How Europe, India and Africa are incentivizing foreign investment

Overview

Africa is a vast, hugely diverse continent comprising 54 countries.⁹ It offers similarly sprawling opportunities for multinationals seeking new markets for organic growth. This potential, however, doesn’t come without distinct challenges.

Each African nation has a unique business environment, yet many tax authorities can be aggressive and focused on multinationals. And while all countries have regulation, there can sometimes be a disconnect between law and practice, which organizations have to navigate.

Despite this, the continent is clearly appealing to outside investors – note the wealth of operators in physical infrastructure across the continent, for example. “Pockets are deep in Africa because of the money coming in from global donors overseas,” says Burkert. “In fact, there's much more money being spent in Africa than in Europe.”

While certain strengths apply broadly across the continent – such as extensive natural resources – others depend very much on the level of development attained by each country.

In East Africa, for example, the prime recipient for overseas attention has traditionally been Kenya, where strong economic structures make it easy to do business, compared with many other parts of Africa. In West Africa, investment centers around English-speaking Nigeria which has updated its legislation and adopted international standards in a bid to become more investor-friendly.

“Nigeria is working hard to overcome perceptions around historic corruption, and remains a compelling proposition,” says Natasha Meintjes, Global Compliance and Reporting Services Partner, Ernst & Young Advisory Services (Pty) Ltd. “It’s oil-rich and coastal, with a huge population hungry for consumer goods, and a very strong financial services sector.”

Among the French-speaking nations, meanwhile, the Ivory Coast is Africa's most popular investment hub. Then there’s South Africa, a very mature economy that has suffered political challenges and economic fragility, yet remains another compelling investment destination. 

It’s widely recognized that Africa isn't without its difficulties and in the wake of COVID-19, businesses are rethinking their strategies and the role that the continent has to play in the global picture. With a limited incentives landscape, Africa may find it harder than other regions to woo foreign investment. Yet in the right areas, for the right companies, there is opportunity across the continent.

What the region offers

Incentives overview

Companies seeking incentives in Africa will have to dig hard to find them. Most African governments aren’t offering cash grants and the incentives that are available will be on a more discretionary basis. Many require pre-approval, and this can take up to 12 months.

African incentives tend to be given at a national level, in the form of tax allowances or reduction in the tax rate, and will be specific to each country and its level of development. They lean toward job creation in the extractive industries, exports, infrastructure and manufacturing.

Nigeria, for example, offers limited tax holidays for companies producing glass, fertilizer and steel. Ivory Coast, meanwhile, offers discretionary capital investment incentives for activities in certain regions. Companies can claim 35-40% off their total investment in any assets they acquire for their business or agricultural activity.

One rule common to African incentives is that companies aren’t allowed to claim more than one for any particular project. This means companies have to do their research before deciding which to accept.

“You can't double dip,” says Heleen Etzebeth, Quantitative Services Leader, Ernst & Young Advisory Services (Pty) Ltd. “A company has to understand which incentive would give them a better return, and pay attention to the period over which they can make use of that return.”

The one exception to the general African incentives picture is South Africa, which offers an extensive range, from cash grants for developing infrastructure, to a suite of compelling R&D incentives (see below).

R&D incentives

While Europe and the US offer major R&D incentives, African incentives tend to relate to infrastructure rather than innovation. Yet some R&D enticements do exist – South Sudan, for example, offers a 100% R&D tax deduction, while Tunisia gives an additional bonus 50% for companies that have applied R&D in specific sectors.

South Africa takes a different approach here, too. It offers a 150% tax deduction for any venture developing new patentable innovation, where the work improves a process, or researches anything of scientific or tech nature and comes up with new IP.

“As South Africa’s tax rate is 28%, companies can get a 42% tax deduction on any work that’s R&D-related,” says Etzebeth. “This is even open to companies employing South African companies to perform their R&D, meaning the IP sits outside of South Africa.”

Sustainability incentives

Africa offers some energy-efficiency incentives that allow companies to claim tax deductions. Again, South Africa is leading the way, with its 12L tax incentive, which has delivered extensive CO2 savings in the mining and manufacturing industries, among others, since its introduction in 2013.¹⁰

South Africa also introduced its Carbon Offset Administration System in 2020, introducing carbon tax credits, which companies can use to offset up to 10% of their total liability, depending on the sector. Those liable for high carbon tax can buy credits from other organizations to further reduce those liabilities.¹¹

There are specific incentives available in some African states for companies reducing their electricity and water use. Again, any incentives here will be discretionary in nature. Tunisia, for example, offers an additional 50% for companies investing in cleantech projects, and for energy savings and the development of renewable energy.

While the regions featured above may be hugely disparate in terms of operating environments, there’s one thing that’s true across the board – organizations shouldn’t expect an obstacle-free ride – either in how they conduct business generally, or their experience of accessing incentives.

Take the issue of language. While Africa has hundreds, areas of Europe where English isn’t widely spoken can prove equally incomprehensible for companies from elsewhere, for example. And while India is a single country, it contains over 100 different regional languages too.

In India, incentives often come with restrictive clauses, including lock-in periods that prevent companies from disposing of assets or moving infrastructure. Further, the disbursal of funds may be time consuming. These procedural hurdles can be hard to understand, making compliance difficult.

Africa, meanwhile, battles against poverty, fraud and corruption, with most African countries sitting low in global rankings for ease of doing business.

And while instability in Africa may prove off-putting, investors may be deterred from investing in Europe for the opposite reason – regulation there can feel too stifling for certain companies seeking extra freedom to innovate.

Then there’s the issue of navigating the incentives landscape itself. Investors in Africa face a similar problem – every incentive will be managed by a different department, and the rules may change on a daily basis.

“A company may have to deal with different regulators and various bodies for the different aspects, in order for an incentive to be legally right and accepted, and for the company to get the benefits it should,” says Meintjes.

Penalties for mistakes can be severe. In South Africa, a company that underpays its tax could incur the due taxes plus an additional 200%.

Yet things can be equally complex in Europe, too.

“European State aid is a difficult structure if a company wants to make decisions quickly,” says Christian Koller, Senior Manager, EY Global Incentives, Innovation and Location Services, Ernst & Young AG. “It’s very administrative. Companies need to dedicate large resources to managing certain fundings, as time-to-cash can take at least nine months. Member states may not understand the rules properly either. And this can lead to repercussions when certain things are agreed to but can’t be delivered when it comes to compliance.”

The world of incentives is incredibly complex. Each region and its countries present specific issues, which require help from consultants on the ground – to carry out thorough risk management and ensure compliance with complex rules, many of which will be hidden from plain sight.

“Often when companies are investing into a country, they miss asking the question they didn’t know to ask,” says Meintjes. “Many fail to understand the options available, to make sure they’re setting up the company for future success, making it easy to transfer money in and out of the country further down the line, for example. A consultant on the ground will know about the changes to subsidies and incentives. They see it on a daily basis.”

In India, highly competitive states often disguise the real value of their incentives in the rush to claim its own offering as the best. An experienced adviser will understand what’s really to be gained.

“Promises will be given, and a company can easily look at the huge amount of incentives on paper. However a realistic evaluation of what is actually available is essential, while also keeping each state’s payment history in mind,” says Thakkar.

In the EU, meanwhile, the finer details of European State aid rules are so complex they escape even the representatives of member states themselves. As such, hiring an adviser can be invaluable for the effective planning of an incentive strategy.

“Just spending time up front with an adviser is immeasurably beneficial,” says Koller. “If you get the process wrong at the start, it's almost always irrecoverable.”