INCOME TAX INCENTIVES FOR RENEWABLE ENERGY RESEARCH AND

INCOME TAX INCENTIVES FOR RENEWABLE ENERGY RESEARCH AND
INCOME TAX INCENTIVES FOR RENEWABLE ENERGY RESEARCH AND
DEVELOPMENT AND IMPLEMENTATION: A COMPARISON BETWEEN SOUTH
AFRICA AND CHINA
by
Keshia Natalia de Gouveia
25280636
Submitted in partial fulfilment of the requirements for the degree
Magister Commercii in Taxation
in the
FACULTY OF ECONOMIC AND MANAGEMENT SCIENCES
at the
UNIVERSITY OF PRETORIA
STUDY LEADER : Mrs W Janse van Rensburg
Date of submission:
2013-11-11
© University of Pretoria
ABSTRACT
INCOME TAX INCENTIVES FOR RENEWABLE ENERGY RESEARCH AND
DEVELOPMENT AND IMPLEMENTATION: A COMPARISON BETWEEN SOUTH
AFRICA AND CHINA
by
Keshia Natalia de Gouveia
STUDY LEADER:
MRS W. JANSE VAN RENSBURG
DEPARTMENT:
TAXATION
DEGREE:
MAGISTER COMMERCII
Like many fossil fuel dependant countries, South Africa faces the dual problem of
responding to an increasing demand for coal production to satisfy rising energy
requirements, while at the same time responding to the call to reduce greenhouse
gas emissions. The exploration of renewable energy sources as an alternative to
fossil fuels has therefore become an increasingly pressing concern in South Africa.
South Africa has significant renewable energy potential which can simultaneously
address both energy needs and the environmental concerns arising from
greenhouse gas emissions. A tax incentive regime is a popular governmental policy
instrument that has the potential to advance technologies and stimulate markets by
encouraging research and development as well as the implementation of renewable
energy technologies. It is therefore important to determine how the tax incentives
currently available in South Africa for research and development and the
implementation of renewable energy technologies, compare with those adopted
internationally.
China was identified as a country that offers generous fiscal incentives to encourage
research and development and the implementation of technology such as renewable
energy technologies. The objective of this study was to determine how the income
tax incentives for research and development and the implementation of renewable
energy technologies currently available in South Africa compare with the income tax
incentives available in China for the same purpose. This was achieved by means of
© University of Pretoria
a head-to-head comparison of the impact that the two tax regimes would have in a
hypothetical case study
Keywords:
Renewable energy
Research and development
R&D
Implementation
Fiscal policy
Tax incentives
China
© University of Pretoria
OPSOMMING
Soortgelyk aan baie lande wat van fossielbrandstof afhanklik is, word Suid-Afrika
gekonfronteer met ’n tweesydige probleem, naamlik hoe om aan die toenemende
vraag na steenkool te voorsien ten einde stygende energiebehoeftes te bevredig en
terselfdertyd te reageer op die noodsaaklikheid om kweekhuisgasse te verminder.
Navorsing rondom hernubare energiebronne as 'n alternatief vir fossielbrandstowwe
is en word al hoe meer relevant en dringend.
Suid-Afrika het aansienlike hernubare energiepotensieel wat gelyktydig energiebehoeftes sowel as omgewingskwessies rondom die uitwerking van koolsuurgas op
die omgewing kan aanspreek. ’n Beleidsisteem wat belastingaansporings aanmoedig is 'n gewilde instrument wat deur owerhede gebruik word ten einde
tegnologiese vooruitgang te bevorder en markte te stimuleer. Dit word bereik deur
die gebruik van voorsiening van belastingaansporings vir navorsing en ontwikkeling,
asook vir die implementering van hernubare energietegnologieë. Dit is derhalwe
belangrik om te bepaal hoe die belastingaansporings wat huidig in Suid-Afrika
beskikbaar is vir navorsing en ontwikkeling en die implementering van hernubare
energietegnologieë, vergelyk met internasionaal aanvaarde belastingaansporings.
China is geïdentifiseer as ʼn land wat mildelike fiskale aansporings bied ten einde
navorsing en ontwikkeling en die implementering van hernubare energietegnologieë
aan te moedig. Die doel van die studie was, om deur middel van ’n hipotetiese
gevallestudie, te bepaal hoe die inkomstebelastingaansporings wat in Suid-Afrika
beskikbaar is, vergelyk met die aansporings in China.
Kernwoorde:
Hernubare energie
Navorsing en ontwikkeling
Implementering
Fiskale beleid
Belastingaansporings
China
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TABLE OF CONTENTS
CHAPTER 1 ............................................................................................................... 1
INTRODUCTION........................................................................................................ 1
1.1
BACKGROUND ........................................................................................... 1
1.2
PROBLEM STATEMENT ............................................................................. 3
1.3
PURPOSE STATEMENT............................................................................. 4
1.4
RESEARCH OBJECTIVES.......................................................................... 4
1.5
IMPORTANCE AND BENEFITS OF THE PROPOSED STUDY.................. 5
1.6
DELIMITATIONS ......................................................................................... 5
1.7
ASSUMPTIONS........................................................................................... 6
1.8
DEFINITION OF KEY TERMS ..................................................................... 7
1.9
RESEARCH DESIGN AND METHODS ..................................................... 10
1.10
OVERVIEW OF CHAPTERS ..................................................................... 10
CHAPTER 2 ............................................................................................................. 12
IMPORTANCE
OF
RENEWABLE
ENERGY
TECHNOLOGY
AND
GOVERNMENTAL POLICIES ......................................................................... 12
2.1.
INTRODUCTION ....................................................................................... 12
2.2.
RENEWABLE ENERGY TECHNOLOGY .................................................. 12
2.3.
BENEFITS OF RENEWABLE ENERGY .................................................... 15
2.3.1.
Social and economic development .............................................................. 15
2.3.2.
Access to energy ......................................................................................... 16
2.3.3.
Energy security ............................................................................................ 17
2.3.4.
Climate change mitigation and reduction of environmental and
health impacts.............................................................................................. 17
2.4.
RENEWABLE ENERGY POLICIES........................................................... 19
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2.4.1.
Policies to encourage investment in renewable energy research
and development ......................................................................................... 20
2.4.2.
Policies to encourage the implementation of renewable energy
technology ................................................................................................... 23
2.4.3.
Tax-based policy instruments to encourage renewable energy
research and development and the implementation of renewable
energy technologies..................................................................................... 25
2.4.3.1.
DISCOURAGING
UNDESIRABLE
ENVIRONMENTAL
PRACTICES .............................................................................................. 26
2.4.3.2.
IMPLEMENTATION OF RENEWABLE ENERGY .............................. 27
2.4.3.3.
INDUCING INNOVATION................................................................... 28
2.5.
THE RENEWABLE ENERGY ENVIRONMENT IN SOUTH AFRICA
AND CHINA ............................................................................................... 29
2.5.1.
Introduction .................................................................................................. 29
2.5.2.
Current renewable energy environment in South Africa............................... 29
2.5.3.
The current renewable energy environment in China .................................. 32
2.6.
CONCLUSION ........................................................................................... 34
CHAPTER 3 ............................................................................................................. 35
ANALYSIS OF INCOME TAX INCENTIVES FOR
RESEARCH
AND
DEVELOPMENT
AND
RENEWABLE ENERGY
IMPLEMENTATION
OF
RENEWABLE ENERGY TECHNOLOGIES IN SOUTH AFRICA..................... 35
3.1.
INTRODUCTION ....................................................................................... 35
3.2.
RESEARCH AND DEVELOPMENT TAX INCENTIVES IN SOUTH
AFRICA...................................................................................................... 35
3.2.1.
Section 11D – definition of research and development................................ 36
3.2.2.
Section 11D – automatic allowance ............................................................. 37
3.2.3.
Section 11D – additional 50% allowance ..................................................... 37
3.2.4.
Allowances for machinery or plant used for research and
development purposes................................................................................. 38
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3.3.
ALLOWANCES
FOR
MOVABLE
ASSETS
USED
IN
THE
PRODUCTION OF RENEWABLE ENERGY ............................................. 40
3.4.
ALLOWANCES IN RESPECT OF AFFECTED ASSETS........................... 41
3.5.
CERTIFIED EMISSION REDUCTIONS – SECTION 12K.......................... 42
3.6.
THE IN THE PRODUCTION OF INCOME AND FOR THE
PURPOSES OF TRADE REQUIREMENTS ............................................. 43
3.7.
CONCLUSION ........................................................................................... 44
CHAPTER 4 ............................................................................................................. 45
ANALYSIS OF INCENTIVES FOR RENEWABLE ENERGY RESEARCH AND
DEVELOPMENT AND THE IMPLEMENTATION OF RENEWABLE
ENERGY TECHNOLOGIES IN CHINA............................................................ 45
4.1.
INTRODUCTION ....................................................................................... 45
4.2.
RESEARCH AND DEVELOPMENT INCENTIVES IN CHINA ................... 45
4.2.1. SUPER-DEDUCTION
OF
RESEARCH
AND
DEVELOPMENT
EXPENSES................................................................................................ 45
4.2.2. QUALIFIED ENTERPRISES...................................................................... 46
4.2.3. QUALIFYING RESEARCH AND DEVELOPMENT ACTIVITIES ............... 46
4.2.4. QUALIFYING RESEARCH AND DEVELOPMENT EXPENSES................ 47
4.2.5. PROBLEMS RELATED TO THE RESEARCH AND DEVELOPMENT
SUPER-DEDUCTION ................................................................................ 48
4.2.6. ALLOWANCES FOR RESEARCH AND DEVELOPMENT CAPITAL
EXPENDITURE ......................................................................................... 48
4.3.
HIGH AND NEW TECHNOLOGY ENTERPRISE ...................................... 49
4.4.
THE CLEAN DEVELOPMENT MECHANISM (CDM) ................................ 50
4.5.
ENVIRONMENTAL PROTECTION AND ENERGY OR WATER
CONSERVATION PROJECTS .................................................................. 51
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4.6.
SPECIAL EQUIPMENT FOR ENVIRONMENTAL PROTECTION,
ENERGY
OR WATER
CONSERVATION
AND
PRODUCTION
SAFETY ..................................................................................................... 52
4.7.
SYNERGISTIC
UTILISATION
OF
RESOURCES
AS
RAW
MATERIALS............................................................................................... 52
4.8.
PREFERENTIAL
TAX
TREATMENT
OF
ENERGY
SERVICE
COMPANIES (ESCOS).............................................................................. 52
4.9.
INVESTMENT IN ENERGY EFFICIENT EQUIPMENT ............................. 53
4.10. CONCLUSION ........................................................................................... 54
CHAPTER 5 ............................................................................................................. 55
COMPARISON OF THE INCOME TAX INCENTIVES AVAILABLE IN SOUTH
AFRICA AND CHINA FOR RENEWABLE ENERGY RESEARCH AND
DEVELOPMENT AND THE IMPLEMENTATION OF RENEWABLE
ENERGY TECHNOLOGIES ............................................................................ 55
5.1.
INTRODUCTION ....................................................................................... 55
5.2.
DETAILED COMPARISON ........................................................................ 55
ALLOWANCES
FOR
RESEARCH
AND
DEVELOPMENT
CAPITAL
EXPENDITURE ......................................................................................... 56
ALLOWANCES FOR MACHINERY OR PLANT USED FOR RESEARCH
AND DEVELOPMENT PURPOSES .......................................................... 56
5.3.
HYPOTHETICAL CASE STUDY PERFORMED........................................ 59
5.3.1. CASE STUDY ............................................................................................ 60
5.4.
CONCLUSION ........................................................................................... 64
CHAPTER 6 ............................................................................................................. 66
SUMMARY, CONCLUSION AND VALUE OF THE STUDY..................................... 66
6.1.
INTRODUCTION ....................................................................................... 66
6.2.
ACHIEVEMENT OF RESEARCH OBJECTIVES AND SUMMARY OF
FINDINGS.................................................................................................. 66
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6.2.1. TO PROVIDE A GENERAL UNDERSTANDING AND OVERVIEW OF
THE IMPORTANCE OF RENEWABLE ENERGY TECHNOLOGY
AND
THE
GOVERNMENTAL
POTENTIAL
TO
POLICIES
ADVANCE
THAT
RENEWABLE
HAVE
THE
ENERGY
TECHNOLOGIES AND STIMULATE MARKETS....................................... 66
6.2.2. TO CRITICALLY ANALYSE AND EVALUATE THE INCOME TAX
INCENTIVES FOR RENEWABLE ENERGY RESEARCH AND
DEVELOPMENT AND THE IMPLEMENTATION OF RENEWABLE
ENERGY TECHNOLOGIES AVAILABLE IN SOUTH AFRICA AND
CHINA........................................................................................................ 68
6.2.3. TO COMPARE INCOME TAX INCENTIVES FOR RENEWABLE
ENERGY
RESEARCH
AND
DEVELOPMENT
AND
THE
IMPLEMENTATION OF RENEWABLE ENERGY TECHNOLOGIES
AVAILABLE IN SOUTH AFRICA AND CHINA IN ORDER TO
EXPOSE
ANY
DIFFERENCES
AND
MAKE
RELEVANT
RECOMMENDATIONS AS TO WHAT SOUTH AFRICA CAN LEARN
FROM CHINA. ........................................................................................... 70
6.3.
OVERALL CONCLUSION.......................................................................... 71
6.4.
RECOMMENDATIONS.............................................................................. 72
6.5.
FUTURE RESEARCH................................................................................ 74
LIST OF REFERENCES .......................................................................................... 75
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LIST OF FIGURES
Figure 1: Hydroelectric power generation.......................................................................... 14
Figure 2: Global contribution of renewable energy technologies....................................... 15
LIST OF TABLES
Table 1:
Abbreviations used in this document.................................................................. 9
Table 2: Renewable energy research and development funding policies ......................... 21
Table 3: Renewable energy deployment policies and funding mechanisms ..................... 23
Table 4: Categories of tax-based measures...................................................................... 25
Table 5: Summary of research and development tax incentives available in South
Africa ................................................................................................................ 40
Table 6:
Comparison of tax incentives for renewable energy research and
development and implementation of renewable energy technologies in
China and South Africa .................................................................................... 55
Table 7: Case study of the income tax incentives available in China and South Africa
for R&D and implementation of wind energy technology................................. 62
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INCOME TAX INCENTIVES FOR RENEWABLE ENERGY RESEARCH AND
DEVELOPMENT AND IMPLEMENTATION: A COMPARISON BETWEEN SOUTH
AFRICA AND CHINA
CHAPTER 1
INTRODUCTION
1.1 BACKGROUND
The world’s climate is changing, and most climate scientists agree that the increased
level of greenhouse gases in the earth’s atmosphere is a major cause of the change.
Due to the release of carbon dioxide and other gases in the atmosphere by energy
generation processes, the excessive use of fossil fuels such as coal is considered to
be the main driver behind global warming and climate change. (Salim & Rafiq,
2011:1051.)
Historically, South Africa has been largely dependent on fossil fuels as a source of
energy, with approximately 70% of the total energy supply derived from coal. This
over-dependence on coal has led to an increasingly high level of carbon dioxide
emissions relative to the size of the South African economy and population. The
coal-burning sector alone accounts for 87% of carbon dioxide emissions. (Menyah &
Wolde-Rufael, 2010:1374.)
South Africa, like many other fossil fuel dependant countries, is currently faced with
the dual challenge of producing more coal to satisfy energy requirements, while at
the same time having to contend with the need to reduce greenhouse gas emissions
(Krupa and Burch, 2011:6258). According to Krupa and Burch (2011:6258), “South
Africa’s current power structure has resulted in inequality and economic injustices as
wealth and power while also contributing to significant environmental degradation.”
More attention has thus been drawn to furthering the exploration of alternatives to
fossil fuel, such as renewable energy sources (Krupa and Burch, 2011:6258).
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There are a variety of benefits, or opportunity areas as they are known, associated
with the implementation of renewable energy technology. In developing countries
energy is a vital tool to stimulate production, income generation and social
development. Developed countries, on the other hand, are more concerned with
identifying alternative energy solutions to mitigate climate change, ensure energy
supply security and stimulate the creation of employment. (IPPC, 2011:191.)
Renewable energy technologies have the potential to address numerous
environmental, social and economic developmental problems, in addition to
adaptation to climate change (IPPC, 2011:191). According to the IPCC (2011:191),
the four most significant opportunities associated with the implementation of
renewable energy technologies are social and economic development, energy
access, energy security, and climate change mitigation.
There are a number of viable renewable energy sources in South Africa and these
have the capacity to simultaneously address both the energy needs and the
environmental concerns associated with carbon dioxide emissions. However, far too
few renewable energy projects for electricity generation have been deployed under
the current renewable energy policies implemented in South Africa. (Edkins,
Marquard & Winkler, 2010:ii.)
Governmental policies have the potential to advance technologies and stimulate
markets, and it is therefore important for governments to consider the
implementation of policies to encourage renewable energy research and
development and the implementation of renewable energy technologies (IPCC,
2011:191). Policy tools available to governmental policy-makers include tax based
options – a country’s tax system can be utilised in a variety of ways in order to
achieve its renewable energy goals (OECD, 2010:111). It is therefore important to
determine what income tax incentives are currently available in South Africa for
renewable energy research and development and the implementation of renewable
energy technologies, and how these incentives compare with those implemented in
other countries.
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A number of countries are currently meeting the challenge of the transition to a
resource efficient economy. A study by Ernst and Young found that the People’s
Republic of China currently has one of the most attractive renewable energy
markets. (Ernst & Young, 2012:21.) In addition, China offers generous fiscal
incentives to encourage renewable energy research and development and the
implementation of renewable energy technologies (Chan & Cheung, 2010:58).
Furthermore, both South Africa and China form part of BRICS (Brazil, Russia, India,
China and South Africa), a group of nations characterised by their emerging and
rapidly-growing economies (PwC, 2012:2). It is on this basis that it was determined
that China is a suitable country for purposes of comparison.
1.2 PROBLEM STATEMENT
The excessive use of fossil fuels such as coal is considered to be the main driver of
global warming and climate change (Salim & Rafiq, 2011:1051). Like many fossil fuel
dependant countries, South Africa is currently faced with the dual problem of
producing more coal to satisfy energy requirements, while at the same time dealing
with the challenge of reducing greenhouse gas emissions (Burch & Krupa,
2011:6258). Apart from their limited availability and detrimental effect on the climate,
the combustion of fossil fuels has a number of additional negative environmental
consequences. Renewable energy technologies, however, have the potential to
address multiple environmental, social and economic developmental problems, in
addition to adaptation to climate change. (IPPC, 2011:191.)
South Africa is endowed with sources of renewable energy that can simultaneously
address both energy needs and the environmental concerns arising from carbon
dioxide emissions. However, under existing renewable energy policies, few
renewable energy projects for electricity generation have been deployed. (Edkins,
Marquard & Winkler, 2010:ii.) The question then arises how existing renewable
energy policies can be improved in order to encourage renewable energy projects.
Fiscal policies, such as tax incentives, are utilised by governments in a variety of
ways in order to achieve their renewable energy goals.
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An extensive database search undertaken for this study indicated that there have
been few studies of the differences between the income tax incentives available in
South Africa and those available in other countries in respect of renewable energy
research and development and implementation of renewable energy technology.
It was determined that China is a suitable country for purposes of comparison. A
comparison will therefore be made between the income tax incentives available in
South
Africa
for
renewable
energy
research
and
development
and
the
implementation of renewable energy technologies, and the incentives available in
China for the same purpose.
1.3 PURPOSE STATEMENT
The international comparison will identify and discuss differences identified between
South Africa and China, and possible improvements to the current South African
legislation, with the focus on the ability of the legislation to encourage renewable
energy research and development and the implementation of technology flowing
from the research and development. It is intended that the international comparison
will highlight possible lessons that could be learnt from China.
The aim of this study is therefore to narrow the knowledge gap that has been
identified between current South African practice and the best international practice,
by determining how the income tax incentives in South Africa for renewable energy
research and development, and for the implementation of renewable energy
technologies, compare with the income tax incentives available in China for that
purpose.
1.4 RESEARCH OBJECTIVES

