Rise of the electrical vehicle – A discussion on tax incentives and related tax considerations
Rise of the electrical vehicle – A discussion on tax incentives and related tax considerations
Recently, the South African private sector (and South Africa in general) has been boosted by the President’s announcement regarding further relaxations to the existing legal framework applicable to private renewable energy generation.
Aside from addressing the current electricity supply shortfall, this will also hopefully assist in boosting South Africa’s electric vehicle market, including the infrastructure needed to increase the roll-out of electric vehicles and charging stations, with the ultimate goal of this taking South Africa closer to its goal of getting to net zero carbon emissions. At the same time, it is important to understand how tax laws encourage or discourage the use and purchase of electric vehicles.
It is a well-accepted principle that taxes can achieve several different purposes including increasing revenue for governments but also importantly encouraging or prohibiting certain behaviour. The Carbon Tax Policy published by National Treasury in May 2013 specifically recognised the important role that carbon taxes play in internalising the external costs of climate change and creating the correct incentives to stimulate changes in the behaviour of producers and consumers.
This article briefly discusses some of the potential applicable South African taxes that one should consider with reference to potentially changing behaviour and pursuing e-mobility more vigorously in light of some of the existing environmental taxes imposed on vehicles that cause carbon emissions, such as those using petrol and diesel.
Brief overview of environmental taxes on petrol and diesel motor vehicles
Environmental levy on CO2 emissions on newly manufactured motor vehicles
In terms of Schedule 1 Part 3D of South Africa’s Customs and Excise Act 91 of 1964 (C&E Act), an environmental levy is payable on certain locally manufactured motor vehicles which are manufactured in a a special ad valorem manufacturing warehouse. Specifically, the environmental levy is imposed on vehicles, which use result in CO2 emissions. The environmental levy is imposed based on the CO2 emission level of the locally manufactured vehicle. While the customs legislation classifies vehicles with reference to the environmental levy item number and tariff subheading in which the vehicle falls, there are broadly speaking two categories of vehicles that are affected by the levy:
- Vehicles described as “Other, double-cab, of a vehicle mass not exceeding 2 000 kg or a G.V.M. not exceeding 3 500 kg, or of a mass not exceeding 1 600 kg or a G.V.M. not exceeding 3 500 kg per chassis fitted”. As of 1 April 2022, the environmental levy imposed on these vehicles is R176.00 per g/km CO2 emissions exceeding 175g/km. In other words, the environmental levy is only payable if the vehicle’s CO2 emissions exceed 175g/km; and
- All vehicles falling under the general description “Other”, which are subject to an environmental levy of R132.00 per g/km CO2 emissions exceeding 95g/km. In other words, the environmental levy is only payable if the vehicle’s CO2 emissions exceed 95g/km.
Carbon tax on petrol- and diesel-powered motor vehicles
When the Carbon Tax Act 15 of 2019 was introduced in 2019, it made provision for the imposition of carbon tax on GHG (greenhouse gas) emissions arising from the use of petrol- and diesel-powered motor vehicles. However, in light of the fuel levy dispensation that already existed at the time under the C&E Act, it was decided that GHG emissions arising from the use of petrol and diesel in motor vehicles would be taxed through the fuel levy dispensation, by providing for a carbon fuel levy on petrol and diesel. This levy was increased to 9c/l for petrol and 10c/l for diesel from 6 April 2022 and is payable in addition to the general fuel levy and the road accident fund levy. In light of this approach, the formula in the Carbon Tax Act to calculate one’s carbon tax liability (including from the use of petrol and diesel) was amended to prevent double taxation. In other words, carbon tax arising from the use of petrol and diesel in motor vehicles is only taxed under the fuel levy dispensation and not also under the Carbon Tax Act. To ensure fairness, the carbon fuel levy is also increased annually at by the same percentage as the carbon tax rate at which GHG emissions are taxed under the Carbon Tax Act.
Petrol and diesel motor vehicles to be scaled down and eventually banned in the UK and EU
Two of South Africa’s (and Africa’s) largest trading partners (particularly for motor vehicles) include the United Kingdom (UK) and Europe (EU). In April 2022, the UK Department of Transport published a paper titled: “Outcome and government response to the green paper on a New Road Vehicle CO2 Emissions Regulatory Framework for the UK” (UK Paper) which, amongst others, confirmed that the UK Government will introduce a zero-emission vehicle mandate setting targets requiring a percentage of manufacturers’ new car and van sales to be zero emission each year from 2024.
