International Comparison of Depreciation Rules and Tax Rates for Selected Energy Investments
U.S. Tax Depreciation Rules for Energy Investment Less Favorable than Many Other Countries
By The Quantitative Economics and Statistics Group, Ernst & Young LLP
A new study commissioned by the ACCF compares depreciation rates and effective tax rates for various energy investments for the United States and eleven foreign countries and finds that the U.S. generally has less favorable tax depreciation rules and higher tax rates for several key energy investments than many other countries, including a number of the U.S.’s major trading partners. The U.S. federal tax code not only hinders much needed energy investments but also makes it harder to slow the growth of greenhouse gas emissions. The study was released at a Capitol Hill briefing keynoted by Senator Chuck Hagel (R-NE) and Representative Jim Mattheson (D-UT) on May 2, 2007.
The American Council for Capital Formation requested from the Quantitative Economics and Statistics group of Ernst & Young LLP an analysis comparing the tax depreciation rules for various energy investments between the United States and selected foreign countries.
The analysis examined eleven asset types used in the energy sector across twelve countries. The analysis examined the tax depreciation in several ways: 1) the percentage of the original investment recovered during the first five years, 2) the percentage of the original investment recovered during the first ten years, 3) the net present value of the depreciation deductions over the life of the asset, and 4) the effective tax rate of the investment taking into account depreciation, tax credits and the countries’ marginal tax rate.
The results of the study are:
- The United States generally has less favorable tax depreciation rules for electric generation, electric transmission and distribution, and petroleum refining than many other countries, including a number of the U.S.’s major trading partners.
- The U.S. generally has slower cost recovery during the first five and ten years after the investment than the comparison countries. For example, investments in electric generation fueled by natural gas, nuclear and coal recovers less than 38% of the original investment during the first five years and 68% during the first ten years in the U.S., compared to 80% and 97%, respectively, in Canada.
- When the time value of money is taken into account, the U.S. depreciation rates remain less favorable than most of the competitor countries. Again, an investment in electric generation fueled by natural gas, nuclear and coal has a net present value of depreciation over the entire recovery period of less than 66% of the original investment in the U.S. compared to 84% in Canada.
- Because the United States has the second highest statutory corporate marginal tax rate among OECD countries combined with generally less favorable tax depreciation rules, the differences in effective tax rates are even greater. Based on a number of assumptions including economic depreciation, we estimate the corporate effective tax rate on investments in electric generation fueled by natural gas, nuclear and coal at 27-31% in the U.S., compared to 14% in Canada.
- These findings are consistent across all of the energy assets studied, including different types of electric generation, electricity transmission and distribution, pollution control equipment, and petroleum refining.
- Cross-country comparisons require a number of assumptions and limitations to summarize the complex tax treatment of multiple investments across multiple countries. The analysis makes note of the assumptions and limitations.