To provide a general understanding and overview of the importance of
renewable energy technology and the governmental policies that have the
potential to advance renewable energy technologies and stimulate markets.
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
To analyse and critically evaluate the income tax incentives for renewable
energy research and development and the implementation of renewable
energy technologies available in South Africa and China respectively.

To compare income tax incentives for renewable energy research and
development and the implementation of renewable energy technologies
available in South Africa and China in order to expose any differences and
make relevant recommendations as to what South Africa can learn from China.
1.5 IMPORTANCE AND BENEFITS OF THE PROPOSED STUDY
This study will make a unique contribution to the development of a forward-looking
taxation policy by identifying and investigating differences in the income tax
incentives available for research and development, and for the implementation of
renewable energy technologies in South Africa and China respectively. The possible
improvements identified in this study could be used by the legislator to improve
current legislation in order to assist in achieving government’s renewable energy
goals.
It is also intended that the findings should assist taxpayers in determining what
incentives are available should they wish to engage in research and development in
the field of renewable energy technologies in South Africa, or in the implementation
of technologies emerging from the research and development.
1.6 DELIMITATIONS
The proposed study has several delimitations relating to the context, constructs and
theoretical perspectives of the study. Firstly, it will be limited to the discussion of the
use of income tax incentives in the context of renewable energy policies that are
available to governmental policy makers, with the focus on research and
development and implementation income tax incentives in particular. Accordingly,
the study will not consider the specifics of policy design but will focus on the
concepts of the incentives. In addition, this study will focus on the corporate income
tax incentives available to taxpayers for the defined purpose, and will exclude the
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discussion of any potential additional tax regimes imposed by the relevant legislative
authorities. This study will focus on exposing the differences between the South
African and Chinese income tax incentives, and will not address the viability in a
South African context of the Chinese income tax incentives and governmental
policies identified. The study is performed with specific reference to the geographic
context of South Africa and China. Finally, the study will focus only on the income tax
incentives from the perspective of the taxpayer, as a mechanism to reduce the
taxpayer’s income tax liability.
The case study provided in chapter 5 does not address the political, economic and
policy aspects of the implementation of the income tax incentives or any other aspect
other than the pure application of the current corporate tax law in South Africa and
China.
1.7 ASSUMPTIONS
For the purposes of this study it is assumed that a pure literature review is an
appropriate means of investigating the proposed topic. It is assumed that tax
incentives do help spur spending and investment on renewable energy research and
development and implementation of renewable energy technologies. It is further
assumed that the Chinese tax incentives and governmental policies identified are
viable in a South African context. For the purpose of this study, it is assumed that
research and development relates to the innovation stage of the renewable
technology cycle while implementation relates to the actual deployment of the
renewable energy technologies, and that these stages can be viewed in isolation.
For the purposes of the case study that is performed in chapter 5, it is assumed that
the case study is based on a hypothetical scenario and is in accordance with the
generally accepted rules of calculating income tax in terms of the Income Tax Act
(58/1962) and the Chinese corporate income tax laws.
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1.8 DEFINITION OF KEY TERMS
This study involves a number of key concepts which are defined below:
Affected asset: “An asset such as any line or cable used for the transmission of
electricity, including any earthworks or supporting structures forming part of the line
or cable installation” (Stiglingh et al, 2013:251).
Allowance: “Tax-free amount subtracted from income to arrive at taxable income”
(business dictionary.com, 2013).
Arm’s length: “Transactions between affiliated firms which are made purely on
commercial basis both firms trying to maximise their advantage, and neither firm
accommodating or favouring the other in any way” (business dictionary.com, 2013).
China New Law: “Refers to China's ‘New Enterprise Income Tax Law’ (PRC, 2007),
a major departure from the previous tax system. Unlike the old system, with its
differentiation between domestic and foreign-owned enterprises and separate tax
preference policies, the new tax law unifies taxes and tax rates for foreign and
domestic enterprises” (Go, undated).
Deduction: “Business expenses or losses which are legally permitted to be
subtracted from the gross revenue of a firm in computing its taxable income”
(business dictionary.com, 2013).
Expenditure: “Payment of cash or cash-equivalent for goods or services, or a charge
against available funds in settlement of an obligation as evidenced by an invoice,
receipt, voucher, or other such document” (business dictionary.com, 2013).
Incentive: “Inducement or supplemental reward that serves as a motivational device
for a desired action or behaviour” (business dictionary.com, 2013).
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Fossil fuel: “Ancient organic remains (fossils) in sediments which over eons became
sedimentary rock, giving rise to solid, liquid, and gaseous fuels such as coal, crude
oil, and natural gas. Coal is derived from vegetable matter altered by pressure,
whereas crude oil and natural gas are derived from animal and vegetable matter
altered by pressure and heat. Essentially, all fossil fuels are highly concentrated
forms of far-ancient sunlight trapped in organic cells. They are the primary energy
source for human societies since the industrial revolution (mid-19th century to early
20th century), are non-renewable, and also a primary source of global warming”
(business dictionary.com, 2013).
Global warming: “Steady increase in the Earth's average lower atmosphere (near
surface) temperature due to emissions and build-up of greenhouse gases. While this
temperature has risen by 0.6°C in the last 140 years, it may rise from 1.5°C to over
2.0°C by the year 2070, and could completely alter climate zone patterns resulting in
increased or decreased rainfall, winds, snow, and other unprecedented weather
phenomena. The rising temperature could melt the polar ice caps and cause sea
levels to rise everywhere, permanently flooding many low lying parts of the earth.
The temperate areas in Asia and Americas might experience crop failures due to
drier and hotter conditions” (business dictionary.com, undated).
Greenhouse gas:
“Any of various gaseous compounds … that absorb infrared
radiation, trap heat in the atmosphere, and contribute to the greenhouse effect”
(Merriam-Webster, undated).
Photovoltaic: “Capable of producing a voltage when exposed to radiant energy,
especially light” (business dictionary.com, 2013).
Renewable energy: “Derived from resources that are naturally regenerative or are
practically inexhaustible, such as biomass, heat (geothermal, solar, thermal
gradient), moving water (hydro, tidal, and wave power), and wind energy. Municipal
waste may also be considered a source of renewable (thermal) energy” (business
dictionary.com, 2013).
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Research and development (‘R&D’): “Systematic activity combining both basic and
applied research, and aimed at discovering solutions to problems or creating new
goods and knowledge’” (business dictionary.com, 2013).
The following table lists the abbreviations used in this document.
Table 1:
Abbreviations used in this document
Abbreviation
Meaning
CIT
Corporate income tax rate
CDM
Clean development mechanism (Kyoto Protocol)
CO2
Carbon dioxide
DST
Department of Science and Technology (South Africa)
ESCO
Energy service company
EMC
Energy management contract
EPC
Energy performance contract
GHG
Greenhouse gas
GWh
Gigawatt-hour
HNTE
High and new technology enterprise also: High-new technology
enterprise
IPCC
Intergovernmental Panel on Climate Change
IPP
Independent Power Producer Procurement Programme
KWh
Kilowatt-hour
OECD
Organisation for Economic Co-operation and Development
NERSA
National Energy Regulator South Africa
PPA
Private purchase agreement
IPP
Independent Power Producer Procurement Programme (IPP).
R&D
Research and development
RMB
Renminbi (currency of People's Republic of China)
SAT
State Administration of Taxation in the People’s Republic of China
UNFCCC
United Nations Framework Convention on Climate Change
The Act
The Income Tax Act no 58 of 1962
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1.9 RESEARCH DESIGN AND METHODS
This study is a non-empirical study, which will be based on a review of existing
literature. Saunders, Lewis and Thornhill (2007:595) define a literature review as a
“detailed and justified analysis and commentary of the merits and faults of the
literature within a chosen area, which demonstrates familiarity with what is already
known about the research topic”.
The current South African and Chinese legislation regarding income tax incentives
available to taxpayers for renewable technology research and development, and the
implementation of renewable technology, will be critically evaluated. A comparative
analysis will then be undertaken to critically compare the legislation by means of a
hypothetical case study in order to highlight any differences, benefits and limitations
in South Africa’s current income tax incentive legislation as compared to Chinese
legislation. Finally, the findings will be summarised in a conclusion and relevant
recommendations will be made to highlight what South Africa can learn from China.
1.10 OVERVIEW OF CHAPTERS
This study comprises six chapters. Following the introduction, which sets the context
of the study in chapter 1, chapter 2 will provide an understanding of renewable
energy technologies, the importance thereof and the policies available to
governments to encourage renewable energy research and development and the
implementation of renewable energy technology.
Chapter 3 comprises a detailed analysis of income tax incentives for renewable
energy research and development and implementation of renewable energy
technology, specifically in South Africa. This is then followed by Chapter 4 which
provides a detailed analysis of similar incentives in China.
The purpose of chapter 5 is to critically analyse and compare the income tax
incentives available in South Africa and China as identified in chapters 3 and 4
respectively. This is achieved by providing a head-to-head comparison of the income
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tax incentives identified, followed by a hypothetical case study to illustrate the impact
of certain of the incentives.
Chapter 6 concludes the study with an assessment of how the study has achieved
the proposed research objectives and considers suggestions in respect of
possibilities for future research.
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CHAPTER 2
IMPORTANCE OF RENEWABLE ENERGY TECHNOLOGY AND
GOVERNMENTAL POLICIES
2.1.
INTRODUCTION
This chapter will provide a general understanding of renewable energy technologies,
the importance thereof and the policies available to governments globally to
encourage research and development in the field, and the implementation of
renewable energy technologies that become available.
2.2.
RENEWABLE ENERGY TECHNOLOGY
Renewable energy is a general term which encompasses a variety of technologies
derived from naturally replenished sources that can satisfy multiple energy service
needs by the production of electricity, thermal energy and mechanical energy, as
well as fuels (IPCC, 2011:191).
Certain of these renewable energy technologies can be deployed locally in rural
environments, while others are typically deployed in large energy networks in urban
environments. The extent to which renewable energy technologies are developed
and implemented varies, with some being technically mature while others are in an
earlier phase of technical maturity and commercial deployment, or fill specialised
niche markets. (IPCC, 2011:191.) Examples of renewable energy technologies are
discussed in the table below.
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Table 2:
Renewable energy sources and technologies
Renewable energy technology
Bioenergy
Direct solar energy
Description
Bioenergy can be produced by various processes that
use feedstocks to produce energy such as electricity
and heat.
The feedstocks used for this purpose include biomass
from forest, agricultural and livestock residues; shortrotation forest plantations; energy crops; the organic
component of municipal solid waste; and other organic
waste streams.
The principal behind direct solar energy is to harness
the energy emitted by the sun in order to produce
electricity. Materials that are capable of producing an
energy voltage when exposed to radiant energy,
especially light, known as photovoltaics, are used to
harness and then produce thermal energy (heating or
cooling).
Accessible thermal energy from the Earth’s interior is
harnessed to produce energy. Heat is extracted from
this thermal energy and then stored in geothermal
reservoirs using wells or other means.
Geothermal energy
Heat is stored in underground reservoirs of porous rock
containing hot water, known as hydrothermal reservoirs,
that provide sufficient natural heat. Natural reservoirs
that do not produce sufficient heat and are improved by
means of hydraulic stimulation, are called enhanced
geothermal systems.
Once fluids of various temperatures reach the surface,
they are used to generate electricity or, more directly,
for applications that require thermal energy, such as
heating. Lower-temperature heat from shallow wells are
used for geothermal heat pumps in heating or cooling
applications.
Hydropower technologies harness the kinetic
gravitational energy driving the movement of water from
higher to lower elevations. These technologies are used
primarily to generate electricity. See figure 1 below.
Hydropower
Hydropower projects include dam projects with
reservoirs, run-of-river and in-stream projects. Due to
the variety of sources available, hydropower has the
potential to meet large urban needs as well as rural
needs on a smaller scale.
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Renewable energy technology
Ocean energy
Wind energy
Description
Ocean energy technologies rely on the potential, kinetic,
thermal and chemical energy of ocean water. These
energies can be transformed in order to produce
electricity, thermal energy, or potable water.
Wind energy technologies harness kinetic energy from
movements in the air. According to the IPCC (2011:9),
the primary application of wind energy is to produce
electricity from large wind turbines located on land
(onshore) or in sea- or freshwater (offshore).
Source: Adapted from IPCC (2011:8,9)
Figure 1: Hydroelectric power generation
Source: USGS (2013)
The IPCC estimates that renewable energy accounted for only 12.9% of the total
global primary energy supply in 2008. In addition, it was found that renewable energy
contributed only approximately 19% of global electricity supply (16% hydropower,
3% other renewable energy sources). The contribution of renewable energy
technologies to total global energy production as discussed above is depicted in
figure two below. (IPCC, 2011:9.)
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Figure 2: Global contribution of renewable energy technologies
Source: IPCC (2011:10)
2.3.
BENEFITS OF RENEWABLE ENERGY
There are a variety of benefits, or ‘opportunity areas’ as they are known, associated
with the implementation of renewable energy technology. In developing countries,
energy is a vital tool to stimulate production, income generation and social
development. Developed countries, on the other hand, are more concerned with
identifying alternative energy solutions to mitigate climate change, address energy
supply concerns and stimulate the creation of employment. (IPPC, 2011:191.)
Renewable
energy
technologies
have
the
capacity
to
address
multiple
environmental, social and economic developmental concerns, including adaptation to
climate change (IPPC, 2011:191). According to the IPCC, the four most significant
opportunities associated with the implementation of renewable energy technologies
are social and economic development, energy access, energy security, and climate
change mitigation (IPPC, 2011:191). These benefits are discussed in detail below.
2.3.1. Social and economic development
The IPCC (2011:191) are of the view that one of the most relevant factors that
influence increasing energy consumption is economic growth. The expansion and
diversification of global economic activity has led to the demand for more
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sophisticated and flexible energy sources. This demand has therefore been
associated with the shift away from the simplified method of direct fuel combustion
towards energy, which is of a higher quality. (IPCC, 2011: 191.)
It was found that access to clean and reliable energy is an important factor for
human development, which contributes to economic activity, income generation,
poverty alleviation, and improvements in healthcare and education (IPCC, 2011:
191).
2.3.2. Access to energy
Inadequate access to energy, especially electricity, can place serious obstacles in
the way of development, and result in growing poverty and an outward migration of
people to large urban areas, as well as increasingly negative expectations in the
community about its future (Kaygusuz, 2011:937).
Kaygusuz (2011:937) is of the view that access to electricity can provide such
societies with a higher degree of economic sustainability and a better quality of life.
In 2009, more than 1,4 billion people globally lacked access to electricity, with 85%
of these people located in rural areas (IPCC, 2011:191). There are various initiatives
– some of which are based on renewable energy technology, particularly in
developing countries – that are aimed at improving access to electricity (IPCC,
2011:191).
Small and standalone renewable energy structures have the potential to address
rural communities’ energy needs in a more cost-effective manner than fossil fuel
alternatives such as diesel generators. For example, solar energy structures are a
practical and cost-effective means of generating electric power to provide basic
services, such as lighting and access to clean drinking water in rural areas. (IPCC,
2011:191.)
The lack of access to electricity is, however, not the only problem that faces rural
communities. Clean fuels for cooking and general household use are also in short
supply. (Kaygusuz, 2011:937.) Without access to modern energy sources, rural
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communities are largely dependent on the use of traditional biomass sources such
as wood, charcoal and animal waste for cooking and heating, which increases their
exposure to pollutants, and in turn increases the risk of contracting respiratory and
lung diseases. Modern bioenergy technologies include liquid propane gas stoves,
renewable energy-based biomass stoves and biogas systems that offer a safer
alternative to these potentially harmful traditional biomass sources. (IPCC,
2011:191.)
2.3.3. Energy security
According to the IPCC (2011:191), “energy security can best be understood as
robustness against (sudden) disruptions of energy supply. More specifically,
availability and distribution of resources, as well as variability and reliability of energy
supply can be identified as the two main themes”.
Energy insecurity together with the ever increasing price of conventional energy
sources are significant threats to economic and political stability. Energy supplies are
currently dominated by fossil fuels. Uncertainty regarding the availability, and the
price volatility, of these fuels have significant economic impacts and have been a
major driver behind the demand for renewable energy. Renewable energy
technologies contribute to energy security through the diversification of energy
supplies and reduction of the dependence on limited resources. (IPCC, 2011:191.)
2.3.4. Climate change mitigation and reduction of environmental and health
impacts
Climate change mitigation is one of the key drivers behind the growing demand for
renewable energy technologies. Climate is the term used to refer to average weather
patterns, and the average climate around the world is referred to as global climate.
The term ‘global climate change’, refers to the global climate and a pattern of change
that has occurred. One of the most significant indicators of climate change is the
increased temperature of the Earth. This increase in the earth’s temperature is
referred to as global warming. The world’s climate is changing. Most climate
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scientists agree that the increased level of greenhouse gases in the earth’s
atmosphere is a major cause of the change. (EPA, 2013.)
The greenhouse effect is a natural occurrence which is essential in keeping the
earth’s surface warm. Greenhouse gases allow sunlight to enter and then prevent
the heat from escaping the atmosphere. The most important greenhouse gases are
water vapour (H20), carbon dioxide (CO2), methane (CH4), nitrous oxide (N20),
halocarbons, and ozone (O3). These gases occur naturally and are vital to our
survival on earth. (The National Academies, 2008:3.)
However, human activities such as the burning of fossil fuels, are escalating the
concentration of these gases, which has led to the amplification of the natural
greenhouse effect. The higher concentration of greenhouse gases in the atmosphere
acts as a thickening blanket which in effect traps more infrared energy than occurs
naturally thus resulting in a gradual increase in temperature resulting in turn in global
warming. (The National Academies, 2008:3.)
The expected effects of global warming and climate change include (IPCC,
2007:230):

