United States: The Senate's New Base Erosion Tax: Highlights for Renewable Energy

Summary

On December 2, 2017, the Senate approved its version of the Tax Cuts and Jobs Act. The Senate Bill includes the base erosion and anti-abuse tax, a new tax intended to apply to companies that significantly reduce their US tax liability by making cross-border payments to affiliates. Given its potential to disrupt the financing of renewable energy projects, taxpayers in the renewable energy sector have been paying close attention to its developments.

In Depth

The Senate approved its version of the Tax Cuts and Jobs Act (Senate Bill) on December 2, 2017. The Senate Bill generally leaves the base erosion and anti-abuse tax (BEAT) unchanged from earlier versions of the Senate Bill. Taxpayers in the renewable energy sector have been paying particular attention to the BEAT, given its potential to disrupt the financing of renewable energy projects.

The House has approved a motion to go to a conference committee to reconcile the House's tax reform bill with the Senate Bill, and the Senate is expected to consider a similar motion this week. While important policy differences await resolution, it appears that some form of tax reform legislation will likely be enacted before the end of 2017.

In brief, the BEAT is a new tax intended to apply to companies that significantly reduce their US tax liability by making cross-border payments to affiliates. If the cross-border payments reduce a company's US tax liability to less than 10 percent of its US taxable income (as discussed in more detail below), the BEAT applies. In calculating the company's US tax liability, certain credits, such as the investment tax credit pursuant to Section 48 (ITC) and the production tax credit pursuant to Section 45 (PTC), are taken into account, making it more likely that such a company is subject to the BEAT. Multinational tax equity investors reducing their US tax liability from cross-border affiliate payments may therefore find that investments in ITC and PTC eligible projects after enactment of the BEAT are much less attractive.

Taxpayers Subject to the BEAT

  • Domestic corporations (other than regulated investment companies, real estate investment trusts or S corporations) that are part of a group with at least $500 million of annual gross receipts (averaged over a 3-taxable-year period) and which have a "base erosion percentage" of 4 percent or higher for the taxable year: 
    • In simplified terms, large multinational corporations that make payments to foreign affiliates resulting in deductions equal to 4 percent or more of their total deductions are potentially subject to the BEAT.
    • The "base erosion percentage" generally equals the aggregate amount of "base erosion tax benefits" (see below) of the taxpayer for the taxable year, divided by the aggregate amount of the deductions allowable to the taxpayer for the taxable year.
  • Foreign corporations engaged in a US trade or business that meet the $500 million gross receipts and "base erosion percentage" tests (described above): 
    • However, for purposes of the "gross receipts" test, generally only gross receipts, which are taken into account in determining effectively connected income, are taken into account. 
General Summary of the BEAT

The BEAT is a tax equal to the taxpayer's "base erosion minimum tax amount" for the taxable year.

  • In simplified terms, this amount is determined by a formula that compares 10 percent of the taxpayer's income without taking deductible payments to foreign affiliates into account with the taxpayer's regular tax liability (taking such deductions into account and reducing by certain credits, as discussed below). If the 10 percent amount is larger, then the BEAT is owed.

The "base erosion minimum tax amount" equals the excess (if any) of (A) 10 percent of the taxpayer's "modified taxable income" for a taxable year over (B) the taxpayer's regular tax liability reduced (but not less than zero) by tax credits (other than the R&D credit) allowed in that year.

  • For taxable years after 2025, the percentage in (A) increases to 12.5 percent, and the research & development credit is included in (B).
  • In the case of taxpayers that are members of a US affiliated group which includes a bank or registered securities dealer, the percentage in (A) is increased to 11 percent (13.5 percent for taxable years after 2025).
"Modified taxable income" means the taxpayer's taxable income for the taxable year, determined without regard to (A) any "base erosion tax benefit" with respect to any "base erosion payment" or (B) the base erosion percentage of any net operating loss deduction allowed under Section 172 for the taxable year. 
  • A "base erosion tax benefit" generally means any deduction that is allowed with respect to any "base erosion payment," such as depreciation and amortization deductions.
  • A "base erosion payment" generally means any amount paid or accrued to foreign persons that are related parties for which a deduction is allowed, as well as a payment to a related foreign person to acquire depreciable or amortizable property.
  • Base erosion tax benefits are disregarded if withholding tax under Sections 1441 or 1442 is applied to the base erosion payment, modified to the extent that reduced rates of withholding are applied under an applicable income tax treaty.
  • "Related party" generally means any 25 percent owner of the taxpayer, as well as any person related to the taxpayer or any 25 percent owner of the taxpayer. 
  • Special rules apply for payments to expatriated entities, certain payments for services and "qualified derivative payments."
  • "Qualified derivative payments" generally means payments made by a taxpayer pursuant to derivatives that the taxpayer marks to market and on which the taxpayer recognizes ordinary income. 

Concerns for Renewable Energy

  • Tax equity investors—such as large multinational companies and banks—may need to consider the potential application of the BEAT.
  • The BEAT could affect investors' decisions with respect to future ITC and PTC projects. It could also have an impact on the value of existing projects that will continue to generate PTCs after the enactment of the BEAT.
  • Because the BEAT determination is made annually and involves complex calculations, potential tax equity investors may not know whether they will be entitled to the full benefit of PTCs and ITCs in a given year.

Effective Date

If enacted, the BEAT would apply with respect to base erosion payments paid or accrued in taxable years beginning after December 31, 2017.

The Senate's New Base Erosion Tax: Highlights for Renewable Energy

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions