Green taxes in the fight against climate change
By Magdalena Zamoyska, tax advisor, partner, MDDP
There is a perception that the only meaningful achievement of this year’s COP27 summit is the agreement to set up a ‘loss and damage’ fund to cover the losses of developing countries caused by climate change-related disasters. Beyond this, no agreements were made that would take the world back from the path towards climate catastrophe.
In this context, it is worth asking about the role of tax regimes in shaping pro-environmental business and consumer behaviour. Alongside the introduction and continuous tightening of restrictions on greenhouse gas emissions, fiscal tools are a powerful means of shaping – or even forcing – desired actions towards halting climate change.
On the one hand, the legislator can introduce burdens in the form of taxes and charges that sanction environmentally negative actions. The carrot is tax incentives and reliefs related to climate-positive initiatives. There are not many of these in Polish tax law (for the time being at least), but it’s worth noting which measures can be used by taxpayers.
Climate-sensitive fiscal solutions are sometimes referred to as green taxes. Do they actually work? Let’s look at two examples: the ‘plastic tax’ and the plastic bag levy.
As an EU member state, Poland is obliged to implement pro-environmental solutions and to pay certain charges. One of these is the so-called plastic tax. This levy is paid by the Polish government to the EU budget from 2021. Seemingly, it does not burden taxpayers directly, but is effectively paid from their taxes. The projected size of the levy for 2022, which Poland will finance, will be more than 1.7 billion złotys (after accounting for the ‘rebate’ associated with our relatively low level of GDP compared to the EU average). Thus, we will be among the top EU payers, just as we were last year, only that we will most likely pay more for this year than for 2021. This is not something to be proud of. This is because the levy affects countries that fail to collect and recycle waste the most. Looking at the numbers, it turns out that Poland is not showing progress in this area. In future, the development of the extended- producer responsibility mechanism or the deposit system will oblige businesses and consumers to actively participate, also financially, in the recycling process. Therefore, it is hoped that Poland will produce less plastic waste which cannot be recycled – and that should also result in a decrease in the plastic levy.
As of 2018, with some modifications, Poland has a recycling fee for plastic bags issued for the packaging of goods in shops. The fee is 20 groszy net per bag, and is paid by firms to the account of the provincial marshal. In practice, the fee is passed on to the consumer who buys a plastic bag from a shop, and the cost of the fee is included in its price
Has the introduction of the levy affected consumer behaviour? From daily observations, it can be concluded that yes it has. An increasingly common behaviour in shops is to pack purchased goods in reusable bags, and this is true for both older and younger consumers.
Other EU environmental initiatives should not be overlooked, such as the border carbon tax (CBAM). This is to be levied on certain groups of imports from outside the EU (such as cement, fertilisers, iron and steel, aluminium, electricity) produced in countries where climate standards are less stringent than in the EU.
The question arises whether, with the EU and consequently the Polish government introducing fiscal tools to prevent a climate catastrophe, there is any chance of achieving this goal. It is difficult to judge today, but according to the prevailing opinion, action needs to be stepped up. The process of change is too slow. The introduction of CBAM, for example, will be preceded by a three-year reporting period, meaning that the levy will not take effect until 2026 at the earliest. However, given the current stage of the legislative process, even this deadline seems unrealistic.
Lack of tax incentives
Polish tax law does not contain reliefs and exemptions that are specifically targeted at pro-environmental activities. Therefore, both businesses and individual taxpayers should verify whether the initiatives they undertake and the expenses they incur entitle them to apply for the benefits provided for in tax regulations, mainly income tax acts.
A solution for firms worth noting is the R&D tax credit. It entitles businesses to a double deduction of certain qualified R&D expenses. Eligible expenses include salaries, expenses for the purchase of fixed assets and materials and raw materials – but only if they are directly related to R&D activities. In the context of pro-environmental activities, R&D activities can be, for example, the development and implementation of an innovative system for the production of ecological cosmetics or a service providing energy-saving tools.
Another example, available mainly to individuals, is the thermo-modernisation allowance, which entitles taxpayers to deduct from their income any expenditure on construction materials, equipment or services related to the thermo-modernisation of a single-family residential building. The amount of the deductible relief cannot exceed 53,000 złotys within three years from the end of the year in which the expenditure began to be incurred. The deduction is therefore available to those who, when thermo-modernising their own home, invested in environmentally-friendly solutions such as a photovoltaic installation or a heat pump.
The sharp rises in energy prices have shown that more and more residential building owners have decided to make such investments. In addition to the thermo-modernisation allowance, they have been able to obtain funds from programmes subsidising photovoltaics and the replacement of their home heating source (replacing old polluting boilers for new ones), or by taking out preferential loans for this purpose. Ecology is only one of the factors influencing homeowners’ behaviour, and is probably not the main argument in their decision-making, but the positive impact of investments on the environment cannot be overlooked.
Tax consequences of environmental activities
In addition to the tax burden and incentive mechanisms, an important issue for taxpayers is the need to identify and predict the tax consequences of their environmental activities. For many years, businesses have been taking advantage of the opportunity to develop by investing in renewable energy sources (RES). From a tax point of view, they need to consider all aspects of such an investment – the deduction or reimbursement of VAT, the qualification of expenses for income tax relief including the identification of fixed assets, the determination of depreciation rates and the deduction of financing costs, and finally property tax.
As well as those activities that businesses are obliged to do by law, or aimed at making a profit, there are also those that are voluntary, carried out as part of corporate social responsibility (CSR) or environmental policy (under ESG). A business manager needs to analyse whether a given environmental expense can be included in tax deductible expenses or deducted from income. Firms should consider whether they will undertake such activities themselves or in partnership with an NGO. Also of key importance is the right to deduct VAT on the cost associated with the environmental activity, as well as the obligation to charge this tax on certain services.
The possibility of including expenses for environmental activities as tax deductible costs should not be questioned. Admittedly, it cannot be demonstrated that they are directly linked to a specific revenue stream, but in the current market reality, corporate social responsibility (including environmental responsibility) is an obligatory area of activity for companies – lack of activity here may be associated with negative consequences for the business in the long term. Such activity is therefore indirectly related to generating revenue, or at least securing a revenue source. It also cannot be qualified as ‘business representation’ (for which expenses are excluded from tax costs), despite the fact that it contributes to building a positive image for the business. An analogous qualification should apply to VAT, which means that a firm can deduct VAT on expenses for pro-environmental activities and, additionally, should not be obliged to charge it when performing certain activities. This, however, is not self-evident, as, for example, the provision of services free of charge is subject to VAT unless a link to the business activity can be demonstrated. In the case of environmental initiatives, such a link should not be questioned, although the tax authorities show a different approach in this respect!
In individual cases, when undertaking any type of pro-environmental activity, the determination of the tax consequences may not be straightforward and clear. An important demand would therefore be not only the introduction of clear and transparent tax provisions that could apply to pro-environmental activities, but also interpretations by the tax authorities and courts that would favour such activity.