Global Tax Alert | 12 November 2015
South African Government issues draft Carbon Tax Bill for public comment
On 2 November 2015, South Africa's National Treasury released a draft Carbon Tax Bill (the draft Bill) for public comment, following on the announcement made by the Minister of Finance in the 2015 Budget Speech.
The draft Bill provides for the introduction of carbon tax in a phased manner effective 1 January 2017. The carbon tax will be payable by persons conducting a qualifying activity that emits greenhouse gases (GHG) and will be levied at the headline rate of R120 per ton of CO2e. As a result of tax-free allowances which will remain fixed until 2020, the initial effective carbon tax range will be between R6 to R48 per ton CO2e. The carbon tax will be a self-assessment tax administered by the South African Revenue Service (SARS) through the Customs and Excise Act.
The final tax rate, exemptions and actual date of implementation will be determined by the Minister of Finance through the annual Budget process.
Reducing the impacts of climate change through facilitating a viable and fair transition to a low-carbon economy is essential to ensure environmentally sustainable economic growth for South Africa. The carbon tax is intended to contribute towards meeting South Africa's commitments to reduce GHG emissions.
The draft Bill includes the detailed and revised carbon tax design features as per the Carbon Tax Policy Paper of 2013 and the Carbon Offsets Paper of 2014 and takes into account public comments received following extensive stakeholder consultation since 2011.
The carbon tax is to be introduced in a phased manner and will be implemented together with complementary measures like reduction in the electricity levy, credit rebate for the renewable energy premium, tax incentive for energy efficiency savings, increased allocations for free basis electricity/alternative energy and funding for public transport and initiatives to move freight from road to rail.
Application of the tax
The tax applies to every person that conducts an activity included in Annexure 1 to the Notice 172 of 2014: Declaration of greenhouse gases as priority air pollutants (i.e. a qualifying activity), will be liable for carbon tax. This is quite an extensive list, covering everyone from oil and gas companies to manufacturing companies.
An initial marginal carbon tax rate of R120 per ton of carbon dioxide equivalent (CO2e) is proposed with a planned implementation date of 1 January 2017.
Sources of GHG emissions
The sources of GHG emissions are diverse and include:
- Scope 1: Direct GHG emissions from sources that are owned and controlled by the person (e.g., emissions from fuel combustion and industrial process)
- Scope 2: Indirect GHG emissions resulting from the generation of electricity heating and cooling, or steam generated off site by purchase by the person
- Scope 3: Indirect GHG emissions from sources not owned or directly controlled by the person but related to the entity's activities (i.e., emissions that occur in the value chain of the reporting company)
The carbon tax will only be levied on direct GHG emissions, i.e., Scope 1 emissions. The complementary measures and incentives have been introduced to encourage the reduction of Scope 2 emissions.
Tax-free thresholds and allowances
Different tax-free thresholds and allowances will apply to the different type of emissions, such as:
- A basic 60% tax-free threshold
- An additional 10% tax-free allowance for process emissions
- A variable tax-free allowance of up to 10% for sectors exposed to trade
- A tax-free allowance of 5% for early actions or efforts to reduce emissions that exceed the industry average
- An additional 5% tax-free allowance for companies participating in phase 1 (up to 2020) of the carbon budgeting system
- A carbon offsetting allowance of either 5% or 10%
The combined effect of the tax-free allowance threshold will be capped at 95%. The tax-free allowance thresholds will remain fixed during the first phase until 2020. They might be reduced or replaced with absolute emissions thresholds thereafter. The tax-free allowances will range between 60% and 95% of total emissions which implies that carbon tax will be imposed on 5% to 40% of actual emissions and hence the initial effective carbon tax rate will range from R6 to R48 per CO2e.
Calculation of carbon tax
The tax base for the calculation of carbon tax comprises the taxpayer's volume of GHG emissions from fossil fuel combustion, emissions from industrial process and product use and fugitive emissions (e.g., from coal mining) multiplied by a corresponding emission factor. Schedule 1 to the Draft Bill provides GHG emission factors (CO2e) per ton.
The calculation of the tax base requires an accurate system for monitoring, reporting and verifying GHG emissions and will be closely linked to the Department of Environmental Affairs' (DEA) mandatory reporting requirements which are expected to become effective in the first half of 2016. Taxpayers will have to use the same methodology to report their emissions to both DEA and SARS.
The carbon tax is calculated using the tax base (emissions times the respective emission factor) adjusted for the tax-free allowances multiplied by the carbon tax rate.
Example: Company A produces electricity and heat from sub-bituminous coal mined underground (this would constitute a fossil fuel combustion emission). It uses 5,000 tons of sub-bituminous coal with an emissions factor (as per Schedule 1) of 1.8541 CO2e per ton of coal. The tax-free threshold for this company is 60%. The carbon tax is calculated as: 5,000 x 1.8541 x (1-0.6) x 120 = R444,984.
The carbon tax applies to all sectors and activities except the Agriculture Forestry and Other Land Use and Waste sectors which will be exempt up to 2020 due to measurement difficulties. In the case of GHG emissions from the use of petrol and diesel in non-stationary emissions, the carbon tax will be added to the current fuel tax regime and included in the fuel price. Fuels used by international aviation and international maritime sectors will initially be excluded from carbon tax as these are covered by international agreements.
The carbon tax will be a self-assessment tax administered by SARS through the Customs and Excise Act as an environmental levy. Taxpayers will need to submit their tax returns based on their own assessment of GHG emissions. The period for the carbon tax will be the calendar year from January to December. A taxpayer will have to submit six-monthly environmental levy accounts and payments for periods 1 January to 30 June and 1 July to 31 December.
- Comments can be submitted until 15 December 2015
- Further clarification may be announced in the next budget speech in February 2016
- Taxpayers should:
- Determine whether they are conducting a qualifying activity as per Notice 172 of 2014
- Determine whether they are able to classify their emission activities into fossil fuel combustion emissions, fugitive emissions or process emissions
- Determine if they are able to calculate their emissions input and output
- Determine the effect on e.g. long term contracts and start including carbon tax in budgets
- Determine whether they would be able to report the required information as needed when completing the Carbon Tax submissions
For additional information with respect to this alert, please contact the following:
Ernst & Young Advisory Services (Pty) Ltd., Indirect Tax, Cape Town
- Jana de Bruyn
+27 21 443 0433
Ernst & Young Advisory Services (Pty) Ltd., Transaction Tax, Johannesburg
- Wendy Gardner
+27 11 772 3988
Ernst & Young Advisory Services (Pty) Ltd., Indirect Tax, Johannesburg
- Folkert Gaarlandt
+27 11 772 5220
EYG no. CM5952