How Taxes Can Drive Sustainability

“You really have to look at these investments on an after-tax basis to get the full picture of return on investment.”
Kathy HoffelderApril 30, 2013

Although the corporate tax director doesn’t normally pow-wow each week with the head of sustainability, a new green-tax index just might encourage more talking between the two–and maybe with the CFO in on the conversation. 

The inaugural KPMG Green Tax Index measures how countries are using taxes to influence corporate sustainability behavior. The index, which ranks each country’s green-tax incentives and tax penalties, shows which areas of the world are the most tax-friendly for corporate sustainability initiatives.

The idea for the index sprang from discussions with clients, though the Green Tax Index measures countries’ initiatives and not individual corporations’ efforts. But as John Gimigliano, principal-in-charge of sustainability tax at KPMG’s Washington national tax practice notes, the index satisfies corporate inquisitiveness over which countries would be the best investment for their sustainability efforts. Clients, according to Gimigliano, often say “all of our growth is outside of the U.S. Can you tell me about France or Singapore?”

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And for those companies already investing in cleaner manufacturing facilities in a given part of the world, for example, the index is also a good guide for seeing if a corporation has taken advantage of all of the tax incentives that are available. “It helps companies who have already made sustainability investments in certain jurisdictions,” according to Gimigliano. “Did I miss anything when I made that investment? Can I go back and claim it [as a tax benefit] now?”

The index, he says, should help CFOs and finance staffs think about sustainability investments on an after-tax basis as opposed to a pre-tax basis, which is the more common way sustainability executives view it currently. “People who aren’t tax people think on a pre-tax basis in terms of evaluating return on investment,” he says. But “you really have to look at these investments on an after-tax basis to get the full picture of return on investment.”

Comprised of data concerning 21 countries, the KPMG Green Tax Index survey found that “all of them have green tax systems that warrant attention from corporate tax and sustainability teams,” according to the accounting firm. The survey unearthed over 200 individual tax incentives and penalties tied to corporate sustainability. At least 30 of the moves have been introduced since January 2011.

The United States topped the overall rankings, which sought to determine “which countries are most active in using green tax incentives and penalties to drive sustainable corporate behavior and achieve green policy objectives,” followed by Japan, the United Kingdom and France. Mexico and Russia took up the final two slots, 20 and 21, respectively. The findings weight tax penalties higher on the list than tax incentives. That’s because that while a company may choose whether or not to take advantage of a tax incentive, it cannot avoid the penalties, .

Though the United States is far lower on the tax-penalty scale of the index, it gets high marks in terms of incentives because of its federal tax incentive program for energy efficiency, including its production tax credit for renewable energy and its tax incentives for constructing energy-efficient buildings. 

Aside from energy-tax programs, KPMG analyzed the tax systems of the countries to gauge the number and range of incentives and penalties in water efficiency, carbon emissions and other green policy areas. 

Countries differ in terms of the relative stress they place on incentives and penalties. France’s green-tax policy is thus weighted heavily toward penalties. The relative weakness of its incentives caused it to rank lower than the United States, where a carrot might work better than a stick. Including more tax penalties, Gimigliano says, would be a hard to achieve in the United States, where “politically that has been proven hard to do.”

The United Kingdom, which took third place overall, leads in the policy areas of carbon-reduction and climate-change tax initiatives.

KPMG will review each country’s data in the index periodically to keep its ranking current, but an overall index update will occur every 24 months.

Other versions of KPMG’s Green Tax Index could be on tap, however. Some corporations have already asked Gimigliano to benchmark their own company against others in a form of corporate version of the index. “I’d love to be able to develop that functionality and a Green Tax Index 2.0,” he says.