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June 30, 2023
Energy Tax Credits and the Global Minimum Tax
The Internal Revenue Code (IRC) (often referred to simply
transferability is allowed for 12 tax credits to businesses
as the tax code) contains a number of credits to encourage
that may face a global minimum tax.
certain investments. These include energy credits, some of
which were enacted in P.L. 117-169 (commonly referred to
Table 1. Selected Energy Tax Credits That May Be
as the Inflation Reduction Act of 2022, IRA) and intended
Refundable or Transferable for Large Multinational
to encourage investment in certain renewable energy
Corporations
technologies. (Other major business credits include the
research and experimentation, or R&E, credit and the low-
Refundable Transferable
income housing credit.) Concurrently, countries around the
Alternative Fuel Vehicle
world are planning to implement a 15% global minimum
Refueling Property Credit
X
tax on large multinationals (GLoBE). Tax credits, like the
(IRC Section 30C)
energy credits, lower the effective tax rates on taxpayers
that claim them. Under a GLoBE regime, the reduced
Renewable Energy
effective tax rates that result from these energy credits may
Production Tax Credit (IRC
X
trigger an additional tax that offsets or eliminates their
Section 45)
benefits. Whether an additional tax would apply depends on
Carbon Oxide
the nature of the business making the investment, the
Sequestration Credit (IRC
X
X
magnitude and design of the credits, and whether
Section 45Q)
investments are active or passive.
Zero-Emission Nuclear
Energy Tax Credits
Power Production Tax
X
The tax code includes multiple energy tax provisions—
Credit (IRC Section 45U)
several of which were extended and expanded by the IRA.
A brief summary of the changes and a comparison to prior
Clean Hydrogen Production
law can be found in CRS Report R47202, Tax Provisions in
Tax Credit (IRC Section
X
X
the Inflation Reduction Act of 2022 (H.R. 5376) (for further
45V)
information, congressional clients may contact Donald J.
Qualified Commercial
Marples). In addition to these changes, the IRA also
X
Vehicles (IRC Section 45W)
allowed certain energy credits to be refundable or
transferable.
Advanced Manufacturing
Production Tax Credit (IRC
X
X
Within the context of businesses likely to be subject to the
Section 45X)
GLoBE regime and other businesses, only selected IRA
Clean Electricity Production
energy tax provisions are eligible for refundability.
Tax Credit (IRC Section
X
Refundability generally allows organizations to treat the
45Y)
amount of the tax credit as a tax payment—with
overpayments of tax being refundable. (A broader set of
Clean Fuel Production Tax
IRA energy tax provisions are refundable to specific types
X
Credit (IRC Section 45Z)
of tax-exempt entities.) If refundability is elected, the tax
credits can be claimed for the first five years starting with
Energy Investment Tax
X
the year a facility is placed in service, as opposed to a
Credit (IRC Section 48)
potentially longer period if refundability is not elected. As
Qualifying Advanced Energy
shown in Table 1, refundability is allowed for three tax
Investment Tax Credit (IRC
X
credits available to large multinational businesses that may
Section 48C)
face a global minimum tax.
Clean Electricity Investment
Businesses likely to be subject to the GLoBE regime (along
Tax Credit (IRC Section
X
with other businesses) are allowed a one-time transfer of a
48E)
broader set of tax credits. Any payments received in
Source: CRS analysis of the Internal Revenue Code.
exchange for the transfer of credits would be excluded from
the selling business’s income, and any amounts paid to
The Global Minimum Tax and Tax
obtain a transferred credit could not be deducted from the
Credits
recipient business’s income. As shown in Table 1,
The Organisation for Economic Co-operation and
Development (OECD) has advanced a number of proposals
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Energy Tax Credits and the Global Minimum Tax
to address international profit shifting. One of these
Finally, under the equity method of accounting, income and
proposals, referred to as Pillar 2 or GLoBE, would impose a
any associated tax credited will be excluded from the
minimum tax of 15% in each country for large
effective tax rate calculation. The equity method of
multinational corporations with global or total revenues
accounting applies in cases where a firm has a
over €750 million (about $820 million as of June 15, 2023).
noncontrolling interest in a subsidiary or venture. Thus,
Pillar 2 is discussed in more detail in CRS Report R47174,
firms that have passive investments in projects that benefit
The Pillar 2 Global Minimum Tax: Implications for U.S.
