The Role of Tax Strategy in Supporting Renewable Energy for Sustainable Development in Iraq: An Applied Study

Abstract

Iraq continues to suffer a persistent shortfall in its generation system, while its economy relies heavily on hydrocarbons for revenues. The renewable energy regulators have set up a target for 2030, which views the development of renewable as one pillar of economic diversification, encompassing large scale solar plants with expected capacity of 12 GW or 33% of the total electricity generation. However, this target falls outside the scope of GHG reduction target set for Iraq, wherein renewables excluding hydropower are limited to less than 8.5% of total cumulative anthropogenic CO2eq and non-GHGs, per IEA standards. These figures are slightly higher at around 8%, due to disputes on conversion from unit output (e.g. TWh to kWh). In this paper, we are going to evaluate the taxation system in Iraq, with special attention paid to Articles 15 (tax holidays) and 17 (customs exemptions) of the Iraqi Law of Investment No. 13 of 2006 (amended in 2010 and 2015). These articles are considered mediators since they have an indirect impact on the investments into renewable energy sources and sustainable development. The analysis is conducted with the use of theories of public finance and investment decisions and relies upon official statistical data and such methodology instruments as the Analysis of Implementation of Announcements (AIR), Compound Annual Growth Rate (CAGR), Tax Incentive Effectiveness Index (TIEI), and NPV/IRR simulation for a 100 MW solar energy plant in Iraq compared with Jordan, Egypt, and Morocco. A tax holiday alone elevates the simulated project's IRR from 7.7% to 9.3%, barely above the 10% threshold cost of capital for viability; with CBI funding, it jumps to a viable 13.0%. Iraq has a very poor AIR, which stands at 2.2% (operational) and 8.9% (under construction), indicating that the deployment rate should increase by 41-55 times over past levels. The TIEI score of 6.05/10 shows sound fiscal policy, but weaknesses in both systemic and administrative dimensions compared to regional competitors, which combine relatively minor tax incentives with supportive legislations and auctions.

Keywords: Tax strategy; tax incentives, renewable energy investment, sustainable development, Investment Law No. 13 of 2006, Index of the Effectiveness of Tax Incentives (IET), NPV/IRR simulation, Iraq.