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Budget Observations – Business Incentives and Carbon Tax
The Minister of Finance, Mr. Enoch Godongwana, presented National Treasury’s annual 2022/23 budget earlier this afternoon. We set out below the most notable observations from a business incentives and environmental taxation point of view.
2022 Budget Observations
Business Incentives Updates
• Research and Development – The R&D tax incentive is being extended in its current format from 30 September 2022 to 31 December 2023. During this interim period, a workshop will be held to discuss potential changes and improvements to the tax incentive, the results of which will be made known in the 2022 Taxation Laws Amendment Bill due out later this year. In the meantime, the supercharged 150% deduction continues on a pre-approval basis making it critical for companies to continue submitting applications for the incentive.
• Section 12L Energy Efficiency Tax Incentive – It is proposed that the Energy Efficiency Tax Incentive be extended to 31 December 2025.
• Youth Employment Initiatives – An amount of R18.4 billion is allocated to support youth employment under the presidential employment initiative. Over the medium term, an anticipated R1.7 billion will also be spent on Jobs Fund (current open call for proposal closing on the 28th of March 2022). The DTIC has been allocated R1,5 billion for the social employment programme.
• Employment Tax Incentive (ETI) – The maximum monthly ETI value per employee will be increased by 50% to R1 500. Given the abuse of employment tax incentives, government also proposes amendments to the Employment Tax Incentive Act (2013) to impose understatement penalties on reimbursements that are improperly claimed.
• Review of existing incentives – In line with recommendations from the Katz Commission as well as the Davis Tax Committee, incentives that have not widened social or economic benefits will not be renewed and those that are considered effective will be retained and potentially redesigned to further improve performance.
• Department of Trade, Industry and Competition (DTIC) Programmes – Ongoing support will be provided to the Automotive Incentive Scheme, Special Economic Zones, Global Business Services Incentive, Film and Television Production Incentive, the Black Industrialist Programme, the Agro-Processing Support Scheme, the Strategic Partnership Programme, the Clothing and Textiles Programme and the Aquaculture Development and Enhancement Programme.
• Blended Finance – R6.8 billion has been allocated to the agriculture industry in the form of blended finance programmes, farmer development and post‐settlement support initiatives.
• Tourism Equity Fund – The Department of Tourism will allocate R360 million over the medium term to support the pilot phase of the Tourism Equity Fund introduced in 2021.
Carbon Tax-Related Updates
The following changes to the carbon tax are applicable to 2022:
• The carbon tax rate will increase from R134/tonne Carbon Dioxide Equivalent (tCO2e) to R144/tCO2e from 1 January 2022.
• The carbon fuel levy will increase by 1c to 9c/litre for petrol and 10c/litre for diesel from the 6th of April 2022.
• A proposal has been made that the carbon tax cost recovery quantum for the liquid fuels refinery sector increases from 0.56c/litre to 0.63c/litre from the 1st of January 2022.
In terms of Phase 2, it must be noted that Phase 1 of the carbon tax will be extended to the 31st of December 2025. As such, the introduction of Phase 2 of the carbon tax has been delayed. Phase 1 was scheduled to come to an end at the end of this year, but it will be extended until the end of 2025.
However, we can expect the following changes to be made to the carbon tax from the 1st of January 2023:
• Adjusting the threshold for the maximum trade exposure allowance from 30% to 50%. This means that only those sectors with a trade exposure above 50% will be able to access the full 10% trade exposure allowance. Previously, it was those sectors that had a trade exposure above 30%.
• Given that mandatory carbon budgets will come into effect from the 1st of January 2023 for some sectors, National Treasury has noted in the Budget Review that it will remove the 5% carbon budget allowance. It will also penalise those companies that exceed their mandated carbon budgets. National Treasury proposes a carbon tax rate of R640/tCO2e for those Greenhouse Gas (GHG) emissions that exceed the budget.
• The Carbon Tax Act currently makes provision for taxpayers conducting electricity generation activities to offset the costs of purchasing additional renewable electricity against their carbon tax liability. This has been extended until the 31st of December 2025. However, it will be limited to the carbon tax liability associated with the combustion of fossil fuels of electricity generators and will not be used to offset the total carbon tax liability of these generators.
National Treasury aims to introduce a limitation on what can be claimed as sequestration under the carbon tax. It proposes to allow sequestration for only those activities within the operational control of a taxpayer. The plan is for this to take effect from the 1st of January 2022.
In terms of the future of the carbon tax:
• Government proposes to increase the carbon tax rate each year by at least 1 USD/tCO2e, to reach 20 USD/tCO2e by 2026. From the start of the second phase, now the 1st of January 2026, government proposes to increase the carbon tax rate more rapidly each year, to at least 30 USD/tCO2e by 2030. Thereafter, it proposes to accelerate this even more by 2035 and then 2040 and finally to a carbon tax rate of up to 120 USD/tCO2e by 2050.
• Furthermore, it plans to reduce the basic tax-free allowances that are currently in place. It is anticipated that these reductions will come into play from the 1st of January 2026, Phase 2 of the carbon tax.
• Government plans to increase the carbon offset allowance by 5% from the 1st of January 2026 to encourage investment in carbon offset projects.
The above will be taken into consideration as part of the second phase of the carbon tax review process.
Environmental
• Government plans to investigate an upstream plastic tax and a tax on single-use plastics.
• Increases were announced for the plastic bags levy, the vehicle emissions tax and the incandescent lightbulb levy (effective from the 1st of April 2022).
Concluding Comments
We welcome the proposal for the extension of the section 11D R&D and the section 12L Energy Efficiency Tax Incentive sunset clauses.
Carbon tax will progressively increase over the coming years whilst the allowances will be reduced and phased out over time. Companies have to place a strategic focus on reducing greenhouse gas (“GHG”) emissions otherwise face the risk of a heavily increasing carbon tax liability going forward. In the shorter term, companies must take advantage of the current saving opportunities on offer in the form of carbon tax allowances, sequestration and benefits claimable under the section 12L energy efficiency tax incentive.
For additional information please feel free to contact:
Christo Engelbrecht: christo@catalystsolutions.co.za, +27 84 513 8177.
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