Cape Town - Developers of South African projects of the UN's clean development mechanism (CDM) which designed to cut harmful carbon emissions, need clarity from the government and the SA Revenue Services (Sars) on the taxability of carbon credits.
This is according to a recent report by africapractice, the communications and research consultancy, which said the taxability of CDM projects could have "important consequences" for the economics of the projects. Sars assistant general manager of legislation, Franz Tomasek, said on Friday that it was difficult to comment in any detail because work on carbon credits was in its early stages.
Carbon credits, also known as certified emission reductions, are generated by CDM projects to reduce emissions of greenhouse gases in developing countries such as South Africa. They are sold to developed countries that have set targets for reducing greenhouse gases. Serge de Reus, an associate director in corporate and international tax at Pricewater houseCoopers (PwC) said on Friday that tax should be used as an instrument to give taxpayers incentive to make use of the CDM and generate carbon credits. In the absence of specific measures to deal with the CDM, PwC, which in the final stages of applying to become an official auditor of the CDM, has embarked on its own study of the tax issues at stake.
According to De Reus, a key question was whether Sars would consider the expenditure incurred on CDM projects as revenue in nature, and hence tax deductible, or capital in nature , and hence not deductible under the income Tax Act, although it may be possible to claim a capital allowance. If expenditure was classed as capital in nature, it would not be as attractive for project developers, said De Reus. A related matter would be whether the income generated from the sale carbon credits would be of a revenue nature (and thus taxable as ordinary income) or of a capital nature (and subject to lower tax as a capital gain).
Tomasek said that because classification between capital and revenue may be involved, it was likely that the determination of the tax treatment would be "fairly fact intensive". According to PwC, other indirect tax and regulatory issues needed to be examined, including.
- Whether VAT input credits could be claimed;
- Whether VAT should be levied on the sale of carbon credits; and
- If the sale of carbon credits to non-South African residents would be regarded as the export of capital for exchange control purposes.
De Reus said there were also a number of industry-specific issues that needed to be considered.
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