Demand for carbon credits — which are now exempt from goods and service tax (GST) — will increase among emissions-intensive enterprises, such as petrochemical companies, when Singapore hikes its carbon tax from 2024, says KPMG.
While Singapore set its initial carbon tax rate at $5 per tonne of CO2 equivalent (tCO2e) generated — a significantly lower rate than envisioned — when it was introduced in 2019, the tax will soon increase over three phases. It will rise to $25 in 2024 and to $45 in 2026, before increasing to between $50 and $80 per tC02e by 2030.
However, the Inland Revenue Authority of Singapore (IRAS) has moved to waive the tax from such activities. IRAS has said that from Nov 23 this year, the issuance, transfer and sale of carbon credits, including in digitised form, is to be treated as “neither a supply of goods nor a supply of services, i.e. an excluded transaction” for GST purposes.
“This clarifies the GST treatment of carbon trading, cuts costs for businesses and may help to foster Singapore’s carbon credit market,” KPMG writes in an addendum to its October white paper on understanding the tax costs of carbon trading in Singapore. The addendum attempts to explain how the latest GST treatment will affect carbon trading in Singapore.
IRAS also confirmed that such transactions conducted prior to that date would be subject to GST. The issuance of carbon credits prior to Nov 23 to a local person, except for those issued by the National Environment Authority (NEA), was taxable at 7% GST. Similarly, the sale of carbon credits after the issuance to a local person was subject to 7% GST.
“With this amendment, both the issuance and sale of carbon credits, including the digitised form,
are outside the scope of GST. This simplifies GST compliance and removes related costs as
issuers and sellers of carbon credits, including in tokenised form, do not need to charge to GST on these transactions to local buyers,” explains KPMG.
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The accounting organisation says that businesses should consider transactions prior to Nov 23, 2022 and assess implications such as whether these were subject to GST. “If they had not been complying with the former GST rule on carbon credit transactions due to any lack of understanding on this in the nascent market, they should now disclose this to the IRAS,” KPMG says.
“Moving forward, they should update their accounting system to ensure that no GST is charged from the effective date. Such transactions would thus not be reported in the GST returns,” it adds.
KPMG believes that Singapore’s waiver of GST on carbon trading is “a step in the right direction” to anchor the country’s position as a carbon services and trading hub. In addition, the GST waiver for transactions in the voluntary carbon credit market can bring great cost savings.
It notes that prior to the new amendment, GST on each transaction represented an additional 7% — which is a cost that would correspondingly have increased along with the GST hike beginning in 2023.
Given that these transactions are typically of high value, this amendment can translate to significant cost savings. This in turn will raise strong interest amongst carbon trading players. The decision should foster the growth of carbon credit trading in Singapore, taking it to greater heights, says KPMG.
“More trading activities may lead to positive spinoffs for other players in the carbon trading chain. This bodes well for the carbon market ecosystem in Singapore, which is still at a nascent stage as compared to those of other countries,” it adds.
KPMG believes that the GST move illustrates the importance that Singapore places on developing an international carbon marketplace and services ecosystem to support international decarbonisation efforts. “The waiver helps to support the growth of the carbon trading industry, while also supporting organisations on their decarbonisation journeys.”
In terms of further boosting carbon trading in Singapore through other tax-related areas, KPMG says it already sees multiple uses of carbon credits across industry sectors. “Some multinationals generate and sell carbon credits within their group, others centralise management of carbon emissions in one entity, while a third group uses centrally sourced carbon credits to create new types of green products to sell to customers,” it says.
KPMG notes that there is some uncertainty regarding how to determine an appropriate arm’s length price given the “unique economic attributes” of such activities. “To further enhance the attractiveness of Singapore as a carbon trading hub, the IRAS could consider issuing guidance on the transfer pricing considerations relevant to carbon credits.”
