Transition at risk of slowing down due to high taxation of the energy sector

The transition to fossil-free energy requires major investments in facilities producing and distributing electricity. At the same time, electricity consumption is expected to increase, which also entails a great need for investments. In a new SNS report, tax scholar Peter Nilsson argues that the energy sector is taxed more heavily compared to the business sector as a whole, something that risks impeding the willingness to invest. Furthermore, the possibility to exempt investments in infrastructure from Swedish rules on limits for interest deductions is not exploited, even though this is possible according to the EU directive. Such an exemption, according to Peter Nilsson, would have a great impact on the energy sector.

Taxation of profits in the energy sector. English summary 44.0 KB PDF

The energy sector is facing significant changes, and in this report, Peter Nilsson shows that the energy sector is taxed more heavily compared to the business sector as a whole. The income and property tax levied in the energy sector amounts to approximately 18 percent of earnings before tax, whereas the corresponding figure for the business sector as a whole is 14 percent.

It is important that the energy industry is able to carry out tax-related depreciations faster than accounting-related depreciations. This enables the creation of an interest-free tax credit, which these companies can then use to finance investments. This has a significant impact on investments in hydropower with a long lifespan in particular. Peter Nilsson estimates that these tax credits roughly equal a year’s worth of investments for the industry. Not least with regards to staying competitive, it is important that Swedish energy companies are able to continue using this form of financing.

As this concerns capital-intensive activities – where revenues may be limited during an investment phase at the same time as interest costs are high – the ways in which interest costs are addressed in the tax legislation play a major role. The point of departure in this legislation is that a company is allowed to make deductions for all interest costs. Since 2019, however, there are rules in place regarding limits on interest deductions in relation to negative net interest expenses. Just a small increase in the interest rate means that the industry is unable to make deductions for the entire negative net interest expenses. However, deductions which cannot be used for a particular year can be pushed forward for up to six years, but according to Peter Nilsson, this is not enough time for large, long-term energy investments.

»There is room in the EU directive in terms of excluding infrastructure investments from the rules on interest deduction limits. However, Sweden has not introduced this exemption, which is unfortunate«, says Peter Nilsson, Adjunct Professor of Tax Law at the Department of Law, Lund University, and Director at KPMG.

This report is part of the SNS research project Taxes in a Globalised World.