Tax incentives for solar energy

ATILLA DILMEN
Published 08.02.2019 00:03

Regarding domestic energy output, for a decade, clean energy has experienced remarkable growth due to financial and tax incentive schemes. Since the beginning of 2010, the renewable energy industry has taken a growing share of electricity production and according to official statistics, its share reached over 30 percent at the end of 2017. It was 19.5 percent in 2009. Among the renewable energy sources such as hydro, geothermal and wind, solar power is the fastest-growing branch of clean energy. "Solar installed power will leave behind wind energy in 2025, hydropower in 2030 and coal before 2040," says Evren Evcit of Zorlu Energy. Electricity production based on solar power has tripled since 2016, catching early the target of 2018 stated in the 2015-2019 strategic plan of the Energy and Natural Resources Ministry. But, despite this huge development and incentives, the solar sector is still in need of technical, political and financial support.

Solar energy provides relief from dependency on conventional energy sources, most of which are imported. As the current deficit is mostly rooted in fossil fuel sources, to shoulder this burden and increase the share of the solar power the Energy and Natural Resources Ministry presented a series of regulations, and the government adopted supportive policies to stimulate investment. These reforms create a competitive energy market and encourage national and foreign entities to participate.

The newborn industry

This relatively new industry is backed by several financial incentives, such as feed-in tariffs, a government purchase guarantee for 10 years and financial aids from governmental bodies. In a similar way, investors can benefit from tax incentives, such as exemptions, exceptions and tax credits issued through personal income tax, corporate income tax and value-added tax laws.

For instance, regarding incentives on the personal income tax code, those who installed a solar system on their properties' roof or façade to generate electricity are granted exemption selling surplus electricity to the final source supplier, even if they are taxed on other incomes. This exemption is provided for both residents and nonresidents.

As for the conditions, the capacity of unlicensed generation should not exceed 10 kW and the properties – only for residences, not workplaces or factories – should be owned or rented. Besides, this tax policy, effective after March 2018, is acceptable only for one facility and withholding tax levied on the payments related to the said business is 0 percent. The most appealing aspect is that investors are free of bookkeeping and paperwork.

However, there is no such exemption in corporate tax. Instead, companies can benefit from reduced corporate tax under the "Investment Incentive System," adopted in 2012. Corporate holding investment incentive certificates (IIC) will be eligible for a tax credit depending on their complete, expansive and modernization expenditures. The purpose of this document is to allow partial deductions of qualified expenses from income, reducing the taxable income. The policy contains six incentive schemes and different cooperate income tax (CIT) rates.

Investment certificates provide both value-added tax (VAT) and custom incentives. According to VAT law, taxpayers owning the certificate do not pay VAT when buying machinery and equipment, including imported items, without the limits of cost range. With law 7161, effective after Jan. 2, 2019, this document is not necessary anymore. According to this new amendment, those who invest money in renewables, including solar power, are exempt from paying VAT. This is applicable to imported material. As an extension, those who supply machinery and equipment to these taxpayers might be able to claim a VAT refund under certain circumstances.

Also, employees working for firms doing business in clean energy sectors can benefit income tax withholding allowance on their wages for 10 years.

Is it a unique policy?

To attract foreign and domestic investment, each country has its own schemes supported by tax incentives. In the United States, for instance, despite President Donald Trump's slap on solar panels, owners of residential and commercial solar energy systems benefit from 20-30 percent tax deductions provided by a solar tax credit scheme, also known as the investment tax credit. The bill, "Tax Cuts and Jobs Act," reduces the corporate tax rate to a flat 21 percent and provides taxpayers deductions for investment costs up front.

Despite the various incentives, the sector still has room for development. For example, a low-interest credit line is the most direct way to boost the supply, as in many other sectors. Particularly, for the last year with interest rates hike, firms have been struggling to fund their projects. Long-term and low-interest rate credits are necessary to lessen the financial burden.

