The greening of tax systems, especially in Europe but increasingly in other parts of the world too, signals a shift from taxes on labour to environment-related taxes. Alongside this, incentives related to environmentally friendly projects and assets have been included in the tax legislation of a number of countries.
The most well-known regulation in the field of environmental issues is, of course, the Kyoto Protocol, which requires industrialised countries to reduce emissions by an average of at least 5% from 1990 levels between 2008 and 2012.
Numerous other directives have been implemented in the EU on environmental issues, such as the EU Emissions Trading Scheme Directive and the Energy Tax Directive, and a proposal has been put forward for a new directive on renewable sources.
There are many tax incentives related to environmentally friendly projects or activities and assets – tax advantages which in these times of economic crisis are more than welcome.
Many countries already offer tax incentives related to environmentally friendly assets, such as accelerated depreciation or tax credits, R&D credits and exemptions on income from specific primary-sector activities. In some cases exemptions are available for indirect taxes – indeed, a world of possibilities for tax savings.
Indirect environmental taxes certainly come into play, but for the purposes of this article the focus will remain on green taxes as they relate specifically to corporate income tax.
Tax incentives for environmentally friendly activities or assets
Several countries offer tax incentives related to environmentally friendly projects or assets. Tax incentives can be broadly separated into several major categories:
- reduced corporate income tax rates;
- tax holidays (no taxes for a period of time);
- investment allowances and tax credits (reductions in taxes that are based on the amount of investment and are in addition to normal depreciation);
- accelerated or free depreciation (allowing businesses to write off depreciation more rapidly);
- exemptions from indirect taxes, ie, import tariffs on inputs; and
- export-processing zones (special zones for exporters; enterprises in such zones are typically exempt from all indirect taxes or, in some cases, all direct taxes).
Tax incentives can also take other forms; for example, some countries have exemptions for profits related to primary-sector activities or have possibilities to form provisions or reserves. There are other tax measures.
Investment allowances and tax credits
Tax incentives can be used to stimulate certain behaviour. Part C of the International Bureau of Fiscal Documentation (IBFD) book Tax and the Environment: A World of Possibilities mentions the following:
- legislators feel the need to do something to attract investments by enacting incentives instead of dealing with the reasons investors do not invest in their country;
- it is politically easier to defend tax incentives than to defend subsidies; and
- some countries may feel pressure from multinational companies that threaten to locate investment elsewhere if they are not given concessions.
If a government wants tax-payers to use certain environment-friendly assets or to invest in certain environment-friendly projects, it could provide them with an incentive. A non-exhaustive overview is provided in the first column of the table opposite of the types of incentives used by different governments.
Accelerated or free depreciation
Some countries provide the possibility to depreciate environmentally friendly assets according to an accelerated scheme. While the depreciation rates are generally intended to correspond to the depreciation rate of the capital property, there is considerable flexibility to shift the incentive structure for capital costs through the manipulation of allowable depreciation rates.
The second column of the table opposite table gives an overview of incentives on the accelerated or free depreciation with respect to environmentally friendly projects or activities or assets in some countries.
Anuschka Bakker is a chief editor at the International Bureau of Fiscal Documentation.
Fiscal incentives for investments in energy-efficient/environmentally friendly assets
- R&D concessions and grants
- Clean Business Australia grants
- Rebates supporting the installation of renewable energy water pump systems
- No specific environmentally friendly fiscal incentives
- Immediate deduction or investment tax credit on expenditures related to the Scientific Research and Experimental Development programme
- ‘Credit against tax payable’ for investments in certain environmental protection, energy and water conservation equipment
- Compensation from the multilateral fund of Montreal Protocol
- Tax exemption for collecting and processing or treating of biodegradable waste water
- Deduction of profits derived from infrastructure related to water
- Deduction of profits derived from biotechnology
- Deduction for replacing specified assets
- Allowance for investing in sustainable energy and certain types of energy-saving assets
- Allowance for investing in environmentally friendly assets
- Tax credit for environment protection investments
- Tax credit for acquisition of vehicles
- Tax credit for investments in renewable energies
- Deduction of expenses related to forest planting and ditching
- Deduction of expenses related to felling
- Capital allowance of 100% on specific categories of energy-efficient or environmentally friendly assets
- Tax credit for environmentally friendly vehicles
- Tax credit for energy-efficient homes and appliances
- Alcohol fuels credit
- Biodiesel fuel credit
- Low-sulphur diesel production credit
- Renewable electricity production credit
- Advanced nuclear power facility production credit
- Energy credit
- Qualifying advanced coal project credit
- Qualifying gasification project credit
- Carbon dioxide sequestration
Source: Part C, ‘Tax and the Environment: A World of Possibilities’, IBFD, 2009
Accelerated or free depreciation
- No specific free depreciation arrangements for environmentally friendly projects or assets, other than carbon sink forests
- Immediate deduction of expenditure on, inter alia, environmental activities, land care operations and mining site rehabilitation
- Specific depreciation provisions for water facilities
- No specific fiscal incentives for environmental purposes
- Accelerated depreciation regarding intangible expenditures related to renewable energy and energy conservation projects
- No specific free depreciation arrangements
- Higher rate of depreciation for assets relating to environment protection
- Special depreciation of eligible facilities (the energy-supply-demand-structural-reform-promoting tax measures) and recycling facilities
- Accelerated/free depreciation on an array of environment friendly assets
- Accelerated depreciation for environmental treatment and disposal assets, plants used for generation of electricity through natural resources and waste disposal assets
- Deduction for expenditure on assets related to the eradication of plants, prevention of soil erosion and dam/irrigation plant construction, etc
- Accelerated depreciation of assets related to R&D
- Free depreciation of investments in qualifying mining assets
- Deduction for depletion related to the extraction of natural resources
- No free depreciation other than on certain ships and certain allowances on expenditures on cars by reference to the carbon dioxide emissions of the car
- Election to deduct certain expenses regarding costs of a pollution-control facility and qualified environmental remediation expenditures, etc
- 50% additional depreciation allowance for qualified cellulosic biofuel plant property and for qualified reuse and recycling property
- Accelerated depreciation of qualified smart electric metre or grid system
- Accelerated depreciation of soil or water conservation and for land used in farming
- Deduction of costs of qualified clean-fuel vehicles
- Accelerated depreciation for small business refiners
- Accelerated depreciation of energy-efficient commercial building property