Windfall tax team issues discussion document

The five-person panel appointed by the Treasury to study the possibility of imposing a windfall tax on petrochemicals group Sasol and state-owned PetroSA on Thursday issued a 102-page discussion document.

Finance Minister Trevor Manuel in May appointed Dr Zavereh Rustomjee as chairperson of the panel as well as Dr Rod Cromption from the National Energy Regulator, businesswoman Almorie Maule, Dr Boni Mehlomamkulu from the Department of Science and Technology and independent consultant Dr Grove Steyn.

The task team is to advise Manuel on possible introduction of windfall profits in South Africa’s liquid fuel sector, particularly in the synthetic fuel industry.

Manuel first mooted the possibility of a windfall tax during his Budget speech in February.

“It would be premature at this early stage of the investigation to have expressed specific views, as the task team is open to learning key lessons from past and current policies with a view to recommending that they be considered for the future” the five-person panel said in the discussion document.

In March, China began levying a windfall tax on its oil producers and in April Ecuador imposed a 50% windfall tax on foreign oil revenues.

The task team invited interested parties to make submissions by August 4.

Oral presentations will be heard at public hearings in the second or third week of August. The task team will then compile a report and make recommendations to Manuel by mid-September 2006.

Among the options to be considered included a revised subsidy regime where the previous price support and reimbursement arrangement could be reinstated.

A second option was a cost-based administered price regime where synthetic fuel producers could be reimbursed for their output on the basis of a cost-plus price structure.

Another option would be a progressive formula tax where synthetic fuel production could be subject to a formula-based progressive profit tax, along similar lines to the South African gold mining tax formula, the panel said.

A fourth option would be to look at investment-linked tax and subsidy options where regard would be taken of economic and environmental considerations as well as an account taken of investment by synthetic fuel producers in expanded or improved production capacity, as part of an incentive-based targeted tax regime, the task team added.

The discussion document did not reflect the views of the South African government or the Treasury, who were invited to make formal inputs into the process, the panel said.

In the discussion document, the task team sought to define a the term “windfall”.

About 30% of South Africa’s liquid fuel is produced from coal and natural gas using synthetic fuel technology.

Sasol converts low-grade coal to liquid fuel and PetroSA converts natural gas to liquid fuel.

For Sasol’s financial year to June 2005, the group reported record operating profit of R14,506-billion.

“Concerns exist that the present dispensation benefits the synthetic fuel producers and their shareholders disproportionately, at the expense of the consumer and the taxpayer,” the panel said.

South African taxpayers and motorists have in the past supported the synthetic fuels industry through sizeable subsidies, when the administered fuel price had been too low to recover the costs of production.

“This had the effect of protecting the companies from adverse impact of a below-cost price, with the associated benefit to the country’s balance of payments of greater stability in domestic fuel production,” the task team said.

“This price support arrangement also provided for a recovery by the fiscus of a share of the windfall profits to the industry when high oil prices resulted in a high-administered fuel price,” the panel added.

“An agreement was in place that an offsetting reimbursement to the fiscus would be paid when oil prices exceeded $28,50 per barrel, but this fell away in 1995. A revised subsidy regime that provided for a subsidy in the case of low oil prices without the requirement of a payback during times of high oil prices was in place until 1999; this revised regime was based on recommendations by the Arthur Andersen report,” the task team said.

When the agreement expired in 1999 the Department of Minerals and Energy Affairs appointed consultants to recommend a more appropriate fiscal regime.

The issue had not been raised since 1999 as global oil prices were until recently at moderate levels, the panel stated.

“Internationally, oil and gas companies are often subject to fiscal regimes that effectively tax the windfall profits associated with high oil prices relative to resource extraction costs,” the task team added.

“These tax or profit-sharing regimes assist in mobilising surplus funds for public investment purposes, but arguably also inhibit exploration and hold back global supply, contributing to the persistence of high fuel prices already underpinned by strong growth in demand,” the panel said.

“Careful consideration needs to be given to the long-term development of this industry, the design of appropriate fiscal measures and the evolution of the relevant environmental and industrial regulatory arrangement,” the task team noted.
- I-Net Bridge

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