For investors, less financial burden means being able to cope with unforeseeable variations in a project's cash flow in the future. Lowering the credit rates creates an attractive investment climate for future contributors. More contribution results in more competitive markets, cutting down the costs in long term. So lower interest rates are no doubt the key.

The other point is that higher feed-in tariffs or payments in other currencies can be a guard for financial risks. As a company would be able to adjust and follow their revenue and expenses in the same currency, this gives flexibility against currency fluctuations. All of these provide opportunities for investors to determine the investment risk appetite.

The other expectation of the sector is the expansion of the net metering policy. Net metering means consuming the electricity produced in the same place. In this way, the customer or investor only pays for their net consumption, imposing a reduced financial burden on consumers. Net metering reduces the cost of transportation of electricity and potential loss while transferring. This policy is already in place in many countries. Although Turkey already has both the legislation base for net-metering and practice, this method should be spread to a wider base, and legal arrangements must ensure that all investors can benefit from this policy equally.

Another important issue to address will be the increase of physical capacity for grid connections in many regions. The grids are used for transferring the electricity produced to suppliers. It is the case now happening in many regions that many investors' applications are denied because of insufficient capacity. To reach the target set by government agencies and to attract more investors, the capacity, technology and efficiency of grid connections and installations should be improved. Turkey has great potential for sunlight, with its average hours totaling almost double that of some European countries. When factoring in size and geographic location and its flat landscapes, southeast Anatolia and the Mediterranean region are the best-suited locations, with an average of 2,993 hours of sunshine annually. In Europe, it is around 1,800 hours.

Creating a single, simple and transparent approval process is another fundamental step to attract investments. At this point, the announcement of timelines and notifications in each step of the process must assure that each investor's application is examined in detail and given the same assessment. In addition, as complex licensing and permitting procedure may discourage investors, simplified procedures, easy access to information and shortened timetables create a favorable investment climate for firms and individuals.

Trump's attempt

Whether to levy import taxes on solar panels has been a matter of debate for a long time to protect local production. To see the consequences of this policy, the case of Trump's move against the import of panels is remarkable and can be compared to Turkey, though the two do not have similar diversity in sources.

Trump's move of imposing tax on panels, specifically imported from China, did not hamper as it is thought before to pull the plug on thousands of jobs, because the cheap fossil-fuels source is a strong alternative for the U.S. High mobility of funding and alternative job opportunities in conventional energy sources have prevented any adverse effects on its economy.

Turkey has its own dynamics, of course. Imposing or increasing the import tax may not end with the desired outcomes as costs soar. But domestically oriented companies producing panels can benefit if proper actions are taken. Even though import tax means an increase in cost, this policy stimulates local production in the country and enhances the job market.

At first, this might not be sufficient to offset the cost of import taxes but with additional tax incentives and low-interest rate, in the long-term, it is possible to compensate for that cost. Even with sustainable production, Turkey has the potential to export panel equipment, as it has already started to do so to the Middle East and some African countries.

It will reportedly work

One way tax incentives for companies can be 100 percent depreciation of assets – used and new – in the first years is to ensure much-needed capital from the start. This accelerates the return on investments more and helps firms reduce high initial capital cost. Another use for incentives is that the expenditures of the investment can be treated as a R&D expenditure. In this way, investors can benefit from extra deductions by reducing taxable income. These tax incentives can provide significant leverage to solar energy development in Turkey.

With promises to reach the goal of 5 GW of solar capacity by the early 2020s, Turkey has the potential to access this target by using appropriate financial and tax schemes. For instance, "Turkey may be near the top of the list of countries consuming and producing renewable energy," said professor Carmine Difiglio, the former deputy director for energy security. I believe that solar power investments will increase massively if the above precautions are sufficiently taken into consideration, and tailored policies are adopted and implemented properly. For Turkey, it is highly possible that within decades all the electricity in houses and workplaces will be generated from clean energy.

* Tax auditor at the Turkish Tax Inspection Board

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