Energy Tax Credits and the Global Minimum Tax

Energy Tax Credits and the Global Minimum Tax

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Updated July 21, 2023
Energy Tax Credits and the Global Minimum Tax
The Internal Revenue Code (IRC) (often referred to simply
Businesses likely to be subject to the GLoBE regime (along
as the tax code) contains a number of credits to encourage
with other businesses) are allowed a one-time transfer of a
certain investments. These include energy credits, some of
broader set of tax credits. Any payments received in
which were enacted in P.L. 117-169 (commonly referred to
exchange for the transfer of credits would be excluded from
as the Inflation Reduction Act of 2022, IRA) and intended
the selling business’s income, and any amounts paid to
to encourage investment in certain renewable energy
obtain a transferred credit could not be deducted from the
technologies. (Other major business credits include the
recipient business’s income. As shown in Table 1,
research and experimentation, or R&E, credit and the low-
transferability is allowed for 12 tax credits to businesses
income housing credit.) Concurrently, countries around the
that may face a global minimum tax.
world are planning to implement a 15% global minimum
tax on large multinationals (GLoBE). Tax credits, like the
Table 1. Selected Energy Tax Credits That May Be
energy credits, lower the effective tax rates on taxpayers
Refundable or Transferable for Large Multinational
that claim them.
Corporations
There were concerns that, under a GLoBE regime, the

Refundable Transferable
reduced effective tax rates that result from these energy
Alternative Fuel Vehicle
credits may trigger an additional tax that offsets or
Refueling Property Credit

X
eliminates their benefits. Whether an additional tax would
(IRC Section 30C)
apply depends on the nature of the business making the
investment, the magnitude and design of the credits, and
Renewable Energy
whether investments are active or passive. Certain credits
Production Tax Credit (IRC

X
from passive investments do not affect the tax rate, and the
Section 45)
Organisation for Economic Co-operation and Development
Carbon Oxide
(OECD) recently released guidance that provides for
Sequestration Credit (IRC
X
X
favorable treatment of transferable credits as well as
Section 45Q)
refundable credits.
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.
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Energy Tax Credits and the Global Minimum Tax

Refundable Transferable
may impose a tax on those related companies’ domestic
operations. Subsidiaries of foreign firms operating in the
Clean Electricity Investment
United States may be subject to the IIR or the UTPR. U.S.
Tax Credit (IRC Section

X
firms’ domestic operations may be subject to the UTPR.
48E)
Most countries had planned to implement the UTPR in
2025; however, recent OECD guidance provides a
Source: CRS analysis of the Internal Revenue Code.
transition rule so that the UTPR will not apply to any
The Global Minimum Tax and Tax
country with a corporate tax rate of at least 20% until 2026.
Credits
Tax credits are treated in three different ways under the
The OECD has advanced a number of proposals to address
Pillar 2 model rules. Ordinary credits reduce the effective
international profit shifting. One of these proposals,
tax rate and can trigger additional Pillar 2 taxes. Refundable
referred to as Pillar 2 or GLoBE, would impose a minimum
tax credits are treated as increases in income rather than
tax of 15% in each country for large multinational
reductions in taxes. This difference is significant. For
corporations with global or total revenues over €750 million
example, if a firm has a 15% tax rate before credits and
(about $820 million as of June 15, 2023). Pillar 2 is
credits reduce the rate to 10%, an additional tax of 5% will
discussed in more detail in CRS Report R47174, The Pillar
apply. That additional tax will eliminate the credit’s benefit.
2 Global Minimum Tax: Implications for U.S. Tax Policy,
If the credit is refundable, the effective tax rate is reduced
by Jane G. Gravelle and Mark P. Keightley.
to 14.3% (15/105), and an additional 0.7% tax will apply.
Finally, under the equity method of accounting, income and
GLoBE is based on financial income and allows a
any associated tax credited will be excluded from the
deduction for 5% of payroll and 5% of tangible assets. The
effective tax rate calculation. The equity method of
carve outs are larger in the short term, beginning at 10% of
accounting applies in cases where a firm has a
payroll and 8% of tangible assets. The purpose of these
noncontrolling interest in a subsidiary or venture. Thus,
deductions is to focus the minimum tax on intangible
firms that have passive investments in projects that benefit
income with the goal of addressing profit shifting by firms
from tax credits will not have reductions in effective tax
locating intangible assets in low-tax countries.
rates from these credits. Many credits, including low-
income housing credits and some energy credits, would
GLoBE allows three types of top-up taxes to achieve the
therefore not have their incentives reduced through Pillar 2
15% minimum tax, which apply in a specific order:
taxes.
• Qualified Domestic Minimum Top-Up Tax
Recently, the OECD clarified the treatment of transferable
(QDMTT): the source country can apply a QDMTT to
credits. These credits will be treated as refundable credits if
achieve the 15% rate.
sold, and thus will increase the income of the seller rather
•
than reduce tax liability. The purchaser will treat the
Income Inclusion Rule (IIR): If a country does not
difference in the sales price and the value of the credit as a
enact a QDMTT, the country where the parent company
reduction in tax expense. The treatment as a refundable
is located can apply the IIR to the parent to impose the
credit will also apply to credits that are not sold; that is,
tax on its subsidiaries at a 15% rate.
they will increase income.
• Undertaxed Payments Rule (UTPR): If neither of
Policy Options
these taxes are enacted, countries where related
While the recent OECD guidance has addressed concerns
companies are located can apply the tax under the UTPR
that the global minimum tax could substantially undermine
to those companies to collect the tax. Countries that
the value of energy credits, a remaining issue is whether the
enact a UTPR can collect a share of the top-up tax based
United States should adopt Pillar 2. Even with the favorable
on the share of tangible assets and employees located in
treatment of energy credits, firms might still have an
the country. (The UTPR is sometimes referred to as the
effective tax rate lower than 15%. The United States could
undertaxed profit rule.)
consider enacting a general QMDTT so that the United
States, rather than other countries, would collect the tax.
Numerous countries are in the process of adopting Pillar 2;
This top-up tax could apply only to companies subject to
these include members of the European Union, the UK,
GLoBE.
Canada, Japan, and South Korea (the United States has not
adopted Pillar 2), and elements of the tax may be imposed
Jane G. Gravelle, Senior Specialist in Economic Policy
by 2024. Even if the United States takes no action to adopt
Pillar 2, U.S. multinational firms may be subject to a top-up
Donald J. Marples, Specialist in Public Finance
tax under the IIR and the UTPR. The UTPR means that any
IF12439
other countries where U.S. firms have related companies

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Energy Tax Credits and the Global Minimum Tax

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