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It seems that almost every day we see a new headline about the need for the government to find new resources to fund its spiralling spending commitments.
We heard in the mini budget a few months back that an extra R40bn will be needed in new taxes over the next few years. But where will all this be harvested?
Whether he is funding the fallout from the ravages of the pandemic or continuing to prop up parasitic parastatals, finance minister Tito Mboweni is under siege, with begging bowls being thrust at him from every quarter.
It is in this context that the carbon tax is a sitting target. It is time for firms to look at this issue much more seriously.
This planet-saving tax was designed to deter pollution by making polluters pay more. And as shareholders and other stakeholders put more focus not just on company profits but also on a firms’ environmental footprints, it is difficult to argue against this principle.
However, the current rate of the carbon tax is far lower than it could be. The government has already signalled its intention to increase the rate, and it is an easy tax to collect using well-established SA Revenue Service mechanisms.
The only question to my mind is when an increase will be announced, and given the squeeze on state finances it may come far sooner than many suspect. And it could hurt. A lot.
Despite recurrent warnings and several delays to allow for consultation, the carbon tax appeared to take many SA businesses by surprise. However, as this burden on their finances rises it would be reckless not to scrutinise — and then adopt — the steps that are available to trim their tax burden.
The design of the carbon tax includes several allowances, which in effect reduce the amount a firm will need to pay over to the fiscus. Clearly, companies should make use of these allowances to mitigate the burden.
The most significant tax allowance is a 60% basic allowance on all emissions, with an additional 10% allowance for process and fugitive emissions.
Process emissions are from the chemical transformation of raw materials, while fugitive emissions refer to gases from leaks or other unintended or irregular releases.
Technical? Yes, but boy, it will pay you to master the detail so you can claim every last cent.
There are a host of additional allowances firms can access:
A trade exposure allowance of up to 10%.
A performance benchmark allowance — you can claim a 5% allowance if your processes are less emission intensive than a sector benchmark.
A carbon budget allowance, for those who have voluntarily participated in the development of a carbon budget with the department of environment, forestry & fisheries.
A carbon-offset allowance, which makes provision for taxpayers to reduce the amount of carbon tax they owe by using carbon offsets.
n addition to these allowances, companies can make use of the well-established Section 12L energy efficiency tax allowance. Section 12L of the Income Tax Act became effective in November 2013, allowing companies to claim this allowance for an individual energy-saving project or a combination of such projects.
To claim, a company needs to draw up a baseline model and a report, to be submitted to the SA National Energy Development Institute for approval. The baseline model determines what the energy use would have been if the new energy savings measures had not been implemented.
Once this baseline is approved, an energy performance assessment report must be compiled — demonstrating the energy savings achieved in the relevant assessment year. Once the savings have been certified, the company can submit the paperwork with its tax returns to claim the allowance.
There is more good news. In addition to this energy-saving tax allowance, there are other options to mitigate the effect of the carbon tax. These include more accurate measurement of energy consumption or emissions, and the use of a company-specific emissions calculation instead of the default emission measurement levels that have been included in the legislation.
The default emission measurement process allows for a one-size-fits-all approach — and is simpler to apply — but it could lead to your liability being overstated and a higher carbon tax bill.
The opposite is also true, and in some cases by choosing the default emission factor your carbon tax bill can be reduced. For large emitters it should, however, be worthwhile assessing which option to choose. By choosing the most beneficial emission factor to apply to your carbon tax calculations tax savings of 10% could be possible.
Finally, investing in carbon reduction projects should also be considered, as lower emissions will mean less tax.
The complexities of the carbon tax and its accompanying allowances are daunting. But playing the system is much more likely to boost your bank balance than playing the lottery.
Additional work and research will need to be undertaken and resources allocated to this by any polluting firm to see what the possible savings might be — and whether the rewards this work can reap in terms of a lower tax bill can exceed the cost and effort required.
However, while Mboweni struggles to find extra funds as government receipts continue to fall, the carbon tax rate is bound to be hiked. There will, of course, be a temptation to just look the other way. That could be costly.