PwC today launches its Pre-Budget Submission ‘Supporting Ireland’s decarbonisation journey through tax policy’. The Submission proposes a comprehensive suite of tax policy proposals including a mixture of introducing new and innovative measures, extending existing measures and reinvigorating older measures with a view to positively signaling Ireland’s commitment to tackling climate change. The ideas presented would also promote investment, encourage job creation and contribute to socio-economic prosperity.
In March 2021, the Government approved the Climate Action and Low Carbon Development (Amendment) Bill 2021 which will set Ireland on the path to net zero emissions by 2050. During the remainder of 2021, there will be substantial developments at an EU level in the fight against climate change, including the 26th UN Climate Change Conference of the Parties (‘COP26’) in November 2021. Ireland has a challenging road ahead with substantial changes required across all sectors, businesses and members of society, but there will also be a lot of opportunities.
This Submission, which focuses on tax policy for a green recovery, is also aligned to a number of themes outlined in Government’s Economic Recovery Plan published a few days ago.
PwC’s 2021 Irish CEO survey revealed that 78% of Irish business leaders are concerned about the threats of climate change and environmental damage to their future growth prospects. However, only one in five (20%) plan double digit investment in sustainability and environmental initiatives.
Peter Reilly, Head of Tax Policy, PwC Ireland, commented: “Climate change is one of the greatest challenges of our generation, requiring wholescale transformation of every sector of our economy, unprecedented innovation and committed leadership. Tax policy will play a major role not only influencing behaviour towards a sustainable economy, but also encouraging investment and creating jobs in the right areas while boosting a green COVID-19 recovery. PwC’s Green Pre-Budget Submission, focuses on four key areas where we believe tax policy can play a critical role in Ireland’s decarbonisation journey: supporting renewable energy adoption, environmental taxes and incentives, Ireland as a ‘green finance hub’, and incentivising consumer behaviour.”
The Climate Action and Low Carbon Development Bill 2021, once ratified, will put targets including 70% renewable electricity by 2030 and a net zero emissions economy by 2050 on a statutory footing. This target may be further increased to 80%. Offshore wind, in Ireland in particular, is underdeveloped and presents huge potential, including the opportunity for additional capacity to be exported which would directly and positively impact Ireland’s economic prosperity.
PwC’s Submission proposes a range of potential tax measures which would support the adoption and deployment of renewable energy projects such as the introduction of capital allowances on grid connection costs. Opportunities in the areas of investment and divestment of projects, reviewing the R&D tax credit as well as cash flow considerations within the VAT and relevant contracts tax regime.
Environmental taxes such as excise taxation act as a key deterrent to behaviours that are contrary to our climate action goals. On the other hand, environmental tax incentives such as accelerated capital allowances for energy efficient equipment are a very valuable cash flow benefit for businesses.
Building on the progress made in Budget 2021, the areas focused on include the further expansion of existing regimes to support a reduction in greenhouse gas emissions and promote investment in energy efficient equipment by businesses. For example, Government could consider extending the Biofuels Obligation Scheme to other sectors where mineral oils are utilised, i.e. to the heating sector where there is already a high usage of fossil fuels.
ESG is propelling growth in the financial services sector. For example, 100% of global asset managers with operations in Ireland confirmed in a PwC Ireland hosted webcast that ESG investing will change the global economy in the next 3-5 years. With over 37,000 people in financial services in Ireland, the sector has the people with the skillset, initiative and drive to position Ireland as the leading international centre for ESG products and investments - a ‘Green Finance Hub’.
The Submission proposes a range of tax measures which would positively impact the establishment of ESG Funds in Ireland in addition to measures that would encourage investment from both Irish and international investors in these Irish based ESG Funds. These measures would be subtle but would be impactful in positioning Ireland as a centre of excellence for ESG innovation. In addition, the Submission proposes measures that are designed to attract key ESG talent to the Irish market that would underpin Ireland’s ability to be leaders in this space
Another key area is supporting Ireland’s position as a global aircraft leasing hub. A key measure for this industry would be the extension of the accelerated capital allowances regime to apply to energy efficient/sustainable fuel type aircraft for the aircraft leasing sector would be game-changing.
Despite retrofit grants available, and related announcements this week, there are many reasons why households in Ireland may be deferring improving their home’s energy efficiency, not least high upfront costs. A focused approach to retrofitting homes (including associated upskilling) would not only stimulate economic activity, it would also help provide for much more healthy, ergonomic and energy efficient workspaces for the new wave of e-worker in light of the move from office to home.The Submission proposes that Ireland’s approach to retrofitting be reviewed including considering a ‘Help to Insulate’ scheme in order to incentivise retrofitting properties.
Also proposed are tax measures focusing on two key aspects of consumer behaviour and mobility: the use of public transport and the adoption of electric vehicles. Consideration of more specific measures and expansion of existing measures in the areas of tax relief for public transport costs particularly in a post COVID-19 world, taxation of hybrids / EVs as well introducing a tax deduction for commuting expenses and reintroducing tax relief for investment in park and ride facilities.
