OVER the last year, we have seen increased initiatives by the government to reduce carbon emissions by 45% (from the 2005 levels) by 2030, as committed under the 2016 Paris Agreement. Let us examine the key tax considerations and what we may (or may not) expect in the upcoming Budget 2020.
Carbon pricing generally takes the form of a carbon tax or a permit-based emission trading system (ETS). Although not common in Asia, carbon tax has been implemented in some countries, and with much success, e.g. Sweden. Last year, Singapore introduced a carbon tax at S$5 per tonne of greenhouse gas (GHG) emissions on facilities producing more than 25,000 tonnes of GHG annually, up to 2023 (see table).
Energy, Science, Technology, Environment and Climate Change (MESTEC) Minister Yeo Bee Yin recently confirmed that there are no immediate plans to introduce carbon pricing in Malaysia. Instead, the focus will be on “low-hanging fruits” such as energy efficiency (EE), energy reform and renewable energy (RE) as part of our climate strategy.
Given the resource limitation, it makes sense to take this approach first and consider carbon pricing later, after a detailed impact study has been undertaken, including whether to implement a carbon tax or introduce a “cap and trade” scheme.
Renewable energy (RE)
Malaysia targets that by 2025,20% of its energy production will be from RE sources (excluding large hydro), even though the current RE mix stands at less than 3%.
Against this backdrop, a number of initiatives have been introduced, including Net Energy Metering (NEM) and Large Scale Solar (LSS).Under the NEM initiative, only 58.6MW of the 500MW allocation has been approved, so there is opportunity still, particularly for businesses, to consider installing solar panels and reducing their electricity bills, while helping achieve the RE target.
A further 500MW will be awarded under the LSS3 tender.
Tax incentives are available to encourage investment in RE projects, such as the Green Investment Tax Allowance (GITA), a 100% allowance on qualifying capital expenditure (QCE) incurred on green technology (greentech) assets or projects, which can be offset against 70% of statutory income. These currently cover up to 40 activities and assets.
However, these incentives only apply to QCE incurred up to the year of assessment 2020 and generally do not include sales tax or Customs duty exemptions. We hope to see an extension (and enhancement) of these measures to encourage further participation. In practice, it may be possible for RE players to obtain indirect tax exemptions by applying for Approved Service Project (ASP) status under the Income Tax Act; however, this provides for at least 60% allowance on QCE (as opposed to 100% under GITA).
Taxpayers would need to consider the potential trade-off between the indirect tax savings and the income tax benefit lost. Perhaps the authorities may consider ways to allow investors to enjoy both tax benefits.
Energy efficiency (EE)
The business case for energy efficiency is clear – energy savings translate to cost savings and GHG emission reductions. Tax incentives relating to EE services are available in the form of GITA for EE projects/purchase of assets, as well as the Green Income Tax Exemption (GITE), a 100% tax exemption on statutory income for various greentech services e.g. green buildings/ cities, green data centres and electric vehicles.
The GITE incentive will expire in 2020, and it is hoped this incentive will be extended (if not enhanced or expanded).
The government may also consider measures to increase EE efforts by the private sector, including special deductions on EE-related investments and R&D activities.
Another action which would be welcomed is the extension of the Green Technology Financing Scheme (GTFS) 2.0 post-2020, which would include Energy Services Companies (ESCOs) financing EE-related investments or assets and energy performance contracts.
There are many tax measures available relating to environmental sustainability, including incentives for activities relating to waste management and energy conservation.
Various non-tax initiatives under the purview of MESTECC and agencies like Seda are also underway or in the works to improve public and business awareness of the green agenda as well as promote opportunities available.
At the same time, MESTECC is also working on developing legislation and a regulatory framework for climate change and sustainability.If we were to put together the pieces, these areas have great potential as new economic growth areas, while achieving the country’s climate and sustainability objectives. Clear policy direction, commitment to a cohesive action plan and effective communication are key success factors. Hopefully we will see more initiatives on this front in the upcoming budget.
Sharon Yong is a Tax Partner in Ernst & Young Tax Consultants Sdn Bhd. The views reflected above are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms.