To: Mr Martin Grote
Chief Director: Tax Policy
The Budget Office
National Treasury


QUESTIONNAIRE ON EMPLOYMENT INCOME EXEMPTION

We refer to your fax of 18 October 2000 concerning the above, in which you invited the SAACE to provide you with more information in support of the concernes which were raised by our industry during the recent public hearings held by the parliamentary Portfolio Committee on Finance. The information reflected in this response was mainly drawn from the SAACE’s bi-annual management information survey. We have also received input from member firms whose experience in the international field could be regarded as fairly representative.

1. GENERAL BACKGROUND

The South African Association of Consulting Engineers is a business association with voluntary membership. We represent the interests of 388 member firms. Altough it is difficult to obtain statistics of firms that do not belong to the SAACE, we estimate that SAACE member firms represent in excess of 80% of the capacity in the consulting engineering market. A comprehensive list of SAACE member firms is available in printed format and can be made available to the Department.

Consulting engineers provide intellectual services, the value of which cannot be reduced to a monetary asset base, but which is vested in the expertise of the professional and technical skills of the people working in this industry. Reduced to measurable quantities our member firms operate out of a total of 881 offices, and employ a projected 10414 people (we are awaiting the results of our latest Management Information Survey, covering the period up to June 2000). In June 1997 our members employed 12158 people.

2. DOMESTIC ACTIVITIES

This paragraph will deal with our industry in total, and the next paragraph (international activities) will be expressed as a percentage of total activity.

Total employment for member firms receded from 12158 in June 1997, to a projected 10414 in June 2000. This is a decline of 14.3%. Over the same period total salaries declined from R1185 million to R1137 million per annum (a 4% decline) and Fee Income declined from R3.266 bn to R3.072 bn (a 6% reduction). In 2000 the profit margin of member firms is estimated at 8.5%.

Of the total staff employed, 26.2% are professionally qualified, 43.7% are technically qualified and 30.1% are in administrative support positions.

The total project value in which our members are involved in 2000, is in the order of R30 bn.


3. INTERNATIONAL ACTIVITIES

From an "asset" perspective, SAACE member firms currently operate 46 offices employing a total of 605 people outside the borders of South Africa. This represents 5.8% of our total capacity. However, 11.3% of the total fee value is earned outside South Africa (9.1% in other African countries, and 2.2% in the rest of the world).

Apart from the people working in foreign countries, some of the local capacity is also working on foreign projects, albeit from their local offices. This accounts for the apparent discrepancy between the value of foreign work and the number of employees and offices abroad.

The SAACE does not have appointment-specific data of our firms’ activities and can therefore not answer the questions pertaining to typical contract length, project cost structures, value of fees repatriated to SA, etc. However, based on specific inputs received from some of our members, cost structures on foreign projects could be in the order of: professional and highly skilled expertise 64%, direct project expenses 9% and overheads 27%,


4. OTHER INFORMATION

Despite differentiation and diversification of their services, the impact of the declining domestic market on many member firms has been quite severe. In some instances the drop in domestic employment has been as high as 15 % and the increase in employment on foreign contracts as high as 63%.

According to information received from member firms, appointments in African countries outside of the RSA are almost entirely funded from development assistance. Because of very low profitability margins due to the high cost of international operations, any adverse changes in tax legislation will make South African firms uncompetitive against most other international consulting firms against which South African firms have to compete and that are able to offer more attractive tax structuring to their employees. Although profit margins are very low, one of the advantages of being able to deploy capacity elsewhere, is that that capacity is not lost to the local industry, should local market conditions improve. A number of our member firms have indicated that they would have had to retrench many more professional people, had it not been for the fact that they could redeploy those individuals on appointments abroad. One of our member firms reported that 27% of their total earnings derives from work abroad.

With regard to some of the specific provisions of the Act, it is considered that Section 10 (1) (o), in particular the reference to the 183 day continuous period of absence required, does not take cognisance of the realities of working on overseas projects. Employees need to be back in South Africa on occasion for technical briefings and report back; not all employees relocate their families, and therefore return more regularly to be with their loved ones; in the case of one specific member firm all their employees in Mozambique have, without exception, at some stage contracted malaria and had to be flown back to South Africa for treatment.

A number of firms have pointed out that contracts entered into and tendered for up to February 2000 are now burdened with foreign dividend tax which was not taken into account at the time of tender. Without some form of exemption from the new regulations, adjustments will have to be made to the remuneration of employees working on foreign projects, that would result in many of those contracts running at a loss.

In closing, the SAACE believes that it is becoming more difficult for South African companies to compete abroad on a sustainable basis. This will contribute to a flight of skills as well as capital from the country. Given the new tax regime it has already been suggested that considerable volumes of South African construction plant and equipment currently employed in projects outside our borders will be sold off into those projects rather than attracting tax incurring rental income for the South African companies. This will result in the South African economy having to bear significant costs when a future economic upturn gives rise to significant construction activity, and capacity has to be increased. Capital equipment and skills once lost will not be easily replaced, and then at great expense to the taxpayer.

We hope the above input is of value.


From: Pieter E Roux