The South African Revenue Service (SARS) is stepping up action against employers who abuse the Employment Tax Incentive (ETI), heading to court to secure legal backing to boost enforcement.
The ETI is designed to stimulate youth employment in South Africa, but its application has yielded mixed results.
According to Finance Minister Enoch Godongwana, evidence from an evaluation of the ETI in 2018 showed that the incentive had a small but positive impact in supporting its goals.
However, the data is inconclusive due to broader job-market issues in South Africa.
“Some empirical studies show that the ETI has a positive but modest effect on youth employment and job retention, particularly among smaller firms, while other studies have shown no impact on employment,” he said.
“However, the overall impact on aggregate unemployment remains limited due to broader structural labour-market constraints.”
While the impact of the incentive on its stated goals remains limited, the incentive’s structure has opened the door for the system to be gamed and for employers to improperly claim ETI credits.
According to Tax Consulting SA, legislative amendments introduced in 2021 and 2023 were specifically aimed at addressing practices inconsistent with the ETI’s intent.
However, the changes require stronger enforcement from SARS to be effective.
“For some time, legislative changes have been introduced with comparatively limited visible enforcement from SARS,” the tax experts said.
However, a new test case “may suggest a growing focus by the tax authority in this area.”
Tax Consulting said that SARS has approached South Africa’s courts with a test case seeking clarity on the interpretation and application of the ETI.
The outcome is expected to have a bearing on more than 330 employers, identified for allegedly improperly claiming ETI credits.
The matter before the court—although relating to a joinder application to participate in the test case—sheds light on the core issue to be decided and signals that SARS is stepping up to enforce the rules and curb perceived abuse, it said.
SARS flexing its powers
The Tax Administration Act empowers SARS to designate a dispute as a ‘test case’ where multiple taxpayers are affected by substantially similar legal and factual issues.
In this instance, the test case is intended to provide clarity on the efficiency and consistency of the interpretation and application of the ETI, particularly where arrangements may be structured to obtain benefits not aligned with the incentive’s purpose.
According to Tax Consulting, a test case can serve as an appropriate mechanism to promote greater certainty.
Both SARS and the National Treasury have, for several years, flagged concerns that the incentive was being used by taxpayers to benefit in ways that fall outside its intended purpose.
Since its introduction on 1 January 2014, the ETI has aimed to reduce the cost of employing young South Africans and encourage job creation through a cost-sharing mechanism between government and employers.
The incentive allows qualifying employers to reduce their Pay-As-You-Earn (PAYE) liability, without affecting employees’ wages.
However, government communications, including Budget Speeches and SARS revenue announcements, have repeatedly highlighted schemes designed to extract unintended tax benefits from the incentive.
ETI abuse has been acknowledged as a systemic issue, undermining both the fiscus and the policy intent of the incentive.
SARS’s own reporting reflects this concern, with ETI-related audits and investigations forming a consistent part of its compliance focus.
The 2024 Budget Review emphasised this point, proposing that punitive measures to support amendments be refined in the legislation to address the abusive behaviour of certain taxpayers towards the incentive.
Similarly, SARS’s 2022/23 revenue announcement highlighted ETI as an audit focus area, with significant recoveries linked to PAYE ETI audits.
The move toward a test case has been broadly welcomed within the industry, particularly as it reflects a shift from ongoing legislative changes to tangible enforcement action.
Tax incentives rely not only on clear rules but also on consistent enforcement to maintain their integrity and achieve their intended outcomes.
“This development serves as a broader caution to taxpayers,” Tax Consulting said.
“Structures or solutions marketed as mechanisms to access ETI benefits should be approached with care to ensure it does not fall outside the spirit and requirements of the law.”
