By Gillian Niven,Claire Tucker Sunday, November 01, 2015

The National Treasury published the Draft Carbon Tax Bill (the Draft Bill) for public comment on 2 November 2015.

 According to Bowman Gilfillan Africa Group's Head of Public Law and Regulatory, Claire Tucker, "The introduction of a carbon tax has been resisted by many sections of industry, so this Draft Bill will be carefully scrutinised.  National Treasury and the Department of Environment Affairs (DEA) hope that the carbon tax regime will create an incentive to use more environmentally friendly methods and technologies to reduce or eliminate the source of the pollution. The Draft Bill builds on the extensive stakeholder consultation conducted over the past five years, which includes the Carbon Tax Policy Paper and the Carbon Tax Discussion Paper."

 Tucker says that the disincentive to pollution in the Draft Bill is supported by tax incentives such as emissions offsets, and the government believes that it supports their desired emissions reduction outcomes.

 "The Draft Bill provides for the introduction of the carbon tax in a phased manner, with the first phase commencing on 1 January 2017 and running to 1 January 2020. It is proposed that the Commissioner for the South African Revenue Service (SARS) will administer the Act as if the carbon tax were an environmental levy as contemplated by the Customs and Excise Act. The Department of Environmental Affairs (DEA) will assist SARS in auditing an entity’s self-reported tax liability by collecting greenhouse gas emissions data," she says.

 "The publication of the Draft Bill provides a further opportunity for stakeholders to comment on National Treasury’s carbon tax policy and administration. The deadline for written comments to National Treasury is 15 December 2015, after which the comments will be considered and a revised draft of the Bill will be submitted to Cabinet for approval and tabling in Parliament," Tucker notes.

 Bowman Gilfillan Africa Group associate Gillian Niven, explains that carbon tax is calculated at a rate of R120 per tonne carbon dioxide equivalent (CO2-e) of the greenhouse gas emissions of a taxpayer. The Draft Bill contains formulae for the calculation of the amount of carbon tax payable by a tax payer.

 Niven says that the carbon tax must be levied in respect of the sum of the greenhouse gas emissions of a taxpayer for a particular tax period. This is expressed as the CO2-e of those greenhouse gas emissions resulting from fossil fuels combustion; fugitive emissions in respect of commodity, fuel or technology; and industrial process and product use. The CO2-e of each of the aforementioned processes is calculated by using differing formulae contained in the Bill.

 The Draft Bill provides for a number of transitional tax-free allowances which will reduce a tax payer’s carbon tax liability. These include a basic tax-free allowance of 60 % for fossil fuel combustion; an additional tax-free allowance of 10 % for process emissions; a variable tax-free allowance for trade-exposed sectors (maximum 10 %); a maximum tax-free allowance of 5 % for above average performance (i.e. early actions and /or efforts to reduce emissions that beat the industry average); a 5 % tax-free allowance for companies with a Carbon Budget; and a carbon offsetting allowance of either 5 % or 10 %.

 "These tax-free allowances will range from between 60 and 95 % of total emissions. In other words, the carbon tax that will be imposed will equate to between 5 to 40 % of the actual emissions during the tax period. Taking into account all of the above tax-free thresholds, the effective carbon tax rate will vary from between R6 and R48 per ton CO2-e," explains Niven.

 "Further, the land-use, land-use change and forestry and waste sectors will be excluded during the first phase (1 January 2017 to 1 January 2020)," she says.

 Niven notes, "The National Treasury is in the process of finalising regulations to give effect to the carbon offset scheme and is engaging the Department of the Energy and the DEA on the administration of the offset scheme. Draft regulations will be published for public comment in early 2016."

 She notes that the revenue received from carbon tax will not be ring-fenced, but will nonetheless be “recycled”. These revenue recycling measures will include  funding for the energy efficiency tax incentive already being implemented;  a reduction in the electricity levy, additional tax relief for roof top (embedded) solar photovoltaic (PV) energy as already provided for the in 2015 tax legislation;   a credit for the premium charged for renewable energy (wind, hydro and solar, as per the Integrated Resource Plan);   additional support for free basic electricity to low income households; and  additional allocations for public transport.

 Niven explains that the Draft Bill lists a number of impermissible tax avoidance arrangements.

 "If SARS is satisfied that an arrangement is an impermissible tax avoidance arrangement, it may determine the liability for the carbon tax imposed and the amount thereof as if the arrangement had not been entered into or carried out, or in such manner that SARS deems appropriate for the prevention or diminution of that tax benefit," Niven says.

 Tucker further notes that the Draft Bill is planned to come into operation on 1 January 2017. This means that the parliamentary process must be concluded and assent to the Bill given within one year.

 "The deadline for written comments to National Treasury on the Bill is 15 December 2015. Once this comment period has expired, National Treasury will consider the comments by stakeholders and a revised Draft Bill will be submitted to Cabinet for approval and tabling in Parliament. The Draft Bill is a money bill and will be introduced in Parliament by the Minister of Finance in terms of section 77 of the Constitution," she explains.

"In addition to potential delays in the parliamentary process, regulations giving effect to the provisions of the Bill must be drafted and submitted for public comment in order for a number of important sections of the Bill to have practical effect. It must be noted that National Treasury contemplates publishing draft regulations giving effect to the carbon offset scheme for public comment in early 2016. The regulations with respect to the emissions intensity benchmark as required by the performance-based tax-free allowance will be developed by Treasury over the next six months, based on input received from the respective industry associations. Without these regulations, the allowances and offsets provided for in the Draft Bill cannot be implemented and tax incentives for affected entities will be unavailable," Tucker adds.