Less than a year after appointing a team to investigate the potential for windfall taxes on South Africa’s liquid-fuel industry, Finance Minister Trevor Manuel is expected to announce details on the issue.
In his mini budget speech last October, Manuel said he had received a comprehensive report from the team and that he would address the issue at the next full budget.
The task team sought to establish whether profit exceeded the cost of capital and whether these were windfalls.
Analysts have attempted to preview the after affects of the decision by either increasing future tax rates for Sasol or indicating its potential result on Sasol’s valuation.
Following last year’s budget announcement where the potential tax was mentioned, Sasol shares fell by 8,3% as the company’s market value shed nearly R13-billion in a day. The JSE Top 40 index was relatively flat for the day.
Chris Hart, an economist at Absa, said there are a number of options that the government may choose to implement some sort of windfall tax, but added that a windfall tax would be against the country’s tax policy over the past decade.
“The whole point of tax policy in the last 10 years was to introduce taxes so that everything was treated more evenly,” Hart said on Monday, “so you don’t have arbitrage between industries.”
Hart said there are possible options, including subsidies and windfalls using floors and ceilings, as well as a stick-and-carrot approach to encourage further capital expenditure by existing producers.
If a windfall tax is imposed on the liquid-fuels industry, then why are other industries that are also achieving record profits due to massive domestic demand, such as cement, not being assessed for such a tax?
South Africa is importing large amounts of crude oil as the refining industry, even at full capacity, cannot cope. The government and Sasol have both mentioned talks of a potential new coal-to-liquids plant in the country.
In December, Sasol said it was in early-stage studies to build a new coal-to-liquids plant in South Africa, more than 20 years since it last built a plant in the country.
“If it works in China and the United States, why shouldn’t it work in this country as well?” said chief executive Pat Davies last year. “This country is also running short of fuel and we would love to invest here using our technology to ensure the country’s fuel demands are also met.”
When asked what would be the best outcome regarding the extraordinary tax in the budget, Hart said: “The best solution would be, they say, ‘We have mooted the idea, gone through the discussions and decided against it.'” — I-Net Bridge