Taxing the Kyoto ProfitsJUDr. Tomas Balco, LL.M., ACCA

Associate ProfessorSchool of Law, KIMEP

Central Asian Tax Research Center

© 2011 Central Asian Tax Research Center

Content

• Responses to Global Warming Threat– Trading vs. Taxation

• Tax Policy Questions – Allowances– Taxing the Kyoto Profits

• Kazakhstan?

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© 2011 Central Asian Tax Research Center

Global Warming Threat ResponsesTaxing vs. Trading

Carbon Taxation• Pros

– Generates Revenues– Direct, transparent, simple– Motivates to reduce CO2

producing fuels

• Con’s– Does not motivate to reduce

emissions– Is a regressive tax in nature– Con’s can be eliminated by

other taxes – energy or emission taxes

Trading of Allowances

• Pros– If structured well motivates

reduction of emissions– If allowances not given for

free – may raise revenue

• Con’s– Free allowances – no

revenue generated– Complexity allows profit

few sophisticated players

Tax Policy Questions - Allowances

• Main Issues– Recognition– Realization– Free of Charge Allowances– Treatment of Penalties

• Other issues– Tax Planning Considerations– Traders profits

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RECOGNITION OF ALLOWANCES

• Issue: Recognition of the cost of acquiring permits.

• 3 options:– 1. Commodity (deductable expense)

• Suitable for users of allowances– 2. Intangible asset

• Amortizable or not? – 3. Financial asset

• May be appropriate when purchased for trading

REALISATION

• Issue: Recognition of income • Two options: inventory or realization taxation.

– Option 1: inventory or the market value principle - any difference in the value of allowances at the end of that year would be reflected in taxable income.

– Option 2: realization principle - any difference in the purchase price of allowances and the selling price would be reflected in taxable income.

TAX TREATMENT OF ALLOWANCES ALLOCATED FOR FREE?

• Issue: Tax Treatment of free allocation of allowances for free

• Two options for tax treatment presently in use:1. No recognition of the allowance as taxable income.

Purchase cost zero, hence no deduction in taxable income when surrendered or sold (but added to taxable income if sold).

2. Recognize the allowance as taxable income with market price at granting period being used as purchase costs, deducted from taxable income when surrendered or sold.

TAX TREATMENT OF PENALTIES

• Issue: Penalty in case of non-compliance with the obligation to surrender allowances to cover emissions– E.g. EU ETS system, penalty is 100 € per tonne CO2

emitted and in addition, the obligation to surrender the missing number of allowances still remains.

• Two options for tax treatment of penalties:1. Not deductable against taxable income

2. Deductable against taxable incom

TAX PLANNING CONSIDERATIONS

• Issue: Interaction of different tax systems creates an arbitrage situation

• Areas:1) Transfer of profit carrying permissions into low tax

jurisdictions – taxing profit in the low tax jurisdiction

Response: Transfer-pricing, anti-avoidance rules

2) Transfer of loss-making permissions into high tax jurisdiction – utilizing the loss in high tax country

Response: Transfer-pricing, anti-avoidance rules

TRADER’S PROFITS

• Issue: Traders may stand as independent party located in low tax/off-shore jurisdictions – booking the trading profits off-shore– Transfer pricing rules may be de-actived due to nature

of this non-related party transaction

• Response: generally ?, – KZ transfer pricing rules may still apply– Establishing extra-territorial capital gain tax rules –

tracing the origin of the allowance ( too aggressive?)

Kazakhstan?

• Was the last signatory who did not ratify– Ratified – February 2009– Non-Annex I country

• Can host CDM projects– Tax treatment of such project?

• Impact or implications of Kyoto?– Sale of allowances ?

• Other considerations– Carbon Taxation – solution to air problem?– Emission Taxation – (10 MAI/t – approx. $ 110)

Thank you…

tombalco@yahoo.com

tomas@kimep.kz