In February 2023, the Organization for Economic Co-operation and Development (the “OECD”) published technical guidance with respect to the implementation of Pillar 2. According to the US Treasury, “Pillar Two provides for a global minimum tax on the earnings of large multinational businesses, leveling the playing field for U.S. businesses and ending the race to the bottom in corporate income tax rates.” (Source: US Treasury Website).
The OECD Pillar 2 technical guidelines treat non-refundable income tax credits as a reduction in taxes for purposes of calculating a Company’s effective tax rate. If a Company has an effective tax rate less than 15%, that Company may be subject to a top-up tax pursuant to the undertaxed payments rule (the “UTPR”). The USA Minimum Tax enacted as part of the Inflation Reduction Act adds back in most income tax credits into the calculation of a Company’s effective tax rate, whereas Pillar 2 rules do not under the UTPR.
Why does this matter? By implementing Pillar 2, OECD member countries may end up taxing Companies that have participated in supporting America’s energy transition to renewable and low-carbon energy by applying top-up taxes. If such top-up taxes are applied, it would hinder a shift in corporate America to purchase tax credits under Sec. 6418, curtailing a necessary supply of tax-capital needed by the renewables industry.
The US Treasury writes that the February OECD guidelines provide “protections for important tax incentives, including green tax credit incentives established in the Inflation Reduction Act” (Source: ibid). While this is true as it relates to tax credits secured through tax equity structures, referred to in the Pillar 2 guidelines as Qualified Flow-Through Tax Benefits, there remains uncertainty as to whether credits purchased under Sec. 6418 would receive the same favorable protections.
As Treasury works with the OECD, we strongly recommend they focus the discussion on protecting the economic value of transferable tax credits in the US tax code. Otherwise, there will be insufficient tax-capital to sustain the growth of the renewables industry in America over the next decade.
For more information on this topic, here is a link to a well written article on Taxnotes.