Energy Tax Credits and the Global Minimum Tax

Updated July 21, 2023

Energy Tax Credits and the Global Minimum Tax

The Internal Revenue Code (IRC) (often referred to simply

as the tax code) contains a number of credits to encourage

certain investments. These include energy credits, some of

which were enacted in P.L. 117-169 (commonly referred to

as the Inflation Reduction Act of 2022, IRA) and intended

to encourage investment in certain renewable energy

technologies. (Other major business credits include the

research and experimentation, or R&E, credit and the lowincome housing credit.) Concurrently, countries around the

world are planning to implement a 15% global minimum

tax on large multinationals (GLoBE). Tax credits, like the

energy credits, lower the effective tax rates on taxpayers

that claim them.

There were concerns that, under a GLoBE regime, the

reduced effective tax rates that result from these energy

credits may trigger an additional tax that offsets or

eliminates their benefits. Whether an additional tax would

apply depends on the nature of the business making the

investment, the magnitude and design of the credits, and

whether investments are active or passive. Certain credits

from passive investments do not affect the tax rate, and the

Organisation for Economic Co-operation and Development

(OECD) recently released guidance that provides for

favorable treatment of transferable credits as well as

refundable credits.

Energy Tax Credits

The tax code includes multiple energy tax provisions—

several of which were extended and expanded by the IRA.

A brief summary of the changes and a comparison to prior

law can be found in CRS Report R47202, Tax Provisions in

the Inflation Reduction Act of 2022 (H.R. 5376) (for further

information, congressional clients may contact Donald J.

Marples). In addition to these changes, the IRA also

allowed certain energy credits to be refundable or

transferable.

Within the context of businesses likely to be subject to the

GLoBE regime and other businesses, only selected IRA

energy tax provisions are eligible for refundability.

Refundability generally allows organizations to treat the

amount of the tax credit as a tax payment—with

overpayments of tax being refundable. (A broader set of

IRA energy tax provisions are refundable to specific types

of tax-exempt entities.) If refundability is elected, the tax

credits can be claimed for the first five years starting with

the year a facility is placed in service, as opposed to a

potentially longer period if refundability is not elected. As

shown in Table 1, refundability is allowed for three tax

credits available to large multinational businesses that may

face a global minimum tax.

Businesses likely to be subject to the GLoBE regime (along

with other businesses) are allowed a one-time transfer of a

broader set of tax credits. Any payments received in

exchange for the transfer of credits would be excluded from

the selling business’s income, and any amounts paid to

obtain a transferred credit could not be deducted from the

recipient business’s income. As shown in Table 1,

transferability is allowed for 12 tax credits to businesses

that may face a global minimum tax.

Table 1. Selected Energy Tax Credits That May Be

Refundable or Transferable for Large Multinational

Corporations

Refundable

Transferable

Alternative Fuel Vehicle

Refueling Property Credit

(IRC Section 30C)

X

Renewable Energy

Production Tax Credit (IRC

Section 45)

X

Carbon Oxide

Sequestration Credit (IRC

Section 45Q)

X

Zero-Emission Nuclear

Power Production Tax

Credit (IRC Section 45U)

Clean Hydrogen Production

Tax Credit (IRC Section

45V)

X

X

Qualified Commercial

Vehicles (IRC Section 45W)

Advanced Manufacturing

Production Tax Credit (IRC

Section 45X)

X

X

X

X

X

Clean Electricity Production

Tax Credit (IRC Section

45Y)

X

Clean Fuel Production Tax

Credit (IRC Section 45Z)

X

Energy Investment Tax

Credit (IRC Section 48)

X

Qualifying Advanced Energy

Investment Tax Credit (IRC

Section 48C)

X

https://crsreports.congress.gov

Energy Tax Credits and the Global Minimum Tax

Refundable

Transferable

Clean Electricity Investment

Tax Credit (IRC Section

48E)

X

Source: CRS analysis of the Internal Revenue Code.

The Global Minimum Tax and Tax

Credits

The OECD has advanced a number of proposals to address

international profit shifting. One of these proposals,

referred to as Pillar 2 or GLoBE, would impose a minimum

tax of 15% in each country for large multinational

corporations with global or total revenues over €750 million

(about $820 million as of June 15, 2023). Pillar 2 is

discussed in more detail in CRS Report R47174, The Pillar

2 Global Minimum Tax: Implications for U.S. Tax Policy,

by Jane G. Gravelle and Mark P. Keightley.

