South Africa’s new Carbon Tax Bill has been nearly 10 years in the making but it was finally signed into law by President Cyril Ramaphosa at the end of May 2019. The Bill, which imposes taxes on carbon-producing activities and enterprises, is likely to have an impact on South Africa’s corporates.
High emission business activities, such as the generation of electricity from coal-fired power stations, will rack up more tax than low emission industries. The purpose of the Bill is to push the country towards a more sustainable future by incentivising renewable energy and zero-emission processes.
The Carbon Tax Bill will force many companies to make serious changes to their processes in order to become more environmentally-friendly. “This is a complex piece of regulatory framework that will have a severe cost-impact on many large businesses – especially those in the industrial sector,” says Mazars director of tax consulting David French.
“In light of this, businesses will have to rely heavily on auditors who can advise from a risk and control perspective, tax consultants with an in-depth understanding of the Carbon Tax Bill in order to calculate and correctly apply tax credits, and experienced sustainability consultants who can advise on strategies to reduce operational carbon emissions,” he explains.
Two phases of the Carbon Tax Bill
The Bill will be introduced in two phases. The first phase came into effect on 1 June 2019, while the second phase is expected to start in 2023. The aim is to slowly increase the carbon tax burden on businesses and industry over time, easing South Africa into more sustainable practices, while minimising the impact on the operating costs of companies.
This will also help to slowly shift the behaviour of consumers and producers, leading South Africa gently into a low-carbon economy. During the first phase, businesses will be taxed on the total volume of their greenhouse gas emissions. The initial rate is R120 per tonne of carbon dioxide, methane, nitrous oxide, hydrofluorocarbons or an equivalent greenhouse gas.
This tax rate will increase once the second phase kicks in. Currently, Eskom produces around 200 million tonnes of carbon dioxide per year. Once the second phase of the Carbon Tax Bill comes into effect, the power utility will be expected to pay up to R11.5 billion in carbon tax.
“It is also important to note that carbon taxes will be imposed on liquid fuels at source, as an addition to the current fuel taxes; as well as on stationary emissions, that will be determined by source category as stipulated in the National Environmental Air Quality Act,” notes French.
Carbon Tax allowances
Luckily for high emission businesses, such as Eskom, there are tax-free allowances that will lower the burden on their operations. A basic tax-free allowance of 60% for all activities is currently in effect during phase one. Businesses can also make changes to their processes to be eligible for further tax allowances.
In addition, there is a 10% process and fugitive emissions allowance, a 10% allowance for companies that use carbon offsets, a performance allowance of up to 5% for businesses that reduce the intensity of their greenhouse gas activities and a 10% allowance for trade-exposed sectors, according to French.
The combined effect of these tax-free allowances could mean that certain businesses can reduce their carbon tax by up to 95%. “This means that businesses can realistically expect to be taxed between R6 and R48 per tonne of CO2 in the first phase, if they claim correctly,” explains French.
The true impact of the Carbon Tax Bill on businesses in South Africa is still yet to be determined. One month after phase one has come into effect, companies are still figuring the process out. At the end of this financial year, the tax implications will be fully understood. Companies can expect higher costs of doing business in South Africa, but they also need to start taking sustainability more seriously if they want to save money.
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