Fuels industry avoids windfall tax
August 6, 2007
By Sherilee Bridge
Johannesburg - The government will not proceed with plans for a tax on the windfall profits earned by synthetic fuel producers such as Sasol, South African Finance Minister Trevor Manuel on Monday.
He said the decision had been taken in the interest of a conducive environment for additional investments in domestic fuel security.
The government would, however, consider taxing these producers under the Mineral and Petroleum Royalty Bill.
Synfuels producers have posted stronger profits on a rising oil price.
The price of crude oil has increased from an average of $29 per barrel in 2003 to a high of $60 in the third quarter of 2005.
Manuel said the government also decided it would not implement a progressive tax regime for the upstream oil and gas companies and would not consider a tax on "must have volumes".
Instead, the government has opted to partner companies such as Sasol to invest in further synfuels expansion.
"What we are saying is we believe Sasol will be a very important player in production of synfuels long into the future," said Manuel.
"We have an interest in ensuring additional refining capacity," said Manuel.
He did not elaborate on the extent of the proposed investment expected from Sasol but said that he did expect the company to propose an investment platform that would be mutually agreeable.
The local synthetic fuels industry accounts for some 35 percent and 40 percent of domestic petroleum sales in South Africa.
Responding to recommendations made by the synfuels task team, Manuel said that he agreed that windfalls had been generated in the domestic synthetic fuels industry but it could not be concluded that this was due to a structural or permanent change in the price of oil.
The synthetic fuels task team, set up in April 2006, was appointed to investigate reforms to the fiscal regime applicable to windfall profits in the sector, with particular reference to synthetic fuels.
Headed by Zavareh Rustomjee, the task team released its final 183-page report for public comment in February this year.
Some of the proposals were to impose a possible tax on windfall profits and an incentive arrangement for new investment in liquid fuel production capacity.
Local fuel producers sell into an administered price market at prices determined by the international price of crude oil without reference to domestic production costs.
Concerns existed that this dispensation benefits synthetic fuel producers and their shareholders disproportionately, at the expense of the consumer and taxpayer.
International oil and gas companies are often subject to fiscal regimes that effectively tax windfall profits associated with high crude prices relative to resource extraction costs.
Manuel said in 2006 that consideration needed to be given to the long-term development of the domestic fuel industry, the design of appropriate fiscal measures and the evolution of the relevant environmental and industrial regulatory regimes.
"We want to be fair, we want to avoid retrospective tax law," Manuel said.
The government has, however, agreed to explore an incentive regime for the investments in the production of liquid fuel as a means of reducing the country's dependency on imports and promote fuel security.
It has also agreed to consider alternative fuel production such as biofuels. - I-Net Bridge
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