The Biden administration’s subsidies for companies investing in green technologies could be grabbed by foreign governments under global minimum tax rules, in a “massive” transfer of US tax dollars overseas, a group of multinationals is warning.
In summer 2021, 130 of the world’s leading economies signed up to a plan to force multinational companies to pay a global minimum corporate tax rate of at least 15 per cent following negotiations in Paris at the OECD.
But the Global Business Alliance, a Washington trade group representing the largest foreign multinationals investing in the US, says its members face “great uncertainty” over how billions of dollars of new US clean energy tax credits will be treated under the terms of the OECD deal.
The concern is that US tax credits might reduce a company’s US tax liability to less than the globally agreed 15 per cent, leaving multinational corporations investing in the US open to being taxed by foreign jurisdictions as part of a “top-up tax” mechanism to increase the tax liability to 15 per cent.
Although no single country has yet fully implemented the OECD arrangement, the UK, South Korea and Switzerland have already produced draft legislation, while the United Arab Emirates, Australia, Hong Kong, New Zealand and Singapore have launched consultations on the OECD’s rules.
“As Europe, Korea and other nations move forward, US companies have been given little guidance and could very soon find that the tax incentives to invest here become little more than a massive US tax transfer to foreign countries,” said Nancy McLernon, head of the Global Business Alliance.
A separate Washington-based business group said its member companies were also seeking clarity on the interaction of the OECD rules with the Inflation Reduction Act tax credits.
Anne Gordon, vice-president of international tax policy at the National Foreign Trade Council, a US business lobby group, said the group’s member companies were “not comfortable” about the issue, and that guidance from the OECD to date had not “explicitly” addressed US green credits.
“Our members are trying to get clarity over how this is going to be treated,” said Gordon. “Some of the ones who are investing large sums of money are very concerned if they make all these investments and do this stuff, and then the credits don’t count or reduce their tax rate, and they get stuck with paying the top-up tax to 15 per cent.”
The IRA, Biden’s flagship climate bill, offers close to $370bn in subsidies for clean energy industries aimed at spurring private sector investment and supercharging the country’s decarbonisation efforts.
But the law involves novel types of tax credit, giving developers of renewable energy projects the ability to get the value of the tax credits upfront by selling them to third-party investors. It is unclear how these so-called “transferable” tax credits are treated in tax calculations made to work out whether a company is paying its minimum 15 per cent tax.
Joshua Odintz from Holland & Knight, a tax practitioner who works on OECD issues, said there was an “open question” over how the tax credits would be viewed by the global minimum tax guidance, meaning some companies receiving them could be seen as paying less than 15 per cent. “Today, we just don’t know how all the IRA tax credits will be treated,” said Odintz.
Tax lawyers say the credits offered in the IRA are hybrids of the two most common types of tax credit — refundable and non-refundable. Companies claiming refundable tax credits are eligible to receive the credit as a cash payment even if they have no tax liability in the country, whereas non-refundable credits are available only as a discount to a tax liability.
The US Treasury said “several green credits” included in the IRA would be protected according to recently released OECD guidance on “non-controlled partnerships”, while “several” others would be protected by existing guidance.
A Treasury official said: “[The] Treasury continues to work through the OECD/G20 Inclusive Framework process to provide additional certainty on the treatment of other tax credits.”
Aharon Friedman, a former senior tax counsel to the House of Representatives ways and means committee, said that international disagreements over which tax credits were acceptable and which were not would create maddening complexity for multinationals — and potentially trade wars.
“It’s not just a relatively narrow technical question of, does this particular tax credit meet OECD guidelines? It’s more a matter of who has sovereignty to enact tax law,” he said.
“The OECD just issued guidance. Is this now international law? In the US, a law has to be passed by Congress and signed by the president or the Treasury has to follow administrative procedure. It can’t just surprise people by issuing guidance and saying this is law.”