from tax credits will not have reductions in effective tax
Tax Policy, by Jane G. Gravelle and Mark P. Keightley.
rates from these credits. Many credits, including low-
income housing credits and some energy credits, would
GLoBE is based on financial income and allows a
therefore not have their incentives reduced through Pillar 2
deduction for 5% of payroll and 5% of tangible assets. The
taxes.
carve outs are larger in the short term, beginning at 10% of
payroll and 8% of tangible assets. The purpose of these
The treatment of transferable credits in financial accounting
deductions is to focus the minimum tax on intangible
is unclear, although a 2023 analysis by PwC suggests that
income with the goal of addressing profit shifting by firms
under generally acceptable accounting principles (GAAP),
locating intangible assets in low-tax countries.
these credits are to be accounted for as a reduction in taxes,
and therefore treated as ordinary credits. Thus, energy
GLoBE allows three types of top-up taxes to achieve the
credits that are part of the core business (along with the
15% minimum tax, which apply in a specific order:
R&E tax credit) may be offset by the Pillar 2 tax.
• Qualified Domestic Minimum Top-Up Tax
Policy Options
(QDMTT): the source country can apply a QDMTT to
The broadest option is to make all general business credits
achieve the 15% rate.
refundable, which would preserve the value of energy and
other credits by treating them as an increase in income. The
• Income Inclusion Rule (IIR): If a country does not
PwC study estimates the cost of this approach at $193
enact a QDMTT, the country where the parent company
billion over FY2023-FY2032, an average of $19 billion per
is located can apply the IIR to the parent to impose the
year. This amount would be reduced to $172 billion if
tax on its subsidiaries at a 15% rate.
preexisting unused credits were disallowed. Historically,
the tax code has not made any business credits refundable
• Undertaxed Payments Rule (UTPR): If neither of
(although certain personal credits are).
these taxes are enacted, countries where related
companies are located can apply the tax under the UTPR
A second, more limited option would be to make more of
to those companies to collect the tax. Countries that
the transferable energy credits refundable. These credits
enact a UTPR can collect a share of the top-up tax based
account for less than 20% of the total of R&E, low-income
on the share of tangible assets and employees located in
housing, and business energy credits, so the cost would be
the country.
much smaller. Transferable credits have similar effects to
refundability, so this provision might cost little revenue,
Numerous countries are in the process of adopting Pillar 2;
while allowing more generous treatment of credits under
these include members of the European Union, the UK,
Pillar 2.
Canada, Japan, and South Korea (the United States has not
adopted Pillar 2), and elements of the tax may be imposed
A third option would be to negotiate with the OECD to
by 2024. Even if the United States takes no action to adopt
allow transferable credits to be treated the same as
Pillar 2, U.S. multinational firms may be subject to a top-up
refundable credits, since the economic effects are similar.
tax under the IIR and the UTPR. The UTPR means that any
other countries where U.S. firms have related companies
A fourth option would be to allow taxpayers to defer part or
may impose a tax on those related companies’ domestic
all of the credit until a future time when taxes are higher
operations. Subsidiaries of foreign firms operating in the
and the credit would not trigger a Pillar 2 tax.
United States may be subject to the IIR or the UTPR. U.S.
firms’ domestic operations may be subject to the UTPR.
Additionally, if these options are not feasible, the United
States could consider enacting a general QMDTT so that
Tax credits are treated in three different ways under the
the United States, rather than other countries, would collect
Pillar 2 model rules. Ordinary credits reduce the effective
the tax. This top-up tax could apply only to companies
tax rate and can trigger additional Pillar 2 taxes. Refundable
subject to GLoBE.
tax credits are treated as increases in income rather than
reductions in taxes. This difference is significant. For
Jane G. Gravelle, Senior Specialist in Economic Policy
example, if a firm has a 15% tax rate before credits and
Donald J. Marples, Specialist in Public Finance
credits reduce the rate to 10%, an additional tax of 5% will
apply. That additional tax will eliminate the credit’s benefit.
IF12439
If the credit is refundable, the effective tax rate is reduced
to 14.3% (15/105), and an additional 0.7% tax will apply.
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Energy Tax Credits and the Global Minimum Tax
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