Rebecca Greene, Energy and Sustainability Tax Leader, PwC Ireland, concluded: “Budget 2022 offers a clear opportunity to allocate resources to build back greener and put Ireland on a trajectory towards achieving its ambitious climate targets. The efforts needed to secure a more sustainable country require contributions from all members of society, from individual households to businesses and to Government. The key challenge for Ireland continues to be the decoupling of economic growth with emissions growth, in addition to the required adjustment to behavioural and culture norms to address climate change throughout society. These tax policy measures will support this important transition for our country as well as facilitate a green recovery by creating economic activity and new jobs.”
Link to the full report detailing all of the suggested measures can be found here.
A detail of the suggested measures are listed below:
1. Supporting renewable energy adoption, particularly an underdeveloped offshore sector
Suggested measures to support the renewable energy sector include:
Consider tax reliefs relating to the investment and divestment of renewable energy projects including:
Changes to tax incentives such as the Employment and Investment Incentive Scheme (EIIS) and the relief for investment in renewable energy generation to further promote investment by individuals and corporates in renewable energy companies. Reduction of the capital gains tax cost on disposal of early stage renewable energy projects for further development.
Extend the long term public infrastructure exemption as provided in The Anti Tax Avoidance Directive (“ATAD”) to renewable energy infrastructure projects.
Similar to the UK, introduce capital allowances on grid connection costs and extend the look back period for pre-trading expenses to 7 years.
Consider a consultation process to understand the current scope of the R&D tax credit in the context of sustainability innovation and consider whether an extension of the scope of the R&D tax credit to include innovation in the area of sustainability is needed to promote Ireland as a ‘hub’ for research, development and innovation in the area of sustainability and renewable energy.
Consider certain provisions within the VAT and Relevant Contracts Tax (‘RCT’) regimes as they relate to renewable energy projects in order to allow for greater cash flow and reduced administrative burden for renewable energy developers.
2. Role for environmental taxes and incentives
Suggested measures on environmental taxes and incentives include:
Consider working with the EU to reduce the rate of duty for specific environmentally friendly products. Currently there is no distinction in the EU’s tariff system for items that are made up partially or wholly of recycled or repurposed materials. In addition, transport, such as electric vehicles or buses, attract a high rate of customs duty which inhibits trade in the transport sector for electric vehicles.
Consider extending the requirements under the Biofuels Obligation Scheme to other sectors where mineral oils are utilised. An example of this may be the heating sector where there is already a high usage of fossil fuels.
Consider widening the scope of the current accelerated capital allowances for energy efficient equipment as well as simplifying the current scheme to reduce its administrative burden.
3. Promoting Ireland as a ‘Green Finance Hub’
Suggested measures to promote Ireland as a ‘Green Finance Hub’:
Tax measures which would positively impact both the promotion of ESG Funds and establishment of ESG Funds in Ireland. The suggested measures would be subtle but impactful in promoting Ireland as a centre of excellence with regard to ESG investing.
Promote investment in ESG funds. Specifically, reduce the Investment Undertaking Tax and the Life Assurance Exit Tax to 20% (from 33%) for funds and insurance products which invest in sustainable activities, in addition to, introducing of measures to ensure the holding of ESG assets in Ireland is competitive compared to other jurisdictions.
Promote the establishment of ESG funds through improving the attractiveness of the Investment Limited Partnership through an exemption for dividend withholding tax. Extend the capital gains tax rate of 15% to senior Irish resident employees of an ESG fund manager.
Broaden the exemption from the interest limitation rules for long-term public infrastructure projects, to ensure that investment in Irish renewable energy projects remains attractive.
In order to support Ireland’s position as a global aircraft leasing hub, extend the accelerated capital allowances regime to apply to energy efficient/sustainable fuel type aircraft.
4. Incentivising consumer behaviour
Suggested measures to influence consumer behaviour include:
Review Ireland’s approach to retrofitting: Consider a ‘Help to Insulate’ scheme in order to incentivise retrofitting properties. Consider property tax credits for retrofit costs; reduced capital gains tax on sale of properties that have been retrofitted; reduced stamp duty where retrofitting has taken place shortly after purchase.
Further promote the use of public transport to recognise a more flexible commuter. Facilitate easier tax reclaims on public transport; Introduce tax deduction for commuting expenses and reintroduce tax relief for investment in park and ride facilities
More specific measures for hybrid cars/electric vehicles; lower rates of VRT or motor taxes; incentives for companies using EVs as company vehicle fleet and a trade-in option of old vehicles for electric bikes.
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Budget 2022 offers an opportunity to build back greener and put Ireland on a trajectory towards achieving its ambitious climate targets. Read our insights and recommendations here.
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