure to increase tax revenue and implement more stringent fiscal consolidation, without stifling economic growth. These measures are desperately needed in order to deal with a sharply widening budget deficit and a higher debt trajectory; which continues to drive the fastest growing component in government expenditure, namely interest payments. Budget A short review Government plans to strengthen the economy by investing in small business development, agricultural production, roads and infrastructure and manufacturing, according to the National Budget. Finance Minister Malusi Gigaba on Wednesday unpacked how government will drive economic growth through economic development and industrialisation. Spend on economic development will grow from R156.3bn in 2017/18 to R195.3bn by 2020/21. In terms of Small businesses, Government plans to finalise the design of the enterprise development fund, which has provisionally been allocated R2.1bn over the medium term and will start operating in 2019/20. The fund, announced at the mini budget, aims to improve access and reduce the cost of finance, increase risk appetite for investment start-ups and improve early-stage small enterprise survival rates, the budget review read. The fund will be managed by the small business development department, along with the Department of Science and Technology and Treasury. Regarding industrialisation incentives, Government has allocated R18.8bn towards industrialisation incentives over the medium term, said Gigaba. These incentives will be in the form of grants, loans and tax allowances, he explained.