Memorandum on the Carbon Tax Act, 15 of 2019
Who is liable to pay carbon tax?
Any person who conducts an activity in South Africa that results in GHG emissions above the prescribed threshold for such activity (Section 3 of the Carbon Tax Act) is liable to pay carbon tax. Each activity and its applicable threshold is set out in Schedule 2.
The various industries potentially subject to the carbon tax, provided that they meet the threshold, are, inter alia, energy, manufacturing, construction, transport, oil and natural gas, mining, chemical, meat, refrigeration and air-conditioning, agriculture and forestry and waste sectors.
Rate of tax
The rate of tax to be imposed is R120 per ton carbon dioxide equivalent of the GHG emissions, subject to prescribed allowances more fully explained below.
This rate will be increased by the consumer price inflation plus two per cent for the preceding tax period per year until 31 December 2022.
The rate of tax will be increased after 31 December 2022 by the amount of the consumer price inflation for the preceding tax year as determined by Statistics South Africa (Section 5).
The first tax period is for a period of 6 months, commencing on 1 June 2019 and ending on 31 December 2019. All subsequent tax periods will commence on 1 January of each year and end on 31 December of that year.
Administration and Reporting
Section 15(2) of the Carbon Tax Act read with sections 1 and 54A of the Customs and Excise Act, 91 of 1964 (“Customs Act”) provides that carbon tax will be administered as an environmental levy under Chapter VA of the Customs Act. This means that administrative actions, requirements and procedures concerning the submission and verification of accounts, collection and payment of carbon tax as well as taxpayers’ rights and remedies will be regulated by the provisions of the Customs Act and the rules to the Customs Act (“the Rules”).
Taxpayers must submit annual environmental levy accounts and payments for every tax period in accordance with the Rules (Section 17).
Both SARS and the Department of Environmental Affairs (“DEA”) are tasked with the duty to collect the carbon tax. The carbon tax base will be determined from the emission data that is collected by the DEA and SARS will be privy to this database. The rationale for this structure is that it creates a “checks and balances” process to ensure compliance by taxpayers.
The DEA, to facilitate the Carbon Tax Act, implemented a mandatory GHG reporting system. The National Greenhouse Gas Emission Reporting Regulations, 2016, has the objective of establishing a single national reporting system for the transparent reporting of GHG emissions emanating from identified affected sectors which contribute to South Africa’s GHG emissions. The GHG Reporting Regulations serve as an implementation tool which will be used to regulate the reporting of data and information from identified point, non-point and mobile sources of atmospheric emissions to the National Air Emission Inventory System (“NAEIS”) for purposes of compiling atmospheric emission inventories to inform the carbon tax.
The GHG Reporting Regulations apply to the categories of emission sources listed in Annexure 1 thereto and a corresponding data provider (i.e. reporting company) as classified in regulation 4 thereof.
The reporting obligations imposed on Category A data providers are more comprehensive than for those in Category B, as they are based on operational control and must cover all process, fugitive and combustion emissions from all GHG emission sources and source streams belonging to listed activities. A data provider is classified as –
Category A: any person in control of or conducting an activity marked in the Category A column above the capacity given in the threshold column of the table in Annexure 1 to the GHG Reporting Regulations (Category A data providers thus include persons/companies controlling or conducting activities at a specified capacity which emit GHGs); or
Category B: any organ of state, research institution or academic institution, which holds GHG emission data or activity data relevant for calculating GHG emissions relating to a category identified in the table in Annexure 1 to the GHG Reporting Regulations.
The reporting thresholds under the GHG Reporting Regulations, as well as the emission sources identified in Annexure 1, are informed by the IPCC Guidelines for National Greenhouse Gas Inventories (2006) (IPCC Guidelines), which Guidelines stipulate the reporting methods recommended for each IPCC emission source and relevant GHGs. In this regard, the DEA published the “Technical Guidelines for Monitoring, Reporting and Verification of Greenhouse Gas Emissions by Industry” (Technical Guidelines) as a companion to the GHG Reporting Regulations in April 2017, which aims to provide guidance to reporting companies on methodologies to apply when quantifying GHG emissions from activities listed in Annexure 1 for reporting on the NAEIS.
