DNA considering tax options
‘Tax exemption for emission producers could lure foreign investors'
SOUTH AFRICA’S Designated National Authority (DNA) is about to appoint an accounting firm to undertake a study to give guidance on the classification of certified emission reductions (CER) credits generated when implementing a clean development mechanism (CDM) project.
The DNA, which is housed at the Department of Minerals and Energy, is a structure that regulates and promotes the implementation of CDM activities as required by the Kyoto Protocol.
According to Lwazikazi Tyani, director of SA’s DNA, the study will also identify possible taxation principles, applicable to CDM projects in the South African context. The study would also try to determine how companies involved in gas emission reduction could account for CER in their financial statements.
The results of the study are likely to be made public mid-2007, but Tyani says National Treasury will have the final say on the matter. The Kyoto Protocol is an international agreement initiated by the UN aimed at stabilising greenhouse gas emissions, which are blamed for global warming. The protocol requires developed countries to cut emissions of six greenhouse gases – carbon dioxide; methane; nitrous oxide; hydro-fluorocarbons; per-fluorocarbons and sulphur hexafluoride – by setting targets for these countries.
The protocol provides three ways in which developed countries are to achieve their targets – one of these is by investing and buying credits from CDM projects implemented in developing countries.
South Africa, as part of the developing community, can only participate in CDM activities. Since CDM is a new concept in South Africa and the developing world, there’s a need to understand the whole package that goes with it. Taxation of CERs generated from CDM projects is one of the issues that needs to be clarified to project developers and other CDM participants.
Tax implications that might emanate from gas emission reduction projects in SA include what kind of tax will be levied, and if no tax, which tax breaks or other incentives can be provided to encourage carbon trading in South Africa? These are some of the questions that potential investors are likely to face in gas emission reduction projects.
The DNA, which was formed in December 2004, was given a mandate to regulate the clean development mechanism (CDM) in SA. The CDM gives developing countries an opportunity to attract capital for gas emission reduction projects to meet their sustainable goals.
According to PricewaterhouseCoopers (PwC) in 2005, South African firms interested in investing in emission reduction projects could earn about $400m (R2,8bn). Industry commentators, who argued that the CDM market fluctuates on a daily basis and that it’s difficult to arrive at a definite figure, have challenged PwC’s figure.
Tax exemptions for companies involved in emission reduction projects in SA could stimulate growth in the local CDM industry, which has been experiencing birth pains. Tax breaks could entice emissions producers in developed countries to invest in emission reductions in SA or to purchase carbon credits.
Looking at taxation issues. Lwazikazi Tyani