Summary of the South African broad-based black economic empowerment (B-BBEE) environment

B-BBEE is a South African government initiative to promote the economic transformation to enable meaningful participation in the South African economy by black people.​

Black people are defined as natural African, Coloured, Indian, and Chinese people who are citizens of South Africa by birth, descent or by naturalisation before 27 April 1994.B-BBEE is regulated by the B-BBEE Act, however, the Amended Codes of Good Practice (“Amended Codes”) which came into effect in 2015, provide the principles and guidelines of implementation, targets set and determining the ratings. Apart from the Amended Codes, there are also various Sector Codes, such as the Construction, Liquid Fuels and Mining Charters, which are applicable to the relevant industries and include specific targets.

There is a limited exemption from the equity ownership requirement for certain multinationals, referred to as the equity equivalent contribution. However, this option only applies in limited circumstances, including where a multinational can clearly demonstrate that it does not generally enter into a joint venture or partnership arrangement.​

Understanding and navigating the B-BBEE environment is critical to running a successful business in South Africa. We recommend that any South African business develops a clear and implementable integrated strategy in terms of understanding their current and potential future B-BBEE requirements, and the best way to achieve this. We can assist in all aspects of developing and implementing a BEE framework and structure for your specific business drivers.

1.1. B-BBEE rating

The Amended Codes provide a scorecard with five elements against which an entity must determine how it scored in terms of specified set targets. The five elements are equity ownership, management control, skills development, enterprise- and supplier development as well as socio-economic development; these are discussed below.

The B-BBEE rating (also referred to as contribution level) of the entity will be based on the points scored using the relevant scorecard. The level obtained by the entity will also determine the procurement recognition level which will be used by the entity’s customers in calculating the customer’s B-BBEE contribution level.

* Priority elements: a further minimum target is set; if not met, the entity will be penalised with one level (cannot be more than one level, even if all three elements are not met). Priority element for a QSE is Ownership and either Skills Development or Enterprise and Supplier Development.

1.1.1. Ownership

Ownership is split between voting rights, economic rights and realisation (economic substance). The target, in general, is set at 25% + one vote black shareholding in order to obtain maximum points. There are also sub-elements relating to black women shareholding which is set at 10%.

Multi-national entities may use the Equity Equivalent (“EE”) statement in order to obtain points in this element in cases where they do not wish to have local black partners/shareholders. However, this exemption will only apply where a multinational can clearly demonstrate that it does not generally enter into a joint venture or partnership arrangement in other countries. EE contributions are measurable against the value of the entity’s operations in South Africa. The value of these EE contributions may be measured against 25% of the value of the multinational’s South African operations or may be measured against 4% of the total revenue from its South African operations annually over the period of continued measurement.EE would entail a public or private programme designed to fulfil the requirements of B-BBEE ownership. EE may also entail a programme targeting investment or any other programme that promotes Socio-Economic advancement/ development within the South African economy. Such a programme needs to be approved by the Minister of Trade and Industry in order to qualify for ownership points on the scorecard. It should be noted that this process is cumbersome and time-consuming.

1.1.2. Management Control

Management Control refers to the black representation on the Board as well as the employees. There are different targets for each level of employee.

1.1.3. Preferential Procurement, Supplier and Enterprise Development

Procurement measures the B-BBEE quality of an entity’s suppliers. There are sub-elements for total procurement spend, procurement spends from QSEs, spend from EMEs, spend from black women-owned entities, and spend from at least 51% black-owned entities. The QSE scorecard only deals with two sub-elements, being total procurement spend and spend from at least 51% black-owned entities. The procurement value of the supplier will be based on their recognition value (i.e. their B-BBEE level). Targets are different for each sub-element.

Supplier- and Enterprise Development are separate but linked sub-elements. These refer to any contributions made to QSEs and EMEs who have at least 51% black shareholding. The contributions can be monetary or non-monetary and must be made with the objective of contributing to the development, sustainability and financial and operational independence of the beneficiary. The target for Supplier Development is 2% (QSE scorecard 1%) of net profit after tax, and for Enterprise Development is 1% of net profit after tax.

1.1.4. Skills Development

Skills Development has mainly two sub-elements. The first element looks at the amount of skills development expenditure relating to black employees or black non-employees and a third of the points are obtained through spending on black disabled people.

The second element deals with the number of black people employed in terms of leaderships, apprenticeships and internship as a percentage of the total number of employees.

1.1.5. Socio-economic Development

These contributions can be either monetary or non-monetary and must be made with the specific objective of facilitating income-generating activities for targeted beneficiaries. The target is set at 1% of net profit after tax.

* Priority elements: a further minimum target is set; if not met, the entity will be penalised with one level (cannot be more than one level, even if all three elements are not met). Priority element for a QSE is Ownership and either Skills Development or Enterprise and Supplier Development.

How can we help?

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Structuring an international business is both a science and an art – this is our specialist area of expertise. Regan van Rooy is an international tax and structuring advisory firm focussing on Africa. We have offices in South Africa, Mauritius and Ireland and we can help you with any international tax or structuring query.