Ireland must focus on recovering from the COVID-19 crisis in a greener, more sustainable way. This is possible by investing in a sustainable economic recovery and implementing a sustainable framework in line with other EU member states.
From a tax perspective, this means promoting green activity through tax measures and incentives, as well as reforming our tax regime in areas where sustainability measures are being adopted.
Budget 2021 has the opportunity to set the tone for the future by encouraging businesses to commit to a more sustainable future and encourage investors to provide finance to support the sustained growth of such businesses. Ireland, as a leading global international financial centre, also has the opportunity to become a centre of excellence for innovations in relation to sustainable investing and green finance.
It is unlikely that we will see a variety of climate-driven tax changes in the 2021 Budget. We expect it will focus on carbon tax, mineral oil, diesel and funding decarbonisation efforts in specific sectors. However looking forward, more varied tax measures should be considered in order to have the substantial impact that is needed to decarbonise our economy.
We see the most effective ways for tax measures to tackle the challenges of climate change as a mixture of quick wins, obvious choices and more fundamental changes in how we promote and achieve a sustainable future in our society.
The number of renewable projects in Ireland is growing at an exponential rate. International and domestic investors are seeing Ireland as having abundant opportunities across onshore and offshore wind, solar and biomass. In the medium to long term, there is also floating offshore wind, hydrogen and wave and tidal potential.
However, the tax regime in Ireland has not progressed in line with the growth in this sector. Our ideas for reforming the tax regime for renewable companies include:
The tax regime, at a minimum, should recognise the lead time for renewable projects, and the impact of VAT and RCT on cash flow during the development stage of renewable projects.
We believe consideration could be given to property tax being calculated with reference a property's BER, in addition to its value.
Consideration could be given to a credit against property tax for any retrofit investment in the year or for a period after the retrofit.
Where individuals invest in solar panels for their homes, the costs should be available as a capital allowance or similar relief against income tax.
Under current law, the R&D tax credit is not viewed as being broad enough to clearly encapsulate innovation as constituting qualifying activities. In the area of sustainability, innovation is critical to developing new energy efficiency solutions.
An extension of the scope of the R&D tax credit to include innovation in the area of sustainability or clarification through existing guidance as to what areas would qualify would be welcomed. This would benefit the Agricultural, Transport and Renewables sector specifically but could have broader application.
Specifically, Ireland's potential to unlock significant offshore wind capacity, the target for which is 5GW by 2030, is receiving significant focus. It is expected to play a critical role in decarbonising our energy system either directly, feeding into the local and export power system, or as a means of generating green hydrogen. Significant investment is required to seed innovation in this and related areas. Such innovation should qualify for tax relief in the form of an R&D tax credit or intangible capital allowances.
The introduction of a credit against CGT or a reduced percentage on the sale of a building which has been retrofitted would encourage positive behaviours in the sale of older homes. This would work best for investors and landlords or situations where principal private residence relief is not available. Such individuals would be incentivised to retrofit their investment houses or apartments before selling them on. Similar to the point above on solar panels installed on houses, taxpayers should be entitled to a capital allowance or similar relief against income tax.
Tax incentives should be considered to reward and promote sustainability measures introduced by businesses. This could be in the form of upfront tax relief for investment in energy efficient measures through green capital allowances or a reduction in payroll taxes for employee-related sustainability measures. Tax incentives for corporate power purchase agreements (PPAs) would also be welcomed as an incentive for businesses to go green.
The climate action plan calls for a significant increase in electric vehicles out to 2030. As the cost of electric vehicles (EVs) is anticipated to be higher than conventional combustion engine cars over the short to medium term, the government could further incentivise investment in electric vehicles through a number of measures. These include lower toll charges on roads, in particular the Port Tunnel, lower VRT or VAT rates, relief for businesses where a full electric fleet is used for company cars, and upfront capital allowances for EV infrastructure built onsite. Small measures adopted by a broad range of people could have a fundamental impact overall.
The area of sustainable finance and green finance is multifaceted. It broadly captures the use of finance which is directly or indirectly linked to a product, investment or service that has a positive contribution to climate action. The opportunities for investment are vast, and the form in which that investment is structured is varied. However, there are two key common denominators: the investor and the underlying investment profile from an ESG (environmental, social and governance) perspective. The forthcoming financial regulations in combination with a more widely adopted taxonomy will provide fertile ground for sustainable finance to prosper. From a tax perspective, the areas to incentivise and promote positive behaviours in this space include reduced taxation of returns from green investment products through reduced rates or certain exemptions, in particular, from withholding taxes.
While we don't expect the ideas above to crystallise overnight, Ireland must look to more effective and ingrained policy measures to incentivise resource efficiency and the adoption of low carbon alternatives in this and future Budgets. This will be necessary to meet increased emission reduction targets set by the EU and which Ireland has already committed to.
PwC's energy, utilities and resources tax team have many more ideas applicable to everyone from investors and large multinationals to the individual homeowner, from renewable energy developers to corporates providing company car schemes.
We are here to help and support you in your sustainability efforts. Contact us today.