Investment and other subsidies
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
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 45 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 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 of that captive power plant for that year of assessment is more than 35 per cent of the kilowatt hours of energy input in respect of that year of assessment.
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).
Deductions in respect of environmental conservation and maintenance
Section 37C deems that expenditure incurred by a taxpayer to conserve or maintain land in terms of a 5 year biodiversity management agreement entered into in terms of the National Environmental Management: Biodiversity Act will be deemed to be expenditure incurred in the production of income 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.
Furthermore where a taxpayer agrees to the declaration of its land as a nature reserve, game reserve or the like and certain additional requirements are met, then broadly, the taxpayer is entitled to;
- A deduction of expenditure incurred to conserve and maintain such land; and
- The land is deemed to constitute a deductible donation for purposes of the Income Tax Act.
In this regard the aggregate deduction will be limited to 10 percent of taxable income.
Special Economic Zones (SEZ)
Special Economic Zones (legislation to yet in force)
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 (legislation to yet in force)
A qualifying company located within a SEZ may deduct from its income an allowance 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.