South Africa's National Treasury released the Carbon Tax Bill B46-2018 on 20 November 2018. The Bill was passed by the National Assembly on 19 February 2019 and is said to become operational on 1 June 2019.
The Bill intends to give effect to the "polluter pays principle" and aims to price greenhouse gas emissions by obliging the polluter to internalise the external costs associated with the emittance of carbon, and in doing so, contributing towards addressing the harm caused by such pollution
The key features of the Government's proposed Carbon Tax are:
- taxation under the Bill will be implemented in a phased manner. The first phase will be from 1 June 2019 to 31 December 2022, and the second phase from 1 January 2023 to 31 December 2030;
- a rate of ZAR 120.00 per tonne of CO2e of greenhouse gas emissions will be imposed on entities that conduct activities that exceed the allowed thresholds;
- in order to provide sectors with sufficient time and flexibility to transition their activities to lower greenhouse gas emissions, the Bill provides a significant tax-free emission allowance ranging from 60% to 95% for the first phase, resulting in a tax rate of ZAR 6.00 to ZAR 48.00 per tonne of CO2e;
- the agricultural, forestry and other land use sectors, as well as the emissions from burning biomass, are notability excluded; and
- The South African Revenue Service will have access to the Department of Environmental Affairs' emissions database and be the main implementing administrative authority on Carbon Tax liability assessment.
The market impact of Carbon Tax is anticipated to be minimal during the first phase of implementation, owing to carbon tax allowances and offsets. The second phase, from 2023 onwards envisages a much higher tax rate that could materially impact high-intensive emitters. As a result, industry sectors across the board - as well as consumers - will be impacted either directly or indirectly as the Carbon Tax filters through the South African economy. Experience from other countries that have introduced a price on carbon, either through emissions trading schemes or carbon taxes, demonstrates that those companies that are directly liable to pay a carbon price will seek to pass the carbon costs on to their customers.
Whether the full Carbon Tax can be passed on to a company's customers will depend on a range of factors including:
- existing contractual relationships with customers
- are these long-term fixed contracts?
- how is the price structured?
- can the price be varied as a result of a change in law?
- the commercial environment in which the company is operating and what its competitors are doing; and
- the operation of consumer protection laws which may limit how a carbon price is passed through supply chains.
Preparing for South Africa's Carbon Tax
In preparation for the proposed Carbon Tax, businesses should be considering the following:
1. Determine Liability - Will your company be covered by the Carbon Tax directly and have to pay the Carbon Tax to the Government?
- If so, what is the extent of your liability having regard to tax-free thresholds and industry assistance?
- If not, does your company operate in a sector where its suppliers may be directly liable to pay the Carbon Tax and be seeking to pass those costs on?
2. Know your customers and suppliers - Understanding the inputs and outputs of your customers and suppliers will assist in determining whether it is reasonable and feasible to pass through the Carbon Tax.
3. Review Supply Contracts - Do your existing contracts make provision for increasing the price of goods or services as a result of the introduction of a Carbon Tax - either specifically or in general terms as a result of a change in law or change in tax clauses?
- If so, be aware of any time limits for giving notice of the introduction of the Carbon Tax, a change in tax or change in law and the possible time it may take to negotiate agreed pass through.
- If not, for example, if the contract is for a fixed price or if a change in law or change in tax clauses are not triggered, consider whether there are other grounds to amend or renegotiate the contract or even to terminate the contract if it becomes uneconomical.
4. Update Template Contracts - Does your company use standard supply contracts for its goods and services? If so, you may want to include provisions which clearly specify who will be responsible for direct and indirect costs associated with the Carbon Tax.
5. Consider when to start passing costs on - Consumer protection laws may also prevent companies from changing their pricing structures for goods and services until the company has actually incurred the Carbon Tax or had associated costs passed through to it. Consider when the Carbon Tax legislation commences, and when liable companies are required to pay the tax to the Government.
6. Determine how to best allocate carbon costs - There are a number of different options for determining how costs associated with the Carbon Tax are allocated between parties, depending on the type of contract and the anticipated costs to the business. Companies may want to consider the level of transparency required in calculating the amount of the Carbon Tax that is passed through, for example, through using a fixed increase, formulas or industry standards. Note that, as consumer protection laws may limit the extent to which costs can be passed through, you may have to be able to demonstrate the costs claimed to be associated with the Carbon Tax.
7. Consider when to allocate carbon costs - Companies should also consider whether carbon costs should be charged periodically based on an agreed uplift or only after they have been incurred and verified.
8. Explore options to refuse or limit pass-through from your suppliers - In certain circumstances you may be entitled to push back on the whole or partial pass-through of the Carbon Tax, for example, if your suppliers are in a competitive market or are unlikely to incur any significant carbon costs.
9. Influencing the supply chain - Some companies may be able to put pressure on others in their supply chain to improve the fuel efficiency of their operations by resisting the pass-through of part of the Carbon Tax and requiring suppliers to take measures to reduce their greenhouse gas emissions.
10. Take advantage of offsets and allowances - Companies will be able to effectively reduce their Carbon Tax liability through the use of various allowances and offsets catered for under the Bill, up to a maximum of 95%.
- Carbon offsets may be utilised to reduce Carbon Tax liability by up to 10% depending on which sector they are in. There may be commercial synergies that would enable your company to generate offsets as a result of its own activities or acquire offsets by investing in approved projects or from your suppliers or customers in lieu of passing through the Carbon Tax.
- Tax-free allowances will be given to companies during the first phase to provide for a smooth transition into a low carbon economy, taking into account international competitiveness and carbon leakage concerns.
This article was written by Mike Webb, Senior Associate, Seelan Moonsamy, Tax Consultant, and Jean Van Wyk, Candidate Attorney, Baker McKenzie Johannesburg