Tax policy and tax mechanisms have often been seen as one of the ways in which governments can influence the behaviour of its citizens. This is no different in South Africa with the introduction of the sugar tax as a recent and quintessential example of such behavioural taxes. Given that the South African government continues to commit to various environmental agreements and undertakings in the relevant international forums, it is no wonder that the extent of environmental taxes continues to increase.
In fact, the Centre for Tax Policy and Administration of the Organisation for Economic Co-operation and Economic Development (OECD) recently published a paper (OECD Paper) that shared some interesting statistics regarding revenue from environmentally related taxes in South Africa. For instance, as a share of GDP, South Africa has the 18th highest environmentally related tax revenue among 34 OECD and five partner economies. In 2014, environmentally related tax revenues were at 2.14% of GDP, compared to 2.0% on average among 39 countries.
In particular, the OECD Paper states that in South Africa, taxes on energy represented 93% of total environmentally related tax revenue compared to 70% on average among the 39 comparative countries. Some more specific statistics extracted from the OECD Paper include that South Africa has higher tax rates on transport fuels than on fuels used for heating and process purposes or electricity generation.
Given that environmental taxes are front and centre of mind at the moment, we discussed recent announcements made by the Minister of Finance in relation to environmental taxes in our Special Edition Budget Speech Alert issued on 20 February 2019. In particular, the long-awaited and much-anticipated carbon tax was announced as being implemented with effect from 1 June 2019, which may impact the ratio of taxes in South Africa on transport fuels compared to electricity generation and the like.
Furthermore, we discussed the proposed draft Environmental Fiscal Reform Policy Paper to be published by National Treasury during the course of this year, which will outline options to reform existing environmental taxes to broaden their coverage and strengthen price signals. It is understood that the paper will also consider the role new taxes can play in addressing air pollution and climate change, promoting efficient water use, reducing waste and encouraging improvements in waste management. Government will also investigate a tax on “single-use” plastics including straws, caps, beverage cups and lids, and containers, to curb their use and encourage recycling. It will also review the biodiversity tax incentive.
Notwithstanding the ongoing developments regarding environmental taxes and the anticipated Environmental Fiscal Reform Policy Paper, it is worthwhile briefly considering and highlighting some of the key environmental taxes in South Africa today, with particular reference to the energy tax incentives and fossil fuel tax disincentives (as opposed to transport fuel taxes). Most businesses, from small to medium enterprises to large corporates, are impacted by these taxes in some way as indicated by the OECD Paper.
Section 12B allowance on renewable energy assets
Section 12B of the Income Tax Act, No 58 of 1962 (Act) is a very attractive tax incentive for taxpayers owning renewable energy assets and provides for an accelerated depreciation allowance for plant, machinery, implements, utensils and articles used in the production of renewable energy in the course of one’s trade. In particular, s12B recognises the following renewable energy sources:
- Wind power;
- Photovoltaic (PV) solar energy;
- Concentrated solar energy;
- Hydropower to produce electricity of not more than 30 megawatts; and
- Biomass comprising organic wastes, landfill gas or plant material.
Section 12B also allows for a deduction in relation to improvements (other than repairs) to the aforesaid plant and machinery during the course of its expected life.
In short, while some renewable energy plants have an expected useful life of say, around twenty years, s12B allows one to claim an accelerated capital allowance of between one to three years (depending on the nature of the renewable energy). A very welcome tax incentive to invest in renewables indeed.
Section 12D deductions in respect of electricity transmission lines
Section 12D of the Act grants an allowance on the acquisition cost actually incurred by a taxpayer in respect of any new or unused “affected asset” which is owned by the taxpayer and is brought into use for the first time by the taxpayer and is used directly by such taxpayer for the purposes contemplated in the definition of “affected asset”. An “affected asset” includes specifically any line or cable used for the transmission of electricity, as well as any earthworks or supporting structures forming part of such cables/transmission lines. In respect of transmission lines/cables, the allowance is granted on the actual cost of acquisition or improvement or the cash cost in an arm’s length transaction multiplied by 5% per annum. Taxpayers can therefore claim an allowance on electricity transmission lines, however, the key issue is often that such transmission lines are not owned by taxpayers, but rather by Eskom and hence this incentive is to some extent limited.
Section 12L energy efficiency savings allowance
In simple terms, s12L of the Act allows any person registered with the South African National Energy Development Institute (SANEDI) to claim a deduction for energy-efficiency savings derived from activities performed in the carrying on of any trade, provided the relevant requirements of the section, read with the Regulations published under s12L(5) by the Minister of Finance (Regulations), are met.
The rationale behind the s12L allowance is that the incentive to be more energy efficient can effectively contribute towards a reduction in the demand for energy (especially electricity) thereby resulting in a reduction in carbon-dioxide emissions (given the fossil fuel intensive nature of energy production in South Africa). The reduced reliance by energy intensive industries on fossil fuel driven energy comes with the added benefit that there is less strain on the national grid and thus potentially less chance of load shedding for ordinary South Africans.
Section 12N – improvements to property not owned by taxpayers
Section 12N allows a lessee that makes improvements to another person’s land to depreciate those improvements if the improvements are associated with the Independent Power Producer Procurement Programme administered by the Department of Energy. Furthermore, the allowance of depreciation for a lessee making improvements on another person’s land is extended to include depreciation associated with s12B (eg energy renewal assets).
Section 12U additional deduction in respect of supporting infrastructure in respect of renewable energy
Large scale renewable energy projects such as wind farms and solar farms require extensive upfront capital expenditure. While s12B caters for the actual plant and machinery generating the renewable energy, it does not cover supporting infrastructure (such as roads, fences and the like) required to fully develop such projects. Section 12U of the Act was thus introduced with effect from 1 April 2016 to allow a specific deduction for expenditure incurred in respect of the aforementioned supporting infrastructure. Ordinarily such expenditure is of a capital nature and hence not deductible in terms of the general deduction formula set out in s11(a) of the Act and this additional incentive thus makes investment in large scale renewable energy projects more attractive.
While there are various incentives regarding the investment in, construction of, and improvements to small and large scale renewable energy projects, one should also consider the impact of the soon-to-be introduced carbon tax.
In short, the pending carbon tax will play a role in achieving the objectives set out in the National Climate Change Response Policy of 2011 (NCCRP) which focuses on the “polluter-pays” principle and aims to ensure that businesses and households take these costs into account in their production, consumption and investment decisions.
The proposed headline carbon tax is R120 per ton of CO2e for emissions above the tax-free thresholds. Given the above tax-free allowances, this would imply an initial effective carbon tax rate range as low as R6 to R48 per ton of CO2e. The aim of the tax is thus to alter behaviour towards carbon intensive industries and practices thereby reducing emissions in the medium to long term and ensuring South Africa’s critical contribution to halting the effects of climate change.
Environmental taxes will become increasingly important in South Africa’s tax framework and businesses and individuals alike should aim to keep abreast of the ongoing developments in this area. In particular, the various tax incentives pertaining to renewable energy projects, coupled with the pending introduction of the much-awaited carbon tax, provide for a very attractive proposition for taxpayers to invest in renewable energy. However, as indicated, there is a spider web of specific tax provisions to navigate to ensure that such investors implement their investments in an efficient manner and thus one would be well advised to consult relevant advisors prior to embarking upon such a project.