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Multinationals’ compliance with ownership requirement

There is good news for multinationals in South Africa who are struggling to comply with the ownership requirement in the Codes of Good Practice.

Entities operating in South Africa are part of the transformation process through compliance with the Codes of Good Practice and are therefore required to contribute to the objectives of Broad-Based Black Economic Empowerment (B-BBEE). However, multinationals struggle to comply with the ownership element because of their worldwide practices. Without compliance in this category, obtaining a good score has proven difficult.

The good news is that the Codes of Good Practice have made provision for the recognition of ownership through alternative contributions.

A multinational is defined by the Codes of Good Practice as “a measured entity with a business in the Republic of South Africa and elsewhere, which maintains its international headquarters outside the Republic”. For an entity to qualify as a multinational, it must therefore have operations in South Africa and in at least one other country.

Measured entities who qualify as multinationals can, for the purpose of statement 103 of the Codes of Good Practice, be allowed to score ownership points by way of what is known as an equity-equivalent contribution. Such contributions are made to an equity-equivalent programme.

These programmes are public programmes or schemes of any government department, provincial or local government in the Republic of South Africa, or any other programme approved by the Minister as an equity-equivalent programme. Programmes are usually sector-specific, but the Minister may consider approving programmes that are not. (For more information on programmes, visit the website of the Department of Trade and Industry.)

The objective of the equity-equivalent programmes is to support growth initiatives in South Africa. These initiatives focus on (but are not limited to) priority skills, enterprise creation and the promotion of social advancement or development. Contributions to these initiatives are not the same as contributions to the enterprise development/socio-economic development elements but the principles set out in these elements are applicable.

Two targets are set for equity-equivalent programme contributions. A multinational must invest either 25% of the value of its South African operations, or alternatively elect to invest 4% of the total revenue from its South African operations annually over the period of continued measurement.

In terms of Annex 103 (A), as set out in the Codes of Good Practice, the ownership score relevant to equity-equivalent programme contributions is calculated using one of those two targets. Specific rules should also be adhered to when calculating contributions to qualifying programmes.

From the brief outline above, it is clear that a multinational is faced with a complex task when it comes to determining its possible ownership score. It is therefore crucial to engage the services of a B-BBEE professional to ensure that all relevant regulations are complied with.

Article written by San-Reece Roelf of Exceed Tax & Management Services (021 882 8140).