The Minister of Finance, Enoch Godongwana, will announce new tax proposals in the 2023 Budget which will be delivered on 22 February 2023.
The Budget Review, which provides further information on these proposals, will contain substantive tax policy proposals and rate changes in Chapter 4, with more technical tax proposals in Annexure C. Carbon tax is one area that could be affected, and we predict possible technical tax proposals in this regard that may be announced in the Budget.
Extension of the utilisation period for carbon offsets
A carbon tax has been introduced in a phased manner. The first phase of the carbon tax was meant to end on 31 December 2022. In the 2022 Budget, it was announced that the first phase would be extended to 31 December 2025. As a result of the extension of the first phase a number of consequential amendments were made to the Carbon Tax Act, 2019.
Unfortunately, no amendments were made to the Carbon Offset Regulations (Government Notice 1556 of 29 November 2019).We anticipate that an extension of the utilisation period for carbon offsets will be announced in the 2023 Budget. Carbon offsets are investments in projects that reduce, avoid or sequester greenhouse gas emissions. Taxpayers may, provided they satisfy the relevant requirements, thresholds, conditions and limitations, reduce their greenhouse gas emissions by the amount of any eligible carbon offsets before calculating their carbon tax.
The carbon offsets are valuable in that they reduce a taxpayer's carbon tax liability. As a general rule, the Carbon Offset Regulations do not permit taxpayers to derive carbon offsets in respect of activities which are subject to the carbon tax. There is an exception to the general rule which applies during the first phase of the carbon tax to projects which are implemented before the 1 June 2019 start date of the carbon tax and which became subject to carbon tax. The carbon offsets derived from pre-1 June 2019 projects remain eligible under the carbon offset system provided that the carbon offset will be utilised on or before 28 July 2023 in relation to the first phase of carbon tax ending on 31 December 2022.
Despite the extension of the first phase to 31 December 2025 the utilisation period in the Carbon Offset Regulation remains unchanged. We expect that an announcement will be made that the utilisation period will be extended such that carbon offsets will remain eligible under the carbon offset system provided that the carbon offset is utilised on or before 28 July 2026 in relation to the first phase of carbon tax ending on 31 December 2025.
Mandatory carbon budgets
The 2022 Budget contained a proposal that a higher carbon tax rate of ZAR640 per tonne of carbon dioxide equivalent will apply to greenhouse gas emissions which exceed the carbon budget. Emissions which are within the carbon budget will be taxed at the statutory carbon tax rates which are ZAR144 in 2022 and ZAR159 in 2023. Since the carbon tax is payable in respect of a carbon tax period which runs from 1 January to 31 December each year it is anticipated that a carbon taxpayer will pay the higher carbon tax rate for each year that its emissions exceeds the carbon budget.
It would be preferable, even if it is only a transitional measure, if the higher carbon tax rate is payable in respect of emissions which exceed the carbon budget over a number of years rather than annually. This would give carbon taxpayers, whose emissions exceed their carbon budgets in a particular year, the opportunity to take steps to reduce the excess emissions below their carbon budget in other years.
We do not have any expectation that such an amendment will be proposed but we believe it would be welcomed.
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