ESG Newsletter | Tax incentives for the carbon credit chain

At the end of March, the Municipality of Rio de Janeiro announced the Rio +30 Cidades conference, in an event at which it also announced a proposal under discussion for granting tax incentives to companies participating in the carbon credit market, at various stages of the chain. For more information, please find further details below.

During the event announcing the Rio +30 Cidades conference, the Rio de Janeiro Municipality also presented details an ongoing proposal to grant tax incentives to companies in the carbon credit chain. Based on this, on April 04, 2022, the Executive Branch of the Municipality presented to the Rio de Janeiro Municipality Bill  No. 1153/2022, currently under analysis.

The Bill proposes  amendments to the Tax Code of the Municipality of Rio de Janeiro, resulting in a reduction from 5% to 2% in the rate applied to the Tax on Services (“ISS”) charged to companies operating in the Municipality and that render development and audit services for carbon credit projects, services of registration and certification of carbon credits and the provision of platforms for the transaction of carbon credits. In short, this refers to preparatory activities, since the transaction involving carbon credits itself is not taxed through the ISS, given that it is not a service activity.

Furthermore, the Bill establishes the ISS Neutral Program, aiming to encourage the acquisition of carbon credits by the respective taxpayers. The program will consolidate credits to be assigned in the Electronic Invoice for Services system for the amortization of the tax due.

 If the Bill is approved, the proposed incentives will be calculated by the Municipal Department of Economic Development, Innovation and Simplification and informed to the Municipal Department of Finance and Planning to be granted, considering proportionally the variables of individual annual purchase of carbon credits by the respective taxpayers in the applicable year (“CICC”, in the Portuguese acronym) and overall amount of purchases of carbon credits made in the respective year by the set of ISS taxpayers in the Municipality of Rio de Janeiro (“MGCCC”, in the Portuguese acronym).

The Bill establishes that the overall annual amount of the incentive applied to the group of benefitting taxpayers must not exceed BRL 60,000,000.00 (sixty million Brazilian reais).

It is also noteworthy that for the recognition of the purchase of carbon credits by taxpayers for consideration in the variables indicated above and allocation of incentives, the Municipal Department of Economic Development, Innovation and Simplification will assess the regularity of the records of the respective credits and purchase, in accordance with the applicable legislation. Carbon credit purchases will only be recognized, for the purpose of the proposed law under discussion, when the service providers of registration, certification and trading platforms of carbon credits are all regularly established in the Municipality of Rio de Janeiro.

The proposal under discussion, if approved, will be effective until December 31, 2030. According to the Bill’s Explanatory Notes, the temporary nature of the tax incentives is indicated to verify the achievement of performance targets of the proposed tax burden reduction and the ISS Neutral Program, including from a socioeconomic perspective. For this, the program must be evaluated annually on its efficiency and effectiveness.

 Demarest’s ESG and Tax teams are available to clarify any doubts and provide further information on the Rio +30 Conference and on tax incentives applicable to the carbon credits’ market, or on other demands related to such matters.