Tax Law Could Hit U.S. Firms in South Africa

With little fanfare, Congress passed a measure this week that could sharply restrict the profits of U.S. companies doing business in South Africa and prompt more of them to leave the country.

The legislation, which is generating controversy in the Reagan Administration and the South African government, was inserted at the last minute into a bill raising $9 billion in new revenues. It would bar firms from deducting taxes they pay to the South African government from the taxes they owe the United States.

Although the White House opposed the measure, President Reagan signed it into law as part of the budget compromise reached with Congress to reduce the deficit by $76 billion in the next two years.

Legislation Draws Fire

On Wednesday, as word of the little-noticed provision began circulating widely, the anti-apartheid legislation drew fire from U.S. and South African officials and spokesmen for some American corporations.

The measure is “a deliberate attempt to destabilize the South African economy,” South African Foreign Minister Roelof F. (Pik) Botha charged in a statement issued in Pretoria. “. . . The decision is a particularly gross form of hypocrisy--under the pretense of contributing to peaceful change, it in fact encourages polarization and conflict.”

The government-controlled South African Broadcasting Corp. declared, “The livelihood of thousands of black citizens of South Africa is unscrupulously sacrificed because of domestic U.S. considerations.”

In the Administration, which has resisted stringent sanctions against South Africa, officials said that the measure will further weaken U.S. diplomatic leverage in pressing for an end to apartheid.

” . . . The most likely effect will be to accelerate the takeover of U.S. assets by South African firms at bargain prices,” said State Department spokeswoman Phyllis Oakley.

The law, sponsored by Rep. Charles B. Rangel (D-N.Y.), takes effect Jan. 1.

Unlike current U.S. sanctions against South Africa--which prohibit imports of certain products, ban American investment except in black-run businesses and restrict high-technology exports to South Africa--the new law is the first to levy a direct financial penalty on American firms doing business there. It is also the first U.S. tax credit penalty levied against another nation, officials said.

The denial of the credit would generate an additional $23 million if all 163 American firms doing business in South Africa remain, according to an analysis prepared by House aides. But Rangel said it is intended to have more of a “moral and symbolic” effect.

If companies decide to stay, he said, they should be reaping no benefits from the United States for doing so. “We shouldn’t be making it any easier for them in the future,” he said.

How U.S. firms will respond to the new law is uncertain.

At the very least, the new law “definitely drives up the cost of business,” said David Hauck, an analyst with the Investor Responsibility Research Center, a Washington-based organization that monitors U.S. corporations in South Africa.

Foresees Faster Exodus

Unless these firms find a way to shift profits away from South Africa to related entities in other countries, he added, “they will simply be making less money than before. More of them (will leave South Africa) than would have before this bill was passed.”

Alec Rogoff, president of the Assn. of Chambers of Commerce, a major South African business group, said in Durban that “some American companies will, no doubt, be forced by this measure to disinvest, but hopefully others will find ways to enable them to stay on in South Africa.”

Ian Leach, chief executive of the South African subsidiary of Caterpillar Inc. and president of the American Chamber of Commerce in South Africa, said he believes that the tax credit loss “will have a severe impact” on the profitability of U.S. companies. A top manager of one American subsidiary predicted that companies that are already wavering “will pull out. A trickle could become a stampede in this way, though I believe that the fainthearted have already left.”

In recent years, U.S. sanctions against South Africa have prompted numerous American firms to pull out of the country.

51 Firms Left in 1987

During 1987, 51 firms announced that they were ending their South African operations and 11 more have said that they will be ending their business activities there in the near future, including the Ford Motor Co., Pepsico, Merck and Co. and the Revlon Group, according to Allison Cooper, an analyst with the Investor Responsibility Research Center.

A South African government official, who asked to remain unidentified, said that the major companies affected by this measure probably would be Mobil and Caltex because their profit margins are higher than smaller companies, among them Hewlett Packard and 3M, which remain simply to keep their names and products in the South African market.

J. J. Kenney, a spokesman for Union Carbide Corp. in the United States, said his firm is concerned about the new law but that “we are still evaluating it. . . . We don’t know how much it will affect us.”

Others condemned the law as an unwarranted intrusion into their business affairs and an unfair method of “double taxation.”

“This is another tax that impedes corporate America from providing job growth and international competitiveness” and also has “a negative effect . . . in attempting to defeat apartheid in South Africa,” said Robert E. Mercer, chairman of the Goodyear Tire and Rubber Co.

“It is an obvious revenue raiser put together by people that either do not understand or care about that nation.”

No Committee Discussion

Rangel’s legislation was not discussed by committees in either the House or Senate, nor was it mentioned in congressional debate this week. Administration officials said that the White House felt compelled to accept it to complete the long-delayed budget accord.

Some senators were privately angered by inclusion of the bill in the larger tax legislation.

“This proposal was essentially shoved into the larger tax bill and passed at the midnight hour, through the back door,” said an aide to Sen. Richard G. Lugar (R-Ind.), a strong supporter of U.S. sanctions against South Africa.

Times staff writer Michael Parks in South Africa contributed to this story.