allAfrica.com: South Africa: Windfall Tax On Fuel Firms Fires Up Public Debate (Page 1 of 2)

THE global windfall tax debate will intensify in SA this month with the release of an initial discussion document on whether and how the domestic synthetic fuels industry should pass on a portion of what have been described as "obscene" profits to the taxpayers, who have helped build the companies.

The release of the document, expected in the next few days, will be followed by public hearings in Pretoria or Cape Town later this month.

Public sentiment towards the two companies targeted by the investigation, Sasol and state-owned PetroSA, is unlikely to be sympathetic, with fuel prices reaching new highs this week on the back of higher oil prices and a weaker rand.

The inland petrol price rises to R6,73 today, up from half that figure five years ago, while global energy companies such as Sasol continue to make super profits.

Opponents of the windfall tax proposal made by Finance Minister Trevor Manuel in February point out that the oil industry is cyclical. They want to know if government creams off additional profits in the good times, will it support synthetic fuels companies in the bad times?

This is one of the options the task team will consider.

A "price support and reimbursement arrangement" will see Sasol and PetroSA -- which supply about 40% of SA's demand for fuel -- receiving a subsidy if the oil price drops below a set floor price, and subjecting them to a tax if oil prices rise above a ceiling.

The task team will also consider a cost-based arrangement and a progressive profit tax directly linked to profitability.

Another option involves tax and subsidy options based on the investments the two firms make.

The windfall tax issue is being hotly debated in several parts of the world amid growing anger over rising fuel prices. Motorists in countries such as the US and UK have felt the full impact of soaring oil prices, whereas SA has been shielded to some extent by the rand's gains.

Rejecting calls for a European Union oil industry windfall tax in May, Austrian Finance Minister Karl-Heinz Grasser said it was "not realistic" unless such a tax was implemented on a worldwide basis.

Some say it should be left to market forces rather than governments to correct any apparent imbalance.

An alternative proposal is to force oil companies to spend a percentage of their profits on developing alternative and renewable energy systems.

Suggestions have been made that government should review the method it uses to regulate fuel prices in SA, instead of imposing windfall taxes on the synthetic fuels industry.

Others argue that the fiscal gains from a windfall tax could be used to repair deteriorating roads in SA.

It will be difficult to arrive at a formula that has a meaningful yet nondestructive effect on the country's fuel industry.

The task team will be able to draw on international experience of windfall taxes.

Countries that recently introduced or raised taxes related to high oil prices, or that have had such schemes in the past, include the US, the UK, China, Russia, Bolivia and Norway.

But the South African situation has some unique aspects.

Sasol and PetroSA do not make fuel using oil; instead, they use coal and gas as feedstock, hence the term "synthetic" fuels.

The two firms' production costs are widely believed to be lower than those of traditional oil refineries, so a different cost structure will apply.

There is no easy answer, says Ernst & Young's energy, chemicals and utilities partner, Norman Ndaba.

Relevant Links

Southern Africa
Economy, Business and Finance
Petroleum
South Africa



"I don't agree with a windfall tax. It's like swatting a fly with a bazooka." He says oil and synthetic fuel companies should not be punished for their investment choices.

Deloitte tax director Duane Newman warns that government should consider the windfall tax issue on a holistic basis and not base its decision only on whether it is justified in the case of the synthetic fuels industry.

"It is vital that the impact on other local industries be evaluated and whether this could create an impression of whether these other industries could be next," Newman says.