SARS Moves to Prevent Unintended Tax Exemptions in Petroleum Industry

The South African Revenue Service (SARS) has introduced retrospective amendments to the Customs and Excise Act to prevent a potential loss of tax revenue from the petroleum industry. These modifications seek to preclude a legal interpretation that could have relieved certain petroleum products from excise duty and contributions to the fuel and Road Accident Fund levies, a situation that could substantially impact the national fiscus.

The draft Taxation Laws Amendment Bill now includes changes that affect petroleum products like aviation kerosene, illuminating kerosene, distillate fuel, and specified aliphatic hydrocarbons. The National Treasury and SARS released this draft, along with the Revenue Laws Amendment Bill and regulations on carbon offsets and electronic services.

The anomaly identified involves the interpretation of the Customs and Excise Act that would have allowed the petroleum industry to escape several tax liabilities and burden SARS with reimbursing taxes collected since January 1, 2002. An essential part of the issue was the two contradictory notes within the relevant section of the act, inciting a problematic technical interpretation.

The proposed legislation, not highlighted in the 2024 budget, stems from an extraordinary occurrence where the interpretation presented posed a notable threat to the national treasury, paralleling previous unforeseen tax law clarifications such as the tax-free dividends declared to offshore companies in 2004.

To align domestic legislation with the global framework and negate the ambiguous interpretation, the amendments would reclassify the mentioned petroleum products under the Correct Harmonised System Convention, established by the World Customs Organisation. This convention dictates customs tariffs and trade statistics internationally, and the retrospective change to 2002 aligns with the global introduction of a distillation threshold for these products.

SARS has carefully decided on the retrospective application of this amendment to January 1, 2002. This intends to rectify the misalignment that occurred when South Africa enacted changes in product subheadings under the international convention without mentioning the required distillation point threshold.

The Fuels Industry Association of South Africa, currently reviewing the proposed amendments, perceives it as a necessary corrective step to maintain consistency in fuel categorization with the Harmonised System Convention, ensuring uniform classification for customs tariffs and the collation of international trade data.

The resolution of this issue illustrates SARS's vigilance in safeguarding the fiscus and underscores the importance of maintaining current and clear legislation to avoid costly misinterpretations in the future.