Public private partnerships

1. Public private partnerships Afzal Khan RAFT afzal.khan@raft.co.za 083 786 4709

2. In a forest of options PPP trees are being ignored Business Day 30 May 2012

3. PPPs are about risk

4. Definition on SARS website • Public private partnerships refer to contractual arrangements in which a private party performs part of a government function and assumes the associated risks. In return, the private party receives a fee according to predefined performance criteria. A public private partnership may also be a project in which a private party uses state assets for its own commercial purposes, and government benefits from the profits generated by the enterprise.

5. SARS Policy Document on Procurement • 2.5.11 Public Private Partnership (PPP) • a) If there is a need, SARS may enter into a PPP in accordance with the National Treasury Regulations.

6. Definition of PPP in the Income Tax Act • “Public Private Partnership” means a Public Private Partnership as defined in Regulation 16 of the Treasury Regulations issued in terms of section 76 of the Public Finance Management Act, 1999 (Act No. 1 of 1999);

7. Definition of PPP in Treasury Regulations • “public-private partnership” means a commercial transaction between an institution and a private party in terms of which – (a) the private party either performs an institutional function on behalf of the institution for a specified or indefinite period; or acquires the use of state property for its own commercial purposes for a specified or indefinite period; (b) the private party receives a benefit for performing the function or by utilising state property, either by way of: (i) compensation from a revenue fund; (ii) charges or fees collected by the private party from users or customers of a service provided to them; or (iii) a combination of such compensation and such charges or fees;

8. Schedule 3 of PFMA • WESTERN CAPE • Destination Marketing Organisation • Western Cape Commissioner for the Environment • Western Cape Cultural Commission • Western Cape Gambling and Racing Board • Western Cape Investments and Trade Promotion Agency • Western Cape Language Committee • Western Cape Liquor Board • Western Cape Nature Conservation Board • Western Cape Provincial Development Council • Casidra (Pty) Ltd

9. What does MFMA Say? Can a municipality enter into a PPP?

10. MFMA? • Section 120 • Yes you may enter into a PPP

11. What are the benefits? To third parties who contract with you on PPPs

12. The law

13. Section 10(zI) of the Income Tax Act • (zI) any amount received by or accrued to or in favour of any person from the Government, where— • (i) that amount is granted for the performance by that person of its obligations pursuant to a Public Private Partnership; and • (ii) that person is required in terms of that Public Private Partnership to expend an amount at least equal to that amount in respect of any improvements on land or to buildings owned by any sphere of government or over which any sphere of government holds a servitude.

14. Does “Government” include a municipality • Will need to get clarity on that since government is not defined. • Reference is made to “all spheres of government”. • Reference is to PFMA and not MFMA. • My answer - yes

15. Section 12N of the Income Tax Act • 12N.   Deductions in respect of improvements not owned by taxpayer.—(1)  If a taxpayer— (a) holds a right of use or occupation of land or a building; (b) incurs an obligation to effect an improvement on the land or to the building in terms of— (i) a Public Private Partnership; or (ii) an agreement in terms of which the right of use or occupation is granted, if the land or building is owned by— (aa) the government of the Republic in the national, provincial or local sphere; or (bb) any entity of which the receipts and accruals are exempt from tax in terms of section 10 (1) (cA) or (t); (c) incurs expenditure to effect the improvement contemplated in paragraph (b); (d) completes the improvement contemplated in paragraph (b); and (e) uses or occupies the land or building for the production of income or derives income from the land or building,

16. Section 12N of the Income Tax Act • the taxpayer must, for the purposes of any deduction contemplated in section 11D, 12D, 12F, 12I, 13, 13bis, 13ter, 13quat, 13quin, 13sex or 36, and for the purposes of the Eighth Schedule, be deemed to be the owner of the improvement so completed.

17. Allowable Deductions • 11D – Scientific or technological research and development – 100% • 12D – Pipelines, transmission lines and railway lines – 100% • 12F – Airport and port assets – 100% • 12I – Industrial policy projects • 35% to 100% • R36000 per employee • R20million to R30million additional training allowance

18. Allowable Deductions • 13 – Buildings used in a process of manufacture – 10% • 13bis– Buildings used by hotel keepers 5% or 20% • 13ter - Residential buildings 2%, 10% • 13quat – Erection or improvement of buildings in urban development zones • 20% then 8%, 20% over five years. • Low cost housing 25%, 13% 10%, 25% over four years • 13quin– Commercial buildings - 5% • 13sex – Residential units – 5% • 36 - Unredeemed balance of capital expenditure in connection with mining operations

