Organisation for Economic Co-operation and Development Centre for Tax Policy and Administration Mary Bennett Head of Tax Treaty, Transfer Pricing & Financial Transactions Division OECD Centre for Tax Policy and Administration OECD Project on the Tax Aspects of Cap and Trade Stockholm June 15, 2009 Hugh J. Ault Senior Advisor CTPA, OECD

Organisation for Economic Co-operation and Development Centre for Tax Policy and Administration OECD Cap and Trade Project  The Centre for Tax Policy has recently opened a project on the tax aspects of Cap and Trade systems.  The work is coordinated with ongoing work on climate change in other parts of the Organization and draws on their experience and expertise.  It is hoped to be able to make a brief submission to the December 2009 Copenhagen Climate Change Conference (COP15).  Initial work has already been done with respect to VAT issues and this work will be expanded to cover direct taxes and treat aspects

Organisation for Economic Co-operation and Development Centre for Tax Policy and Administration Basic Approach of the Project It would identify what forms of emissions permit trading schemes exist and their common themes; It would review the agreed objectives for tax treatment of emissions permit trading schemes; It would focus on and identify the various tax aspects of emission permit trading regimes, with a view to optimizing their effective design; It would identify the experience and dilemmas found in current environmental taxes and tradable permit regimes It would cover direct and indirect taxes as well as indirect consequences with respect to tradable permits and derivative financial products based on tradable permits, and the related administrative and compliance burdens; It would work from actual cases to identify the difficulties encountered in connection with existing tradable permit regimes; and It would explore the impact of various accounting treatments on design and tax results (in particular in a cross-border context).

Organisation for Economic Co-operation and Development Centre for Tax Policy and Administration Domestic Law Issues  The project would examine issues arising under domestic law, based on Country investigations A tradable permit may be characterised as an intangible, as a financial asset or be subject to some other special classification under the relevant domestic law. A tradable permit may be further classified as either a capital asset or an ordinary asset – and accordingly subject to the applicable domestic tax rules provided for these two different classes of assets. Domestic tax law may additionally provide for differential tax treatment depending on whether a tradable permit is used in connection with an activity that generates emissions or is rather simply held or traded for investment purposes. Domestic law may similarly provide special tax rules for financial instruments such as derivatives the value of which is derived from an underlying tradable permit.

Organisation for Economic Co-operation and Development Centre for Tax Policy and Administration Domestic Law Issues  Additional important issues under domestic law affecting the analysis of tradable permits What is a realization event with respect to the use/disposition of the permit? What is the tax treatment of actual abatement measures? How are the permits viewed for purposes of CFC legislation? How is the source of the income from dealings in the permits determined?

Organisation for Economic Co-operation and Development Centre for Tax Policy and Administration Treaty Law Aspects  Tax treatment of tradable permits under Treaty Law Tradable permit is not a defined treaty term and thus initial classification is a function of domestic law (Art. 3(2)) Possible treatments could include Art. 7 (Business profits); Article 13 (Capital Gains); Article 21 (Other Income); Art. 6 (Immoveable Property) Dealing with classification conflicts Transfer pricing issues under Art. 9 When does trading in permits constitute a PE?

Organisation for Economic Co-operation and Development Centre for Tax Policy and Administration Conclusion  The aim of the project to is develop more information on the current tax treatment of tradable permits and the impact of that treatment on the function of the cap and trade systems. Possible outcomes might be some kind of “best practices” analysis and possible clarifications in the Model Treaty and Transfer Pricing Guidelines