GLoBE is based on financial income and allows a

deduction for 5% of payroll and 5% of tangible assets. The

carve outs are larger in the short term, beginning at 10% of

payroll and 8% of tangible assets. The purpose of these

deductions is to focus the minimum tax on intangible

income with the goal of addressing profit shifting by firms

locating intangible assets in low-tax countries.

GLoBE allows three types of top-up taxes to achieve the

15% minimum tax, which apply in a specific order:

• Qualified Domestic Minimum Top-Up Tax

(QDMTT): the source country can apply a QDMTT to

achieve the 15% rate.

• Income Inclusion Rule (IIR): If a country does not

enact a QDMTT, the country where the parent company

is located can apply the IIR to the parent to impose the

tax on its subsidiaries at a 15% rate.

• Undertaxed Payments Rule (UTPR): If neither of

these taxes are enacted, countries where related

companies are located can apply the tax under the UTPR

to those companies to collect the tax. Countries that

enact a UTPR can collect a share of the top-up tax based

on the share of tangible assets and employees located in

the country. (The UTPR is sometimes referred to as the

undertaxed profit rule.)

Numerous countries are in the process of adopting Pillar 2;

these include members of the European Union, the UK,

Canada, Japan, and South Korea (the United States has not

adopted Pillar 2), and elements of the tax may be imposed

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

tax under the IIR and the UTPR. The UTPR means that any

other countries where U.S. firms have related companies

may impose a tax on those related companies’ domestic

operations. Subsidiaries of foreign firms operating in the

United States may be subject to the IIR or the UTPR. U.S.

firms’ domestic operations may be subject to the UTPR.

Most countries had planned to implement the UTPR in

2025; however, recent OECD guidance provides a

transition rule so that the UTPR will not apply to any

country with a corporate tax rate of at least 20% until 2026.

Tax credits are treated in three different ways under the

Pillar 2 model rules. Ordinary credits reduce the effective

tax rate and can trigger additional Pillar 2 taxes. Refundable

tax credits are treated as increases in income rather than

reductions in taxes. This difference is significant. For

example, if a firm has a 15% tax rate before credits and

credits reduce the rate to 10%, an additional tax of 5% will

apply. That additional tax will eliminate the credit’s benefit.

If the credit is refundable, the effective tax rate is reduced

to 14.3% (15/105), and an additional 0.7% tax will apply.

Finally, under the equity method of accounting, income and

any associated tax credited will be excluded from the

effective tax rate calculation. The equity method of

accounting applies in cases where a firm has a

noncontrolling interest in a subsidiary or venture. Thus,

firms that have passive investments in projects that benefit

from tax credits will not have reductions in effective tax

rates from these credits. Many credits, including lowincome housing credits and some energy credits, would

therefore not have their incentives reduced through Pillar 2

taxes.

Recently, the OECD clarified the treatment of transferable

credits. These credits will be treated as refundable credits if

sold, and thus will increase the income of the seller rather

than reduce tax liability. The purchaser will treat the

difference in the sales price and the value of the credit as a

reduction in tax expense. The treatment as a refundable

credit will also apply to credits that are not sold; that is,

they will increase income.

Policy Options

While the recent OECD guidance has addressed concerns

that the global minimum tax could substantially undermine

the value of energy credits, a remaining issue is whether the

United States should adopt Pillar 2. Even with the favorable

treatment of energy credits, firms might still have an

effective tax rate lower than 15%. The United States could

consider enacting a general QMDTT so that the United

States, rather than other countries, would collect the tax.

This top-up tax could apply only to companies subject to

GLoBE.

Jane G. Gravelle, Senior Specialist in Economic Policy

Donald J. Marples, Specialist in Public Finance

https://crsreports.congress.gov

IF12439

Energy Tax Credits and the Global Minimum Tax

Disclaimer

This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to

congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.

Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has

been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the

United States Government, are not subject to copyright protection in the United States. Any CRS Report may be

reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include

copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you

wish to copy or otherwise use copyrighted material.

https://crsreports.congress.gov | IF12439 · VERSION 2 · UPDATED