Fuel giant Sasol has rolled out the big guns in its fight to resist the imposition of windfall taxes, presenting a 256-page report to the team tasked with recommending whether such taxes should be applied to liquid fuels and, particularly, synthetic fuels in South Africa.
The report includes several appendices by leading international business consultants, as well as the advice of tax luminary Michael Katz.
Sasol’s defence is built on numerous planks. One is that the tariff protection payments of R7,94-billion it received between 1989 and 2000 is small potatoes compared to the R334-billion in indirect and direct payments by the government to South African industries between 1989 and 2005.
Research by Deloitte shows direct grants to defence industries topped R200-billion in this period, excluding a further R3,5-billion to Armscor. Deloitte’s Duane Newman says defence-related payments relate mainly to the pre-1994 era.
After defence, the motor industry is the greatest beneficiary of government largesse, with Motor Industry Development Programme benefits totalling R90-billion.
The Strategic Investment Programme (SIP) has paid out more than R10-billion in this period, as has the General Export Incentive Scheme (GEIS).
Telkom has received R3,8-billion, understood to be for payments relating to rolling out landlines in previously disadvantaged areas.
Sasol says that recovering the tariff protection it has received ”will create precedents that may affect other industries”.
It says that windfall taxes should not be used because existing regulation is inadequately implemented or policed. In the case of the operation and pricing of pipeline services, for instance, Sasol says regulation and regulators are now in place to ensure that the industry does not unfairly benefit at the expense of consumers.
”If the objective of windfall taxes is to counter or rectify perceived industry distortion that has transpired as an indirect result of previous government intervention, then the appropriate policy response may lie in the regulatory arena.”
Sasol says modified regulatory structures have already been put in place in a set of Acts that grant broad powers to the relevant ministers and appointed regulatory bodies.
”It is more appropriate for the nascent regulatory institutions to be given the opportunity of fulfilling their mandates before windfall taxes are used as a blunt instrument to redress past regulatory imbalances.”
Sasol says the government is heading for a fiscal surplus, meaning that it should not be considering windfall taxes as a source of additional revenue.
”The oil and gas industry, for the emotive reasons acknowledged by the task team, has been an obvious target for such fiscal activity, particularly where such deficits have coincided with times of high oil prices.
”In South Africa, however, government revenue currently exceeds expenditure. An independent firm of economists has predicted that if government revenue is collected at the same rate as currently, the fiscus may have a budget surplus of some R20-billion for the 2006/2007 year.
”It would therefore seem that additional revenue collection would not be an immediate objective that would justify the imposition of a windfall tax on Sasol.”
It says: ”If the ceiling price for repayments were adjusted to [say] $50/barrel, and Sasol was required to refund 25% of its before-tax synfuels profits, and if the proceeds were applied to a reduction in the fuel price, the fuel price would drop by only 5c/litre.
”A $1/barrel change in the oil price would have an impact of 4,5c/litre, and a 10% change in the dollar/rand exchange rate would have an impact of 40c/litre in a deregulated market.”
Sasol says the trend is to provide support or tax incentives for producers of alternative fuels.
”Sasol commissioned research by an independent consultant, the Washington Tax Policy Division of Deloitte, which concluded that windfall taxes have never been levied on producers of alternative fuels.
”On the contrary, it is common for tax jurisdictions, especially in recent times, to provide incentives to taxpayers that engage in the production of alternative fuels.”
It says that in the United States there are a mixture of tax credits designed to stimulate capital investment in the alternative and renewable fuels industries.
”In a notable minor irony, the most important of these were introduced as part of the original windfall profit tax legislation applicable to the crude oil industry.”