rising of sea levels,

increase in the strength of hurricanes and other storms,

disruption of the natural life cycles of species,

increase in the occurrence of floods and droughts,

impact on global food production, and

disruption of ecosystems.
Apart from the fact that fossil fuels are being irreversibly depleted, and the
detrimental impact of greenhouse gases released by their combustion, there are also
health-related concerns about the many pollutants they release when burnt.
Exposure to some of these pollutants, either directly or as a result of the urban smog
they cause, has been associated with increases in the incidence in circulatory and
respiratory diseases and other human health problems. It is, moreover, known that
some of these emissions are responsible for acid rain and the resulting acidification
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of forests, freshwater lakes and even soil. This can harm aquatic life and cause
damage to foliage. (Encyclopaedia Britannica, 2013.)
Renewable energy technologies therefore have the potential to assist in the
reduction of GHG emissions and address the environmental and health concerns
raised above (IPCC,2011:192).
2.4.
RENEWABLE ENERGY POLICIES
Apart from reducing GHG emissions, renewable technologies can have a direct
impact on the supply of energy to rural areas, and on energy security in general. By
creating employment opportunities these technologies have the potential to stimulate
job creation and, as a consequence, provide an impetus for social and economic
growth and development. (IPCC,2011:192.)
Governmental policies have the potential to advance technologies and stimulate
markets and it is therefore important for governments to consider the implementation
of policies that will encourage research and development in the field, as well as the
implementation of renewal energy technologies that emerge from the research and
development (IPCC, 2011:882).
The IPCC organises renewable energy policies into the following simplified
categories (IPCC, 2011:883):

The first is fiscal incentive. These policies provide mechanisms that enable
individuals and companies that make a contribution to renewable energy, to
reduce certain taxes they are liable for, or to receive financing from the public
purse in the form of rebates and grants.

Secondly, there are policies that make public finance available for the
development of renewable energy. This is provided in the form of loans and
equity that can generate financial returns for the treasury, and guarantees by
which the public purse incurs financial liability.

In the third place regulations are used to guide and control activities that may
have a positive or negative impact on the development and deployment of
renewable energy.
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It is important to note that when considering renewable energy policies, the IPPC
make a distinction between policies that are geared towards research and
development of renewable energy technologies and those that focus on deployment
of renewable energy technologies. Government policies will therefore be discussed
below in the context of the relevant stage of the renewable energy technology life
cycle to which they relate. (IPCC, 2011:883.)
2.4.1. Policies to encourage investment in renewable energy research and
development
Funding is a vital resource required to stimulate research and development in the
field of renewable energy technologies. However, there are a number of barriers to
obtaining such funding, which are discussed below. (Pegels, 2010:4948.)
Firstly, because the renewable energy market has not reached maturity yet, it is still
volatile and characterised by risk and uncertainty – both of which are economic
barriers to the development of renewable energy systems (Pegels, 2010:4948).
Financial institutions take this risk into consideration, which raises the cost of
lending. Investments in the development of such technologies are therefore
unattractive to potential investors due to high interest rates for funding. In addition,
uncertainty regarding the capital return on investment can limit the financial support
and mechanisms available to fund renewable energy technology projects. This
uncertainty and lack of financial support create a major barrier to potential investors
in medium to large-scale renewable energy development in South Africa. (Pegels,
2010:4948.)
Secondly, private institutions may be reluctant to take on the risk associated with
investing in a new technology that may not ultimately succeed (IPCC, 2011:882).
Last, the time period for the technology to reach the deployment phase in the
marketplace is significant and may exceed the period acceptable to private investors.
Hence, governmental polices play a crucial role in overcoming these barriers to the
funding of renewable energy research and development and the implementation of
emerging technologies. (IPCC, 2011:882.)
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The table below provides a list of policies that are potential sources of funding
available for renewable energy research and development, together with their
definitions.
Table 2: Renewable energy research and development funding policies
POLICY/FUNDING SOURCE
DEFINITION
FISCAL INCENTIVES
These are funds granted to academics to
nurture and support academic work in a
given discipline and thus help to generate
new knowledge that can stimulate new
applications.
Academic R&D funding
Grants provide financial support for the
development of new ventures when risks are
highest and financing and investments
therefore difficult to obtain. Such grants can
in some instances help to generate funds by
bolstering the confidence of potential
investors.
Grant
The purpose of incubation support funding is
to support new ventures by covering
operating costs, providing advice on
business development and how to go about
raising capital, providing market research
and creating and guiding management
teams.
Incubation support
National and international public research
centres
Public-private partnership
Through what is known as ‘open access’,
companies can gain access to intellectual
property by entering into joint agreements
with one or several public research and
development centres, which will also share
some of the cost of developing the
innovations and be in a position to endorse
the benefits of new technologies.
Such partnerships make it possible for
organisations to benefit from crossdisciplinary research networks,
encompassing a range of organisations in
different locations – from universities to
industrial organisations – participate. This
opens opportunities to explore novel
solutions that might normally seem to be too
risky. Networking also makes it easier to
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build supply chains and, ultimately, to bring
innovative products and processes to
maturity.
Prizes can be accompanied by monetary
rewards that enable the winners to pursue
research and development work that would
otherwise not be possible.
Prize
Reductions in taxes made possible by such
incentives, provide organisations with scope
to explore possibilities that would otherwise
not be considered.
Tax incentives
This scheme gives companies access to
research and development centres.
Voucher scheme
PUBLIC FINANCE
Venture financing – on its own or as a
component of matching financing – makes
possible original research that would
otherwise be too risky and expensive.
Venture capital
This is a financing instrument that is made
available in the initial (pre-commercial)
stages of research and product
development, often in the form of loans
repayable only when products or procedures
reach the commercialisation stage.
Soft/convertible loan
Source: Adapted from IPCC(2011:886)
Successful research and development funding policies can assist in leading
technology innovators towards commercialisation and help attract early and later risk
capital investment that otherwise would not be available because investors tend to
avoid high risk and protracted investment horizons (IPCC, 2011:886).
In addition to governmental policies geared to renewable energy research and
development and the implementation of renewable energy technologies, it is
important for governments to ensure that they are able to create demand for
renewable energy technologies in the marketplace. Governmental policies that have
the capacity to stimulate the implementation of renewable energy technologies are
therefore discussed below. (IPCC, 2011:886.)
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2.4.2. Policies to encourage the implementation of renewable energy
technology
There are various renewable energy specific policy options that are aimed at
implementation (also referred to as ‘deployment’), that have the capacity to create a
demand for renewable energy technologies in the market place. (IPCC, 2011:889.)
This section will focus primarily on fiscal incentives and public financing tools.
Financial incentives such as those based on investment, taxation concessions,
rebates and grants can reduce the costs and risk associated with investment in
renewable energy by reducing the upfront investment costs incurred for the
installation, and the production costs of the technologies. These incentives
compensate for market failures which render renewable energy at a competitive
disadvantage, and assist in alleviating the financial burden of investing in renewable
energy. (IPCC, 2011:889.)
The provision of public finance is also important to encourage the uptake of
renewable energy. Public finance mechanisms have a dual objective, firstly to
directly mobilise or leverage commercial investment into renewable energy projects,
and secondly to indirectly create scaled-up and commercially sustainable markets for
these technologies. (IPCC, 2011:889.)
The table below provides a list of general renewable energy policies for the
deployment of renewable energy technologies together with their definitions.
Table 3: Renewable energy deployment policies and funding mechanisms
POLICY
DEFINITION
FINANCIAL INCENTIVES
Grant
This is financial assistance granted by a
government for a specific purpose, that does
not have to be repaid.
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Grants and rebates help to alleviate the
financial burden associated with preparatory
work such as establishing infrastructure and
acquiring plant and equipment.
This is a payment received directly from the
government in respect of renewable energy
produced.
Energy production payment
A rebate is a single direct payment made by
a government to an organisation to cover a
specified percentage or amount of the
investment cost required to develop or
implement a renewable energy system or
service.
Rebate
This policy provides an incentive to the
investor or owner of qualifying renewable
energy technology. It can provide a full or
partial deduction from tax obligations or
income.
Tax incentives
Depreciation results in a reduction of the tax
burden in the first years of operation in
respect of renewable energy equipment.
Variable or accelerated depreciation
PUBLIC FINANCE
Investment
Financing provided in return for an equity
ownership interest in a renewable energy
company or project.
Guarantee
This is a funding mechanism aimed at risk
sharing. It provides comfort to commercial
banks that extend loans to renewable energy
companies and projects that have high
perceived credit risk.
Loan
Financing which is provided to a renewable
energy company or project in return for a
debt (repayment) obligation.
Public procurement
Public entities preferentially purchase
renewable energy services and/or renewable
equipment.
Source: Adapted from IPCC(2011:890-891)
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From the above table it is evident that there are various climate change policies and
funding mechanisms available to governmental policy makers to encourage
renewable energy research and development and the implementation of renewable
energy technologies. For the purposes of this study, the discussion will focus on taxbased polices available for renewable energy research and development, and for the
implementation of renewable energy technologies. These tax policies are discussed
in detail below.
2.4.3. Tax-based policy instruments to encourage renewable energy research
and development and the implementation of renewable energy
technologies
A country’s tax system can be used in several ways to achieve its renewable energy
goals (OECD, 2010:111). Examples of such tax measures can be separated into
three categories as outlined below (OECD, 2010:111).
Table 4: Categories of tax-based measures
Discouraging
undesirable
environmental
practices
Placing a cost on
environmentally
harmful activities
Taxes on use and
emissions such as a
carbon tax
Inducing the
implementation of
renewable energy
Providing incentives for
actions that will help
achieve renewable energy
objectives
Tax incentives for
implementation of
renewable energy
technology projects
Accelerated depreciation for
abatement of capital
expenditure
Source: adapted from OECD (2010:11)
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Inducing innovation
Providing positive
incentives for actions that
increase innovation
Measures to reduce the
cost of innovation (such as
R&D tax credits,
accelerated depreciation
for innovation capital and
enhanced allowances for
R&D labour costs or
reduced taxes on R&D
labour).
Measures to increase the
returns on innovations,
such as reduced corporate
tax rates
The above listed headings are discussed in detail below.
2.4.3.1.
Discouraging undesirable environmental practices
The measures in the first column of the table seek to discourage harmful
environmental activities such as the combustion of fossil fuels by placing an
economic cost on such activities. An example of this type of tax measure is the
imposition of a carbon tax. (OECD, 2010:111.)
A carbon tax is a market-based instrument of which the purpose is to reduce GHG
emissions by providing incentives to reduce CO2 emissions and reduce energy
demand and carbon intensity by causing two broad effects (Andersen, 2008:65):

