Carbon emissions incentives
Certified emissions reduction exemption
Section 12K of the Income Tax Act provides for a tax exemption on any amount received or accrued inrespect of the disposal of any certified emission reduction (CER) derived in the furtherance of a qualifying clean development mechanism (CDM) project carried on.To stimulate the uptake of CDM projects in South Africa, income from primary CERs, which was exempted from income tax from 2009 to 2012, will be extended to 31 December 2020, inline with the adoption of the second commitment period of the Kyoto Protocol.The VAT Act does not provide for exemption from VAT on the disposal of a CER. It is arguable that the disposal of a CER should be viewed as a supply of services for VAT purposes and that, on exportation of a CER, this service is zero-rated for VAT purposes.
Energy efficiency incentives
Industrial policy projects additional allowance
This is an incentive in relation to industrial policy projects, including greenfield and brownfield manufacturing projects. One of the qualificationsfor eligible projects is the use of improved energy efficiency and cleaner production technology. Measurement and verification (M&V) of savings will be required to verify that savings are sustained over the incentive benefit period.
Under Section 12I of the Income Tax Act (Industrial Policy Projects), projects that have already received incentives or grants under other types of schemes will be excluded. Such projects need to be ring-fenced and taken out of theequation when calculating and reporting savings for the tax claim.
Section 12I provides for an additional allowance on assets (new or used), applied to a project that qualifiesas an Industrial Policy Project (IPP) defined in relation to assets used in the manufacturing sector. The project must be approved by the Minister of Trade and Industry. The only projects that qualify for this allowance are greenfield projects costing more than South African rand (ZAR)50 million or brownfield projects costing more than ZAR30 million, less than ZAR50 million or 25 percent of expenditure on existing assets.
The incentive in relation to a qualifying project comprises:
The incentive (i.e. tax deduction) is limited to:
Energy efficiency savings allowance
Section 12L allows as a deduction, in determining the taxable income of a taxpayer, an amount in respect of energy efficiency savings by the taxpayer with regard to that year of assessment. The deduction is calculated at 95 cents per kilowatt hour (or equivalent) of energy efficiency savings. The energy efficiency savings have to be measured and confirmed by a measurement and verification (M&V) body as defined in the published regulations in relation to section 12L. No deduction is allowed if the taxpayer receives a concurrent benefit in respect of energy efficiency savings.
No person may receive the section 12L allowance in respect of energy generated from renewable sources or co-generation other than energy generated from waste heat recovery. Furthermore, a person generating energy through a captive power plant may not receive the allowance unless the kilowatt hours of energy output ofthat captive power plant for that year of assessment is more than 35 percent of the kilowatt hours of energy input in respect of that year of assessment.
Production of renewable energy allowance
Section 12B provides for an accelerated capital allowance for machinery, plant, implements, utensil and articles owned by the taxpayer or acquired by the taxpayer in terms of an installment credit agreement which was brought into use for the first time by the taxpayer for purpose of its trade.
This section applies where the assets are used for purposes such as the generation of electricity from wind power, solar energy, hydropower to produce electricity of not more than 30 megawatts and biomass comprising organic wastes, landfill gas or plant material.
The allowance is calculated as 50 percent of the cost of the assets and the direct cost of installation or erection thereof for the taxpayer in the first year, 30 percent in the second year, and 20 percent in the third year. The allowance also applies to all improvements (other than repairs) and supporting structures that would form part of the machinery, plant, implement, utensil or article.
Research and development allowance
Aside from the section 11(a) general deduction of 100 percent, section 11D provides for an additional 50 percent deduction for revenue expenditure incurred in respect of eligible R&D activities, as well as for prototypes and pilot plants created solely for purposes of R&D that is not intended to be used for production purposes aftercompletion of the R&D. From 1 October2012, the additional 50 percent uplift will only apply to R&D projects for which a pre-approval application form was submitted and approved by theDepartment of Science and Technology.
For capital expenditure, an accelerated allowance is available of 50 percent in the first year, 30 percent in the second year, and 20 percent in the third year.
Environmental treatment and recycling or waste disposal asset allowance
Section 37B provides for an allowance with regard to the cost incurredin acquiring a new and unused environmental treatment and recycling asset or environmental waste disposal asset used in the context of manufacturing and which assets are required by any law for purposes of protecting the environment.
The allowance in respect of an environmental treatment and recycling asset is 40 percent of the cost of the asset in the first year and 20 percent per annum for the next 3 years. The cost of waste disposal assets can be written off on a straight line basis over 20 years (5 percent per year).
Deductions in respect of environmental conservation and maintenance
Section 37C states that expenditures incurred by a taxpayer to conserve or maintain land in terms of a five-year biodiversity management agreement entered into in terms of the National Environmental Management: Biodiversity Act will be deemed to be expenditures incurred in the production of income and for the purposes of trade and will therefore be deductible.
Land used by the taxpayer for the production of income and for the purposes of trade (the productive land) needs to be in the immediate proximity of the land that is subject to the biodiversity management agreement for section 37C to find application. In addition, the expenditure deductible in terms of this section is not allowed to exceed the income generated by the taxpayer on the productive land.
Special Economic Zones (SEZ) (legislation not yet in force)
Special Economic Zones
In terms of section 12R, any qualifying companies, which are South African incorporated companies, alternatively, companies which have their place of effective management in South Africa, and which are located in a SEZ, will be entitled to apply a reduced income tax of 15 percent (as opposed to 28 percent).
The precise requirements to qualify for the reduced rate of tax referred to above have not yet been determined by the legislature. New or improved buildings in a SEZ.
A qualifying company located within a SEZ may deduct from its income anallowance equal to 10 percent of the cost to the qualifying company of any new or unused building owned by the qualifying company or any new or unused improvement to a building owned by the qualifying company. The building must be used by the qualifying company and used by it in the course of trade.