By Dylan Jessup, Manager: Automotive Incentives, EY Cova
How important is B-BBEE compliance to the workings APDP2 and for all participating component manufacturers in the OEMs supply chains?
The inclusion of B-BBEE in the Automotive Masterplan underlines the Transformation objective. The Masterplan aligned itself with the national economic policy interest of transformation. B-BBEE is no longer a sideline issue in relation to AIS benefits only.
It is now more important than ever before for the whole sector. The expected inclusion has been answered clearly by government and the early indications, through the Masterplan development, has allowed the sector time to “get its ducks in a row” in preparation.
Component manufacturers participating in OEM supply chains need to be aware that the requirements stated in the APDP2 Regulations and AIS Guidelines are not the same. This means that complying for one may not result in compliance with the other. Therefore, it is important to understand the two sets of requirements to avoid any confusion or any unforeseen disappointment.
There may be some components manufacturers, who may still think they do not have to comply. This is however not the case because all component manufacturers participating in an OEM supply chain will need to comply with the stipulated requirements in the APDP2 Regulations. The requirement for compliance also has implications for raw material suppliers as raw materials have been included in the local value-add calculation.
So where does all this compliance need to be reflected?
Firstly, any component manufacturer needing to invest in manufacturing capacity and seeking support through the AIS will have to comply with B-BBEE requirements to access the benefit.
Secondly, any component manufacturer seeking to participate in the Production Incentive benefit will need to show compliance: –
- When making application for an Eligible Production Certificate (EPC), as ITAC will not issue the EPC to an applicant if there is no demonstrated B-BBEE compliance.
- When making application to ITAC on a quarterly basis for the Production Incentive and issue of Production Rebate Certificates (PRC). ITAC will not issue a PRC to an applicant until B-BBEE compliance is demonstrated. ITAC may also suspend an applicant’s EPC until compliance is achieved.
The impact is that a component manufacturer will lose tangible financial benefit either through the ability to use the PRC to reduce their import duty liability, by rebating import duty, or selling PRCs into the open market.
Then there is Rebate Item 317.06. Any component manufacturer who is wishing to register with ITAC to use this rebate item will have to comply otherwise ITAC cannot issue the permit. This shall mean that the component manufacturer will have to potentially pay import duty. Why only potentially pay import duty? In Schedule 5 of the Customs and Excise Act, Duty Drawback Item 536 allows for component manufacturers to drawback (recover) full import duty on automotive components. It is important to note that Duty Drawback Item 536 only includes automotive components. Raw materials are excluded – beware! Therefore, Rebate Item 317.06 is more comprehensive in its coverage than the drawback provisions.
Then, last but not least, the real reality check. The quarterly Standard Material (SMD) and C2 (Foreign Content – Annexure C1) Declarations both require the component manufacturers to declare their B-BBEE status.
Component manufacturers failing to disclose their B-BBEE status or are not-compliant as prescribed, will be considered tantamount to an incomplete declaration.
What does this mean?
In the roll-up of the SMDs and the C2s to the applicable OEM, the OEM will lose or forfeit the local content and the local value-add in their quarterly APDP2 account submissions from that specific component manufacturer because of the component manufacturer being not-compliant or failing to disclose.
Some component manufacturers may argue that it does not affect them and it is an OEM “problem”. The impact to the OEM is the final Production Incentive and VALA benefit issued quarterly by ITAC and Customs may be significantly reduced. This translates into a loss of import duty relief afforded to OEMs importing non-locally manufactured vehicles through the APDP2 programme. This may translate into reduced competitiveness of locally based OEM’s which is counterproductive to the overriding objective of the APDP2 of growing local vehicle production.
Whilst there are many views out there on the sustainability of this implementation, we remind you that this analysis is based on existing published regulation. Failure to plan and implement accordingly could find companies coming short if nothing changes. Ultimately, it is a responsibility of all component manufacturers to become B-BBEE compliant as stated in the Regulations so that the APDP2 system works and we can all benefit from a growing automotive industry.
COMPANY: EY COVA
Contact: Dylan Jessup
Email: [email protected]