The U.S. Senate approved a sweeping tax reform bill early Saturday morning, leaving in an obscure provision clean energy groups recently warned could have “devastating” impacts on the renewable energy industry. The approval comes after the House of Representatives passed its own tax bill on Nov. 16, and clean energy stakeholders are calling on lawmakers to protect critical incentives when ironing out final legislation.
The Senate GOP bill, which passed 51-49 along party lines, includes the Base Erosion Anti-Abuse Tax (BEAT) provision. A coalition of clean energy organizations sent a letter to the Senate last week warning the “BEAT program would have a devastating, if unintended, impact on wind and solar energy investment and deployment.” According to the letter, the BEAT provision would affect multi-national companies and “undermine” their usage of the solar industry’s investment tax credit (ITC) and wind industry’s production tax credit (PTC).
Gregory Jenner, partner at law firm Stoel Rives and former head of the U.S. Treasury’s Office of Tax Policy, explains BEAT is “designed to prevent large multi-national corporations from eroding the U.S. tax base by structuring payments to related parties offshore. It works by creating a minimum tax that, in effect, cannot be reduced by any tax credits except the R&E tax credit (section 41).”
He continues, “Many tax equity investors could be subject to this provision (the number and which ones are unclear). If a potential tax equity investor were subject to BEAT, it would have no incentive to invest in renewable energy projects because it couldn’t use either the ITC or PTC against its BEAT liability. This could significantly reduce the amount of tax equity available for renewables.”
Keith Martin, co-head of U.S. projects at Norton Rose Fulbright, also provides some insight into BEAT in a “legal update” posted on the law firm’s website.
“The Senate bill would impose a base erosion tax on large companies that use cross-border payments to reduce their U.S. tax bills below 10 percent of U.S. income after adding back cross-border payments to affiliates,” Martin writes. “An example of such a payment is interest on an intercompany loan or a payment to a back office in India for services.”
He continues, “Large corporations making such payments would have to compare A to B. A is 10 percent of income with cross-border payments added back. B is the corporation’s regular tax liability reduced by the tax credits to which it is entitled. If B is less than A, then the U.S. government will collect the difference as a tax.
“At the last minute, the Senate increased the tax rate in A on banks and securities dealers to 11 percent. The banks appear to have traded a higher tax rate for being spared from having to add back into income cross-border ‘qualified derivative payments’ to affiliates,” Martin notes.
“The base erosion tax may make banks and other large tax equity investors reluctant to finance projects in ways that entitle them to tax credits, since every dollar of tax credit has the potential to create a gap between A and B,” he adds. “The BEAT calculation would have to be made at the end of each year. A tax equity investor will not know when it invests whether it will receive the tax credits on which it is counting. Tax credits in existing tax equity financings could also be at risk. The tax would take effect in 2018.”
In addition to BEAT, Martin notes another Senate bill provision that may harm the renewable energy industry is a change that “would move most U.S. corporations from the regular corporate income tax to the alternative minimum tax.”
In their joint letter last week, clean energy groups praised the Senate for maintaining the phase-down extensions for renewable energy tax credits passed in 2015 – especially since the House’s tax reform bill aims to slash the wind PTC and repeal the so-called “permanent” 10% solar ITC. Although the House’s ITC provision isn’t expected to cause much harm to the solar industry, the American Wind Energy Association (AWEA) has warned that the PTC cuts pose a huge threat to the wind sector.
Now that both chambers of Congress have passed separate tax reform bills, conferees will be tasked with reconciling a wide array of differences between the two versions and a final bill will have to be voted on again. The House bill did not include the BEAT provision. GOP leaders are hoping to send the final legislation to President Donald Trump before Christmas.
Regarding the BEAT provision, Stoel Rives’ Jenner says, “I believe the solar industry should be extremely concerned. Although the outcry has been loud, the industry cannot take for granted that this provision will get changed in conference. Understand that the need for something like the BEAT provision is driven by the changes being made to the international provisions. Without something like BEAT (the ‘A’ stands for ‘anti-abuse’), there would be enough loopholes to drive a truck through.”
Christopher Mansour, vice president of federal affairs for the Solar Energy Industries Association, suggests that the group is on the case.
“We were gratified that the Senate did not alter the ITC. However, we are concerned that the BEAT provision endangers billions of dollars in private-sector investments in American growth industries such as solar,” says Mansour. “At this stage, the legislation is a moving target, and we are working very hard to ensure that any final measure addresses problems BEAT would create.”
Leaders from AWEA, the American Council on Renewable Energy, the American Conservation Coalition, Citizens for Responsible Energy Solutions, the Conservative Energy Network, and Conservatives for Clean Energy have issued a similar joint statement on the Senate approval.
“We applaud the reduction in the corporate tax rate and preserving frameworks that support the clean energy sector. However, we are concerned about provisions that will have a negative impact on clean energy investments, including [the] Base Erosion Anti-Abuse Tax (BEAT) provision and the impact of the corporate Alternative Minimum Tax (AMT) on investment tools that have been critical to the growth of the clean energy sector,” the groups say.
“If these provisions are retained, they will result in broad instability and uncertainty for businesses and investors across many sectors, including the clean energy sector. We look forward to working with conferees to address these concerns so that the sector can continue to contribute to vibrant and diverse domestic energy production.”
In a separate statement, Advanced Energy Economy (AEE), an organization of businesses dedicated to making energy secure, clean and affordable, also points out the pluses and minuses of the Senate bill.
“Despite the progress on reducing the corporate tax rate, the Senate tax package does great damage to the advanced energy industry, which is making significant energy investments right here in the United States,” says Malcolm Woolf, senior vice president of policy for AEE. “On the one hand, the Senate bill keeps the 2015 promise to maintain the phase-down of energy credits for wind and solar, which the House tax bill undermined, and maintains the important electric vehicle tax credit as well as authority for tax-exempt bonding. But the bill does not provide equal treatment for technologies like fuel cells, distributed wind, storage, combined heat and power, geothermal, and advanced nuclear, despite the interest of several Senators in doing so.”
Woolf continues, “The bill passed by the Senate also undercuts tax equity investment opportunities for wind and solar. We strongly oppose any legislation that risks billions of dollars in investment and hundreds of thousands of American jobs. We will continue to work with the Senate and House to ensure that the tax bill sent to the president is a pro-growth plan for an advanced energy industry that already employs more than 3 million people across our nation.”
Ken Kimmell, president of the Union of Concerned Scientists, calls the Senate legislation “a reckless tax cut bill.”
“The bill would threaten the climate by leaving billions of dollars of fossil fuel subsidies intact while changing the tax code in ways that would jeopardize the financing of numerous clean energy projects under construction and discourage future clean energy investments in wind and solar,” says Kimmel in a statement. “But this fight isn’t over yet. We will continue to work with our allies and engage our members and supporters to stop this irresponsible bill.”