DNA con­sid­er­ing tax op­tions

‘Tax ex­emp­tion for emis­sion pro­duc­ers could lure for­eign in­vestors'

Finweek English Edition - - Openers - GUGU­LAKHE MASANGO

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

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