Measures that could promote environmental conservation through ver

What you need to know:
- Due to technological limitations, various businesses, especially in developed countries, are resorting to financing carbon credits to offset their carbon emissions.
By Edwin Prosper
Are you environmentally conscious? If yes, then you must be aware of the skyrocketing demand for eco-friendly approaches to curb adverse climate changes.
You may also be aware of the emerging changes to the business landscape, which demand responsible and sustainable strategies, business models, operations, and investment decisions that are aligned with ESG (Environmental, Social, and Governance) agenda.
Due to technological limitations, various businesses, especially in developed countries, are resorting to financing carbon credits to offset their carbon emissions.
The offsetting of carbon emission by purchasing carbon credits traded in carbon markets is commonly referred to as Verified Emission Reduction (VER).
Simply put, businesses all over the world are now taking active roles to reduce their carbon foot print by purchasing carbon credits traded in carbon markets.
The rationale behind carbon offset is that, since most companies cannot lower their internal carbon emissions in the near future as it would require them to change their production process and technology, they tend to purchase carbon credits to offset their internal carbon emission, ultimately working towards net zero-emission.
Tanzania, like other countries that are piloting projects to prevent deforestation and forest degradation, needs initiatives to limit the deforestation rate to the global average.
The quick win in this regard could be to encourage investments in the VER sectorat this time when the demand for carbon credits is increasing. To achieve this, there is a need to revisit tax measures in our various tax laws.
Currently, Tanzania does not have specific tax laws to cover VER transactions. However, as with all new markets that face global competition, there might be an opportunity for income and job growth in the carbon offsetting sector provided that the tax and regulatory environment provide appropriate conditions for the establishment of sustainable businesses that can compete internationally.
Against this background, I have highlighted below some of the areas that can be prioritised to incentivise VER transactions:
• In the absence of specific laws that govern VER transactions, there is uncertainty as to whether such transactions can be regarded as a supply of service, intangible asset, good, or tangible asset.
To clear the doubt, I am of the view that, VER transactions should be considered as a sale of service since looking at their true nature, they carry several service characteristics as compared to goods.
Given VER transactions as the sale of service, the Value Added Tax (VAT) legislation should expressly state that the sale of carbon credits to a non-resident person is subject to VAT at the rate of zero. This will make the Tanzania carbon market competitive enough to attract several international organizations to purchase carbon credits from Tanzania.
Since Tanzania is more likely to be a seller of carbon credits (as opposed to being a buyer), significant withholding tax implications might be from the other country where the purchaser of carbon credits resides.
However, for completeness, and as a matter of incentivising VER transactions, the income tax legislation may also be amended to specifically exempt VER transactions from withholding tax.
As the number of buyers increases, the above tax reforms will have a directly proportional effect on environmental conservation projects such as afforestation and reforestation, which ultimately boost the effort to combat climate change both from the country’s perspective and the world at large.
• Local companies engaged in the sale of carbon credits should be exempted from turnover taxes, such as service levy and Alternative Minimum Tax (AMT). This is because such companies are generally expected to be loss-making for the majority of the project, mainly because the conservation requires a significant number of years for the carbon credits to be obtained. Therefore, the revenue generated on such projects is generally expected to accrue over the life of the project. In other words, the only benefit expected from VER transactions is the conservation of the environment.
• Lastly, expenses paid/contributed to the community as part of the agreement to conserve the environment should be deductible for corporate income tax purposes.
This is because to be able to conserve the forests for such a significant number of years, the local community must be motivated to take part in the process. Therefore, contributions made to the community are necessary business costs that should be deductible for tax purposes.
I believe by implementing the above tax measures, not only the economic benefits that will be earned from investors in the carbon credits sector but also act as a catalyst in conserving the environment for the good of our generation and the future generations.
In addition, it is also a demanding time for the government to re-look on other laws especially those that govern the environment so that in combination with proposed tax measures the overall objective of an eco-friendly environment is achieved.
Edwin Prosper ([email protected]), is a Tax Advisor at KPMG in Tanzania. The views expressed here are the author’s and do not necessarily represent the views and opinions of KPMG.