Non-Kyoto units
Issue: A deduction should be expressly provided for acquisition of non-Kyoto units
Submission
(35 – PricewaterhouseCoopers)
A deduction should be expressly provided for the acquisition of non-Kyoto units.
Comment
Legislation enacted previously, and contained in the current bill, is restricted to the tax treatment of emissions units which are recognised under the Kyoto Treaty or the New Zealand Emissions Trading Scheme (ETS). Other emissions units exist which have essentially been created by non-government sources, which are not recognised under the Kyoto Treaty, and which are not eligible for surrender under the ETS.
Our view is that because these units are not used in transactions with government, their tax treatment should be determined under ordinary tax rules. The questions raised in the submission (such as whether these units should be capitalised or deducted, depending on the circumstances) are entirely appropriate to be dealt with on a case-by-case basis. It is not clear that deductibility is the right answer in all circumstances.
However, if transactions in non-Kyoto units become significant in the future, consideration could be given to amending the law generally. This is something which should go through a proper consultation process. In the interim, we think that acceptance of the submission below will provide sufficient clarity.
Recommendation
That the submission be declined.
Issue: Basic income tax concepts which apply to emissions units should be extended to non-Kyoto emissions units
Submission
(35 – PricewaterhouseCoopers)
ETS units will be treated for tax purposes as excepted financial arrangements and revenue account property which is not trading stock. These rules should be extended to non-Kyoto units.
Comment
In the interests of certainty, bringing all types of emissions units within the trading stock and excepted financial arrangements rules is desirable.
Recommendation
That the submission be accepted.
Issue: The GST rules which apply to Kyoto units should also apply to non-Kyoto units
Submission
(35 – PricewaterhouseCoopers)
The zero-rating treatment that applies to Kyoto units should also be extended to apply to non-Kyoto units to ensure that the New Zealand market is attractive to foreign participants.
Comment
This matter was considered when the GST provisions dealing with emissions units were introduced.
New Zealand has adopted a broad-based, low-rate approach to GST. This results in New Zealand’s GST being one of the most efficient value-added taxes anywhere in the world. Accordingly, the standard-rating model is deviated from only with very good reason.
Zero-rating was justified for Kyoto units for the following reasons:
- Transactions in Kyoto units will almost exclusively be business-to-business, so there is no revenue loss from zero-rating.
- Transactions involving the government, where no consideration is paid, are unusual from a GST perspective and the risks of error are high.
- Under current emissions projections, there will be a shortfall of units on the domestic market, which will require the import of units, some of which are likely to be acquired on international electronic markets.
- It is important for price stability that New Zealand businesses can both buy and sell emissions units on international markets, as the domestic market, in early years in particular, will be thin.
- The ability of New Zealand businesses to buy and sell emissions units simply and efficiently is key to the success of the ETS and New Zealand’s response to its Kyoto obligations.
While non-Kyoto units may be traded internationally, it is not clear that some of the other reasons set out above apply to them, and some reasons clearly do not.
Accordingly, we do not consider that zero-rating should be extended to non-Kyoto units at this stage.
Recommendation
That the submission be declined.