Furthermore, the UK Government announced that it will continue to regulate the CO2 emissions of new non-zero emission cars and vans to limit their emissions until all new sales are zero emission at the exhaust. If not fully zero emission, it was stated that all new cars and vans sold between 2030 and 2035 must have significant zero emission capability (SZEC). The European Commission has similarly implemented various regulations and intends cutting carbon emissions from motor vehicles by 55% by 2030 with a 100% target by 2035.
The impact of these measures will have a profound influence on Africa and South Africa as exports to those markets will be significantly impacted unless the local market starts to embrace the move towards “net-zero” and commences producing electric vehicles.
Section 12R – Special Economic Zone
In advancing its efforts towards promoting economic growth and industrial development, the South African government, via the Department of Trade and Industry, has established various special economic zones (SEZs) within designated areas in South Africa. Importantly there are a number of specific tax incentives including income tax, value-added tax (VAT), customs & excise and employees’ tax incentives that a “qualifying company” in an SEZ (as defined), could potentially benefit from.
One of the most beneficial tax incentives is that companies carrying on business within certain SEZs are subject to an annual income tax rate of 15% which is a significant benefit compared to the ordinary corporate income tax rate of 27%. In addition, qualifying companies can claim a special capital allowance of 10% per year on the costs of any new or unused building or improvement to such building. These incentives are provided for in sections 12R and 12S of the Income Tax Act, 58 of 1962 (ITA). One should appreciate that only companies operating in an SEZ approved by the Minister of Finance for purposes of section 12R can benefit from the incentive. Currently, only some of South Africa’s SEZs are approved for purposes of section 12R.
Importantly, however, there are various requirements for an entity to commence business in an SEZ and benefit from the favourable tax incentives. Section 12R of the ITA sets out the various requirements, qualifications and exclusions. The definition of “qualifying company” in section 12R(1) is particularly instructive and requires that the company must be tax resident in South Africa and conducts an approved trade in the SEZ. Furthermore, not less than 90% of the income of that company must be derived from the trade carried on in the SEZ itself.
Para (e) of the definition of “qualifying company” furthermore requires that the trade carried on by the company must be either:
Carried on before 1 January 2013 in a location that is subsequently approved as an SEZ in terms of section 12R(3) of the ITA; or
Commenced on or after 1 January 2013 in a location that is approved or subsequently approved as an SEZ in terms of section 12R(3) of the ITA and that trade was not previously carried on by that company (or a connected person in relation to that company) in South Africa; or
Commenced on or after 1 January 2013 in a location that is approved or subsequently approved as an SEZ in terms of section 12R(3) of the ITA and that trade, either:
- comprises the production of goods not previously produced by that company or any connected person in relation to that company in South Africa; or
- utilises the use of new technology in that company’s production processes; or
- represents an increase in the production capacity of that company in South Africa.
Motor vehicle manufacturers (and their suppliers) should consider the section 12R SEZ tax regime and its applicability to the production of electric vehicles in South Africa given that such production of electric vehicles is either non-existent or negligible currently. The commercial impact of these incentives is very favourable, and it could be used as a key tool to adapt to the growing global shift towards net-zero motor vehicles.
The Tshwane Automotive Special Economic Zone (TASEZ) is located in South Africa’s capital city. Although it is not currently an approved SEZ for purposes of section 12R, there is a possibility that it could be approved for this purpose in future. Therefore, it could certainly be considered a launching pad for manufacturers to commence producing electric vehicles within the precinct. At the very least, manufacturers operating in TASEZ can automatically benefit from the preferential value-added tax (VAT) provisions applicable to companies operating in SEZ’s, with the section 12R income tax incentive also becoming available to them if the Minister of Finance approves TASEZ for purposes of section 12R. The sunset date for the section 12R incentive was also recently extended to 31 December 2030.
South Africa’s potential new “driving tax”
The South African National Department of Transport recently published the White Paper on National Transport Policy which, amongst others, proposed further investigations of additional and innovative funding strategies for traffic management functions. It was announced that a traffic-management levy to vehicle licence fees and fuel sales would be investigated. Interestingly, this potential new proposed levy may not impact electric vehicles especially if it is introduced with reference to fuel sales which could further encourage the uptake of electric vehicles in South Africa.
Further carbon tax proposals to potentially incentivise EV uptake
In addition to the above, manufacturers and users of petrol and diesel vehicles must keep in mind that the taxes imposed as a result of the use of such vehicles is only likely to increase. This appears evident from the announcements in the recent 2022 Draft Taxation Laws Amendment Bill, which proposes, amongst other things, substantial increases in the annual carbon tax rate going forward. The likely effect of this is that each person in the petrol/diesel vehicle manufacturing supply chain, including the end-user, will potentially have to pay more for the vehicle and for the fuel necessary to use such a vehicle.
(This article is based on the South African section of CDH’s E-Mobility In Africa publication, which is available here.)
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