East African governments dangle tax breaks, economic zones to Volkswagen, General Motors, Hyundai

Auto makers, who is the fairest of us all? This is the question whose answer informs the region’s policies crafted to attract and retain vehicle manufacturers.

Rwanda seems to have started off as the favourite, followed closely by Uganda with both countries reeling off numerous incentives.

Last year, Volkswagen established a unit for sub-Saharan Africa, targeting Rwanda, Kenya, Ethiopia and Tanzania.

Come January, Rwanda bagged a $20 million deal with Volkswagen for a new vehicle assembly plant. This, it is said, was a result of incentives including tax breaks, and a supportive policy which the VW just couldn’t resist.

“We chose Rwanda because VW received strong support from the Rwandan government and co-operation from Rwanda Development Board,” Thomas Schafer, chairman and managing director of Volkswagen South Africa said.

RDB is championing the Smart City agenda, a perfect fit for VW Mobility Solutions that will see newer cars on Rwandan road, through car pooling and corporate leasing programmes.

Still on incentives, VW was offered a space in the Kigali Special Economic Zone, meaning the firm will enjoy a 10-year tax free regime. VW was also provided with a designated, serviced land complete with electricity connection and water at discounted rates.

Earlier in 2016, Uganda enacted several preferential policies, such as a dedicated customs and tax administration unit to provide a one-stop service for imported and exported goods.

The government offered tax exemption for the auto assembly business when importing equipment and raw materials besides a waiver on corporate tax for the first 10 years of operation.

On its part, Tanzania amended its Finance Bill to lower corporation tax for vehicle assemblers, from 30 per cent to 10 per cent, as an incentive to hasten production and boost the country’s industrialisation drive. 

Plants in many cities

This amendment was welcome news to General Motors, which had announced plans to set up a car assembly in Tanzania as Uganda was putting up one through the Zhong Da Group.

The Hyundai Group is also said to be interested in working with Uganda’s Kiira Motors for a new auto assembly plant.

All these are welcome developments but a former trade adviser at the EAC Secretariat, Yusuf Abdalla, asked the the region to rethink the auto assembly plants policies by focusing more on tax incentives.

“We need to grow as a region and cultivate the ability to negotiate as governments on what brand we can manufacture exclusively then sell to the rest of the world,” said Mr Abdalla.

For example, South Africa gives tax rebates and refunds on certain investments which have helped its auto assembly sector grow. The auto industry, which employs about 100,000 people, is the third largest contributor to the country’s GDP, and accounts for around 12 per cent of exports.

Data from National Association of Automobile Manufacturers of South Africa shows that the country exported 173,000 vehicles to Europe in 2016 out of the more than 600, 000 produced, up from 116,000 in 2015, with forecasts that production will rise by 50 per cent to 900,000 units a year in the next two years.

Challenge

For Kenya, the biggest impediment has been the legislation and lack of incentives. In 2016, Treasury Cabinet Secretary Henry Rotich scrapped excise tax on locally assembled cars in a bid to spur the manufacturing sector. The removal of the excise duty saved assemblers a flat rate payment of $1,500.

However, Kenya has refused to budge on incentives touching on corporate tax, rejecting calls for giving tax holidays to attract more assemblers.

“Auto assembly investors are looking for long-term opportunities that are safeguarded by friendly policies. Or they’ll head elsewhere,” said Dave Williamson, the factory manager at Associated Auto Assemblers Ltd.