Part II of the Carbon Tax Act prescribes certain allowances for several types of emissions and instances. The following emissions are granted allowances: fossil fuel combustion, industrial process emissions and fugitive emissions. Allowances are also granted in respect of:
trade exposure of up to a maximum of 10% (sSection 4);
a tax payer implementing measures to reduce GHG emission not exceeding 5% (Section 11);
a tax payer that conducts an activity that is listed in Schedule 2 in the column “Activity/Sector” and participates in the carbon budget system of 5% (Section 12)
Section 54AA(b) of the amended Customs Act stipulates that the allowances and limitation of allowances prescribed in the Carbon Tax Act must be administered as rebates, refunds or drawbacks, as prescribed in terms of section 75 of the Customs Act. Accordingly, “allowances”, as defined in section 1 of the Carbon Tax Act, must be interpreted as having a similar meaning to that of “rebates, refunds and drawbacks”.
Section 75 of the Customs Act allows for the application of rebates, refunds and drawbacks of excise duties and levies on goods which are subject to customs and excise taxes under Schedule 6 of the Customs Act. This section also provides for the instances and requirements to qualify for refunds and rebates. The Rules to section 75 of the Customs Act govern the administration of rebates, refunds and drawbacks. The Rules prescribe the requirements, the applicable time periods and the documents to be retained, all of which must be satisfied by a taxpayer in any application of rebates, refunds and drawbacks. These provisions are applicable to taxpayers applying for an allowance in terms of the Carbon Tax Act.
Registration and Licensing
The Customs Act (as amended) and the Rules provide that an emissions generation facility/ies (which comprises various emissions generation points) at a combined capacity equal to or above the carbon tax threshold must be licensed as a customs and excise manufacturing warehouse. The application requirements for a licence in this regard are, inter alia:
Submission of forms DA 185, DA 185.4A17 and DA 185.4B2 and supporting documents / annexures;
Compliance with the requirements specified in the Rules, any relevant section and any item of Schedules 6 and 8;
Submission of an agreement in accordance with the draft agreement; and
If the emissions generating facility’s capacity operates below the threshold, a taxpayer will only need to register and will not be required to furnish security.
Payment of carbon tax
As mentioned above, section 17(1) of the Carbon Tax Act provides that a taxpayer must submit an environmental levy account and make payments in accordance with the Rules for each tax period. Draft Rule 54FD.04 stipulates that every licensee must, in the month of July following the tax period, but not later than the penultimate working day of that month:
submit a separate annual account on the prescribed DA 180 form in respect of each licensed emissions generation facility registered to that licensee;
make payment of the environmental levy as calculated on the DA 180 form in accordance with draft Rule 54FD.03; and
submit any other supporting documents the Commissioner may request.
The first environmental levy account and first provisional payment is due in July 2020.
Fortunately, the Carbon Tax Act allows an adjustment period, permitting a taxpayer to adjust their environmental levy accounts and payments for a tax period in the subsequent environmental levy account and payment of the period commencing on 1 January and ending on 30 June in the following tax period. This method is similar to provisional tax, whereby a taxpayer’s income tax liability is paid in advance to ensure that the taxpayer does not remain with a substantial tax debt on assessment. Therefore, the payment of carbon tax can be split into two amounts.
Internal administrative appeal
In the event that SARS precludes allowances or disputes that a taxpayer falls below the carbon tax threshold, the taxpayer has recourse to the remedies set out in Part A of Chapter XA of the Customs Act (sections 77A to 77HA), which include, inter alia, the submission of an internal administrative appeal. In the event that a taxpayer’s internal appeal is dismissed, the taxpayer may make use of the Alternative Dispute Resolution (ADR) process., which process is unfortunately subject to receiving consent from SARS. If SARS fails to grant consent in this regard, the taxpayer’s internal remedies are exhausted and the courts may be approached for appropriate relief.
We recommend that taxpayers who fall within the ambit of the Carbon Tax Act adopt methods to satisfy the criteria to claim the allowances to reduce the carbon tax imposed on its business.