1887

OECD Taxation Working Papers

Working papers from the Centre for Tax Policy and Administration of the OECD that cover the full range of the Centre’s work on taxation with the main focus on tax policy related issues.

English, French

Unintended technology-bias in corporate income taxation

The case of electricity generation in the low-carbon transition

This paper shows that corporate tax provisions can lead to different effective tax rates (ETRs) if there is a capital cost-intensive and a variable cost-intensive way of producing the same output. It develops a framework for analysing sources of the difference in ETRs and adapts existing models to compare forward-looking ETRs for low-carbon and high-carbon electricity generation technologies, considering tax provisions for cost recovery in 36 countries. It finds that standard tax systems are technology neutral when investments are debt-financed because the deductibility of interest payments compensates for the fact that capital allowances are based on nominal (rather than real) capital costs. Under equity finance, ETRs are higher for investments in capital-cost-intensive technologies as the cost of equity finance is often not deductible. Since low-carbon electricity generation tends to be relatively capital-intensive, this result represents a form of unintentional misalignment of the corporate tax system with decarbonisation objectives,.

English

Keywords: corporate taxation, low-carbon transition, cost structure, technology choice, electricity generation
JEL: G11: Financial Economics / General Financial Markets / Portfolio Choice; Investment Decisions; Q48: Agricultural and Natural Resource Economics; Environmental and Ecological Economics / Energy / Energy: Government Policy; H25: Public Economics / Taxation, Subsidies, and Revenue / Business Taxes and Subsidies including sales and value-added (VAT); O14: Economic Development, Innovation, Technological Change, and Growth / Economic Development / Industrialization; Manufacturing and Service Industries; Choice of Technology
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