19. Section 10(1)(cA) • (cA) the receipts and accruals of— (i) any institution, board or body (other than a company registered or deemed to be registered under the Companies Act, 1973 (Act No. 61 of 1973), or the Companies Act, 2008 (Act No. 71 of 2008), any co- operative, close corporation, trust or water services provider, and any Black tribal authority, community authority, Black regional authority or Black territorial authority contemplated in section 2 of the Black Authorities Act, 1951 (Act No. 68 of 1951)) established by or under any law and which, in the furtherance of its sole or principal object— (aa) conducts scientific, technical or industrial research; (bb) provides necessary or useful commodities, amenities orservices to the State (including any provincial administration) or members of the general public; or (cc) carries on activities (including the rendering of financial assistance by way of loans or otherwise) designed to promote commerce, industry or agriculture or any branch thereof;

20. Definition of PPP in the VAT Act • Not specifically defined

21. Definition of Designated Entity in the Vat Act • “designated entity” means a vendor— • (iii) which is a party to a “Public Private Partnership Agreement” as defined in Regulation 16 of the Treasury Regulations issued in terms of section 76 of the Public Finance Management Act, 1999 (Act No. 1 of 1999), to the extent that that party supplies goods or services in terms of that Agreement to the “institution” defined in that Regulation;

22. Designated Entities (VAT News 25) • Designated entities essentially carry out work which would otherwise be done by government, but compete with other vendors in the economy. The funding that these entities receive is treated on the same basis as the consideration received by other vendors for making the same or similar taxable supplies. Payments to designated entities are therefore taxable at the standard rate of 14% (unless the deemed supply is by a welfare organisation, in which case the zero rate applies).

23. Section 8(5) of the VAT Act • 8(5)  For the purposes of this Act a designated entity shall be deemed to supply services to any public authority or municipality to the extent of any payment made by the public authority or municipality concerned to or on behalf of that designated entity in the course or furtherance of an enterprise carried on by that designated entity.

24. Section 11(1)(u) of the VAT Act – zero-rating • (u) the services are deemed to be supplied in terms of section 8 (5) by a designated entity in respect of any payment made in terms of section 10 (1) ( f ) of the Skills Development Act, 1998 (Act No. 97 of 1998), to that designated entity.

25. Section 10 of Skills Development Act (High Level) • Establishing learnerships • Approving workplace skills plans • Allocating grants • Monitoring education and training

26. How does a PPP benefit the private party for Income Tax

27. How does a PPP benefit the private party for Income Tax • Please remember that the VAT Act deems this private party to be carrying on an enterprise.

28. Allowable Deductions • 11D – Scientific or technological research and development – 100% • 12D – Pipelines, transmission lines and railway lines – 100% • 12F – Airport and port assets – 100% • 12I – Industrial policy projects • 35% to 100% • R36000 per employee • R20million to R30million additional training allowance

29. Allowable Deductions • 13 – Buildings used in a process of manufacture – 10% • 13bis– Buildings used by hotel keepers 5% or 20% • 13ter - Residential buildings 2%, 10% • 13quat – Erection or improvement of buildings in urban development zones • 20% then 8%, 20% over five years. • Low cost housing 25%, 13% 10%, 25% over four years • 13quin– Commercial buildings - 5% • 13sex – Residential units – 5% • 36 - Unredeemed balance of capital expenditure in connection with mining operations

30. How does a PPP benefit the private party for Income Tax

31. How does a PPP benefit the private party for VAT purposes

32. How does a PPP benefit the private party for VAT purposes • Deemed to be carrying on an enterprise. • Hence can make vatable supplies and claim input VAT. • Further zero-rating opportunities if related to skills development.

33. How to do a PPP • 16.3.2 The relevant treasury may grant such approval only if it is satisfied that the proposed PPP will – (a) provide value for money; (b) be affordable for the institution; and (c) transfer appropriate technical, operational and financial risk to the private party. • 16.6.3 A PPP agreement must be procured in accordance with applicable procurement legislation.

34. Overarching consideration • 16.12.1 An agreement between an institution and a private party for the latter to perform an institutional function without accepting the significant risks is not a PPP and must be dealt with as a procurement transaction.

35. Section 10(y) • (y) any government grant or government scrapping payment received or accrued in terms of any programme or scheme which has been approved in terms of the national annual budget process and has been identified by the Minister by notice in the Gazette with effect from a date specified by the Minister in that notice (including any date that precedes the date of such notice) for purposes of this paragraph, having regard to— • (i) whether the programme or scheme meets government policy priorities and objectives with respect to— • (aa) the encouragement of economic growth and investment; • (bb) the promotion of employment creation; • (cc) the development of public infrastructure and transport; • (dd) the promotion of public health; • (ee) the development of innovation and technology; • ( ff ) the provision of housing and basic services; or • (gg) the provision of relief in the case of natural disasters; • (ii) the extent to which the programme or scheme will support the policy priorities and objectives contemplated in subparagraph (i); • (iii) the financial implications for government should government grants or government scrapping payments in terms of that programme or scheme be exempt from tax; and • (iv) whether the tax implications were taken into account in determining the appropriation or payment in respect of that programme or scheme;

36. Questions? Afzal Khan RAFT afzal.khan@raft.co.za 083 786 4709