The Medium-Term Budget Policy Statement (MTBPS) affirmed the principles established through the supplementary budget and supports the implementation of the Economic Reconstruction and Recovery Plan launched by President Cyril Ramaphosa on 15 October.
CARBON TAX
Aligning the carbon fuel levy adjustment with the Carbon Tax Act
The Carbon Tax Act No. 15 of 2019 (“Carbon Tax Act”) came into effect on 1 June 2019 and is administered by the South African Revenue Services (SARS) in terms of the Customs and Excise Act No. 91 of 1964 (“Customs and Excise Act”).
Non-stationary greenhouse gas emissions (“GHG”) from petrol and diesel use are for purposes of administration of the carbon tax incorporated in the current fuel levy as a carbon fuel levy in terms of the Customs and Excise Act.
With the implementation of the carbon tax on fuel, and collection as part of the fuel levy mechanism, there is a need to link the carbon fuel levy to the carbon tax. Currently, the fuel levy consists of the general fuel levy and carbon fuel levy.
Necessary administrative adjustments have been made to allow for the automatic adjustment to the carbon fuel levy under the Customs and Excise Act when the carbon tax rate changes annually as provided for in the Carbon Tax Act.
Petroleum refineries carbon tax is reduced by 0.56cents per litre
The Carbon Tax Act provides for all direct non-stationary and stationary GHG emissions from diesel and petrol use, implemented through the fuel levy mechanism, to be deducted from the combustion related emissions of a taxpayer.
Currently, GHG from crude oil and synthetic coal-to-liquid and gas-to-liquid refining processes qualify for tax-free allowances up to a maximum of 90 per cent and 95 per cent respectively. Because of the regulated nature of petrol and diesel fuel prices, refineries are unable to recover these carbon tax costs.
A new sub-section will be inserted in Section 6 of the Carbon Tax Act to allow for
the deduction of the carbon tax cost offset against the payable tax for refineries for petrol produced effective January 2021. We welcome this change as the industry is prejudiced due to its highly regulated pricing structure.
COVID-19 RELIEF MEASURES AND REVENUE COLLECTION
The original pre-COVID estimate for tax collections for 2020/21 was R1 425.4bn with a required growth of in tax revenue of 5.1%. This estimate was revised down in the June 2020 Supplementary Budget to R1 121.3bn due to the COVID-19 pandemic which represents a contraction of R234.1bn (-17.3%) against the previous year.
In the June 2020 Supplementary Budget, government made provisions for taxpayers to alleviate tax obligation pressures induced by the COVID-19 pandemic. A total of 252 398 taxpayers have made use of the relief measures with a total of R52.7bn deferred as follows: R1.6bn (PAYE), R33.0bn (Provisional tax), R19.2bn (Customs and excise) of which R18.4bn is for alcohol beverages and tobacco producers.
As at 30 September 2020, SARS collected R518.8bn, with a surplus of R9.3bn (1.8%) against the June 2020 Special Estimate, and a shortfall year-on-year of R117.0bn (18.4%) in nominal terms.
We do expect SARS to become much more vigilant in auditing taxpayers. We recommend that taxpayers ensure their records are up to date and prepared for these expected tax audits and queries.
GOVERNMENT GRANTS AND INCENTIVES
Alignment of the sunset date of the Special Economic Zone tax regime extended
On 31 July 2020, the Draft Taxation Laws Amendment Bill was released for public comment. It included a proposal to amend tax law provisions concerning Special Economic Zones (SEZs), which specifically intended to align the sunset dates in the SEZ tax provisions.
The proposal was that the legislation be amended to provide that the provisions of the SEZ tax regime cease to apply in respect of any year of assessment commencing on or after 1 January 2028.
The basis for 1 January 2028 as the sunset date was that it allows the incentive to apply for a ten-year period from the approval of designated SEZs by the of Minister of Finance in terms of section 12R (3) of the Act.
In terms of the Tax Laws Amendment Bill, tabled as part of the MTBPS, the provisions of the SEZ tax regime the 2028 sunset date has been extended to 31 January 2031. We welcome this change, but still believe that the SEZ mechanism needs to amended to achieve its intention. It has a narrow application and many taxpayers will not receive substantial benefits under this programme as designed and implemented.
