Regulations Governing Allowances Under the Carbon Tax

In the past week, National Treasury published draft regulations on the trade exposure and performance allowances. These regulations are summarised below, with important considerations highlighted in red.

1. Draft Regulations Governing the Trade Exposure Allowance

A taxpayer can access an allowance of up to 10% if it is deemed to be trade exposed or operates in a sector that is deemed to be trade exposed. There are two methods in which the trade exposure allowance can be determined –

1. Sector-Specific

The draft regulations contain a list of sectors and associated trade exposure allowances in Annexure A.

1. Company-Specific

The regulations permit you to calculate your own trade exposure allowance if you are unhappy with the trade exposure allowance specified in Annexure A.

This can be done by summing the monetary value of the products that were exported and imported by the taxpayer during the tax period and dividing this by the total sales of the taxpayer during the tax period.

If the result of the calculation above is –

• Less than 10% then the allowance is zero;
• Equal to or above 10% and below 30% then the allowance is determined by multiplying the result of the calculation with 0.33; and
• Equal to or above 30% than the allowance is 10%.

There is also additional guidance provided on how a company that operates in multiple sectors should calculate the trade exposure allowance.

 It is vital that you ensure the draft regulations allow you to maximise the trade exposure allowance. With this in mind, we recommend that you –

1. Check Annexure A and ensure you are comfortable with the trade exposure allowance specified;
2. If not, then check the calculation of the trade exposure allowance to ensure it works for you;
3. If not, then it will be worth commenting on the draft regulations.

Finally, if you operate in multiple sectors then we recommend that you look at whether calculation of the trade exposure allowance across multiple sectors works for you. If not, then it will be worth commenting on the draft regulations.

1. Draft Regulations Governing the Performance Allowance

A taxpayer can access an allowance of up to 5% if it is deemed to perform better than a benchmark. According to the Carbon Tax Act, the allowance can be calculated as follows –

Z = (A / B – C) x D

Where –
Z                      percentage to be determined
A                      is the benchmark
B                      is the measured and verified greenhouse gas emissions intensity of a taxpayer in respect of the tax period
C                     is the number 1
D                     is the number 100

The benchmark for various sectors is given in Annexure A of the draft regulations. The sectors with benchmarks are –

1. Iron and steel;
2. Ferroalloys in respect of ferrochrome and silicomanganese;
3. Clay brick manufacturing in respect of saleable brick;
4. The cement sector, in respect of clinker;
5. Chemicals in respect of nitric acid;
6. Ilmenite industry in respect of titanium slag;
7. Sugar industry in respect of raw or white sugar;
8. The mining sector in respect of platinum, gold and coal;
9. The pulp and paper sector;
10. Coal to liquid and gas to liquid petroleum; and
11. Petroleum refining. 

The regulations above have a number of gaps –

1. They do not outline how a taxpayer from a sector not covered in the regulations is able to submit a benchmark. This is critical. If you do not operate in one of the sectors above then there must be a process to follow in which you can still propose a benchmark for inclusion in Annexure A. The performance allowance cannot be limited to the sectors currently in the regulations.
2. The regulations do not outline how much of the 5% you are able to access if you perform better than the benchmark. In other words, do you need to be 5% lower than the benchmark to access the full 5%? This should be specified.
3. Some benchmarks appear to be by product whilst others are by site/facility. This is not too much of a concern provided that the regulations contain a process for all companies to propose a product or site benchmark for consideration.

With this in mind, we would recommend –

1. If you operate in the list of sectors in Annexure A, confirm that the benchmark works for you;
2. If you don’t operate in the list of sectors in Annexure A, consider engaging with National Treasury to get a benchmark for your sector added to Annexure A;
3. Comment on the draft regulations if the benchmark doesn’t work for you or if the sector in which you operate is not listed in the draft regulations.

Commentary is due by close of business on 17 January 2020.

Please note that The National Treasury has also said that it will ensure that the final regulations for the trade exposure and performance allowances are gazetted by the first quarter of 2020.

If you need assistance with ensuring that the above allowances are appropriate to your company and if not, drafting responses to National Treasury then please contact – 

Joslinl@catalystsolutions.co.za 084 299 6873

Christo@catalystsolutions.co.za 084 513 8177

 
Please note that National Treasury gazetted the final regulations governing the carbon offset allowance at the end of November 2019. A summary of these regulations are not contained in this newsletter, but feel free to contact us should you wish to discuss.