OECD Taxation Working Papers N. 37 – UNINTENDED TECHNOLOGY-BIAS IN CORPORATE INCOME TAXATION: THE CASE OF ELECTRICITY GENERATION IN THE LOW-CARBON TRANSITION
OECD Taxation Working Papers N. 37 – UNINTENDED TECHNOLOGY-BIAS IN CORPORATE INCOME TAXATION: THE CASE OF ELECTRICITY GENERATION IN THE LOW-CARBON TRANSITION. This paper shows that corporate income tax (CIT) provisions can lead to different effective tax rates for different technologies producing the same output but having different cost structures, under otherwise identical CIT provisions. The paper develops a framework for analysing the sources of the differences in effective tax rates and adapts existing models to calculate and compare forward-looking average effective tax rates for carbon-neutral and carbon-intensive electricity generation technologies. Considering CIT provisions for cost recovery in 36 OECD and partner economies, it finds that most tax systems calibrate the treatment of capital costs in a way that produces technology-neutral results when investments are debt-financed. This is because most tax systems offset the fact that deductions for capital costs are based on nominal (rather than real) capital costs by allowing deductibility for the full nominal (rather than real) cost of debt. In contrast, when an investment is equity-financed, the capital cost deduction may effectively be seen to be inadequate in the typical circumstance where the cost of equity is not deductible. As a consequence, immediate deductibility of variable costs but not of capital costs implies that average effective tax rates are relatively high for capital-cost-intensive electricity generation when investment is financed via equity. Since low carbon electricity generation tends to be relatively capital-intensive, this result can be seen as a form of unintentional misalignment of the CIT system with decarbonisation objectives. Whether or not there is an overall bias against carbon-neutral technologies in the CIT system, abstracting from technology-specific tax incentives, depends on several other parameters, such as countryspecific fiscal depreciation schedules and the sources of finance. (…) This paper has benefited from support, comments and suggestions provided by Nils Axel Braathen, David Bradbury and Giorgia Maffini at the OECD and by Delegates of the Joint Meetings of Tax and Environment Experts and of Working Party No. 2 on Tax Policy Analysis and Tax Statistics. The authors would like to thank the following experts for their very insightful feedback on earlier versions of the paper: Matt Benge (New Zealand Inland Revenue), Edith Brashares (U.S. Department of the Treasury), Graeme Davis (Department of the Treasury, Australia), Marc Séguin (Department of Finance, Canada), Øystein Bieltvedt Skeie (Ministry of Finance, Norway), Christian Thomann (Ministriy of Finance, Sweden) and Christian Valenduc (Ministry of Finance, Belgium). The paper is part of a broader set of OECD projects on tax policy, the environment and technology choice in a low-carbon transition. (Luisa Dressler, Tibor Hanappi and Kurt van Dender).