Late last year, President Cyril Ramaphosa signed the Taxation Laws Amendment Act, which introduced a significant tax incentive aimed at promoting the production of battery electric and hydrogen-powered vehicles in SA.
This incentive reflects government’s commitment to transforming the automotive manufacturing industry from the production of primarily internal combustion-engined vehicles to include the production of battery electric and hydrogen‑powered vehicles as envisaged in the Electric Vehicles White Paper published in November 2023.
Various African countries, including Togo, Ghana, Benin, Uganda, Tanzania and Zambia, have introduced tax incentives for battery electric vehicles, not only to lower the cost of such vehicles to the consumer, but to boost investments in the local manufacture of electric vehicles.
SA joins a laundry list of African countries that have adopted tax incentives, but battery electric and hydrogen-powered vehicle manufacturers need to be aware of the manner in which the SA Revenue Service (Sars) will apply this tax incentive.
The incentive allows taxpayers to claim income tax allowances of 150% of the cost of:
- Any buildings (and improvements).
- New and unused plant and machinery (including the cost of installation of any foundations or supporting structures designed for the plant and equipment).
- Any improvements to plant and machinery acquired by the taxpayer that are used mainly in the production of battery electric or hydrogen-powered vehicles in SA.
The incentive will apply for 10 years, to assets brought into use from March 1 2026 and before March 1 2036. Sars has also introduced anti-abuse rules, which prevent taxpayers from inflating the cost of the asset or improvement and from claiming the allowance for assets the taxpayer has sold in terms of an instalment credit agreement.
If the taxpayer sells an asset or ceases to use that asset mainly in the production of battery electric or hydrogen-powered vehicles within five years, there will be a 50% recoupment of the cost of the asset. If the asset has been sold, the recoupment will be in addition to the normal recoupments provided for in section 8(4)(a) of the Income Tax Act of 1962, but not exceeding the allowances claimed in respect of that asset.
The extent to which multinationals benefit from the incentives remains to be seen after the enactment of the Global Minimum Tax Act of 2024, which introduces a minimum tax rate of 15% through a domestic minimum top-up tax (DMTT), for companies forming part of a multinational group with revenues exceeding €750m.
The rules involve complex calculations, which allow for a level of exclusion from the DMTT based on the taxpayer’s eligible payroll costs and tangible asset values. The effect of the section 12V allowance and the DMTT will have to be carefully modelled to ensure taxpayers investing in the production of battery electric or hydrogen-powered vehicles obtain the full benefit of the section 12V allowance.
Even though this tax incentive is a leap in the right direction for battery electric and hydrogen‑powered vehicle manufacturers, the sustainability challenges SA faces may dilute the benefits the tax incentive aims to achieve. SA is heavily reliant on fossil fuel-based electricity, with about 80%-85% of SA’s electricity being generated via coal-fired power stations, which ranks the country as one of the most carbon intensive nations globally.
While electric vehicles are marketed as having “zero tailpipe emissions” and are optically favoured, the reality is that charging these vehicles will add to the load already borne by the carbon-heavy and buckling electricity grid and potentially offer only marginally less greenhouse gas emissions when measured from a supply chain perspective.
Vehicle manufacturers should therefore consider a concurrent shift to renewable energy sources such as off-grid solar‑powered battery charging infrastructure that can be made available to consumers to reduce reliance on the national electricity grid.
The manufacturing process for electric and hydrogen-powered vehicles, particularly their batteries, is energy intensive and involves the extraction of rare earth metals such as lithium, cobalt, and nickel. The mining of these materials often has significant environmental and social consequences, raising questions about the sustainability of scaling up electric and hydrogen-powered vehicles under this incentive.
In addition, the disposal and recycling of electric vehicle (EV) batteries at the end of its life cycle is frequently an overlooked issue. SA has limited infrastructure to handle the safe recycling of lithium-ion batteries, which pose environmental risks if not properly managed.
SA’s 150% tax incentive for EV manufacturers is a bold move towards modernising the country’s automotive sector and aligning with global climate goals. However, the tax incentive is undermined by systemic challenges, including a coal-dependent national grid, the environmental impact of EV manufacturing, limited adoption and sustainable waste management processes.
For this incentive to deliver tangible sustainability benefits it must be paired with investments in renewable energy, equitable EV adoption strategies, sustainable manufacturing and recycling practices, and emissions control throughout the supply chain process.
Only then can SA truly drive towards a greener automotive future.
*Fyfe is director, Geel an associate, at Werksmans Attorneys. Their article was reviewed by head of sustainability Natalie Scott.
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