On the 15th of February 2017, the National Treasury released a media statement attaching a discussion document on the review of the Diesel Refund System (“DRS”). The purpose of the discussion document is to invite public comment (by 15 May 2017) and initiate further consultation.

Due to recent issues in the fishing industry regarding the interpretation and implementation of the current DRS, it is of vital importance that the fishing industry (including all affected sectors) submit detailed comments by the deadline. It is essential that the representations are co-ordinated and contain combined comments from all the various sectors. In this regard such comments should be submitted by an umbrella body such as FISHSA. However in order to do this such body would have to obtain comments from each of its affected member associations. The reason for this is because the catch arrangements of fishing vessels (i.e. how and by whom they are contracted and fuelled) can differ depending on the sector. In short it is very important that Treasury obtains a complete overview from the fishing industry in order that that any new diesel refund system put in place is sufficiently robust to cover the various scenarios so that the industry obtains a maximum benefit.

By way of historical context, the DRS was introduced in the year 2000 to provide relief from fuel levies and RAF levies to primary producers in agriculture, forestry, fishing and mining sectors. The stated aim thereof was to protect the international competitiveness of the local industry and not to inflict such levies on non-road users.

The DRS is currently regulated through the Customs and Excise Act provisions and is administered through the VAT refund system (i.e. diesel refunds are offset against VAT payable).

Treasury has recognised that there are technical administration and legal challenges with the current DRS which has led to certain eligible and deserving operators being unable to benefit from the system and in some cases other operators obtaining substantive refunds which are unwarranted.

Treasury accordingly wish to keep the policy intent of the current system but want to simplify its operation in the future so that the intended beneficiaries obtain the maximum benefit therefrom. This has therefore led to the current discussion document.

Current Challenges

Certain of the challenges identified by Treasury are:

The shared VAT administration – currently in order to claim one has to be registered for VAT and this prejudices small primary producers that do not ordinarily have to register for VAT. In addition in certain instances it prejudices joint ventures that carry out the qualifying activities.

Lack of log book compliance.

  •  Authorisation of primary production – in sectors such as the fishing industry the primary production activities of fishing must be authorised by a catch permit. In the past the identity of the   permit holder versus the user claiming has led to controversy in diesel refund claims.
  •  Outsourcing of operations – in the fishing industry in particular a number of arrangements are in place for catching on commercial fishing rights either through joint ventures, catching agreements, and shared ownership of vessels or other hybrid charter agreements. The current wet and dry contracting provisions in the diesel refund system are not sufficiently robust to cater for all scenarios.

 Proposed Reform

Although Treasury envisages a wholesale review of the diesel refund system certain amendments to the current system have already been made. For instance in the fishing sector a slight amendment to the wording of the relevant note in the Customs and Excise provisions have clarified the position that valid catch permits must be on board the vessel ( in possession of the master) rather than such permits having to be issued in the name of the user (the person applying for the refund).

Looking forward the wholesale systemic changes which Treasury are currently looking at include the following:

Currently the DRS focusses on eligible “diesel purchases” by “qualifying users” but Treasury wish to change this focus to rather be on “qualifying activities” and “use”. Thus in future the underlying basis of the claim will not be on the identity of the user but on the actual primary production activity.

  • Treasury wish to link the qualifying activity to a “physical location”. In the fishing industry this will of course be easy as the location of the carrying out of the activity will be on the fishing vessel itself while she is fishing. The crucial issue will be the definition of “fishing”.
  • Treasury want to ensure that contractors are also included in the system on an inclusive basis and not as currently restricted in the “wet” and “dry” contract provisions of the current system. As regards the fishing industry one hopes that the provisions will be sufficiently wide to cover the various scenarios. This is why informed comment and representations from the industry is of vital importance.
  • Treasury want to implement a stand-alone DRS which runs independently from the current VAT system. This of course will address the current issue where certain beneficiaries who qualify cannot claim because they are not VAT registered. Another issue which would be cured in the fishing would be where there is a joint venture (“JV”) which carries on the catching activity (i.e. primary production activity) but is not registered for VAT as it is structured in such a way that it does not produce taxable supplies. In such instance currently the JV itself would not be able to claim.
  • Log book compliance will continue but the format of the log book will most likely change. In this regard the fishing industry needs to ensure that the log book is customised so that it requests information which is relevant and realistic for claiming purposes. Comment on such format is therefore essential.
  • It is envisaged that the new system will be phased in. Therefore initially there will be a confirmation of current diesel refund registrants which will thereafter be followed by a new re-registration of all beneficiaries over time.

 Other proposed changes which will also require comment from the fishing industry are:

The proposed requirement that diesel refunds only be allowed in respect of diesel dispensed to vessels from storage facilities formally on record with SARS;

  •  The new system envisages special treatment to be considered for small and emerging primary producers that fall below the registration threshold. This would be allowing for collective registration of beneficiaries who would then share claims.

In closing the need for comprehensive fishing industry comment by the 15th of May 2017 deadline is crucial so that the new diesel refund system ultimately constructed by Treasury is sufficiently robust to allow a maximum level of claims by beneficiaries in the various sectors – as fishing is after all a non-road user activity which deserves full compensation to remain competitive.

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