Building green – a tax perspective

Climate change or global warming is “heating up” today’s political, business and social discourse. Little surprise then that in Malaysia, there has been an increased awareness of the need to adopt environmentally-friendly and sustainable practices to mitigate its effects.

The Government recognises that one of the most effective ways to encourage Malaysians to embrace the green agenda is to get the private sector to lead the way. Hence, the following tax incentives were introduced in the hopes of encouraging green technology, which would eventually address both rising energy costs and climate change effects:

Giving pioneer status or investment tax allowance to companies investing in generation of energy from renewable sources and energy conservation/energy efficient activities;

Indirect tax exemptions for equipment used to generate energy from renewable sources, energy conservation equipment, energy efficiency equipment such as high-efficiency motors and insulation materials, and energy-efficiency consumer goods;

Stamp duty exemption for purchase of property with Green Building Index (GBI) certification; and

Income tax exemption on additional capital expenditure incurred to obtain GBI certification.

However, the current green incentives are not attractive enough for the public and private sectors as compared with those given in our neighbouring countries. Let’s break this down by the four target sectors of Green Technology under the National Green Technology Policy:

Buildings: The current GBI tax incentives do not recognise and reward stakeholders in a holistic manner as the incentives are only applicable to persons who construct as well as own green buildings. There are no tax incentives given to property developers who develop green buildings but do not own them.

Energy: The period in which the incentives offered for generation of energy from renewable sources and energy conservation/energy efficient activities will end on Dec 31. The implementation of the energy-efficient incentive remains unclear, i.e. whether the incentive is given to energy-efficient systems or specific components and equipment. This has resulted in delays in the implementation of energy-conservation projects by companies.

Transport: The cost of hybrid motor vehicles is still relatively high, thus, making them an unattractive option for the rakyat.

Water and waste management: The incentives are only limited to waste- recycling activities and storage treatment, and disposal of toxic and hazardous wastes. There are currently no holistic tax incentives to cover the entire chain of waste management.

Buildings account for nearly half of all green house gas emissions, the main contributor to global warming, so it is important that new buildings are constructed and existing buildings retrofitted to meet the GBI criteria. It is hoped that the Government will consider broadening the scope of building sector incentives to include property developers, the main drivers and stakeholders of this sector.

However, we have seen in recent years, more property developers embrace the green movement through the construction of green buildings. This demonstrates their commitment towards creating a sustainable environment for future generations. In adopting this more sustainable approach to their business, property developers are not only satisfying their own corporate responsibilities but will also attract the increasing number of environmentally-conscious consumers – and likely reap the long-term economic benefits of going green.

Having said that, it is still a challenge for most property developers to go green. First, there is the risk of uptake of developments being slow as environmentally-friendly projects are currently supply-driven. Demand has not caught up with supply because the market for green is still in its infancy and due to a low appreciation by consumers of the additional costs incurred in such developments. The cost outlay to construct green buildings is 15% to 20% higher, depending on how green the building is compared with conventional buildings. Based on cost-benefit analysis, property developers may find it difficult to commercially justify why they should construct more green buildings. This risk, coupled with the marginally higher construction costs, can potentially erode their shareholders’ returns!

By broadening the scope of tax incentives to the property sector, more property developers will be encouraged to take on green projects. Rewarding the property developers will also stimulate other segments of the building value chain. Some areas where incentives could be given are:

Double deduction of green materials such as wall and roof insulation materials acquired for the construction of green buildings;

Double deduction of expenses, not being the additional capital expenditure such as GBI registration costs, GBI facilitator costs, designs and architecture fees incurred to obtain a GBI certificate;

Double deduction on marketing costs for activities such as trade fairs to promote green developments.

It would be a timely and welcome move if more green tax incentives are announced this coming Budget 2011. However, it is also important that claims for tax incentives should not be administratively cumbersome.

These moves are crucial towards ensuring more property developers heed the call to help provide a sustainable environment and contribute towards fulfilling our Prime Minister’s pledge at the United Nations Climate Change Conference 2009 in Copenhagen to reduce carbon dioxide emissions by 40% by the year 2020.

The author, Margaret Lee, is senior executive director of PricewaterhouseCoopers Taxation Services Sdn Bhd.

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