Neutral ISS: Rio de Janeiro launches effort aimed at the voluntary carbon market

The Municipality of Rio de Janeiro is a frontrunner in the enactment of laws focused on the voluntary carbon market

By Adriana Costa

In June, the Municipality of Rio de Janeiro put an important measure in place aimed at the carbon market. Law No 7,907/2023 launched the Neutral ISS Program, which provides tax breaks for businesses based in the city that operate in the market.

“The Neutral ISS Program is hereby created, with the aim of encouraging the purchase of carbon credits by Rio de Janeiro taxpayers subject to the Municipal Services Tax (ISS), in the form of credits to be awarded in the Electronic Service Invoice system - Nota Carioca, for the amortization of the tax due, pursuant to future regulation.”

According to the City Hall, the purpose is to transform Rio into a green investment hub, in addition to meeting the goals set forth in the 2021-2024 Strategic Plan for the city.

The act provides for a reduction, from 5% to 2%, of the Municipal Services Tax (ISS) rates levied on services of development and auditing, registration and platforms for the trading of carbon credits.

The incentive is meant to be temporary, and will be in effect until the end of 2030 or until the goal of reducing pollutant emissions is reached, whichever comes first.

A tax benefit of up to BRL 60 million will be granted each year to foster the industry. This is a considerable amount, as it corresponds to 1.2% of the approximately USD 1 billion recorded in transactions carried out in the voluntary global carbon market, according to data from 2021.

What is the Voluntary Carbon Market

The voluntary carbon market (VCM) is based on the spontaneous trading of credits by means of mutual agreements or organized markets. Their negotiation is related to key corporate interests, such as institutional reputation or stakeholder demands. For instance, any company can purchase credits voluntarily, thereby reinforcing its sustainability policies.

The carbon market in Brazil

A little over a year ago, Decree No 11,075/2022 regulated the carbon market in the country. The document defined "carbon credit" as: ”a financial, environmental and transferable asset representing the reduction or removal of one ton of carbon dioxide equivalent, which has been recognized and issued as a credit in the voluntary or regulated market”.

The Brazilian carbon market has endless possibilities, and this potential is acknowledged internationally. The creation of consistent policies and new efforts at the national and local levels, such as this act that has recently been enacted in Rio de Janeiro, are crucial to boost this market.

On January 1, 2023, the new rules issued by the Central Bank came into full force to guide how financial institutions must register carbon credits and other sustainability assets, filling one of the many gaps in the regulation of this market.

Read more: Brazil pushes forward on efforts related to the carbon market

Keep in mind that taxpayers should follow the upcoming developments concerning the newly created law, as the program still requires further regulation.

At the national level, it is worth keeping an eye out for the future publication of regulatory standards related to Decree No. 11,075/2022 that grant more legal certainty to the performance of decarbonization activities.

There is no denying that there is still much to be done by the Government to address the topic in a thorough manner and clear up the lingering issues, particularly with regard to taxation.

The next stage in tax and accounting

Domingues e Pinho Contadores keeps up with the new regulations and their developments to support its clients in facing the challenges in a world of constant change. If you want to count on our tax and accounting support, please contact us at: dpc@dpc.com.br.