It is not uncommon for some luxury vehicles in South Africa to have almost half of the price paid go to government’s tax coffers.

Locally produced vehicles are perceived as more expensive in South Africa than when those same vehicles are exported and sold in international markets.

The main reasons for these price disparities are market and distribution differences, specification differences between the models sold, inclusion of add-ons such as motor plans, the exchange rate and then the taxes levied on local sales of vehicles.

Taxation is such an issue that the National Association of Automobile Manufacturers of Southern Africa (Naamsa) have discussed the issue with government.

Naamsa executive director Nico Vermeulen told CitiBusiness that it is important to note that Naamsa does not get involved in the pricing specifics of the different vehicle manufacturers and that the setting of prices for their products is their prerogative.

“However, vehicle affordability and vehicle taxation represents an issue of concern to the automotive industry and the rising tax burden that confronts buyers of motor vehicles, including import duties, ad valorem taxes, emissions taxation in addition to the standard percentage of VAT levied is a matter that has been discussed with the department of trade and industry and will probably also be discussed with Treasury,” Vermeulen said.

Motorists are taxed not just on the vehicles they buy, but also on fuel, tolls and fringe benefits for company cars.

All these taxes bring in a substantial amount of money for Finance Minister Pravin Gordhan and his team to distribute come Budget time.

Taxes levied

The first thing that is added on to the price of the vehicle after it rolls off the assembly line and that  South Africans cannot get away from is Value Added Tax of 14%.

The second is ad valorem tax, essentially a luxury excise tax that exponentially increases with the price of the vehicle and is calculated according to a formula:  {(0.00003 x A) – 0,75}%.

In this formula “A” means the recommended retail price, exclusive of value-added tax, less 20%.

If a vehicle with the recommended retail selling price of R900 000 is taken, using the above formula, the effective tax rate comes to 17.826%. If a vehicle with a recommended retail selling price of R200 000 is taken the effective rate is closer to 3%.

Next is the CO² emissions tax levied from 2010 which is on average about 2.5% to 3% and is directly payable by the manufacturer to the South African Revenue Service.

This tax is also recovered through the selling price to dealers and consumers.

South Africa also has an import duty on new vehicles of 25% and on components of between 7% and 15%, according to Vermeulen. Local manufacturers who use components that are imported in the local assembly could probably levy a portion of that rate through to the dealers and consumers, even though they could rebate some of the import duties through exports under the existing Motor Industry Development Plan (MIDP).

This could mean that another 5% to 10% could be given through to the consumer in the price of the vehicle.

This would already bring the impact of different duties and taxes for example up to 45% (14% VAT + 18% ad valorem + 3% emissions tax + 10% possible import duty flow-through).
Other factors

Import duties also have another function in that the lower the import duty on vehicles, the more fierce pricing competition would be in that region. South Africa’s import duty on vehicles currently stand at 25%, which still gives a measure of protection to locally produced vehicles.

In the US the import duty is only 2.5% which would mean that manufacturers in that country would have to price more competitively to get their product sold.

South Africans generally buy their cars with more add-ons and specifications such as air-conditioning and electric windows than buyers in overseas markets. Also the basic price quoted in certain international markets does not include these specifications and is only added to the price at the request of the buyer.

According to Guy Kilfoil, General Manager: Group Communications and Public Affairs at BMW South Africa, the South African specification BMW 335i sedan features the following additional options as standard over and above the specification on the US car: full leather seats, a Hi-Fi loudspeaker system, park distance control, a sports leather steering wheel, a rear-view camera, electric adjustment and memory for the front seats and an eight-speed automatic gearbox.

“These are all stock standard on the South African car but are optional on the US spec car.

This alone makes up for more than R62 000 worth of additional standard options. In addition, all BMW vehicles sold in South Africa feature a five- year, 100 000km motorplan which takes care of all scheduled servicing and maintenance and repair work necessary for the car.

This is not available in the US. On this particular vehicle the Motorplan is valued at R55 000 alone,” Kilfoil explains.

Dealership margins and how they are derived also differ between South Africa and international markets. Manufacturers who export also levy a margin when they sell to international markets, but considering that under the new Automotive Production and Development Programme (APDP) manufacturers need to maintain production levels of 50 000 units and more to qualify for some support, manufacturers might sacrifice some of this margin in trying to keep up the volumes of exports, thus lowering the cost of the exported unit.

Once you throw this all into the pot and depending on what assumptions you make about the market you compare South Africa with, it is very possible that a vehicle exported from South Africa into another market can be 50% cheaper that what that vehicle is sold for locally.

Exchange rate

Finally vehicle buyers should remember that rapid fluctuations in the exchange rate could account for some of the anomaly in price. If the exchange rate to the dollar is R10 the calculation indicates that a vehicle costing US$30 000 should cost R300 000 in South Africa.

If five months later the exchange rate dropped to R7 to the dollar, suddenly that same vehicle is expected to cost only R210 000.