Like the rest of the world, South Africa relies on fossil fuels for energy production. These fossil fuels release carbon dioxide into the atmosphere contributing to global warming and climate change. Growth in carbon dioxide and other greenhouse gas emissions tends to be linked to economic growth. The current debate has raised the question whether it is possible to delink emissions growth from economic growth. An area that has been receiving much attention lately has been the introduction of incentives to encourage South African companies to become more energy efficient in the hope that energy efficiency will contribute to decoupling energy use from economic growth.
These incentives exist in three areas. The first is the recently introduced section 12L of the Income Tax Act, No 58 of 1962 (‘the Act’) which provides a tax deduction calculated at 45 cents per kilowatt hour or kilowatt hour equivalent of energy efficiency savings for any person that is carrying on a trade during any year of assessment ending before 1 January 2020. This tax incentive, although on the statute book, is not yet in operation as the regulations required to make it fully operational have not yet been promulgated.
In order to claim this allowance the company will have to obtain an energy efficiency savings certificate. This certificate will be issued by an accredited institution, board or body prescribed by the regulations. The certificate will have to indicate the following information:
- the baseline at the beginning of the year of assessment;
- reporting period energy use at the end of the year of assessment;
- the annual energy efficiency savings expressed in kilowatt hours for the year of assessment;
- full criteria and methodology used to do the calculation of the energy efficiency savings; and
- any other information prescribed by the regulations.
It is important to note that section 12L will apply to projects such as lighting, insulation of certain buildings on the premises, an upgrade of the air conditioning systems, even reducing the use of fossil fuels like coal and diesel will qualify. This is due to the taxpayer implementing an energy efficiency measure.
The second incentive available to taxpayers is the registration of their energy efficiency programme as a clean development mechanism programme from which they will derive certified emissions reductions (more commonly known as carbon credits). Companies will be able to sell these carbon credits without having to pay any income tax on the amount received (in accordance with section 12K of the Act). Companies which qualify for both the section 12K tax exemption and the section 12L tax deduction will need to evaluate which incentive better suits their particular circumstances as it may not be possible to receive both tax incentives for the same energy efficiency programme.
A third incentive is provided by the Department of Trade & Industry (“the DTI”) which administers the green technology and resource efficiency improvement grant falling under the manufacturing competitiveness enhancement programme. This is a cost-sharing grant that supports companies with green technology upgrades that will lead to cleaner production and energy efficiency. The size of the company applying for the incentive will determine the cost-sharing grant percentage that it may qualify for. The percentage is determined as follows:
- If the company’s total assets originally cost less than R5 000 000 the company may qualify for a grant of 50% of investment cost;
- If the company’s total assets originally cost at least R5 000 000 but less than R30 000 000 the company may qualify for a grant of 40% of investment cost; and
- If the company’s total assets originally cost R30 000 000 but does not exceed R50 000 000 the company may qualify for a grant of up to 30% of investment cost.
Before a company can apply for this grant an assessment must be done so that the company can receive a report that they will submit with their application. This report is known as a cleaner production and/or energy efficiency audit or a green technology assessment report for the project. This assessment should be done by an accredited service provider and the DTI encourages applicants to make use of the national cleaner production centre.
The overlapping nature of these incentives means that companies may qualify for multiple incentives. However, there are rules that limit their ability to enjoy multiple benefits. For instance, the section 12L energy efficiency tax deduction will not be allowed if the company receives a concurrent benefit in respect of energy efficiency savings. A concurrent benefit may include a cash grant offered by the DTI for any energy efficiency savings. Therefore, a taxpayer that receives a grant from the DTI to retrofit its building with energy efficiency equipment may be disqualified from claiming the energy efficiency savings tax deduction. It will therefore be important that companies carefully consider the implications of their decisions.
There are other factors that should be included in any company's decision matrix. For instance, newer, start-up companies may prefer the government grant as the cash injection will enable them to reduce their initial expenses. Established, expanding companies, on the other hand, may prefer tax incentives that reduce their effective tax rate thereby increasing profit.
The range of incentives provides opportunities that companies should consider in the design and planning stages of new projects. For instance, a company constructing a new manufacturing plant may introduce energy efficiency measures upfront that can generate saleable environmental commodities in the form of carbon credits. The likely introduction of the carbon tax on 1 January 2015 is bound to create a demand for these carbon credits as companies seek carbon credits to offset their carbon tax liabilities.