Many South African companies face unprecedented dangers amid the coronavirus crisis, with the economic impact of the lockdown on an already contracting economy.
In these circumstances it is vital for any company to plan their tax affairs carefully.
Hence the focus by Cova Advisory on new Carbon Tax details, which have only recently been published by the Treasury.
Understanding them is challenging, not least because there is not yet total clarity on all aspects of the regulations and how to claim each and every allowance.
However, failing to examine, to assess and then to act will mean that company executives are neglecting an opportunity to make savings – especially on a tax some corporates are resistant to pay in the first place.
A concern with the Carbon Tax is the way in which information and legislation has dribbled out, in a frustratingly unpredictable way after the tax has been implemented. It is vital that all the rules around the carbon tax are clear so that companies can plan to reduce their carbon footprint and thereby reduce their carbon tax liability. The fundamental purpose of the tax is to change behaviour, and by implication, a business will want to pay as little as possible.
We attempted to tackle this in a recent webinar, which looked at some of the allowances under the Carbon Tax Act, and the ways to reduce your carbon tax liability. Some of the main messages are summarised below.
For anyone who is not familiar with the structure of the Carbon Tax Act, the tax is levied on the direct emissions of a company over a calendar year.
The act was signed into law on May 23, 2019, and became effective on June 1, 2019. The design of the tax includes a number of tax-free allowances, which effectively reduce the amounts which need to be paid over to the fiscus.
Regulations have been published for these tax-free allowances. Most recently, the regulations for trade-exposed sectors were published. In addition, we now have the regulation for the allowance if a company is able to emit lower emissions than others in their sector.
We almost have a complete picture, but one more part of the Carbon Tax that is crucial for claiming the allowances is yet to be launched – and that is the carbon offsets administration system and its associated guidelines.
So, what is new?
We now have a better idea of what it means for a company to be considered as trade-exposed, and how it must go about claiming the allowance.
Companies that are trade-exposed are those which face competition from products that are imported or exported. Companies that manufacture products locally and are subject to the Carbon Tax may become less competitive if the same products are being imported and are not subject to a Carbon Tax. For this reason, the National Treasury included a tax-free allowance of up to 10% for these companies.
There is a sector-based approach, where the trade intensity index of each industry sectors is defined, and the allowances are allocated using a sliding-scale approach. However, there are provisions for companies which operate in more than one sector.
The approach seems logical, but there are still some uncertainties that exist with the determination of company-specific trade-exposure allowances, relating to the type of import, export and production data to be used. In addition, there isn’t clarity on auditing requirements.
Further calculation and analysis will also be needed by a company when it comes to claiming an allowance under the Performance Benchmark Regulations.
The regulations include a set of greenhouse gas intensity benchmarks for certain sectors, and the better a company performs against these benchmarks in containing its emissions, the higher the allowance – which is capped at 5%.
However, it isn’t always clear how these benchmarks are calculated as the methodologies will need to be requested, the measurement and verification requirements of the regulations are not defined, and some sectors have been left out.
In addition to all of this, there are further areas to explore in reducing your Carbon Tax burden.
There is a Renewable Energy Premium credit which will reduce the Carbon Tax for entities which generate electricity from green technology, such as wind and solar. Details of the rates for each renewable energy type have now been published and will be updated annually.
Finally, companies must consider the carbon offset allowance for firms that have undertaken a carbon-offset project – that is a project which results in emission reductions and which has been registered under an accredited standard.
The administrative rules on this are incomplete – as we still await a carbon offset administration system to create a South African based registry for carbon credits. It is the system that will be used to transfer carbon credits from an international registry into South African Carbon Credits which can then be used as a carbon offset allowance to reduce your Carbon Tax liability.
To conclude, then, companies need to ensure that as a starting point to manage their Carbon Tax liability, they need to quantify their gross tax liability and then fully understand which allowances are worth pursuing.
There are still some gaps and uncertainties in the Carbon Tax legislation – but one thing which is certain is that it can make financial sense to invest time and effort to get the most out of the trade exposure, performance benchmark and carbon offset allowances.
Zelda Burchell is manager at Cova Advisory.