Demand effect – The cost of energy is increased due to the tax imposed, which
results in a reduction of the energy demand.

Substitution effect – Consumers are encouraged to substitute carbon fuels with
low-carbon or carbon-neutral fuels.
It has been found that countries that impose carbon taxes experience a reduction in
fuel demand (Andersen, 2008:65). The extent of the reduction in demand is,
however, dependant on (Andersen, 2008:65):

the tax rate imposed,

how the taxes are imposed,

how easy it is for fuel users to substitute between various fuel types and nonfuel inputs, and

scale and secondary effects resulting from changes in economic activity.
The assumption is that lower consumption would lead to a reduction in greenhouse
gasses. However, the total level of emissions will depend on the relative
consumption levels of each fuel type. An economy that encourages the use of coal
which is a high-carbon fuel will produce a higher level of emissions than that of an
economy which encourages the use of low-carbon fuels. (Andersen, 2008:65.)
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2.4.3.2.
Implementation of renewable energy
The second column deals with taxation policy that is aimed at encouraging taxpayers
to undertake actions that contribute to the accomplishment of renewable energy
objectives. These policies include investment in renewable energy projects,
exemptions on and reductions in corporate tax rates, and other ways to alleviate the
tax burden of individuals and corporations that support renewable energy research
and development and deployment, including tax credits and investment allowances.
(OECD, 2010:111.)
Despite the economic value acquired, the implementation of tax incentives in
developing countries can be a contentious matter (Van Parys & James, 2010:401).
The use of tax incentives may come at a significant cost for the country
implementing them. These costs do not only include financial costs such as the loss
of revenue and administrative costs but, if the incentives are not carefully designed
and implemented, the inefficient allocation of capital may also result in welfare costs.
(Van Parys & James, 2010:401.)
In their study of the effectiveness of tax incentives in attracting investment in the
CFA franc zone, Van Parys and James (2010:402) came to the conclusion that there
was no compelling evidence that the reduction of the amount paid in taxes had
significant impact. At the same time they did, however, find that reducing the
complexity of the incentives significantly increased investments. They also found that
the extension of legal guarantees to increase investor certainty, helped to attract
foreign investment. The outcomes provided compelling evidence that in developing
countries it would be more important to reduce the compliance cost of taxes than
merely reducing the tax burden itself. (Van Parys, & James, 2010:402.)
By contrast, Doshi (2012) is of the view that “… tax incentives do help spur spending
and investment. They also help in sweetening the deal. Multinational companies
have set up thousands of R&D centres and invested billions of dollars in R&D in
China. China provides generous tax incentives for R&D. So do other developed
countries like Australia [and] France. Thus, globally, many governments are
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encouraging R&D spending and provide corresponding incentives in the form of tax
credits, tax deductions and grants. This is evidence that tax incentives help.”
Therefore, even though Van Parys and James found that there is no convincing
evidence of the effectiveness of the reduction taxes on investment, in the light of
Doshi’s (2012) view it can be assumed that ‘tax incentives do help spur spending
and investment’.
2.4.3.3.
Inducing innovation
The final category (column 3) deals with tax measures that assist in the reduction of
the cost of innovation. Research and development is an activity which earns a high
social rate of return, contributes to economic growth and assures competitiveness.
Governments are therefore encouraged to spend a significant amount of money to
stimulate corporate sector investment in research and development. (Mohnen &
Lokshin, 2009:1.)
According to an article published by the OECD, governments support corporate
research and development for the following reasons (OECD, 2010:1):

In order to maintain long-term economic growth, investment in research and
development is generally considered to be of fundamental importance.

Research and development contributes to national competitiveness.

Research and development investment risk. Few R&D projects are likely to
end-up by delivering marketable new products or processes. As a result,
without some inducement firms will be likely to be credit constrained when
investing in R&D.

Research and development projects tend to have a ripple effect – knowledge
gained spreads to other organisations that may not have borne the costs of this
investment.
Research and development tax incentives have been noted as a popular
governmental policy mechanism which has been implemented on a worldwide basis
(Mohnen & Lokshin, 2009:1). According to Mohnen & Lokshin (2009:1), the main
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benefit of research and development incentives is that the implementation thereof
assists in reducing corporate income taxes in proportion to the research and
development effort. This has the effect that the cost of engaging in research and
development activities is decreased, which in turn encourages firms to increase
research and development to a level that is socially optimal (Mohnen & Lokshin,
2009:1).
The discussion above has provided an overview of the mechanics of the difference
tax policies available to governmental policy makers.
2.5.
THE RENEWABLE ENERGY ENVIRONMENT IN SOUTH AFRICA AND
CHINA
2.5.1. Introduction
The purpose of this study is to compare the income tax incentives available in South
Africa with the income tax incentives provided in China, in order to identify any gaps,
alternatives and possible improvement to the current South African legislation. In line
with research objective two, it is however important to provide an understanding of
the renewable energy environments in South Africa as well as in China prior to the
analysis and comparison of the incentives available. The following section provides
an overview of the renewable energy environments in South Africa and China.
2.5.2. Current renewable energy environment in South Africa
The energy sector in South Africa is currently dominated by Eskom, a state-owned
enterprise accounting for approximately 95% of energy production. Coal is currently
the primary source of energy production in South Africa, with a contribution of 86%
as opposed to the contribution of alternative sources such as nuclear energy and
renewable energy sources which account for the balance. (Pegels, 2010:4946.)
During 2008, South Africa experienced an energy crisis which led to power outages
lasting several hours and spreading like wildfire across the country (Pegels,
2010:4947). According to Krupa and Burch (2011:6258), this was the result of a
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combination of three major factors: mass electrification, a period of strong industrial
growth, and defective planning for maximum loads that could occur. The result was
that the demand for power began to exceed the available supply (Krupa & Burch,
2011:6258).
In reaction to this crisis, Eskom together with the Department of Minerals and Energy
released the ‘National response to South Africa’s electricity shortage’. In summary,
this plan addressed (Pegels, 2010:4947):

supply-side interventions, which include the construction of two new coal-fired
power stations, and

demand-side interventions, which aim to reduce the demand of energy in the
short term.
However, Pegels (2010:4947) believes that these programmes are progressing too
slowly, and that the electricity sector faces three major problems. Firstly, electricity
undersupply, which results in an inadequate reserve margin.
Secondly, Eskom
estimates that it will require over R300 billion over the next decade for the extension
of power infrastructure, while Eskom is underfunded. Lastly, the country’s high
emission intensity, which results in environmental damage. (Pegels, 2010:4947.)
Until recently the shift towards renewable energy technology as opposed to the use
of fossil fuels was perceived to represent an unnecessary economic cost. The need
for renewable energy in South Africa has, however, in recent years become
increasingly important and has created an opportunity to foster a more secure,
labour intensive and sustainable economy and society. (Pegels, 2010:4948.) As
Edkins et al (2010:ii) point out, “renewable energy could be the technological key to
economically and socially sustainable societies”.
According to Musango (2011:125), there are numerous challenges and barriers
which affect the deployment of renewable energy in South Africa. The main barriers
are posed by the cost of innovation and market expectations regarding the cost of
energy (Pegels, 2010:4948). The consumer price of energy must be low enough to
make the renewable energy commercially attractive. South Africa currently has some
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of the lowest energy prices in the world. The challenge is therefore to develop
technologies at an initial capital cost that is low enough to produce energy at a price
which can compete with conventional technologies such as coal and gas. (Pegels,
2010:4948; Parker, 2009; Musango, 2011:125 and Burch & Krupa, 2011:6256.)
Risk and uncertainty also represent a common economic barrier to renewable
energy development. Because the renewable energy market is still far from mature,
it is seen by financial institutions as volatile and uncertain. (Pegels, 2010:4948.)
Financial institutions take this risk into consideration, which raises the cost of
lending. Investments in the development of such technologies are therefore
unattractive to potential investors due to high interest rates for funding. In addition,
uncertainty regarding the capital return on investment can limit the financial support
and mechanisms available to fund renewable energy technology projects. This
uncertainty and lack of financial support poses a major barrier to potential investors
in medium to large-scale renewable energy development in South Africa. (Musango,
2011:129.)
According to Rajen Ranchhoojee (2013) the Projects and Energy Director and Head
of Africa at law firm Routledge Modise, the energy sector in South Africa is heavily
regulated. Enterprises that wish to engage in renewable energy generation are
required to obtain an electricity generation licence from the National Energy
Regulator South Africa (‘Nersa’). In addition, enterprises are only entitled to provide
electricity under private purchase agreements (PPA) with industrial entities or Eskom
and are not able to simply provide energy to the public. (Ranchoojee, 2013.)
To ensure the reliable and efficient supply of electricity, at least 3 725 megawatts are
required to be drawn from renewable energy sources, according to experts. The
renewable energy initiative in South Africa is largely driven by the Independent
Power Producer Procurement Programme (IPP). The main purpose of the IPP is to
assist the government in meeting the target of 3 725 megawatts and to provide
support for the development of the renewable industry in South Africa. The IPP
requires bidders to bid on tariffs and the identified socio-economic developments.
The tariff will be payable by the buyer in terms of the PPA to be entered into between
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the buyer and the project company of a preferred bidder. (Department of Energy,
2012.)
One of the requirements of the IPP is that a certain percentage of the components
for the renewable energy project (such as wind turbines and solar panels) are locally
sourced. This creates difficulty with regard to the cost of projects, because local
content is significantly more expensive than content which is sourced internationally.
(Ranchoojee, 2013.)
It is expected that rising electricity prices will make investments in renewable energy
projects more viable for investors in the future, nevertheless these technologies still
require considerable support in order to be commercially viable on a larger scale
(Pegels, 2010:4949). According to Parker (2009), ‘tax incentives, if properly
structured, can play a valuable role in moving South Africa toward a sustainable
energy future’.
2.5.3. The current renewable energy environment in China
China is currently one of the largest and fastest growing economies in the world. As
a consequence of the rapid process of industrialisation and urbanisation, China’s
GHG emissions have increased substantially. The country’s energy system is
predominantly coal driven and faces a variety of problems such as shortages of
resources, low energy efficiency, high emissions and environmental damage and a
lack of effective management systems. Renewable energy thus plays an important
role in the development of China’s power sector. In 2010, China was found to be the
leader in renewable energy for the second year in a row as it attracted USD 49 billion
in new investments. This investment exceeded two-thirds of emerging country
investments and more than a third of global investments in renewable energy during
2010. (Peidong, Yanli, Jin, Yonghong, Lisjeng & Xinrong, 2009:440.)
Although, in terms of the Kyoto Protocol, there is no legally binding requirement for
China to cut carbon dioxide emissions, the Chinese government has nevertheless
been proactive and has implemented numerous renewable energy policies and
regulations (Peidong et al , 2009:441). As a result of this, China currently has one of
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the most attractive markets for renewable energy investment in the world (Ernst and
Young , 2012:21).
One of the most significant moves by China’s government was the introduction of the
renewable energy law on 28 February 2005, which was followed by the
implementation of detailed regulations (Martinot, 2010:287). This law was intended
to address the following five goals (Martinot, 2010:287):

establish the importance of renewable energy in China’s national energy
strategy,

remove market barriers,

create markets for renewable energy,

establish a financial guarantee system, and

create awareness, skills and understanding.
The fundamental purpose of the renewable energy legislation was to provide a
framework of responsibility that places the responsibility and authority for the setting
of targets and the formulation of plans and financial measures with the national
government (Martinot, 2010, 289).
According to Go (in Jackson, 2011:16), China has demonstrated that central
government support and a vibrant capital market to provide finance are necessary to
build the renewable energy industry, and Peidong et al (2009:447) indicate that the
Chinese government has stipulated principals and policies to encourage and develop
renewable energy, such as the economic encouragement policy, which is made up
of the following components (Peidong et al, 2009:447):

Financial subsidy: this is the most conventional economic encouragement
practice. This policy can vary in form to include investment, product and user
subsidies.

