Taxing the Kyoto Profits JUDr. Tomas Balco, LL.M., ACCA Associate Professor School 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? 2

© 2011 Central Asian Tax Research Center Global Warming Threat Responses Taxing 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 4

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…