Do well by doing good. Yes, it’s a cliché. But, like all clichés, this phrase is used too often because it contains a grain of truth. For corporates and tax professionals, this sentiment is more relevant than ever because of some trends that are coalescing in the business world.
The Inflation Reduction Act, signed into law in August, ushers in green energy tax credits designed to encourage corporates to cut carbon emissions and drive innovation in energy production and consumption. Additionally, many executives perceive climate change as a real strategic risk to business rather than an abstract societal concern. In a survey published earlier this year, 54% of CEOs said they believe climate change will impact their organization’s ability to sell products and services.
There is a surge in interest from stakeholders of all types who want to do business with, and work for, companies that align with their values on issues such as climate change. In fact, another survey revealed that 70% of consumers believe it’s important for brands to take a stand on social issues such as climate change. When it comes to employees, a separate study found that 46% of workers want their organization to speak out on environmental and sustainability topics.
While some corporates see these macro forces converging, and others see trends diverging to cause even greater angst, one thing has become clear: There is an unprecedented opportunity to reexamine the business model and tax strategy. The new framework establishes a win-win-win for organizations seeking to lower their effective tax rate by investing in green strategies while reducing their long-term risk and creating stronger connections with their key audiences.
The $370 Billion Question
Many of the headlines following the new legislation focused on the corporate alternative minimum tax and the excise tax on stock buybacks. These concepts represent a sea change in our corporate tax structure but, when history is written, a different component of the new law may be more impactful.
The law includes roughly two dozen new green energy tax credits designed to address the long-range risk of climate change by significantly lowering greenhouse gas emissions. These credits run the gamut of strategies and innovations, ranging from incentives for biodiesel and a credit for buying used clean vehicles to an advanced manufacturing production credit and a nuclear-power production incentive. The legislation even provides non-taxable entities with the opportunity to receive direct-cash payments in place of tax credits. In total, the new tax arrangement amounts to nearly $370 billion in funding.
According to one independent evaluation, the law’s programs could lead to a 37% to 41% reduction of greenhouse gas emissions in the US from 2005 levels. These green energy credits are so wide-ranging that almost every organization could invest the time and resources necessary to examine their holdings and operations with respect to which credits they can take advantage of immediately.
Another critical aspect is the incentives the law provides for significant new investments in clean energy and related opportunities. For example, it extends eligibility for the investment tax credit to some standalone energy storage projects, as well as interconnection costs for select projects. It even offers a 10% bonus tax credit for factories and facilities built in so-called “energy communities” to encourage development in areas hit by job losses due to the transition to clean energy.
This new regime encourages corporates and exempt entities (such as local governments) to do more than pore over their current tax strategy to maximize credits and lower their effective tax rate. It inspires decision makers to analyze their entire business strategy, potentially reshape the financial structure of the organization, and seek new opportunities to drive overall business value by embracing clean energy and climate-friendly models. This analysis should include not just the potential to transform operations and product or service innovations but also mergers, acquisitions, and even divestments of holdings that may be operationally and/or financially disadvantaged under the law.
Stick, Meet Carrot
Throughout the US and around the world, governments are incentivizing organizations to reduce greenhouse gas emissions. To date, much of the emphasis has been on the “stick” approach, leading to some confusion and consternation. For example, South Korea produces just 1.38% of global greenhouse gas emissions, yet it counts 26 federal laws on its books related to climate, according to the Grantham Research Institute at the London School of Economics and the Sabin Center at Columbia Law School. Meanwhile, the US produces 12.28% of all emissions but has only 17 federal climate laws.
The new law signifies the most significant nod toward the “carrot” approach to environmental sustainability in US history. A tremendous amount of bipartisan political capital was expended to draft and enact this legislation. Liberal legislators in Oregon and conservatives in West Virginia have agreed to offer taxpayers an extraordinary prospect to lower their effective tax rate while helping the environment. It wouldn’t be a stretch to assume these lawmakers have presented corporates with a “use it or lose it” proposition. If this new tax regime doesn’t accomplish the objective of lowering emissions, rest assured that the next step will be compulsory regulation and enforcement.
The path for corporate leaders seems as crystal clear as we hope our air and water to be. Now is the time to re-examine your tax strategy to ensure you are taking full advantage of any and all new credits, while aspiring to business opportunities enabled by this seismic shift. Ultimately, corporate taxpayers have a duty to their shareholders to minimize their effective tax rate and maximize long-term value. But they also have tremendous new potential to help our planet and its people.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Tifphani White-King is the national tax practice leader for Mazars in the US. She has over 25 years of experience delivering insightful international tax structuring, transaction planning, mergers and acquisitions, tax provision, compliance reporting, and other related services.
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