Selling your company or business? Make sure you have complied with your carbon tax obligations

• South Africa

• Corporate
• Industrials

14-02-2023

An important consideration when entering into a transaction to sell a company or business, is whether it has complied with applicable laws and regulatory requirements.

Carbon tax is a relatively new tax, levied in terms of the Carbon Tax Act No 15 of 2019 (“Carbon Tax Act”) (which came into effect on 1 June 2019), which aims to reduce greenhouse gas emissions, ensuring that the adverse impacts of climate change are considered in the production cycle, by the use of incentives and disincentives.

Subjects of the Carbon Tax Act

Carbon tax is imposed on entities within South Africa that operate emissions generation facilities at a capacity above or equal to the carbon tax threshold, as per Schedule 2 of the Carbon Tax Act (“Schedule 2”) (see Carbon Tax Act 15 of 2019 (www.gov.za)). For example, iron and steel production has a threshold indicating ‘none’, while textile and leather manufacturing has a threshold of 10MW (th). Some examples of sectors that involve carbon taxable activities include energy, manufacturing, construction, transport, and petrochemical production.

Licensing obligations

If an entity conducts an activity resulting in greenhouse gas emissions above the threshold, it must license its emissions generation facilities with the South African Revenue Services (“SARS”). It is important to note that it is not necessary to apply for a license if Schedule 2 provides that the business has a threshold of ‘not applicable’ or a basic tax-free allowance of 100% is indicated. In terms of licensing a facility, the relevant licensing procedure can be found on SARS’ website and includes completing various forms (such as the DA185), as well as submitting supporting documentation.

Submitting returns and allowances

Once the license application is successfully approved by SARS, a carbon tax submission is required annually (the filing season opens on 1 July every year). When completing a submission, a calculation of the environmental levy payable is conducted based on an approved reporting methodology of the Department of Environment, Forestry and Fisheries, or the formulas prescribed in the Carbon Tax Act. The current rate is set at R144.00 per ton of carbon dioxide equivalent emissions and is subject to an annual CPI increase. It is expected that the 2023 rate will be announced by the Minister of Finance, Mr Enoch Godongwana, during his delivery of the National Budget Speech on 22 February 2023.

Allowances found in Schedule 2 of the Carbon Tax Act must be included as part of the final calculation submitted. For example, taxpayers will receive an allowance of up to 10% in respect of their trade exposure. After accounting for the various allowances, the maximum total tax-free allowance for an activity could be up to 95%. These substantial allowances have been extended to 31 December 2025, which gives affected companies some time to adjust to the tax, as well as move to greener production processes.

Key takeaways

If you are selling your business or company, and it operates an emissions generation facility, we caution you to ensure that you have complied with all your carbon tax obligations. If a due diligence identifies that your business has not been tax compliant this may result in numerous consequences, including a reduced sale price or, in the worst case, the transaction failing. If there are warranties or indemnities in the sale agreement that pertain to tax compliance (which is a very common inclusion), and it is uncovered at a later stage that there has been non-compliance with inter alia the company’s carbon tax obligations, then you (as the seller) may be liable to the buyer for amounts owed to SARS (including penalties).

We highly recommend consulting with a tax or legal practitioner if you are uncertain about your carbon tax obligations, calculating the environmental levy, or submitting your annual carbon tax returns. Eversheds Sutherland has a highly skilled team of practitioners and that can assist you and your business in this regard, including with any due diligence on either the buy or sell-side.