New OECD Guidance Gives Relief for US Renewable Credits (1)

New administrative guidance from the OECD’s inclusive framework on base erosion and profit shifting, released on Monday, builds on prior guidance.

It contains a safe harbor from the UTPR, known as the undertaxed profits rule, as it applies to the income of the ultimate parent entity jurisdiction. It also provides supplementary guidance on what constitutes a qualified domestic minimum top-up tax and the conditions for its safe harbor.

In addition, there are new rules on transferable tax credits and tax equity investments, as well as technical updates to currency conversion and the substance-based income exclusion computation rules.

The Organization for Economic Cooperation and Development also suggested that future guidance on the global anti-base erosion regime, or GloBE, may address the “asymmetrical treatment of items of income, expense or transactions between different accounting standards and tax rules including those used with respect to the transitional and permanent GloBE Safe Harbours.”

Additionally, the OECD released a finalized version of the GloBE information return, which temporarily allows reporting by jurisdiction instead of entity by entity.

Safe Harbors

The guidance contains a transitional safe harbor, which deems any ultimate parent entity’s UTPR liability to be zero for fiscal years beginning before 2026 if the entity’s jurisdiction has a statutory corporate tax rate of at least 20%. This effectively serves to delay application of the UTPR on the US profits of a US multinational enterprise until 2026 at the earliest.

The safe harbor, however, delays neither the UTPR’s application to the profits of controlled foreign corporations of US MNEs, nor the application of the income inclusion rule to profits of foreign-parented US subsidiaries.

Furthermore, the guidance precludes a company that elects the transitional UTPR safe harbor from electing the transitional country-by-country reporting safe harbor for future years. This means companies will need to analyze the election’s costs and benefits.

Under the guidance, the qualified domestic minimum top-up tax, subject to certain conditions, will qualify as a safe harbor—thereby precluding application of another country’s income inclusion rule or UTPR. This is likely to expand the trend of implementing the GloBE rules locally through qualified domestic minimum top-up taxes, with the income inclusion rule and UTPR serving as backstops.

The guidance allows countries to implement the safe harbor from qualified domestic minimum top-up tax based on certain local statutory financial accounting standards (without adjustments to conform to the parent’s financial accounting standard), which some companies may prefer.

It doesn’t address the basis on which countries may challenge a company’s qualification for a safe harbor from qualified domestic minimum top-up tax.

Transferable Credits, Tax Equity Investments

The new rules on tax credits relate specifically to transferable tax credits—a priority for the current US administration. Under Section 6418 of the federal tax code, taxpayers may sell certain renewable energy-related tax credits to buyers, who can then use the tax credit against their tax liability.

Previously, it appeared that these credits didn’t constitute a qualified refundable tax credit, which receives more favorable treatment under GloBE than a non-qualified refundable tax credit, and that their purchase would significantly decrease the buyer’s effective tax rate. Consequently, Pillar Two would have recaptured the benefit of these tax incentives.

The guidance effectively treats these credits, whether transferred or retained, like qualified refundable tax credits—regardless of the company’s financial accounting treatment. It also provides additional favorable guidance for entities that participate in tax equity investments, including tax equity investments that generate transferable credits.

Observations

Although this guidance provides important relief, significant technical issues remain outstanding. The OECD previously indicated that additional guidance is forthcoming on deferred taxes and corporate M&A transactions, but none was included in this package.

The guidance substantively changes the rules, including tightening the application of the Article 9.1.3 transition rule for transferor entities in jurisdictions that are partially subject to the GloBE rules, and it foreshadows rules targeting hybrid planning around the transitional country-by-country reporting safe harbor. This suggests that the Pillar Two rules remain in flux, notwithstanding the impending effective date.

Absent future changes, some US companies eventually will be subject to tax on their US profits under the Pillar Two rules. To date, Congress hasn’t indicated that it will advance legislation implementing the Pillar Two rules. These issues are expected to be discussed at the July 19 hearing of the House Ways and Means Committee.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Barbara M. Angus is EY’s global tax policy leader and Jason Yen is a principal in EY’s international tax and transaction services practice. The views expressed are those of the authors and do not necessarily reflect the views of Ernst & Young LLP or any other member firm of the global EY organization.