Questions for tariffs quarterly bulletin: South Africa

Describe the taxes and duties regimes in your location's standard form contracts

What are your standard form contracts?

South Africa's Construction Industry Development Board has endorsed the use of the following suite of contracts on South African projects:

• FIDIC Suite of Contracts;
• NEC Suite of Contracts;
• General Conditions of Contract for Construction Works (GCC); and
• Joint Building Contracts Committee Suite of Contracts (JBCC).

Which party bears the risk of taxes and duties?

• Before the contract is entered into:

The developer/employer bears all the tax obligations. Depending on the nature of the transaction, these may include tax obligations on:

– transfer duty for the acquisition of land;
– rates and taxes due on the land;
– if the developer/employer sources any plant and materials, Value-Added Tax (VAT) would be applicable to such plant and materials (and an input VAT deduction may be claimed); and
– as employers of their employees, developers/employers are required to withhold their employees' Pay-As-You-Earn (PAYE) and make contributions for the Skills Development Levy (SDL), and to the Unemployment Insurance Fund (UIF).

• After the contract is entered into:

Developer/Employer's tax obligations

The developer/employer retains the above tax obligations, with the exception of plant and materials where the contractor may bear this obligation and the related tax obligations.

When a project reaches operation stage and starts to generate income, the developer/employer would be liable to pay:

– corporate income tax (at 27%); and
– dividends tax, as and when dividends are declared (at 20%, unless exempt or a reduced rate applies).

subject to any deductions/allowances that are applicable to certain income under the Income Tax Act, 58 of 1962.

If there are cross-border payments to be made, there may be withholding tax considerations (eg dividend, interest and royalty withholding taxes) as well as exchange control considerations.

Furthermore, depending on the nature of the project, there may be some unique tax obligations on the developer/employer, such as mineral and petroleum resource royalties, international oil pollution compensation levy funds levies, and diamond export levies.

Contractor's tax obligations

Contracts generally stipulate whether or not the Contract Prices are inclusive or exclusive of VAT. Contractors are responsible for paying over the VAT to the receiver of revenue.

If a contractor is required to source any plant and materials, VAT would be applicable to such plant and materials.

As employers of their employees, contractors are required to withhold their employees' PAYE and make contributions for the SDL and to the UIF.

 

If taxes and duties change after the contract is entered into, what relief, if any, is available under your location's?

Standard form contracts? eg change in law provisions, force majeure

Changes to tax and duties are introduced by the promulgation of legislation.

Accordingly, tax and duties changes would constitute changes in law, and would be dealt with as such under the following provisions of the standard form contracts:

• FIDIC 1999 Suite: Under clause 13.7 (Adjustments for Changes In Legislation);
• NEC 3 Suite: Under Option X2 (Changes In The Law);
• GCC (2010 Edition): Clause 6.8.4 (Subsequent changes in legislation); and
• JBCC Edition 5.0, July 2007: Clause 7.0 (Compliance with laws and regulations) read with clause 32.4.1 (changes by authorities).

Laws – statutes, case law

None.

Such issues would be resolved contractually, so there is no applicable statute.

Furthermore, the disputes would typically be resolved in adjudication and/or arbitration, and not in the Courts. As such, there are no published judgments on this subject.

 

For particular market segments in your location, what changes, if any, have employers or contractors made recently to the usual risk allocation?

South Africa has experienced the emergence of the so-called "construction mafia" over the last few years, where groups of people demand payment of up to 10% of the contract value, failing which they cause disruption to the works on site. Several projects have come to a halt as a result of the interference of the construction mafia.

The above development has necessitated scrutiny of the risk allocation of site disturbances. In this regard, the parties either allocate such risk to one of them (which would typically be the contractor), or they would agree to share some responsibilities on community engagements and local procurement.

There is also a focus on conducting due diligences on project sites, particularly for remote areas which are more exposed to disturbances by the construction mafia. Either the employer would conduct such due diligence and then instruct tenderers to price on a certain risk profile, or tenderers may be required to conduct their own due diligences and then price according to the risks they identify.