Introduction of a Manufacturing Support Programme for small and medium enterprises
The Small Enterprise Finance Agency (SEFA) intends to expand its direct lending offering by introducing a manufacturing support programme for small and medium enterprises (SMEs). The intent of the programme is to contribute towards the localisation strategy by supporting manufacturing enterprises within the focus areas of light consumer goods; revitalise industrial production; and high-tech manufacturing and to achieve the following objectives:
• Increase the relative contribution of manufacturing to GDP;
• Grow manufacturing employment targets;
• Change the structure of manufacturing to high tech manufacturing;
• Increase labour productivity;
• Drive import replacement through locally manufactured goods; and
• Increase exports in manufactured goods.
The support will be in the form of a grant and loan and will be capped at R15million per enterprise.
Expanding the Global Business Services (GBS) Incentive
The implementation of the government’s Economic Reconstruction and Recovery Plan is supported by a few priority initiatives, one of which is piloting new models for re-shoring and expanding the Global Business Services (GBS) Incentive as a component of the Presidential Employment Stimulus Programme.
The GBS incentive programme is being expanded to incorporate services that goes beyond the traditional business process outsourcing to include information technology outsourcing, digital, shared services, and re-shoring.
The re-shoring will be facilitated by a pilot model within the incentive programme for
South African companies that currently offshore as a cost containment strategy, to take up the incentive and localise their business services.
According to the Adjusted Estimates of National Expenditure of the Department of Trade Industry and Competition (DTIC) published as part of the MTBPS an additional R120 million has been allocated to GBS through an allocation from the Presidential Employment Stimulus Programme.
Jobs Fund
The cumulative number of new jobs contracted across the term of projects for the portfolio of projects approved as part of the Jobs Fund amounted to 177 213 against a target of 150 000. The number of job placements contracted cumulatively across the term of projects was 82 012 against a target of 80 000.
These overachievements are due to a higher number of projects having the competitive requirements of the Jobs Fund.
The aforementioned is the mid-year progress as reported by the National Treasury. We do expect this fund to be recapitalised.
Incentive Budget Allocation Adjusted
The supplementary budget suspended some R2billion in the allocation for incentives within the budget vote of the DTIC by postponing programme activities until 2021. This shift was confirmed within the MTBPS except for the additional funding for the Global Business Services made available through the Presidential Employment Stimulus.
Through re-prioritisation efforts by the DTIC, applications for incentives remained open during the covid-19 period albeit a slowdown in adjudication and approvals. It is anticipated that these activities will now once again gain momentum as South Africa starts getting back to work.
S12L of the Income Tax Act
Energy savings amounting to 0.63 terawatt hours were realised and verified from energy efficiency and demand‐side management projects during the first half of 2020/21. This was as a result of 10 large projects implemented under the tax incentive in terms of section 12L of the Income Tax Act, Act No. 58 of 1962, as amended.
The aforementioned is the mid-year progress as reported by the Department of Minerals and Energy. There was no announcement on the extension on the S12L, but we do expect it to be extended since the implementation of carbon tax.
TAX ADMINISTRATION
Exemption of amounts received or accrued in respect of government grants
Clarification has been provided through an amendment to Section 12P in that latest change reflects that the grant is exempt from the date it is awarded i.e. approved by government. It also includes an updated 11th schedule of current grants.
CUSTOMS AND EXCISE
Export duties on scrap metals from 1 March 2021
On 10 May 2013, the Minister of Economic Development issued a Trade Policy Directive for the International Trade Administration Commission of South Africa (“ITAC”) to regulate the exportation of scrap metal through the introduction of the Price Preference System (PPS). The objective was to improve the availability of better-quality scrap metal at affordable prices for foundries and mills in the domestic market to assist them in becoming more cost competitive as against imports, enhancing investment, jobs and industrialisation.
According to research conducted by ITAC and DTIC, PPS not provided sufficient support that the sector can flourish in competition with global counterparts, many of which benefit from an export tax on scrap and lower domestic prices for scrap and based on the findings, recommended that the current PPS be replaced with export duties.
An export tax is preferred by government to PPS due to ease of administration and be more effective in reducing the domestic price as it will have the effect of reducing the export price achieved by local scrap dealers, unlike the PPS.
Cova Advisory & Associates