Your Taxes: Saving the planet
Israel has just passed tax incentives for renewable energy and the OECD has pronounced on finance for energy saving investment.
This follows the Paris Agreement of December 2015, in which 195 countries adopted an action plan to avoid dangerous climate change by limiting global warming to below 2°C.
New Israeli Renewable Energy Law:
On December 22, 2016, the Knesset passed the Law for the Encouragement of Investment in Renewable Energy (Tax Incentives for Generating Renewable Energy), 2016 (Book of Laws 2589). The law is effective retroactively from January 1, 2016.
It aims to encourage the supply of renewable energy by wind turbines and photovoltaic installations for two groups of people: (1) individuals and residents’ associations, (2) landowners.
Individuals and residents’ associations that sell renewable electricity may choose between an exemption on income from the sale of electricity of up to NIS 24,000 per year or 10% tax on income of up to NIS 99,006 (in 2016), being the maximum income for exempt dealers under the VAT Law. In addition, national insurance contributions will not be due. (It is not yet clear to us whether/how a residents’ association will allocate income to its members.)
Individuals, if any, who rent out the land on which the renewable energy installation is located may choose between: (1) an exemption for such rental income of up to NIS 5,000 per year plus 31% tax on the excess, or (2) 10% tax on such rental income.
In each scenario, expenses and depreciation are only deductible on a pro rata basis to the extent revenues exceed NIS 99,006 (in 2016). Losses can only be offset against income from the same installation – presumably in future years although this is not spelt out.
If the energy installation is sold, the reduction in income is added to the sale consideration when calculating capital gains tax or land appreciation tax. (It is unclear to us presently what happens if the 10% tax rate is elected).
Other conditions also apply including the following: the electricity must be sold to an authorized supplier (such as the Israel electricity Company, presumably); this is not a business activity; no depreciation has been claimed other than that permitted under this law; all installations of an individual are taken into account and those of relatives (spouse, offspring, spouse’s offspring, spouse of the aforementioned, if they (unclear who) are aged under 21) unless good faith is proven.
Notification must be filed with the electricity supplier in the case of a renewable energy seller, or with the Israeli Tax Authority in the case of a landlord. Switching between alternative breaks must also be notified and take effect the year after that notification. Full business books need not be kept if full applicable tax is withheld and, in the case of renewable energy sellers, revenues do not exceed NIS 99,006 (in 2016).
The maximum duration of these tax breaks is 25 years. Let’s hope the planet is saved by then….
In 2016, the OECD moved to support the Paris Agreement by establishing a Center on Green Finance and Investment.
The OECD says it first spearheaded the “Polluter Pays Principle” in 1972,
Saving the planet requires finance. Governments have limited resources and look to private sector support. Green investment banks that mobilize public and private investment are beginning to emerge. These include KFW, an existing German institution, the UK’s Green Investment Bank, the Australian Clean Energy Finance Corporation and the Connecticut Green Bank.
According to the OECD, The debt securities markets in China, the EU, Japan and the US represent almost 70% of the global annual investment needs projected for the next five years.
Investment needs over the two decades are considered for renewable energy, the energy efficiency portion of building investments, and low-emission vehicles. These three sectors accounted for 75% of outstanding “green bonds” as of June 2015.
Financial institutions should continue to be the largest provider of loans to all these sectors for the earlier stages of infrastructure development through to project operation, at which point other sources of debt capital can be called on to re-finance the debt. These other sources include bond markets, sovereign funds, pension funds, insurance companies and mutual funds.
By 2035, bonds for low-carbon energy investment are projected to reach USD 4.7-5.6 trillion in outstanding securities globally and USD 620-720 billion in annual issuance in the above markets.
Another approach, is to link energy efficiency loan repayment to property tax payments through tax liens e.g. Property-Assessed Clean Energy (PACE) in the US. This approach allows energy savings to offset loan repayments making repayment easier for borrowers and creating increased security for lenders. For example, according to the OECD the Connecticut Green Bank’s C-PACE program financed in less than two years nearly $54 million in upgrades for 89 buildings, accounting for about one-third of the commercial PACE market in the US.
The new Israeli renewable energy law contains limited tax breaks targeted mainly at individuals. Clarification is awaited on various points. The OECD pronouncements address the bigger picture. This week’s fire at a Haifa refinery suggests Israel should do the same.
As always, consult experienced tax advisors in each country at an early stage in specific cases.
The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.