South African Legislative Committee Prefers Slow Phase-in for Carbon Tax: Report

First Interim Report on Carbon Tax for the Minister of Finance
Davis Tax Review Committee
http://bit.ly/1MNF0FS

[Moneyweb.co.za]  The Davis Tax Committee has proposed that the carbon tax be implemented in 2017 as suggested by National Treasury, but recommended that the threshold be set to 100% for the first year.

This would mean that firms that produce direct greenhouse gas emissions from sources that are owned or controlled by them (Scope 1) would be required to comply and submit returns but should not incur a tax liability in the first tax-year after the implementation.

The committee, which has been tasked with a comprehensive review of South Africa’s tax system, on Friday released its first interim report on the carbon tax to the public, almost two weeks after National Treasury published its Draft Carbon Tax Bill for public comment on November 2. The Bill did not propose a 100% threshold during the first year.

According to the committee, its report was submitted to the minister on October 29.

Vinesh Pillay, head of the secretariat for the Davis Tax Committee (DTC), said it was difficult to align the timelines of the two documents but this is not a major problem.

“The Bill is still out for public comment. The DTC report can be taken into account together with comments from the public.”

In e-mailed comments to Moneyweb, National Treasury said the Davis Tax Committee’s process on the carbon tax has had no bearing on the Carbon Tax Bill published.

“The consultation process on the carbon tax by the National Treasury commenced in 2010 and has been an extensive and intensive process so far. The publication of the Carbon Tax Bill will provide for a further process of consultation on some of the technical aspects of the Bill,” it said.

While there has been concern that the carbon tax could be the nail in the coffin of those industries that are already struggling and would push a fragile economy over the edge, National Treasury said the various proposed tax-free thresholds and long-term phasing in has taken into account the developmental stage of the South African economy, the current low growth trajectory and the need for the gradual move towards a low carbon economy.

The Department of Trade and Industry (dti) has also had some reservations about the carbon tax. National Treasury said it has engaged with the DTI and has shared its modelling exercise.

“The Minister of Finance and the Minister of Environmental Affairs have agreed with both the Minister of Department of Trade and Industry and Economic Development to address their concerns. These concerns were primarily with respect to vulnerable sectors such as mining and steel. To that extent the package of measures includes revenue recycling that will ensure the impact of carbon tax on electricity prices during the first phase will be neutral,” National Treasury said.

Backdrop

Izak Swart, director: carbon tax and government incentives specialist at Deloitte, said the world is increasingly moving towards a carbon tax.

According to the World Bank, a carbon pricing mechanism – a carbon tax or a trading scheme – currently covers 12% of global emissions.

Following the United Nations Climate Change Conference in Paris in December, more countries will likely start to follow the pricing mechanism.

But is National Treasury’s proposed implementation date of January 1, 2017 achievable considering that the legislation and systems still have to be refined?

Swart said he has some doubts – there is still a lot of uncertainty around specific issues in the Bill itself.

Folkert Gaarlandt, director for tax at EY, said the timeline is achievable but it would require a lot of cooperation from all stakeholders. There will have to be consultation between government and industry.

“If there is an open consultation process on that, I have confidence that this can work. If you just put rules out there and you say now it is up to the industry to adhere to it, I think there will likely be practical or implementation issues.”

The Davis Committee’s proposal that the tax should be implemented on January 1 2017, but that a 100% threshold should apply, would give stakeholders time to iron out the finer details and get their ducks in a row, Swart said.

Gaarlandt said the purpose of implementing the carbon tax should not be to generate revenue but to change certain behaviour.

“I actually think that the Davis Committee has a good point in saying let’s first make it work and get the right behaviour.”

However, one also has to ask if parties would regard it as relevant if they face no consequences, he said.

“If in that first year the government together with industry consult on the things that work and do not work I think that that is probably the best way to get used to it,” Gaarlandt said.

The Davis Committee said on Friday the 100% threshold “would provide companies with the necessary data to plan more effectively, allow Sars [the South African Revenue Service] to fine-tune tax reporting systems and provide National Treasury with additional information to allow for more accurate modelling and revenue forecasting”.

“It would also assist government in developing and testing the necessary administrative systems.”

Swart said in terms of the Bill, there is still uncertainty about the offset allowances. A heavy emitter may for example want to do something about its carbon emissions, but the technology to move to a lower carbon footprint may not be available yet. Such a firm may want to utilise an offset allowance by planting trees or investing in a solar plant, but at this stage it is unclear how the finer details would work.

The carbon tax was initially supposed to be implemented on January 1 2015 and Swart said great care has been taken to ensure the policy is appropriate.

He stressed however that industry must also play its role to provide input as the unintended consequences of the carbon tax could be very negative – firms may just set up shop in countries where there is no carbon tax.

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