Favourable taxation policy: this is currently the most universal encouragement
policy.

Favourable price policy: this policy is mainly intended for network power
produced with renewable energy.
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As shown above, China has numerous renewable energy technologies and there is
much to be learnt from China in respect of their renewable energy policies and
regulations.
2.6.
CONCLUSION
This chapter provided a general overview of current renewable energy technologies
together with an overview of the key benefits associated with renewable energy,
which highlights the importance thereof. Furthermore, it provided an overview of the
general governmental policies available to policy makers to advance renewable
energy technologies and stimulate markets. In line with objective two outlined in
chapter 1 above, a general understanding of the importance of renewable energy
technology and governmental policies which are available to policy makers to
advance renewable energy technologies and stimulate markets was therefore
obtained in this chapter.
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CHAPTER 3
ANALYSIS OF INCOME TAX INCENTIVES FOR RENEWABLE
ENERGY RESEARCH AND DEVELOPMENT AND IMPLEMENTATION
OF RENEWABLE ENERGY TECHNOLOGIES IN SOUTH AFRICA
3.1.
INTRODUCTION
In line with the research objectives outlined in chapter 1, this chapter will provide a
detailed analysis of the income tax incentives available in South Africa for renewable
energy research and development and the implementation of renewable energy
technology. This analysis will provide an understanding of the income tax incentives
currently available in South Africa that will assist in the comparison between the
income tax incentives available in South Africa and those available in China.
3.2.
RESEARCH AND DEVELOPMENT TAX INCENTIVES IN SOUTH AFRICA
In 2006, section 11D was introduced into the Income Tax Act ('the Act’) in order to
encourage the investment in scientific or technological research and development
(National Treasury, 2006:6). This program is a tax-incentive scheme and is an
indirect approach by the South African government to stimulate investment in
national scientific and technological research and development (National Treasury,
2006:6).
Section 11D was revamped during 2011 and guidance in respect of the amendments
to the section can be found in the ‘Explanatory Memorandum on the Taxation Laws
Amendment Bill 2011’. According to the Explanatory Memorandum, the purpose of
the revamp was to simplify and streamline the accessibility of research and
development incentives. (National Treasury, 2012:78.)
Essentially, in terms of the new section 11D of the Act, the research and
development incentive is split into (National Treasury, 2012:78):

an automatic 100% deduction for tax purposes of research and development
expenditure; and
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
an additional 50% allowance for tax purposes that is dependent upon approval of
a specific research and development project.
A detailed analysis of the mechanics of the section 11D allowances as amended
follows below.
3.2.1. Section 11D – definition of research and development
Prior to the 2011 amendments, section 11D did not provide a definition of the term
‘research and development’. The focus of the previous section 11D(1) was to provide
an incentive for qualifying activities undertaken in South Africa specifically for the
discovery of novel, practical and non-obvious information, or the devising,
developing or creation of any of the intellectual property items regulated by the listed
legislation. (PwC, 2011:59.)
According to the abovementioned explanatory memorandum, a definition of
‘research and development’ was introduced in section 11D(1) in order to incentivise
activities that constitute technical and scientific research and development in a
commercial sense. The proviso that this applies only to activities of a scientific or
technological nature was considered to be too broad and therefore created
uncertainty with regard to interpretation. (PwC, 2011:60.)
In the new definition, the meaning assigned to ‘research and development’ is
broader and covers incremental development of products and processes in addition
to research in respect of new projects (PwC, 2011:60). The definition is now split into
two sections and is defined as follows (PwC, 2011:60):
a) Systematic investigative or systematic experimental activities of which the
result is uncertain for the purpose of:
(i)
Discovering non-obvious scientific or technological knowledge, or
(ii)
Creating an invention, design, computer program or knowledge essential
to the use of these items [this refers to a list which is replicated from the
original version of section 11D], or
b) Developing or significantly improving any of the above if that development or
improvement relates to any:
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(i)
new or improved function;
(ii)
improvement of performance;
(iii)
improvement of reliability, or improvement of quality;
of that invention, design, computer program or knowledge.
3.2.2. Section 11D – automatic allowance
As noted in the previous section, the new section 11D provides for both an automatic
allowance and an additional allowance. Section 11D(2) grants an automatic 100%
deduction for expenditure which is incurred directly and solely in respect of research
and development activities undertaken in South Africa. To qualify this expenditure
must, however, be incurred in the production of income and in the course of carrying
on of any trade (the meaning of the concepts of ‘in the production of income’ and ‘in
the course of carrying on a trade’ will be discussed in section 3.6 below). (PwC,
2011:60.)
This section of the Act makes no reference to a requirement for the expenditure to
be revenue in nature, it therefore follows that capital expenditure also qualifies for
this deduction (PwC, 2011:60).
3.2.3. Section 11D – additional 50% allowance
In addition to the automatic 100% allowance discussed above, subsections (3) and
(4) of the Act permit an additional 50% deduction (also referred to as the 50% uplift)
of the section 11D(2) research and development expenditure. This additional
allowance is conditional on approval by the Department of Science and Technology
(DST) under section 11D(9). The 50% uplift can be applied retrospectively to all
qualifying expenditure incurred from the time that the taxpayer’s application was
originally received by the Department of Trade and Industry. (PwC, 2011:60.)
The 50% uplift is available under the following circumstances (PwC, 2011:60):

Section 11D(3) – expenditure incurred in respect of research and development
carried on by a taxpayer which is a company;
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
Section 11D(4) – expenditure incurred by a taxpayer to fund expenditure of
another person carrying on research and development on behalf of such
taxpayer.
It should be noted that for R&D expenditure which falls within section 11D(4), the
extra 50% deduction is only allowed (for the funder) under the following
circumstances (PwC, 2011:60):

Section 11D(4)(c)(i) – a tax-exempt institute under section 10(1)(cA) (e.g.
universities; or the CSIR); or

Section 11D(4)(c)(ii) – a company that is part of the same ‘group of companies’
as the funder, provided that the other group company (‘the contractor’) does not
claim the deduction under section 11D. In this case, section 11D(5) makes it
clear that the 50% deduction for the funder is limited to 50% of the actual
expenditure incurred directly and solely in respect of that R&D ‘carried on’ by the
company being funded.
Subsections 3 and 4 of the abovementioned section 11D refer to research and
development ‘carried on’. According to section 11D(6), a person ‘carries on’ R&D if
that person may determine or alter the methodology of the research (PwC, 2011:60).
3.2.4. Allowances for machinery or plant used for research and development
purposes
In addition to the research and development allowance provided for in section 11D,
section 12C of the Act was amended by the Taxation Laws Amendment Act
(22/2012) to include new and unused machinery or plant acquired for the purposes
of ‘research and development’. This section now provides for an allowance for
machinery or plant and equipment used for research and development purposed,
that is owned by a taxpayer or acquired by him in terms of instalment sale
agreement and brought into use for the first time on or after 1 April 2012. (PwC,
2011:60.)
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Section 12C provides for an accelerated four-year write-off period in the ratio of
40:20:20:20 of such assets as are acquired under an agreement formally and finally
signed by every party to it on or after 1 January 2012. Improvements to such assets
will also qualify for the allowance. (PwC, 2011:61.)
Further to this, section 13, was amended to include buildings erected or acquired by
a taxpayer and used in any process of ‘research and development’, for which a 5%
deduction is allowed per annum (PwC, 2011:61).
As noted in discussion of section 11D above, section 11D makes no reference to a
requirement for the qualifying expenditure to be revenue in nature and that it
therefore follows that capital expenditure also qualifies for this deduction. It is
therefore not clear whether this section may be applied to assets such as machinery
and fixed property and whether it is intended that fixed assets such as plant,
equipment and buildings might then also automatically qualify for the automatic and
uplift allowances, as an alternative to allowance provided in section 12C. (PwC,
2011:62.)
In summary, an accelerated capital allowance in the ratio of 40:20:20:20 is available
in respect of any new and unused machinery or plant acquired for the purposes of
‘research and development’ and a 5% allowance is allowed in respect of buildings
erected or acquired by a taxpayer used in any process of ‘research and
development’.
Section 23B of the Act provides guidance in the event that an amount qualifies for a
deduction or allowance in terms of more than one section of the Act. In terms of
section 23B, no amount or part of an amount may be allowed or taken into account
more than once as a deduction, allowance or otherwise in the determination of a
persons’ taxable income. It therefore follows than if an amount which is capital in
nature is claimed as a deduction under section 11D of the Act, no additional
allowance will be allowed under section 12C or section 13 of the Act by virtue of
section 23B.(Stiglingh, Koekemoer, van Schalkwyk, Wilcocks & de Swart, 2013:143.)
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3.2.5. Conclusion regarding South African incentives
Following from the previous sections, we may conclude that the South African
taxation system provides the following R&D tax incentives to taxpayers:
Table 5: Summary of research and development tax incentives available in South Africa
TAX INCENTIVE
DESCRIPTION
An automatic 100% deduction for R&D
expenditure
Automatic allowance
An additional 50% allowance which is
Additional 50% allowance
dependent upon approval of the respective
R&D project.
Section 12C provides for an accelerated
four-year (40:20:20:20) write-off period of
such assets as are acquired under an
agreement formally and finally signed by
every party to it on or after 1 January 2012.
Improvements to such assets will also qualify
for the allowance.
Allowances for capital expenditure
Section13 provides a 5% allowance per
annum in respect of buildings used in any
process of ‘research and development’.
It follows that, provided that the requirements as set out in sections 11D, 12C and 13
of the Act are met, research and development expenditure incurred in respect of
renewable energy technology will qualify for the aforementioned allowances that
sections 11D, 12C and 13 of the Act provide for.
3.3.
ALLOWANCES FOR MOVABLE ASSETS USED IN THE PRODUCTION OF
RENEWABLE ENERGY
Section 12B(1)(h) of the Act provides for an accelerated capital allowance in respect
of any machinery, plant, implements and utensils owned by a taxpayer, or acquired
in terms of an instalment credit agreement, which are brought into use for the first
time for the purpose of the taxpayer’s trade and used by that taxpayer in the
generation of electricity from wind, sunlight, gravitational water forces (limited to
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30Mw) or biomass comprising organic wastes, landfill gas or plants (Stiglingh et al,
2013:227).
The accelerated capital allowance provides for a three-year write- off period which
operates on a 50:30:20 basis. The capital allowance which is granted under section
12B(1)(h) is to be calculated on an amount that is deemed to be the lesser of the
actual cost of such assets to the taxpayer, or the cost which a person would, if he
acquired the asset under a cash transaction concluded at arm’s length, have
incurred in respect of the direct cost of acquisition of the asset, including the direct
cost of installation or erection thereof. (Stiglingh et al, 2013:227.)
It should be noted that, in terms of section 23J of the Act, where machinery, plant
implements or utensils are acquired from a connected person as defined in section 1
of the Act, the section 12B(1)(h) allowance will be limited to the cost incurred by the
connected person in this regard (Stiglingh et al, 2013:216).
3.4.
ALLOWANCES IN RESPECT OF AFFECTED ASSETS
Section 12D of the Act provides for an allowance of 5% per annum in respect of the
acquisition of any new and unused affected asset. In such case, an affected asset
would include, inter alia, any line or cable used for the transmission of electricity,
including any earthworks or supporting structures forming part of the line or cable.
(Stiglingh et al, 2013:251.)
In terms of section 12D, the allowance is calculated on the basis of the cost of any
new or unused affected asset which is owned by the taxpayer and is brought into
use for the first time by such taxpayer and used directly for purposes contemplated
in the definition of ‘affected asset’. Furthermore, the allowance is only available to
the extent that such affected asset is used in the production of his income. (Stiglingh
et al, 2013:251.)
.
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3.5.
CERTIFIED EMISSION REDUCTIONS – SECTION 12K
The clean development mechanism (CDM) was introduced by Article 12 of Kyoto
Protocol in 2003, the purpose of which is to assist developing countries in the
reduction of their carbon emissions. In terms of the CDM, projects which are aimed
at the reduction of carbon emissions in developing countries are eligible for certified
emission reduction credits (CERs). Each CER is equivalent to one ton of carbon
dioxide. These CERs can be traded and sold, which provides a cost-effective vehicle
for industrialised countries to manage their emission reduction targets under the
Kyoto Protocol. (United Nations Framework Convention on Climate Change, 2013.)
There are two basic types of CDM projects (United Nations Framework Convention
on Climate Change, 2013):

Projects aimed at contributing to a transition from the consumption of power
derived from the combustion of fossil fuels to the use of less carbon-intensive
fuels.

