Swopping emissions for exemptions: An examination of section 12K
22 March 2016
Posted by: Author: Lee-Ann Steenkamp
Author: Lee-Ann Steenkamp (University of Stellenbosch)
the proposed Carbon Tax is yet to be implemented, section 12K provides a first
step towards South Africa mitigating its impact on Global Warming.
running the most dangerous experiment in history right now, which is to see how
much carbon dioxide the atmosphere... can handle before there is an
This chilling warning
comes from Elon Reeve Musk, the famous South African-born American business
magnate, inventor and, the product architect of Tesla Motors.
According to the International Energy
Agency's World Energy Outlook 2015, South Africa accounted for more than
one-third of the total energy-related CO2 emissions of the
continent, with Africa expected to suffer severely from the impacts of a
changing climate. The Organisation for Economic Cooperation and Development
(OECD) recently conducted an environmental review of South Africa. It found
that although South Africa hosts some of the world's richest biodiversity, the
country's economy is also one of the most energy- and carbon-intensive in Africa.
While acknowledging the progress that South Africa has made, the OECD
recommends that South Africa transitions to a low-carbon, resource efficient
economy, protects the natural asset base and improves the environmental quality
of its people. In short, green growth should be at the heart of South Africa's
issues between climate change and energy security are most pertinently
addressed within the regimes under the UN Framework Convention on Climate
Change (UNFCCC) and its Kyoto Protocol. For many countries, the need for
promotion of renewable energies results from their obligations under the legal
regime of the UNFCCC/Kyoto Protocol. Although South Africa is a non-Annex
country in the Kyoto Protocol, it is a signatory. In other words, it has
ratified the Kyoto Protocol on 31 July 2002, but as a developing country, does
not have targets under the protocol.
The South African government has committed
to ambitious greenhouse gas (GHG) reductions and the proposed carbon tax is
meant to change consumer behaviour and influence investors to shift towards low
carbon options. In 2007, Cabinet proposed that a carbon tax be implemented in
South Africa as one measure to reduce the country's GHG emissions. In 2010,
National Treasury published the Carbon Tax Discussion Paper. Later, further
details were released in the National Budget proposals of 2012. The process
culminated in the publication of the Carbon Tax Policy paper in 2013. However,
the implementation of the proposed carbon tax has been delayed numerous times
and is set to come into effect during 2016.
As part of my green tax series, this
article investigates one of the options available for South African companies
to reduce their carbon footprint and obtain a tax benefit at the same time,
namely section 12K.
section 12K exemption
Section 12K of the Income Tax Act No.
58 of 1962, as amended (the 'Act'), provides an exemption for any amount
received by or accrued to a person in respect of the disposal of any certified emission
reductions derived by that person in the furtherance of a qualifying Clean
Development Mechanism (CDM) project carried on by that person. The exemption
came into operation on 11 February 2009 and applies in respect of disposals on
or after that date.
Essentially, under section 12K,
amounts received or accrued upon disposal of Certified Emission Reductions (CERs)
are exempt for purposes of normal tax and capital gains tax. The capital gain or capital loss from the
disposal of a section 12K asset that is used to produce amounts that are exempt
from normal tax, must be disregarded in terms of para 64(b) of the Eighth Schedule.
The CDM was established as part of
the Kyoto Protocol and provides developed countries with a mechanism to reduce
their own GHG emissions obligations by purchasing credits from CDM projects
that avoid GHG emissions in developing countries. These projects facilitate
financing and technology transfer for GHG reduction in developing countries.
This mechanism includes projects in renewable energy, energy efficiency and
other related fields designed to achieve emission reductions. According to the
2013 explanatory memorandum of the Taxation Laws Amendment Bill the carbon
emission reduction credits from the CDM projects are known as CERs and are
saleable to, and usable only by developed countries for the purpose of meeting
their legally obligations to reduce emissions.
The section 12K incentive was
introduced to enhance the uptake of CDM projects within South Africa. During
the COP18 meetings held in December 2012, the CDM was extended as a flexibility
mechanism under the Kyoto Protocol, enabling developing countries to continue
their participation in the global carbon market. Accordingly, section 12K was
amended on 1 January 2013 so as to extend the exemption to 31 December 2020.
To qualify for the relief available
under section 12K, CDM projects require both South African approval and UNFCCC
registration. The South African approval must be obtained from the Department
of Energy, which is the "Designated National Authority”. CERs are verified and
certified by the UNFCCC Executive Board of the Clean Development Mechanism,
after which they come into existence once issued by this Board.
At the time the CER is granted to the
South African resident, no tax event arises. Where the CERs are disposed of by
a South African company for proceeds, section 12K deems that no taxable income
results. In addition, the expenditure incurred by the South African resident
will not qualify as a deduction under section 11(a) of the Act. The Explanatory Memorandum to the Taxation Laws
Amendment Bill 2009 argues that, because there is no receipt of taxable income,
the value of CERs held by a South African company will not be taken into
account under section 22 of the Act as closing or opening stock.
For VAT purposes, the supply of CERs
is treated as a zero-rated supply. This is so because CERs are exported,
typically to developed nations. This export will be treated as the provision of
services to a non-resident. Accordingly, the documents needed to satisfy SARS
that the services have been exported are less stringent than what is required
to satisfy SARS that goods have been exported. However, the VAT Act does not specifically
state this, which arguably still leaves the VAT position unclear.
Furthermore, it is not unusual
practice to enter forward contracts to dispose of CERs when embarking on a CDM
project. If the product fails to generate the anticipated number of CERs, the producer
may have to go into the market and acquire enough to meet the shortfall. If
these are acquired overseas, the producer may suffer foreign VAT, which would
not be redeemable.
As South Africa is working towards
meeting its obligations to mitigate the impacts of global warming, tax
incentives such as section 12K are necessary contributions to the international
effort to limit climate change. In the
words of Musk, "We're changing the world and changing history, and you
either commit or you don't."
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This article first appeared on the March/April 2016 edition on Tax Talk.