Global Tax Rules to Unleash Billions in Clean Energy Investment

Recent global minimum tax guidance from the OECD will help usher in billions of dollars of financing for clean energy projects in the US.

The guidance makes it less likely companies will be hit by other countries’ minimum taxes when they purchase the clean energy credits to lower their US tax rate.

A key piece of the Biden administration’s push to transition the US to clean energy hinges on pumping investment into the market by letting energy developers sell unused tax credits—known as transferability. Corporations looking to lower their taxes can buy the credits at a discount from clean energy developers.

Many multinationals—expected to make up much of the buyers’ market for the credits—had been worried about falling below the 15% minimum tax rate when they buy the credits.

The global minimum tax, known as Pillar Two, captures companies with more than 750 million euros ($831 million) in annual revenue, and subjects them to a top-up tax if they’re paying below a 15% tax rate. It will begin applying across the EU and beyond starting in 2024, though the rule that would hit US companies’ low-taxed income won’t be in effect until 2026 for US groups.

Guidance released July 17, which reflects consensus from more than 130 countries involved in the global tax talks, provided assurance to both buyers and sellers of the credits that they won’t lose most of the credits’ value to other countries’ minimum taxes. Now, more companies will slowly start to integrate green credits in project and tax planning, companies and tax professionals said.

The guidance should strengthen investment in renewable energy, said Rebecca Kysar, a professor at Fordham Law School and former counselor to the assistant secretary for tax policy at the Treasury Department. Companies interested in buying credits “in most cases, no longer fear those credits are going to be clawed back” by Pillar Two, she said.

If the guidance wasn’t favorable, it would have fundamentally set back the market and investment in cleaner energy, because there wouldn’t have been enough financing to meet the growing demand of projects, according to tax officials from the finance industry.

The oil and gas industry will make up many of the buyers and sellers of the credits and is projected to invest billions of dollars in clean energy projects, according to the American Petroleum Institute.

“It is a game-changer” for the market, said Joshua Odintz, a partner at Holland & Knight LLP.

Tax Credit Treatment

Pillar Two gives more favorable treatment to refundable credits, treating them like additional income. However, non-refundable credits are treated as a reduction in tax, which under the Pillar Two calculations decreases a company’s tax rate more sharply, making it more likely to fall below 15%.

Under the recent OECD guidance, sellers will see the credit treated as additional income—a good answer for those companies, because it only lowers their effective tax rate slightly, making it less likely they fall in-scope of Pillar Two.

Large corporations will enter the market now that they have certainty on Pillar Two’s treatment of the credits, said Alfred Johnson, the CEO of Crux, a company that helps facilitate tax credit transfers. Johnson previously worked at the Department of Treasury at the beginning of the Biden administration.

Corporations will buy the credits from clean energy developers at a discount—for example, paying $90 for a $100 tax credit. For the buyer, the difference will be treated as a reduction of tax expenses. That treatment will have a larger impact on a company’s tax rate than if it were calculated as income—but only a small portion of the credit’s value will be factored. Both of these treatments lower the effective tax rate for companies.

Large corporations in industries such as tech, oil, and pharma will likely only buy clean energy tax credits if they have a high enough effective tax rate to avoid falling below a 15% effective tax rate when they buy the credit.

Market Moves

Companies want to move forward with deals, although the comment period is still open on the proposed rules for implementing the buying and selling of tax credits. The favorable guidance from the OECD adds an extra layer of comfort for these companies.

“It’s one less thing that folks have to cross off their list,” of open questions, said Chris Roetheli, senior vice president of tax credit syndications at U.S. Bancorp. While the list of questions is still long, “there’s one less that has to be dealt with here based on what was put out last week,” he added.

The OECD guidance changes the “underlying economics of a project for the better,” said Aindriu Colgan, the American Petroleum Institute’s director of tax and trade policy.

Many companies will look to buy tax credits as they receive more pressure from stakeholders to obtain electricity from green sources and meet sustainability goals, Odintz said.

The influx of new buyers in the already forming market will help sellers identify more potential financing options and drive up the price of credits. The tax credits sell for approximately 78 to 90 cents per dollar and more than 90 cents for larger projects, according to BloombergNEF.

“Having the stability and certainty on the buy side is enormously important to being able to drive pricing on the credits that is favorable to originators, that drives down the cost to build this stuff, which was the goal of the IRA,” Johnson said of the Inflation Reduction Act.

—With assistance from Isabel Gottlieb.