CHAPTER 3: CHAPTER 3: THE OWNERSHIP ELEMENT OF THE BROAD-BASED BLACK ECONOMIC EMPOWERMENT SCORECARD
3.5 Equity Equivalent Investment Programme
Statement 103 of the Codes outlines how contributions can be made under the Equity Equivalent Investment Programme (“EEIP”) to earn points for the ownership element of the B-BBEE scorecard, through the granting of equity interests to Black people. Multi-nationals cannot easily include Black ownership in the shareholding, as foreign holding companies are often unwilling to surrender control. The EEIP allows such measured entities to earn points for the ownership element of the B-BBEE scorecard without including Black ownership in its structure.
Practically, a measured entity could create a trust or a new company that will carry out the function of utilising the contributions, which it receives from the measured entity for the intended purpose. The contributions to the EEIP should be used for supplier and enterprise development or socio-economic development.
An overview of the EEIP is as follows (Department of Trade, Industry and Competition:
Online):
[T]he Codes of Good Practice have made provision for the recognition of contributions in lieu of a direct sale of equity. Such contributions are referred to as Equity Equivalent (EE) contributions. Such EE contributions count towards the ownership element of B- BBEE made by Multinationals. 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.
In terms of Statement 103 of the Codes, ownership points are awarded on an annual basis if total revenue has been utilised for the measurement period and where contributions are determined with reference to the value of operations, contributions may be considered for the following periods:
• total contributions of more than R100 million can be considered for a period of up to ten years;
• total contributions between R75 million and R100 million can be considered for a period of up to seven years;
• total contributions between R50 million and R75 million can be considered for a period of up to five years; and
• total contributions of less than R50 million can be considered for a period of up to three years.
Statement 103 of the Codes allows multinationals to make partial contributions to the EEIP on a proportional ratio basis for the recognition of ownership points.
3.5.1 Deductibility of contributions for the Equity Equivalent Investment Programme
The requirements of the general deduction formula in section 11(a) of the Act, read with section 23(g), have been discussed in chapter two. As concluded in chapter two, B-BBEE expenditure is likely to be actually incurred in the production of income and the measured entity seeking to earn B-BBEE points is likely to be doing so in the carrying on of a trade. With regard to
contributions relating to the EEIP, the question that then becomes relevant is whether expenditure is capital in nature.
In determining the capital or revenue nature of the contributions, whether the expenditure incurred on EE contributions forms part of the measured entity’s income producing operations or part of its income producing structure, is relevant. In New State Areas Ltd v CIR 1946 AD 610, 14 SATC 155, it was noted (at 170) that:
The conclusion to be drawn from all of these cases seems to be that the true nature of each transaction must be inquired into in order to determine whether the expenditure attached to it is capital or revenue expenditure. Its true nature is a matter of fact and the purpose of the expenditure is an important factor; if it is incurred for the purpose of acquiring a capital asset for the business it is capital expenditure even if it is paid in annual instalments; if, on the other hand, it is in truth no more than part of the cost incidental to the performance of the income-producing operations, as distinguished from the equipment of the income-producing machine, then it is a revenue expenditure even if it is paid in a lump sum.
Expenditure incurred on EEIP contributions, it is submitted, is akin to costs incidental to the performance of the income-producing operations. These contributions are made by measured entities (often multi-nationals) operating in South Africa for the purposes of protecting their earnings and remaining viable businesses in South Africa. In Warner Lambert SA (Pty) Ltd v CSARS 2003 (5) SA 344 (SCA), 65 SATC 346, B-BBEE expenditure was likened to insurance premiums and it was noted in this case (at 9) that “[i]f they are anything like that, they were payments of a revenue nature.” Therefore, even though EEIP contributions may have a long- term benefit in certain circumstances, the true nature of the EEIP contributions is that they are incurred for the performance of the income-producing operations of the entity and are directly related to an entity conducting business in South Africa. The EEIP contributions are made for the purpose of improving an entity’s business prospects by allowing it to remain competitive in the South African climate. These contributions would therefore be revenue in nature and deductible in terms of section 11(a) of the Act.