Green diesel tax cut is in the crosshairs – pre-budget advice warns

Authorities have considered revoking carbon tax deductions on diesel used on farms, government documents have revealed, warning that the case for its continuation “was not strong”.

The issue was among several highlighted in a series of pre-budget briefing papers released yesterday outlining proposed changes to taxation in Ireland.

Among them, the government has been asked to “consider signaling a change in policy” on tax cuts for agricultural diesel later this year, but to postpone action until a later date.

This goes against calls for agricultural contractors to also be included in the Section 664A exemptions for agricultural fuel.

The authorities estimate that the current concessions for farmers represent around €12 million a year in savings for the industry based on the current carbon tax rate.

The Section 664A exemption included in the 2012 Finance Act provided for the “double deduction” procedure rather than an exemption for agricultural diesel.

Section 664A insulates farmers (and only farmers as defined in the legislation) from any carbon tax increase beyond the tax rate that applied in 2012 – €41.30 per 1000 litres.

In addition to the normal deduction farmers get for input costs (including fuel), they also get a second deduction for any carbon tax increase above €41.30 per 1000 liters . Effectively, they pay the tax but can claim any amount over 4 cents per liter as a deduction at their marginal rate.

It emerged as the introduction of an exemption for farmers from a carbon tax increase would have required the introduction of an administratively difficult reimbursement system.

At the time, the finance minister said farmers would get a double income tax deduction for the increased costs resulting from the carbon tax change.

Essentially, the measure protects farmers from the impact of agricultural diesel carbon tax increases that occur after 2012.

Farm and Forestry Contractors in Ireland (FCI), representing around 1,000 Irish contractors, had asked for it to be extended to also include contractors.

Contractors are not included because, although they carry out work directly related to agriculture, they do not meet the definition of “agriculture” in the Fiscal Consolidation Act 1997, as they do not do not also occupy the land on which they work.

The document explained that extending the provision to also include agricultural contractors could cost an additional €24 million per year.

However, he adds that a ‘key question’ was whether farmers should continue to benefit from the double deduction, warning that extending the criteria for beneficiaries ‘could be seen as undermining’ other policies, which could include recent emissions targets.

“Essentially, all other sectors are required to share the costs of carbon tax increases,” he says.

“While the arguments put forward on the absence of viable alternatives to the internal combustion engine are valid and fully verified, other sectors such as commercial transport or construction are in a similar situation and are not able to benefit of the concession. For reasons of fairness, the case for retaining Section 664A for farmers is not strong.

“In a more benign set of circumstances for agricultural businesses, a clear recommendation to remove Section 664A, perhaps on a phased basis over a number of years, might be appropriate.

“The fact that the normal trade deduction, in respect of input costs, would remain in place, as well as the VAT refund scheme for business diesel expenditure, should also be borne in mind.”

The Department of Finance’s climate action and taxation paper said that while the fall and winter of 2022-2023 “would not seem like the appropriate time” to reverse the deductions, due to the war in Ukraine and of its impact on fuel prices and food security, he advised the government to “consider signaling a change in policy within the current year, but defer action to a later date”.

The document also said that changes to the farm fuel tax would be implemented “in a phased manner… over a number of years.”

The document was drafted by the government’s Tax Strategy Group. The group has existed since the early 1990s and is chaired by the Ministry of Finance and has senior civil servants and policy advisers from several ministries among its members.

Papers on various tax policy change options are prepared annually for the Group by officials of the Department of Finance. However, the Tax Strategy Group is not a decision-making body. Documents are released ahead of the budget to facilitate informed discussion.

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