ROBERT MATSILA: What SA can learn from EU’s protesting farmers

Farmers in several countries in the eurozone have been protesting since 2023 against reduced subsidies, cheap imports and stricter environmental regulations under the EU’s Green Deal, a climate and Covid-19 response package that aims to reduce greenhouse gas emissions by 55% by 2030 (relative to the levels of 1990). The eventual target is zero net emissions by 2050.

Agriculture is among the heaviest emitters of greenhouse gases and, unsurprisingly, the targeted sector for transition. Countries are implementing the Green Deal through various measures, including reducing subsidies and limiting the use of inorganic chemicals and fossil fuels.

To level the playing field and avoid “carbon leakage” among trading partners, the EU introduced the carbon border adjustment mechanism (CBAM), a tool to put a fair price on carbon emitted during the production of carbon-intensive goods that enter the EU and encourage cleaner production in non-EU countries.

Carbon leakage occurs when companies based in the EU move carbon-intensive production abroad to countries with less stringent climate policies or when EU products are replaced by more carbon-intensive imports. The adjustment mechanism, which came into effect in October, introduces a carbon tax on goods imported into the EU.

SA, which is carbon heavy due to Eskom’s high dependency on coal-fired power plants, exports about 30% of its horticultural fruits to the EU, and the carbon tax will affect their competitiveness.

Besides the Green Deal and its commendable goals, the EU is responding to pressure on tax revenues, which necessitated spending cuts on agriculture and other sectors of European economies. Pressures on spending are rooted in the founding documents of the EU. In terms of its Stability & Growth Pact (SGP), member states pledged to keep their deficits and public debts below 3% and 60% of GDP, respectively.

These limits have been breached by many countries within the euro area, mainly because of Covid-19 and the war in Ukraine. Countries in breach are required to take corrective measures through spending cuts to bring deficits and public debt within the agreed limits over a period of four to seven years. After high growth rates in 2022 due to Covid-19 stimulus spending, the euro area is back to a period of low growth, which automatically increases pressure to contain budget deficits and public debt and necessitates deep spending cuts.

It matters that protesting farmers are from some countries in the eurozone area, not the 27 members of the EU. The eurozone comprises 19 countries that surrendered their currencies and adopted the euro. The significance of adopting the euro is that taxes became an important source of revenue to fund governments’ spending priorities.

Similarly, SA is facing fiscal pressure from underperforming tax collections. Even before delivering his budget speech on February 21, finance minister Enoch Godongwana had primed citizens that tax revenues were under pressure, with net tax collections having increased by only 7.8% to R1.7-trillion during the 2022/23 fiscal year. For 2023/24 a revenue shortfall of R56.1bn is projected. Like the EU, SA is in a period of “secular stagnation”: low growth and high unemployment, with lower tax collection as a result.

The 2024 budget seeks to raise an additional R15bn from above-inflation increases in excise duties on alcohol and certain categories of tobacco products. Noting that tax revenues are under pressure from a weak economy, the 2024 Budget Review proposes no rate increases to corporate or personal income tax, VAT or the fuel levies, which on its own amounts to R4bn of tax foregone.

The Budget Review cautions that tax increases beyond a certain threshold in a constrained economy can lead to reduced tax collections. While the minister emphasised the need to broaden the tax base and improve tax compliance, there was no focus on new measures to limit tax losses, forgone taxes or claims on tax collected, other than CCTV for the tobacco industry.

Like the Carbon Border Adjustment Mechanism in the EU, the introduction of the global minimum tax on multinationals is expected to increase corporate tax collection in SA by R8bn in 2026/27. This arises from SA complying with the Organisation for Economic Co-operation & Development’s framework to discourage base erosion and profit-shifting by corporates operating in multinational jurisdictions.

Beside this, and if growth does not resume on a sustainable basis, pressures on tax collection may become hardened, leading to heightened investigation of ways to reduce forgone taxes, which may necessitate further tax reforms over and above those in the Budget Review.

Pressure on the fiscus may adversely affect the formulation of new tax incentives. How continued pressure on the fiscus could affect traditional tax incentives could be explained by using an example in agriculture, which, if implemented, could lead to similar strife as that unfolding in Europe.

According to International Financial Reporting Standards (IFRS), businesses can choose their depreciation schedules on fixed and movable assets. In addition to the normal depreciation schedules, the SA government provided additional tax incentive to farmers in the form of accelerated depreciation, which lowers taxable income and taxes paid.

With this tax incentive, also known as the 50:30:20 rule, farmers depreciate their machinery and equipment over three years. This incentive has been so successful that February of each year is normally associated with what became known as “February tax buy”, when farmers buy machinery and equipment and then set off 50% against the income statement at the March tax year end a month later, lowering taxable income. There are downsides to this that are beyond the scope of this article.

It is partly due to this incentive that farmers have been spending, on average, R4bn each year on farming machinery and equipment over the past five years. This led to higher levels of mechanisation rates of commercial agriculture, in turn leading to improvements in productivity, food security and global competitiveness, as manifested by steadily increasing agricultural trade surpluses. This is an example of a tax incentive that works and is delivering.

But are all tax incentives still effective in this structurally changing economy? For instance, as companies increasingly implement labour-displacing automation technologies, personal income taxes, which account for 35% of total tax revenue, may come under pressure. Increasing automation will lead to rising depreciations, with potential negative effects on taxable corporate income.

Therefore, the depreciation tax incentive and others such as VAT refunds and rebates on imported goods could come under pressure as the government is compelled to investigate ways to limit forgone taxes.

Though in distant places, the EU’s protests should be looked at with dual lenses. First, as resistance to steep measures to transition the EU to net-zero emissions by 2050 and, second, as reduced profitability of the agricultural sector due to the withdrawal of subsidies and other tax incentives. It is not unfathomable that SA agriculture could find itself having to contend with similar eventualities should our economic performance not improve.

The SA agricultural sector cannot neglect the need to transition to a greener economy lest global markets start closing access, and industry leaders should start contemplating scenarios where traditional tax incentives may come under scrutiny and strategise on the best response mechanisms.  

• Matsila is a sector specialist for agriculture and agro-processing at the Public Investment Corporation.