B-BBEE revised codes: Are you a winner or a loser?

In October, Minister Davies gazetted revised B-BBEE (Broad-Based Black Economic Empowerment) codes. These codes are voluntary but you cannot deal with a government or public entity without a B-BBEE certificate and some of your customers or suppliers may also require a B-BBEE certificate from you. The thrust of updated codes is to increase black ownership, improve black skills and encourage more dealings with black-owned businesses. Business has one year (to 11 October 2014) before these codes replace the current ones (until then you can choose to comply with either) – it is important you study these closely as they will almost certainly impact on your business. Some of the most significant features of the new codes are: Exempted Micro Enterprises (EMEs) As now, EMEs are deemed to have a level four rating. The threshold for qualifying as an EME has been raised from R5 million annual turnover to R10 million turnover. 100% black-owned EMEs qualify for a level one rating whilst 51% black-owned EMEs can get a level two rating. Previously, EMEs required a certificate from an accounting officer for their scorecard. In terms of the revised codes all they require for a level four rating is a sworn affidavit.  In view of the complexities of getting a certified scorecard, these are significant concessions to small business. Other Enterprises The remaining changes to the codes apply to all other entities and to EMEs if they want them to i.e. if they are convinced they can get higher than a four rating. Number of elements reduced, and Discounting The number of elements has been reduced from seven to five – “Employment Equity” has been moved into “Management Control”, and “Preferential Procurement” and “Enterprise Development” are merged into one element – “Enterprise and Supplier Development”. The other elements are “Ownership”, “Skills Development” and “Socio-Economic Development”. Three of the elements are “Priority Elements” – “Ownership”, “Skills Development” and “Enterprise and Supplier Development”. Businesses which do not reach the threshold requirements for these elements will be discounted by one level – entities will need to achieve 40% of these targets. In other words, a business which would have got a level two rating will drop to a level three, if it misses the criteria for one of the priority elements. Points System  The point scoring methodology has been changed. It could be more difficult to maintain the rating you had – for example a four rating prior to October 2013 will be a seven rating now. Whilst there are more points on offer in the new codes, businesses will need to carefully assess the revised points system. Ownership One of the criteria in scoring in this category is that black ownership of equity needs to be valued at “net value”. This means the value of black equity is calculated net of debt. As many B-BBEE deals have involved loaning funds to BEE equity purchasers, this could have a serious effect on financing B-BBEE deals. In turn this could lead to substantially less B-BBEE deals happening. Skills Development The expenditure compliance target has been raised from 3% to 6%. There are points available for training disabled and unemployed black employees. There are bonus points for employing people who have been on learnership programmes. Enterprise and Supplier Development Procurement has changed and to get points it is necessary to deal with “empowering suppliers”. One key requirement is that 40% of a business’ purchasing should be from 51% black-owned “empowering suppliers”. This is a complicated process and will require checking that the “empowered supplier” complies with all laws and regulations Qualifying Small Enterprises (QSEs) The threshold has been raised from R35 million annual turnover to R50 million. As with EMEs an affidavit on turnover and black ownership is all the verification needed. QSEs must comply with all five elements (previously only four of the seven). In terms of the priority elements, QSEs only need to comply with two of the three (“Ownership” must be complied with and one of either “Skills Development” or “Enterprise and Supplier Development”). QSEs will have a more difficult path ahead. Time frame   As noted, the new codes replace the current ones after twelve months, which gives businesses time to grapple with the new codes. In the twelve month period you may use your existing B-BBEE scorecard. Sector Codes If the sector you are in has its own codes, then you are required to follow them. The new “generic” codes are to be used if there is no sector code in your industry. Fronting  Draft legislation has been released which proposes a B-BBEE Commission to investigate complaints and fronting. The legislation makes it a criminal offence for fronting or for using false data for an entity’s B-BBEE scorecard. In addition, the planned legislation makes it compulsory for State and public businesses to comply with these codes in their procurement and tender policies. Approach these codes with caution! Businesses and their accountants will have to approach these new codes with caution. SAICA is going to be working with the IRBA (Independent Regulatory Board of Auditors) in trying to address anomalies with the DTI and will keep members informed of progress. For example, the revised BEE codes in their current form are flawed in that they do not tie up with other legislation such as the Preferential Procurement Framework of Government. © DotNews, 2005-2013. This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

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