Projects designed to promote the efficiency of all energy systems
The main benefit of such project-based mechanisms is that they can assist in the
reduction of the costs associated with meeting the Kyoto Protocol emission reduction
targets. In addition to this, CDM projects have the potential to support the objectives
of developing countries with regard to sustainable development. The intention with
the CDM mechanism is therefore to reduce the emission of greenhouse gases by
contributing to sustainable development in developing countries while accomplishing
a reduction of carbon emissions in industrialised countries. (United Nations
Framework Convention on Climate Change, 2013.)
In South Africa, an activity can only qualify as a CDM project if it is approved by the
Department of Minerals and Energy and is registered with the United Nations
Framework Convention on Climate Change Committee executive board. In terms of
section 12K, any amount received by or accrued to any person on or after 11
February 2009 in respect of the disposal of any CER issued in the furtherance of a
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qualifying CDM project registered on or before 31 December 2012, will be exempt
from taxation. (Stiglingh et al, 2013:217.)
3.6.
THE IN THE PRODUCTION OF INCOME AND FOR THE PURPOSES OF TRADE
REQUIREMENTS
The ‘in the production of income’ requirement in the context of the Act, refers to all
expenditure attached to the performance of a business operation, incurred bona fide
for the performance of the operation. Case law dictates that in order for expenditure
to be deductible for tax purposes, such expenditure must be shown to be closely
connected to the income-earning activity from which it arose. In addition, the
expenditure must be considered to be a necessary concomitant of the business
activities of the company wishing to claim the deduction. (Stiglingh et al, 2013:133.)
In the Port Elizabeth Electric Tramway Co Ltd v CIR 1936 CPD 241 8 SATC 13 case
it was held that it should also be determined how closely the expenditure is linked to
the actions that produce income and therefore whether such expenditure incurred is
regarded as a necessary concomitant of the income-earning activities.
The term ‘trade’ is given a very wide meaning in section 1 and includes every
profession, trade, business, employment, calling, occupation or venture, including
the letting of property. ‘Trade’ implies an active occupation, as opposed to the
passive earning of investment income. (Stiglingh et al, 2013:127.)
In Burgess v CIR 1993 (4) SA 161 (AD) [1993] 2 All SA 496 (A) the principle that this
definition should be given a wide interpretation was described as being well
established. It was also pointed out that the definition is not necessarily exhaustive.
In terms of ITC 615 (1946) 14 SATC 399 it is submitted that in appropriate
circumstances a taxpayer will be deemed to be carrying on a trade even if he has no
objective to make a ‘profit’ or even if he deliberately sets out to make a loss. But the
absence of such an objective or of the prospect of making profits might indicate,
along with other factors, that he contemplated purposes other than trade or was not
exclusively concerned with trade. (ITC 1385 (1984) 46 SATC 111.)
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3.7.
CONCLUSION
In summary, the following income tax incentives are available to taxpayers in South
Africa in respect of the implementation of renewable energy technologies:

An accelerated capital allowance in respect of any machinery, plant,
implements and utensils used by that taxpayer in the generation of electricity
from wind, sunlight, gravitational water forces (limited to 30Mw) or biomass
comprising organic wastes, landfill gas or plants’.

An allowance of 5% per annum in respect of the acquisition of any new and
unused line or cable used for the transmission of electricity, including any
earthworks or supporting structures forming part of the line or cable’.

An exemption from income tax of any amount received by or accrued to any
person in respect of the disposal on or after 11 February 2009 of any CER
issued in the furtherance of a qualifying CDM project registered on or before 31
December 2012.
The aforementioned income tax incentives were analysed and evaluated, which
provided an understanding of the income tax incentives currently available in South
Africa. A detailed analysis of the income tax incentives available in China for
renewable energy research and development and implementation of technologies
will be performed in the following chapter.
The analysis of the income tax incentives available in South Africa identified in this
chapter, together with the analysis of the tax incentives available in China which will
be provided in chapter 4, will assist in the comparison performed in Chapter 5.
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CHAPTER 4
ANALYSIS OF INCENTIVES FOR RENEWABLE ENERGY
RESEARCH AND DEVELOPMENT AND THE IMPLEMENTATION OF
RENEWABLE ENERGY TECHNOLOGIES IN CHINA
4.1.
INTRODUCTION
In line with the research objectives outlined in chapter 1, a detailed analysis of the
income tax incentives available in China for renewable energy research and
development and the implementation of renewable technologies was performed.
4.2.
RESEARCH AND DEVELOPMENT INCENTIVES IN CHINA
China offers generous fiscal incentives to encourage research and development
activities and investments in innovation. Since setting up the ‘dual enterprise income
tax system’ which is referred to as the ‘New Law’ in the 1980s, China has adopted a
series of preferential taxation policies. (Chan & Cheung, 2010:58.) According to
Chan & Cheung (2010:71), “These favourable tax incentives have successfully
played a positive role in attracting a huge amount of foreign investment and
importing advanced technologies and management skills to China, while promoting
its technological progress and innovation”
4.2.1. Super-deduction of research and development expenses
The Chinese tax laws provide for a super-deduction of qualifying R&D expenses
incurred by an enterprise for new technology, new products, and new production
techniques (Chan & Cheung, 2010:58). In summary, the super-deduction is available
as follows (Chan & Cheung, 2010:58):

R&D expenses that are not capitalised – the enterprise is entitled to an
additional 50% deduction on top of the actual qualified R&D expenses
deduction.
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
R&D expenses that are capitalised – the enterprise can amortise the capitalised
intangible asset on 150% of the actual costs incurred.
On December 10, 2008, the State Administration of Taxation (SAT) issued
Administrative Circular 116 (Circular 116), which provides guidance on the superdeduction for R&D expenses under the New Law. Circular 116 specifies the relevant
conditions and scope of R&D expenditure by ‘qualified enterprises’ that will qualify
for the super-deduction referred to above. (Chan & Cheung, 2010:58.) This incentive
is discussed in detail below.
4.2.2. Qualified enterprises
The additional 50% super-deduction of research and development expenses is only
available to ‘resident enterprises’ which have a sound financial accounting system
and that can accurately account for research and development expenses. Nonresident enterprises or resident enterprises which are not in a position to accurately
account for their research and development expenditure would therefore not be
entitled to enjoy the benefits of the super-deduction of research and development
expenditure.(Chan & Cheung, 2010:58-59.)
In terms of the New Law, the term ‘resident enterprise’ refers to the following (Chan
& Cheung, 2010:59):

an enterprise that is established according to Chinese law; or

an enterprise established according to foreign law, but with its effective
management located in China.
4.2.3. Qualifying research and development activities
Qualifying research and development activities are defined as ‘continuous research
and development activities with definite objectives carried out by an enterprise to
acquire new knowledge of science and technology to make innovative use of the
knowledge or to substantially improve technology, production techniques or product
(services).’ It should be noted however, that routine upgrades or simple applications
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of research and development results, do not meet the aforementioned definition of
qualifying research and development activities. (Chan & Cheung, 2010:59.)
4.2.4. Qualifying research and development expenses
In order to claim the super-deduction, the research and development expenditure
must fall within one of the eight categories. In addition, this expenditure must be
incurred directly in respect of qualifying research and development activities as
described above. (Chan & Cheung, 2010:59.) The following categories of
expenditure are eligible for the super-deduction (Chan & Cheung, 2010:59):

design fees for new products, expenses for formulating procedures relating to
new skills, and expenditures for technical books and information and translation
fees directly related to research and development activities;

materials, fuel and power consumed directly for research and development
activities;

salaries, wages, bonuses and allowances of employees directly engaged in
research and development activities;

depreciation expenses or rentals for apparatus and equipment exclusively used
for R&D activities;

amortisation expenses of intangible assets such as software, patent rights, nonpatented technologies exclusively used for research and development
activities;

development and manufacturing costs of equipment and moulds exclusively
used for intermediate testing and experiments;

on-site testing expenditures for exploration technology;

expenditures for verification, assessment and recognition of research and
development results.
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4.2.5. Problems related to the research and development super-deduction
According to Chan & Cheung (2010:60), there are several potential problems which
arise in relation to research and development super-deduction. They are:

There are no specific standards to differentiate between what constitutes dayto-day improvements, and substantial improvements for manufacturing
enterprises.

The inclusion of substantial improvements to services (‘substantially improve
technology, production techniques or product (services)’ – section 4.2.3 above)
means that only advanced or high-tech enterprises in the service industry could
apply for the research and development super-deduction. Thus, both HNTE
incentives (see section 4.3 below), and super-deductions for research and
development can be simultaneously available.

The threshold for the super-deduction for research and development expenses
is high.
4.2.6. Allowances for research and development capital expenditure
In addition to the super-deduction of non-capital research and development
expenditure discussed above, the New Law and its Implementation Rules both
provide for tax incentives in respect of capital research and development
expenditure. Under the New Law, an enterprise which holds fixed assets which are
subject to advancements in technology may be eligible for an accelerated
depreciation period. (Chan & Cheung, 2010:60.) In terms of the Implementation
Rules, such assets include (Chan & Cheung, 2010:60):

fixed assets affected by accelerated development of next-generation products
due to advancements in technology; and

fixed assets subject to constant exposure to high-tremor and high-corrosion
conditions.
In terms of the Chinese tax laws, depending on their value, equipment can be either
expensed immediately or can be depreciated on an accelerated basis. The cost of
research and development equipment with a unit value that does not exceed
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RMB 300 000 can be expensed immediately. However, if the value of the equipment
is above RMB 300 000, it can be depreciated on an accelerated basis as discussed
above. Where an accelerated depreciation period is applied, the shortest
depreciation period shall not be less than 60% of the minimum depreciation period
as specified in the tax laws. (Chan & Cheung, 2010:60.)
4.3.
HIGH AND NEW TECHNOLOGY ENTERPRISE
In addition to the above allowances, the New Law introduced a special incentive
which applies to High and New Technology Enterprises (HNTE) which, according to
Chan & Cheung (2010:60), “is one of the most attractive tax incentive used as a
catalyst in promoting the integration of technological progress and economic growth,
and facilitating the development of industries towards a high tech era for China.”
The HNTE tax incentive provides for the application of a lower tax rate of 15% as
opposed to a tax rate of 25%. This incentive is available across the whole nation to
all enterprises that meet the requirements and the lower rate can be applicable to the
entire income of an enterprise. (Chan & Cheung, 2010:60.)
The purpose of this tax incentive is to grant preferential tax treatment to industries
and projects that are supported and encouraged by the Chinese government. Such
projects and industries would include those working in the areas of environmental
protection, energy conservation, and water conservation as well as certain
technology transfers. (Chan & Cheung, 2010:60.)
The HNTE tax regime is similar to that of the ‘patent box’ regime which has been
adopted by a number of European Union countries. Tax incentives which encourage
innovation can be provided either at the front-end of the innovation cycle, in the
years in which research and development expenditure is incurred (such as the
research and development super-deduction discussed above) and/or at the back end
of the cycle when income is generate from the exploitation of the intellectual
property. The concept of the ‘patent box’ regime was introduced to provide back-end
incentives that provide a reduced corporate income tax rate for certain income which
is generated from the exploitation of intellectual property, generally by a 50-80%
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reduction of such income. China’s HNTE tax regime, while not called a ‘patent box’,
is even broader and includes types of commercial ‘know innovation’ within the
regime. (PwC,2013:7.)
The New Law provides for an income tax based incentive in respect of stateencouraged HNTEs in the form of a reduced enterprise income rate of 15%,
compared with the regular income tax rate of 25% (Chan & Cheung, 2010:60).The
Implementation Rules stipulate that the description ‘state-encouraged HNTEs’ refers
to enterprises that hold an independent ownership of core proprietary intellectual
property rights, and simultaneously meet the following criteria (Chang & Cheung,
2010:60):

The products or services provided shall fall within the specific scope of stateencouraged high-new technologies.

The ratio of research and development expenditures to the enterprise’s total
income shall not be less than the ratio stipulated.

The ratio of income from high-new technology products or services to total
income shall not be less than the ratio stipulated.

The proportion of employees working in the science and technology field as a
percentage of the total number of staff shall not be less than the ratio
stipulated.

The enterprise shall abide by any rules for assessment or other conditions
stipulated jointly by the Ministry of Science and Technology, the Ministry of
Finance and SAT for the verification and administration of HNTEs.
4.4.
THE CLEAN DEVELOPMENT MECHANISM (CDM)
As mentioned in chapter 3, the Clean Development Mechanism (CDM) was
introduced by Article 12 of the Kyoto Protocol in 2003 as a measure aimed at the
general reduction of GHG emissions. The CDM issues certified emission reductions
(CERs) (carbon credits) for emission reductions achieved by CDM projects,
generally in developing countries. Industrialised countries can then buy these CERS
(or trade them in the market) and use them to offset emissions that exceed
permissible limits in their own countries, and thus effectively invest in emission
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reductions in developing countries. Each CER is equivalent to 1 ton of carbon
dioxide.
In China, enterprises that operate CDM projects are exempt from corporate income
tax in respect of the following income received (KPMG, 2012:17):

The portion of Carbon Emissions Reductions proceeds that are shared by the
government.

Donations received from international financial organisations, domestic and
foreign entities or individuals.

Interest income which is derived from capital deposits or national bonds.
In addition to the above, enterprises that are engaged in CDM projects enjoy a threeyear exemption from corporate income tax, followed by another three-year 50%
reduction of the corporate income tax rate in respect of income derived from
qualifying CDM projects. This exemption is allowed from the first year that the
revenue derived from the transfer of greenhouse gas emission reductions is
received. (KPMG, 2012:17.)
4.5.
ENVIRONMENTAL PROTECTION AND ENERGY OR WATER
CONSERVATION PROJECTS
A full corporate income tax exemption for a period of three years is allowed, which is
then followed by a 50% reduction on the corporate income tax (CIT) rate for an
additional three-year period for income derived from qualified environmental
protection and energy or water conservation projects. This exemption is allowed from
the first year that revenue is derived. (KPMG, 2012:17.)
Applicable projects include projects that involve biomaterial energy, synergistic
development and utilisation of methane, and technological innovation in energy
conservation and emission (KPMG, 2012:17).
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4.6.
SPECIAL EQUIPMENT FOR ENVIRONMENTAL PROTECTION, ENERGY
OR WATER CONSERVATION AND PRODUCTION SAFETY
A tax credit of 10% of the amount which is invested in equipment that qualifies as
special equipment for environmental protection, energy and water conservation and
production safety is available for set-off against corporate income tax payable. The
credit is available against the corporate tax payable for the year in which the
investment is made. (KPMG, 2012:17.)
4.7.
SYNERGISTIC UTILISATION OF RESOURCES AS RAW MATERIALS
For corporate income tax purposes, taxpayers are only required to take into account
90% of the total revenue which is derived from the use of specific resources
associated with the synergistic utilisation of raw materials in the production of goods
(KPMG, 2012:17).
4.8.
PREFERENTIAL TAX TREATMENT OF ENERGY SERVICE COMPANIES
(ESCOS)
‘Energy service company’ (ESCO) is a term that refers to a company that is in the
business of providing energy solutions to energy users. Such energy solutions
include the following (National Association of Energy Service Companies, 2011):

