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South Africa Consults On Diesel Fuel Tax Refund Overhaul

Thursday, February 16, 2017

The South African National Treasury has issued a discussion paper on a new diesel tax refund system, reviewing its administration and addressing anomalies related to its qualifying activities and beneficiaries.

South Africa's existing diesel refund system provides full or partial relief for the fuel levy (FL) and Road Accident Fund (RAF) levy to primary producers in the agriculture, forestry, fishing, and mining sectors. It was introduced from 2000 and is aimed at protecting the international competitiveness of local industries and reducing the road-related tax burden of the RAF levy for certain non-road users.

Diesel refunds are claimed based on the fuel's use, with different settings for primary producers (on land), offshore activities (including commercial fishing and offshore mining), rail freight, and peak power electricity generation plants (with a capacity of more than 200 MW).

For example, primary producers on land (farming, forestry, and mining) qualify for a refund amounting to 100 percent of the RAF levy and 40 percent of the FL in respect of 80 percent of their eligible diesel fuel purchases. Rail freight is refunded the RAF levy only. Full refunds of both the FL and RAF levy apply to offshore activities and peak power electricity generation plants, although the FL refund for electricity generation has been reduced to 50 percent since April 1, 2016.

The discussion paper follows from announcements made in the 2015 Budget that delinked diesel refunds from the country's value-added tax system and committed the National Treasury and South African Revenue Service (SARS) to explore alternative, more equitable rules and administrative procedures, following consultation with affected industries.

It is recognized that the implementation of a new standalone diesel refund administration will have to be phased in to ease the compliance burden on beneficiaries and the administrative burden on SARS. The design of the proposed new system is envisaged to be finalized by the end of 2017 after the public consultation, which is due to end on May 15. That will be followed by an announcement of the details in the 2018 Budget.

The paper noted that the current diesel refund system "has faced several technical administrative and legal challenges, including some eligible firms being unable to benefit from the system, while others appear to be making disproportionate refund claims."

In that respect, as "the systemic problems confronting the current administration of the diesel refund system are due to the emphasis on eligible diesel purchases by qualifying users," it is proposed that "the basis of the diesel refund administration be shifted to qualifying primary production activities."

An indicative list of the type and nature of qualifying activities and use by primary producers is provided in the discussion paper, and is expected to be finalized through the consultation process.

Audits by SARS under the proposed new diesel refund regime will be based on the risk profiling of diesel refund beneficiaries, while enforcement will continue to rely on taxpayer compliance with logbook obligations. Beneficiaries will be expected to update and maintain their diesel refund registration profiles electronically to validate their claims, while claims outside the scope of the beneficiary's registration profile will be denied.

In addition, refunds will only be allowed in respect of diesel dispensed from storage facilities formally on record with SARS to diesel-powered equipment and vehicles, also formally on record with SARS. There will also be a link of the qualifying activities to the physical location of the primary production activities.