This edition of Taxes and Incentives for Renewable Energy describes current incentives to promote renewable energy from wind, solar, biomass, geothermal and hydropower. These incentives also support related areas such as increased energy efficiency, smart-grid management, biofuels, carbon capture systems and storage technologies.
This article outlines specific taxes and incentives for renewable energy in South Africa.
CARBON EMISSIONS INCENTIVES
Certified emissions reduction exemption
Section 12K of the Income Tax Act provides for a tax exemption on any amount accrued in respect of the disposal of any certified emission reduction (CER) credit derived in the furtherance of a qualifying clean development mechanism.
To stimulate the uptake of Clean Development Mechanism (CDM) projects in South Africa, income from primary certified emission reductions, which was exempted from income tax from 2009 to 2012, will be extended to 31 December 2020, in line 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 credit. It is arguable that the disposal of CER credits should be viewed as a supply of services for VAT purposes and that, on exportation of CER credits, 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 qualifications for 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 of four years.
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 the equation 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 qualifies as 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. Only projects larger than South African rand (ZAR)200 million qualify for this allowance.
The incentive in relation to a qualifying project comprises:
- 75 percent of the cost of a new and unused manufacturing asset used in an IPP within an Industrial Development Zone (IDZ); or
- 35 percent of the cost of a new and unused manufacturing asset that is used in an IPP
- If the qualifying project constitutes a Preferred Project (as defined), the incentive comprises:
- 100 percent of the cost of a new and unused manufacturing asset used in an IPP within an IDZ; or
- 55 percent of the cost of a new and unused manufacturing asset used in an IPP.
The incentive (i.e. tax deduction) is limited to:
- ZAR900 million for greenfield projects with preferred status
- ZAR550 million for greenfield projects with qualifying status
- ZAR550 million for brownfield projects with preferred status
- ZAR350 million for brownfield projects with qualifying status.
Energy efficiency savings allowance (legislation not yet in force)
Section 12L proposes 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 will be calculated at 45 cents per kilowatt hour (or equivalent) of energy efficiency savings. The energy efficiency savings have to be measured and confirmed by an institution, board or body as prescribed by regulation. No deduction is allowed if the taxpayer receives a concurrent government benefit in respect of energy efficiency savings.
This section, although promulgated in the Income Tax Act, has not yet come into effect. It will be effective on a date as prescribed by the Minister of Finance in the Government Gazette, potentially during 2015 because the National Treasury has indicated that “some of the revenues generated through the carbon tax will be recycled to fund the energy efficiency savings tax incentive.”
Production of renewable energy and fuels allowance
Section 12B provides for an accelerated capital allowance for machinery, plant implements, utensil or articles, owned by the taxpayer 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, sunlight, gravitational water forces or biomass.
The allowance is calculated as 50 percent of the cost and construction of the assets 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 general 100 percent deduction, this allowance (Section 11D) provides for an additional 50 percent for all expenditures incurred in respect of eligible R&D activities.
The additional 50 percent uplift will only apply to R&D approved by the Department of Science and Technology. R&D in respect to green and energy-saving industries has been identified as a new area of focus.
Environmental treatment and recycling or waste disposal asset allowance
Section 37B provides for an allowance with regard to the cost incurred in acquiring a new and unused environmental treatment and recycling asset or environmental waste disposal asset used in the context of manufacturing.
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 three years. The cost of waste disposal assets can be written off on a straight line basis over 20 years (five percent per year).
|Manufacturing Competitive Enhancement Programme||The MCEP is a cost-sharing incentive available to existing manufacturers for expanding or upgrading facilities. The grant is based on Unilever’s Manufacturing Value Added (MVA) which is calculated on sales less costs of production. The MCEP is further broken into several components, including the Capital Investment and Green Technology and Resource Improvement components.||The maximum grant available is limited to 7-10 percent of MVA. Within this limit a benefit of 30 to 40 percent of the expenditure may be granted, capped at ZAR50 million.||Department of Trade and Industry (DTI)|
|MCEP||The Capital Investment component is utilized to support upgrading and expansion of equipment that will lead to the creation of new jobs or the retention of existing jobs.|
|The main qualifying criteria is that jobs should be maintained for two years and the company must be a level four B-BEEE contributor or must have plans in place to achieve this score in two years.|
|Applications need to be submitted at least 60 days prior to the commencement of the commercial use of the assets.|
|Manufacturing Investment Programme||The MIP is a tax-free grant available to manufacturing entities which is calculated based on the size of the project.||The grant is 15 percent of qualifying costs of the project.||Department of Trade and Industry (DTI)|
|MIP||The MIP is available to existing manufacturers who plan to increase their production facilities. The grant is payable over a two year period.|
|A scoring system is in place to establish if the project will qualify for this grant. Points are allocated based on the sector, the B-BEEE score and the number of additional jobs created.|
|Applications need to be submitted at least three months prior to planned commencement date of production.|
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.