design and implementation of energy savings projects,

energy conservation,

energy infrastructure outsourcing,

power generation and energy supply, and

risk management.
The following diagram shows the exchanged cash flows in a simplified ESCO
project:
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Figure 3: Cash flows in a simplified ESCO project
Source: Syntropolis (undated)
A full corporate income tax exemption for a period of three years, followed by a 50%
reduction on the CIT rate for an additional three-year period is available for income
derived from an energy performance contract (EPC) by a qualifying ESCO (KMPG,
2012:18).
If an ESCO transfers assets which originated in the course of an EPC project to the
energy user at the end of the term of the energy management contract (EMC), the
assets are deemed to be fully depreciated in the hands of the ESCO for corporate
income tax purposes. Similarly, the energy user is then deemed to have received the
project assets from the ESCO, as if they have been fully depreciated (KMPG,
2012:18). Furthermore, the ESCO will not take into account any contributions made
by the energy user in respect of the transfer of the assets. It follows that the ESCO
will therefore not be required to recognise any revenue for corporate tax purposes in
respect of the transfer of assets to the energy user. (KMPG, 2012:18.)
Finally, an energy user who takes part in an EPC project is entitled to deduct
expenditure which has been actually incurred in accordance with the EMC for
corporate income tax purposes, provided that the expenditure is considered to be
reasonable (KMPG, 2012:18).
4.9.
INVESTMENT IN ENERGY EFFICIENT EQUIPMENT
An additional incentive is provided to encourage the investment in energy-efficient
products. Companies that derive revenue from the production and sale of certain
energy efficient equipment are allowed to exclude 10% of the revenue derived from
such equipment for the purposes of determining their corporate tax liability. Similarly,
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enterprises that invest in special equipment for energy conservation will obtain a
credit against tax payable equal to 10% of the amount invested in the equipment in
the year in which the investment is made. In the event that the tax credit amount
exceeds the company’s tax liability, the excess credit may be carried forward for a
period of up to a maximum of five tax years. Equipment that qualifies for this
incentive would include cooling towers and power saving equipment. (KMPG,
2012:18.)
4.10. CONCLUSION
Chapter 4 provided an analysis of the income tax incentives available to taxpayers in
China for renewable energy research and development and the implementation of
renewable energy technologies. It is clear that China offers generous fiscal
incentives to encourage research and development activities and investments in
innovation.
A comparative analysis together with a hypothetical case study is undertaken in
chapter 5 to compare the research and development and implementation tax
incentives outlined in chapter 3 and chapter 4, in order to highlight any differences,
benefits and limitations in South Africa’s current legislation in comparison with
Chines legislation.
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CHAPTER 5
COMPARISON OF THE INCOME TAX INCENTIVES AVAILABLE IN
SOUTH AFRICA AND CHINA FOR RENEWABLE ENERGY
RESEARCH AND DEVELOPMENT AND THE IMPLEMENTATION OF
RENEWABLE ENERGY TECHNOLOGIES
5.1.
INTRODUCTION
In line with the research objectives outlined in chapter 1, this chapter provides a
detailed comparison of the income tax incentives available in China and South Africa
for renewable energy research and development and the implementation of
renewable energy technologies as identified in chapters 3 and 4 respectively.
5.2.
DETAILED COMPARISON
In the table below, the summarised income tax incentives for renewable energy
research and development and
the
implementation of
renewable
energy
technologies available in South Africa as identified in chapter 3 are compared with
the tax incentives available in China identified in chapter 4.
Table 6:
Comparison of tax incentives for renewable energy research and development and
implementation of renewable energy technologies in China and South Africa
CHINA
SOUTH AFRICA
Research and development allowance
Research and development allowance
Qualified R&D expenditure can enjoy ‘superdeduction’ for income tax purposes. Eg: for 100%
qualified R&D expenditure, a company can claim a
deduction of 150%.
In terms of the new section 11D, qualifying
R&D activities qualify for an automatic 100%
deduction for research and development
expenditure; and an additional 50%
allowance which is dependent upon approval
of the respective research and development
project.
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Allowances for research and development
capital expenditure
An enterprise that holds fixed assets that are
subject to advancements in technology may be
eligible for an accelerated depreciation period
Allowances for machinery or plant
used for research and development
purposes
Section 12C provides for an accelerated
four-year (40:20:20:20). write-off period of
such assets
High-new Technology Enterprise (HNTE/ ‘Patent
Box’)
High-new Technology Enterprise (HNTE/
‘Patent Box’)
The HNTE tax incentive provides for the application
of a lower tax rate of 15% as opposed to a tax rate
of 25%.
No similar incentive identified during the
research performed
The Clean Development Mechanism (CDM)
The Clean Development Mechanism
(CDM)
Enterprises that operate CDM projects are exempt
from corporate income tax in respect of the
following income received:
Any amount received by or accrued to any
person in respect of the disposal on or after
11 February 2009 of any CER issued in the
furtherance of a qualifying CDM project
registered on or before 31 December 2012,
will be exempt from taxation




the portion of Carbon Emissions Reductions
proceeds that is shared by the government,
donations from international financial
organisations,
interest income derived from capital deposit
or national bonds,
donations from domestic and foreign entities
or individuals.
Furthermore, enterprises that are engaged in CDM
projects enjoy corporate income tax exemption for
a period of three years followed by another threeyear period of 50% reduction of the corporate
income tax rate in respect of income derived from
qualifying CDM projects
Environmental protection and energy or water
conservation projects
A full corporate income tax exemption for a period
of three years which is then followed by a 50%
reduction for the corporate income tax (CIT) rate for
an additional three year period is available for
income which derived from qualified environmental
protection and energy or water conservation
projects.
Environmental protection and energy or
water conservation projects
No similar incentive identified during the
research performed
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Allowances for movable assets used in the
production of renewable energy
Allowances for movable assets used in
the production of renewable energy
10% of the amount invested in the qualified
equipment credited against CIT payable for the
current year with any unutilised investment credit
eligible to be carried forward for succeeding five tax
years, if such equipment is qualified as special
equipment for environmental protection, energy, or
water conservation and production safety.
The accelerated capital allowance operates
on a 50:30:20 basis and therefore allows for
a write off of the cost of the assets over a
period of three years.
Investment in energy efficient equipment
Investment in energy efficient equipment
Companies that derive revenue from the production
and sale of certain energy efficient equipment are
allowed to exclude 10% of the revenue derived
from such equipment for the purposes of
determining their corporate tax liability.
Synergistic utilisation of resources as raw
materials
Only 90% of the revenue derived from the use of
specific resources associated with synergistic
utilisation of resources as raw materials in the
production of goods is taken into account for CIT
computation purpose.
No similar incentive identified during the
research performed
Synergistic utilisation of resources as
raw materials
No similar incentive identified during the
research performed
ESCOs
ESCOs
Starting from the tax year in which the revenue
from the project first arises, a qualified ESCO that
takes part in an EPC project will be eligible for a tax
exemption in the first three years and a tax
reduction by half (an effective rate of 12.5%) over
the next three years.
No similar incentive identified during the
research performed
When the ESCO transfers the project assets to the
energy user at the end of the term of the EMC, the
ESCO will not have to recognise any revenue to
take into account the contributions the energy user
has made to the price of the assets
No similar incentive identified during the
research performed
An energy user in an EPC project can deduct
reasonable expenses actually incurred in
accordance with the EMC as and when they are
incurred for CIT purposes
No similar incentive identified during the
research performed
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Allowances in respect of affected assets
Allowances in respect of affected assets
No similar incentive identified during the research
performed
Section 12D of the Act provides for an
allowance of 5% per annum in respect of the
acquisition of any new and unused affected
asset. In such case, an affected asset would
include, inter alia, any line or cable used for
the transmission of electricity, including any
earthworks or supporting structures forming
part of the line or cable.
Source: Chapter 3 and chapter 4
Based on the comparison in the table above, the following were identified:

The section 11D research and development tax allowance is similar to the
research and development super-deduction provided in China.

South Africa does not have a ‘patent box’ regime to stimulate the end of the
innovation cycle when income is generated from the exploitation of the
technology, whereas China has the HNTE regime which provides a significant
financial incentive to taxpayers who are in a tax-paying position.

South Africa and China have similar incentives in respect of the CDN; however,
South Africa only provides and exemption for income derived from the sale of
CERS, while China provides three years’ exemption on corporate income tax,
followed by a 50% reduction of the corporate income tax rate for the next three
years, for income derived from specified CDM projects. China therefore
provides a significantly more financially beneficial incentive.

With regard to environmental protection and energy or water conservation
projects, China provides corporate income tax exemption for three years,
followed by 50% reduction of the corporate income tax rate for the next three
years. South Africa does not provide a similar incentive.

China provides a tax credit of 10% of the amount invested in equipment that
qualifies as special equipment for environmental protection, energy, or water
conservation and production safety, that can be set off against corporate
income tax payable. South Africa, on the other hand, provides only an
accelerated capital allowance over three year in respect of the cost of the
investment in the assets. China therefore provides an addition tax deduction.
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
For the purposes of determining their corporate tax liability, China provides
companies that derive revenue from the production and sale of certain energy
efficient equipment with an exclusion amounting to 10% of the revenue derived
from such equipment. South Africa, however, does not provide a similar
incentive.

