Business

Monday September 7, 2009

Taxes that help protect the environment

Part 1 in a 2-part series


REMEMBER Anya Hindmarch’s “I’m NOT a plastic bag” that created queues at Suria KLCC and which sold for astronomical prices on eBay? Hong Kong recently implemented its anti-plastic bag programme by requiring 50 cents tax per plastic bag. This tax led to a dramatic 85% drop in the issue of plastic bags by shops and supermarkets in the first two days!

Green taxes are in fashion globally. No, I am not referring to Islamic taxes like zakat and fitrah but rather, eco-taxes. Just as green-striped ties are in vogue, tax designers worldwide are creating green taxes.

In a groundbreaking initiative in April 2009, Britain presented the world’s first carbon budgets alongside its traditional fiscal budget when Alistair Darling, Chancellor of Exchequer, stipulated legally-binding carbon emission targets.

Barack Obama has also set out to green the United States. Through Uncle Sam, he offered tax credits to consumers who acquire hybrid cars from 2009 and homeowners who install energy-efficient items like air conditioners, windows, roofs and water heaters.

In Taiwan, a cabinet-level reform committee proposed an energy tax and an environment tax to be implemented in 2011. And so the list continues as governments must be careful to be seen to be environment friendly.

Regulations alone fall short of the measures needed to protect the environment; green taxes are essential. The beauty of eco-taxes is that they incorporate costs of environmental damage into the prices of goods and services which cause this effect.

Green taxes, if sufficiently significant, can modify behavior or at least contribute to the cost of reinstatement, for example, the damage caused by the recent floods in Taiwan.

The principle is – let the polluters pay. Green taxes spur technological innovation and the embracing thereof by the marketplace. Further, eco-tax can also be used as a means of reducing income tax by shifting part of traditional taxation to greener pastures.

Some examples of green taxes include Hong Kong’s plastic bag tax which was also implemented in Ireland years ago. (Interestingly, in certain parts of India, the use of plastic bags attracts a jail term of up to seven years or a fine of up to 100,000 rupees i.e. RM7,000.)

Japan has removed duties on biofuel and decreased taxes on cars with low emissions such that these cars are now a status symbol and more popular while China offers tax incentives for companies which reduce water consumption.

China, however, taxes disposals of waste, including water, whether by companies or households and also levies tax on energy consumption.

Sweden has increased recycling by taxing waste disposal. Norway taxes certain products which contain fluorine and this has encouraged sales of refrigerators which use environmental-unfriendly products.

Britain doubled its air passenger duty in 2007 and increased revenue but did not significantly dampen inelastic air travel.

Another method of decreasing carbon emissions is through carbon trading. The EU Emission Trading Scheme is the largest tradable permits programme in the world.

Initially, governments set caps on carbon dioxide (CO2) emissions and issue permits to that extent with annual reductions until the target level is reached.

Companies acquire these permits, perhaps through an auction process, to enable them to legally emit a quantity of CO2. Companies are permitted to buy and sell permits.

With all taxes, avenues are provided for tax planning. Eco-taxes provide for tax avoidance and indeed encourage this in the same way that tax incentives work in the realm of income tax.

The green tax man does not seek to merely increase tax revenue but more importantly, to enhance the noble aim of preserving the environment.

Every time there is a shift to environment-friendly assets, goods or services resulting in less tax revenue, the green tax man rejoices!

Regrettably, where taxes are high, unintended evasion is promoted, for example, tobacco smuggling where duties are high, and illegal landfills and illegal sales of fuel in relation to high eco-taxes. The green tax man would then see red and take action.

McDonald’s recently migrated its European headquarters from Britain to Switzerland, a more income tax friendly country. In the absence of a coordinated global tax initiative, companies in countries with high eco-taxes may choose to migrate to jurisdictions with lower or no such taxes or which grant environment tax holidays. There is thus a need for a worldwide protocol, amidst challenges, because poor countries may suffer more.

On an individual level, green taxes are said to be regressive because the poor are more affected than the rich. These are real concerns which need to be addressed, for example, through redistribution of green tax revenue, or else political leaders may suffer the same fate as Margaret Thatcher.

Part II of this article will focus on Malaysian green taxes, especially in view of Budget 2010. What will Malaysia do to reduce its carbon footprint?

Ronnie Lim is country tax leader of Deloitte Malaysia.

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