China provides energy service companies with significantly financially beneficial
incentives, while South Africa does not provide any similar incentives.
In order to contextualise the effect of certain of the incentives available in South
Africa as opposed to those available in China, a hypothetical case study will be
performed.
5.3.
HYPOTHETICAL CASE STUDY PERFORMED
The following case study focuses on the implementation of a wind farm by a local
enterprise. As a basis for the case study, similar wind farm projects were
investigated. A financial model prepared in respect of a wind farm project was
analysed and formed the basis for the information provided in the case study. Due to
the confidentiality and sensitivity of the information contained in the financial model
analysed, it was decided to adapt the information analysed in the financial model in
order to use it in the hypothetical scenario.
The aim of the case study was merely to illustrate the practical application of theory
considered in chapters 3 and 4in order to make general recommendations for
possible improvements to the current tax incentive legislation in South Africa and
future research opportunities in respect of renewable energy research and
development and the implementation of renewable energy technologies. The case
study does not (as mentioned in the delimitations in chapter 1) address the political,
economic and policy aspects of the implementation of the tax incentives or any other
aspect, other than the pure application of the current corporate tax law in South
Africa and China.
For the purposes of this case study it is assumed that the research and development
phase and the implementation phase of the innovation cycle are undertaken by two
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separate enterprises. The case study will illustrate the effect of the tax incentive for
research and development and implementation of wind farm technology in South
Africa in comparison to the incentives available in China had these incentives been
implemented in South Africa.
5.3.1. Case study
For the purposes of this study, the following was considered in order to achieve the
objectives outlined in chapter 1.
Company A is in the business of research and development of wind farm technology
(including the production of the wind turbines and supporting pillars). During year
one company A expended R100 million on the research and development of the
wind farm technology. Company A’s total taxable income derived during year two
from its trading activities amounted to R250 million.
During year one, company A sold a wind turbine (blades, mechanics and supporting
pillars) to company B for an amount of R20 million. Company B is an energy service
company (ESCO) that is in the business of providing energy solutions. Company B’s
total taxable income derived from its trading activities in years one, two, three and
four amounted to R150 million, R200 million, R250 million and R300 million
respectively.
Based on the information provided, the relevant tax liabilities of company A and
company B respectively were calculated based on the applicable income tax
incentives currently available in South Africa. The relevant tax liabilities of company
A and company B respectively were then calculated based on the applicable tax
incentives currently available in China as if they had been available to the two
companies in South Africa.
In the table below, the income tax incentives currently available in South Africa for
the research and development of renewable energy were applied to Company A’s
taxable income of R250 million (prior to the sale of turbines and research and
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development incentives). Based on these income tax incentives, company A’s
corporate income tax liability amounts to R33.6 million.
The income tax incentives currently available in China for the research and
development of renewable energy as if they were available to taxpayers in South
Africa were then applied to Company A’s taxable income of R250 million (prior to the
sale of turbines and research and development incentives). Based on these tax
incentives, company A’s corporate income tax liability amounts to R18 million. Had
the tax incentives currently available in China for the research and development of
renewable energy been applied in South Africa, they would have resulted in an
additional tax saving of R15.6 million in comparison with the tax incentives
currently available in South Africa for the research and development of renewable
energy.
Next, the income tax incentives currently available in South Africa for the
implementation of renewable energy technologies were applied to Company B’s
taxable income of R150 million, R200 million, R250 million and R300 million (prior to
sale of turbines and research and development incentives) respectively for four
consecutive years. Based on these tax incentives, company B’s corporate income
tax liabilities over the four years amounted to R39.2 million, 54.3 million, 68.8 million
and 84 million respectively. This results in a total tax liability for the four year period
of R246.4 million.
The income tax incentives currently available in China for the implementation of
renewable energy as if they were available to taxpayers in South Africa were then
applied to Company B’s taxable income of R150 million, R200 million, R250 million
and R300 million (prior to sale of turbines and research and development incentives)
respectively for four consecutive years. Based on these tax incentives, company B’s
corporate income tax liabilities over the four years would amount to Rnil for the first
three years and a liability of R40 million in the fourth year. This results in a total tax
liability for the four-year period of R40 million. The income tax incentives currently
available in China for the implementation of renewable energy technologies, had
they been available in South Africa, would therefore have resulted in a tax saving
of R206,4 million in comparison to the income tax incentives currently
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available in South Africa for the implementation of renewable energy technologies
over a four year period.
Table 7: Case study of the income tax incentives available in China and South Africa
for R&D and implementation of wind energy technology
COMPANY A
Current tax incentives available in South Africa
Total taxable income (prior to sale of turbines and research and development
incentives)
Sale of wind turbines to company B
(R)
250 000 000
20 000 000
Section 11D research and development allowance (automatic 100%)
(100 000 000)
Section 11D research and development allowance (50% uplift)
(50 000 000)
Total taxable income
120 000 000
Tax liability at normal 28% tax rate
33 600 000
Tax incentives available in China, if applied in a South Africa context
Total taxable income (prior to sale of turbines and research and development
incentives)
Sale of wind turbines to company B
250 000 000
20 000 000
Research and development 150% super-deduction
Total taxable income
(150 000 000)
120 000 000
Tax liability based on the High-new Technology Enterprise (HMTE) tax rate of 15%
18 000 000
Total tax liability based on current tax incentives available in South Africa
33 600 000
Total tax liability based on tax incentives available in China
18 000 000
Tax saving
15 600 000
COMPANY B
Current tax incentives available in South Africa
Year 1
Total taxable income (prior to incentives)
150 000 000
Section 12B(1)(h) capital allowance in respect of wind turbines purchased (50%
allowance in year 1)
(10 000 000)
Total taxable income
140 000 000
Tax liability at normal 28% tax rate
39 200 000
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COMPANY B
Year 2
Total taxable income (prior to incentives)
200 000 000
Section 12B(1)(h) capital allowance in respect of wind turbines purchased (30%
allowance in year 2)
Total taxable income
(6 000 000)
194 000 000
Tax liability at normal 28% tax rate
54 320 000
Year 3
Total taxable income (prior to incentives)
250 000 000
Section 12B(1)(h) capital allowance in respect of wind turbines purchased (20%
allowance in year 3)
Total taxable income
(4 000 000)
246 000 000
Tax liability at normal 28% tax rate
68 880 000
Year 4
Total taxable income
300 000 000
Tax liability at normal 28% tax rate
84 000 000
Total tax liability based on current tax incentives available in South Africa for
the full three year period
246 400 000
Tax incentives available in China, if applied in a South Africa context
Year 1
Total taxable income
150 000 000
Tax liability (a qualified ESCO which takes part in an EPC project will be
eligible for a tax exemption in the first three years)
Special equipment for energy conservation investment: 10% credit against CIT
payable – carried forward
2 000 000
Year 2
Total taxable income (prior to incentives)
200 000 000
Tax liability (a qualified ESCO which takes part in an EPC project will be
eligible for a tax exemption in the first three years)
.
Special equipment for energy conservation investment: 10% credit against CIT
payable – carried forward
2 000 000
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COMPANY B
Year 3
Total taxable income (prior to incentives)
250 000 000
Tax liability (a qualified ESCO which takes part in an EPC project will be
eligible for a tax exemption in the first three years)
Special equipment for energy conservation investment: 10% credit against CIT
payable – carried forward
2 000 000
Year 4
Total taxable income (prior to incentives)
300 000 000
Tax liability (a qualified ESCO which takes part in an EPC project will be eligible for a
tax reduction by half over the next three years) – effective rate of 14%
42 000 000
Special equipment for energy conservation investment: 10% credited against CIT
payable – carried forward
(2 000 000)
Final tax liability
40 000 000
Total tax liability based on current tax incentives available in China for the full
three-year period
40 000 000
Tax saving if tax incentives available in China were available to tax payers in
South Africa.
206 400 000
Based on the outcomes of the hypothetical case study summarised below, in a
scenario where the income tax incentives currently available in China (as identified in
chapter 4) for the research and development and implementation of renewable
energy technology are assumed to be available to taxpayers in South Africa, the total
tax saving for companies A and B taken together, would amount to R240 000 000
over a four year period. This emphasises that in a scenario purely based on the
application of the income tax incentives available to taxpayers in China for
renewable energy research and development and the implementation of renewable
energy technologies (disregarding any political, economic and policy aspects or
additional tax regimes), China provides a more beneficial tax saving than South
Africa.
5.4.
CONCLUSION
Based on the comparison performed above, it is evident that the number and variety
of
incentives
for
renewable
energy
research
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and
development
and
the
implementation of renewable energy technologies in China exceed the incentives
that are currently available in South African. In addition, the hypothetical case study
emphasised that in a scenario based purely on the application of the income tax
incentives available to taxpayers in China for renewable energy research and
development and the implementation of renewable energy technologies (not taking
into account any political, economic and policy aspects or additional tax regimes),
that China provides significantly a more beneficial tax saving than South Africa. This
chapter has highlighted that there is much that can be learnt from China with regard
to the implementation of income tax incentives to encourage renewable energy
research and development, and the implementation of renewable energy
technologies.
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CHAPTER 6
SUMMARY, CONCLUSION AND VALUE OF THE STUDY
6.1.
INTRODUCTION
The aim of this chapter is to assess the findings of the study in the light of the
research objectives outlined in chapter 1 which originally defined the purpose of this
study.
6.2.
ACHIEVEMENT OF RESEARCH OBJECTIVES AND SUMMARY OF FINDINGS
The achievement of the research objectives as set out in chapter 1 and summary of
findings is outlined below.
6.2.1. To provide a general understanding and overview of the importance of
renewable energy technology and the governmental policies that have the
potential to advance renewable energy technologies and stimulate markets
Chapter 2 provided a general understanding of the importance of renewable energy
technology and governmental policies which are available to policy makers to
advance renewable energy technologies.
Summary of findings on the importance of renewable energy
Energy is a vital tool to stimulate production, income generation and social
development in Developing countries. Developed countries, on the other hand, are
more concerned with identifying alternative energy solutions to mitigate climate
change, address energy supply concerns and stimulate the creation of employment.
(IPPC, 2011:191.)
Renewable energy is a general term which encompasses a variety of technologies
derived from naturally replenished sources that can satisfy multiple energy service
needs by the production of electricity, thermal energy and mechanical energy, as
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well as fuels. It was found that renewable energy technologies are an important
alternative energy source that have the capacity to address multiple environmental,
social and economic developmental concerns, including adaptation to climate
change in developed and developing countries. (IPPC, 2011:191.)
Summary of findings on governmental policies
Governmental policies have the potential to advance technologies and stimulate
markets and play a crucial role in overcoming potential barriers to renewable energy
research and development and the implementation of emerging technologies. (IPCC,
2011:882).
It was found that is evident that there are various climate change policies and
funding mechanisms available to governmental policy makers to encourage
renewable energy research and development and the implementation of renewable
energy technologies included in these policies are tax based policies. For the
purposes of this study, the discussion focused on tax-based polices available for
renewable energy research and development, and for the implementation of
renewable energy technologies.
It was found that a country’s tax system can be used in several ways to achieve its
renewable energy goals (OECD, 2010:111). Firstly, taxes on use and emissions
such as a carbon tax seek to discourage harmful environmental activities such as the
combustion of fossil fuels by placing an economic cost on such activities. Secondly,
tax incentives for implementation of renewable energy technology projects
encourage taxpayers to undertake actions that will assist in achieving renewable
energy objectives. Finally, measures aimed at innovation have the capacity to
reduce the cost of innovation.
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6.2.2. To critically analyse and evaluate the income tax incentives for
renewable energy research and development and the implementation of
renewable energy technologies available in South Africa and China.
An understanding of the renewable energy environments in South Africa and China
was provided at the end of chapter 2 prior to the analysis and comparison of the
incentives available. A critical analysis of the income tax incentives currently
available to taxpayers in South Africa in respect of renewable energy research and
development and the implementation of renewable energy technologies was then
provided in chapter 3. This was followed by a critical analysis of the income tax
incentives currently available to taxpayers in China in respect of renewable energy
research and development and
the
implementation of
renewable
energy
technologies in chapter 4.
Summary of findings on the renewable energy environments in South Africa
and China
The need for renewable energy in South Africa has, in recent years become
increasingly important and has created an opportunity to foster a more secure,
labour intensive and sustainable economy and society (Pegels, 2010:4948). The
energy sector in South Africa is heavily regulated and renewable energy initiative in
South Africa is currently largely driven by the Independent Power Producer
Procurement Programme (IPP).
It was found that far too few renewable energy projects for electricity generation
have been deployed under the current renewable energy policies implemented in
South Africa (Edkins, Marquard & Winkler, 2010:ii). According to Parker (2009), “tax
incentives, if properly structured, can play a valuable role in moving South Africa
toward a sustainable energy future”.
In contrast, the Chinese government has been proactive and has implemented
numerous renewable energy policies and regulations (Peidong et al , 2009:441). As
a result of this, China currently has one of the most attractive markets for renewable
energy investment in the world (Ernst and Young , 2012:21). It was found that China
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has numerous renewable energy technologies and there is much to be learnt from
China in respect of their renewable energy policies and regulations.
Summary of findings in respect of the income tax incentives for renewable
energy research and development and the implementation of renewable
energy technologies available in South Africa
It was found that South Africa has the following income tax incentives available for
renewable energy research and development and the implementation of renewable
energy technologies:

Income tax incentives aimed at research and development.

Capital allowances in respect of certain assets and buildings used in any
process of ‘research and development’.

Allowances in respect of any machinery, plant, implements and utensils used
by that taxpayer in the generation of electricity from wind, sunlight, gravitational
water forces (limited to 30Mw) or biomass comprising organic wastes, landfill
gas or plants’ and any new and unused line or cable used for the transmission
of electricity, including any earthworks or supporting structures forming part of
the line or cable.

An exemption from income tax for qualifying CDM projects.
Summary of findings in respect of the income tax incentives for renewable
energy research and development and the implementation of renewable
energy technologies available in China
It was found that China has the following income tax incentives available for
renewable energy research and development and the implementation of renewable
energy technologies:

Income tax incentives aimed at research and development.

A HNTE tax incentive

Exemptions and reduced tax rates in respect of CDM projects
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
Exemptions and reduced tax rates in respect of environmental protection and
energy or water conservation projects.

A tax credit in respect of special equipment for environmental protection,
energy and water conservation and production safety is available for set-off
against corporate income tax payable.

Incentives in respect of specific resources associated with the synergistic
utilisation of raw materials in the production of goods.

Exemptions and reduced tax rates in respect of ESCO projects.

Credit in respect of special equipment for energy conservation.
6.2.3. To compare income tax incentives for renewable energy research and
development and the implementation of renewable energy technologies
available in South Africa and China in order to expose any differences
and make relevant recommendations as to what South Africa can learn
from China.
A detailed comparison between the current income tax incentives available in South
Africa and the income tax incentives provided in China in respect of research and
development, and the implementation of renewable energy technology was made in
chapter 5. Based on the comparison performed, the differences between the tax
incentives available in South Africa and those provided in China were exposed and
relevant recommendations were made based on the findings in chapter 6. In
addition, a hypothetical case study was performed in chapter 5 to illustrate the effect
of the application of theory considered in chapters 3 and 4.
Based on the comparison and hypothetical case study performed, the differences
between the income tax incentives available in South Africa and those provided in
China were exposed and relevant recommendations were made based on the
findings in chapter 6.
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Summary of findings in respect of the comparison of the income tax incentives
for renewable energy research and development and the implementation of
renewable energy technologies available in South Africa and China
It was determined that the number and variety of incentives for renewable energy
research and development and
the
implementation of
renewable
energy
technologies in China exceed the incentives that are currently available in South
African. In addition, the hypothetical case study prepared in chapter 5 emphasised
that in a scenario based purely on the application of the income tax incentives
available to taxpayers in China for renewable energy research and development and
the implementation of renewable energy technologies (not taking into account any
political, economic and policy aspects or additional tax regimes), that China provides
significantly a more beneficial tax saving than South Africa.
It was highlighted that there is much that can be learnt from China with regard to the
implementation of income tax incentives to encourage renewable energy research
and development, and the implementation of renewable energy technologies.
6.3.
OVERALL CONCLUSION
It was found that there are a number of benefits associated with the implementation
of renewable energy technologies. In addition to the benefits associated with the
reduction of carbon dioxide emissions, renewable energy technologies offer
environmental and health benefits, energy access particularly in rural areas,
increased energy security and improved social and economic development through
the creation of employment opportunities and economic growth.
Furthermore, it is evident that Governmental policies have the potential to advance
technologies and stimulate markets; therefore it is important for governments to
consider the implementation of policies which will encourage renewable energy
research and development and
the
implementation of
technologies.
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renewable
energy
Based on the comparison provided in chapter 5, it was determined that the number
and variety of incentives for renewable energy research and development and the
implementation of renewable energy technologies in China exceed the incentives
that are currently available in South African and it was highlighted that there is much
that can be learnt from China with regard to the implementation of income tax
incentives to encourage renewable energy research and development, and the
implementation of renewable energy technologies.
All the objectives of this study were addressed and the outcome successfully
determined. The aim to determine how the income tax incentives for renewable
energy research and development and the implementation of renewable energy
technologies currently available in South Africa compare with the incentives available
in China was achieved. The value that this study provided to the current body of
knowledge lies in the comparison and recommendations provided in chapter 5.
Relevant recommendations based on the finding above will follow.
6.4.
RECOMMENDATIONS
Based on the comparison, as well as the results of the hypothetical case study
provided in chapter 5, it is evident that the types of incentives for renewable energy
research and development and
the
implementation of
renewable
energy
technologies in China exceed the incentives that are currently available in South
African. For the purposes of this study, the following recommendations are made in
order to assist the South African government to implement tax policies to encourage
renewable energy research and development and the implementation of renewable
energy technologies.
In the first place, well-conceived research and development policies can bring about
an increase in the number of innovators that succeed in bringing innovative
technology to the point of commercialisation. This can improve the investment
climate so that innovators are more likely to obtain risk capital investments, in the
early and later stages of research and development and implementation, from
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investors who are averse to high risks and lengthy delays before they can expect a
return on their investments. (IPCC, 2011:886.)
Research and development tax incentives have been noted as a popular
governmental policy mechanism, which has been implemented on a worldwide
basis. According to Mohnen & Lokshin (2009:1), the main benefit of such research
and development incentives is that their implementation assists in reducing
corporate income taxes in proportion to the R&D effort. This has the effect that the
cost of engaging in research and development activities is decreased, which in turn
encourages firms to increase research and development to a level that is socially
optimal. (Mohnen & Lokshin, 2009:1.) South Africa should therefore consider the
implementation of a ‘patent box’ regime similar to China’s HNTE regime to stimulate
the back-end of the innovation cycle in order to overcome the barriers to the funding
of research and development of renewable energy technology.
Secondly, it is important for governments to ensure that they are able to create
demand for renewable energy technologies in the marketplace, which would
stimulate the implementation of renewable energy technology. There are a number
of renewable energy specific policy options that are aimed at implementation (also
referred to as ‘deployment’) and that have the potential to create a demand for
renewable energy technologies in the market place.
Financial measures such as inducements based on investment, tax incentives,
rebates and grants can reduce the costs and risk associated with investment in
renewable energy by reducing the upfront cost of investments required for the
installation and the cost of producing the technologies. These incentives compensate
for market failures which render renewable energy at a competitive disadvantage
and assist in reducing the financial burden of investing in renewable energy (IPCC,
2011:889). Based on Doshi’s (2012) view it can be assumed that ‘tax incentives do
help spur spending and investment’. South Africa should therefore consider the
implementation of tax incentives similar to China’s incentives in respect of
environmental protection and energy or water conservation projects, energy service
companies and the investment in energy efficient equipment to spur on the
implementation of renewable energy technology.
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Lastly, the IPP bidding process in South Africa requires that renewable energy
components are locally sourced. This raises questions about the affordability of the
projects. South Africa should therefore consider the implementation of tax incentives
for the manufacturing sector, similar to China’s incentives associated with the
synergistic utilisation of resources as raw materials in the production of goods.
6.5.
FUTURE RESEARCH
This focus of this study was to determine how the income tax incentives for
renewable energy research and development and the implementation of renewable
energy technologies available in South Africa compare with the income tax
incentives available in China.
This study highlighted that there is much to be learnt from China with regard to the
implementation of income tax incentives to encourage renewable energy research
and development and the implementation of renewable energy technologies. This
study did not consider the political, economic or policy environments in China and
South Africa nor did it address the interaction of the tax incentives with any additional
tax regimes imposed by the relevant legislative authorities. Furthermore, the study
did not address the viability of the different Chinese tax incentives and governmental
policies identified in a South African context.
There is thus an opportunity for future research to consider the political, economic
and policy environments in China and South Africa in order to assess whether the
Chinese tax incentives and governmental policies identified are viable in South
Africa. There is further opportunity to identify and illustrate the interaction of
renewable energy tax incentives with any additional tax regimes imposed by the
relevant legislative authorities and the impact of the implementation thereof on the
economy.
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