The nuts and bolts of BEAT: Keith Martin on the threat to solar and wind tax credits


Editor’s note: Yesterday pv magazine learned of a provision in the Senate tax bill which renewable energy trade groups warn could hinder monetization of the Investment Tax Credit (ITC) and Production Tax Credit (PTC). When we went looking for information on the BEAT provision, the first mention we found in writing was this post by Keith Martin, co-head of U.S. projects at law firm Norton Rose Fulbright. In this interview, Martin, who was interviewed by KWh Analytics for its #solar100 earlier this month, explains how BEAT works and how it threatens financing for wind and solar projects.


pv magazine: When did you first become aware of the BEAT provision in the Senate tax reform bill?

Keith Martin: A couple of banks called soon after the Senate chairman’s mark was released.


pv magazine: So last week?

Martin: I forget the day, the days are all merging together. I’ve spend a lot of time with these proposals, not just this one but the whole bill.


pv magazine: Can you explain the mechanics of how it works that the ITC would become 100% taxable?

Martin: It’s not that simple. This provision has a good aim, which is as follows: when foreign companies invest in the United States, they usually try to reduce their tax burden. And they way they do it is by having cross-border payments that are deductible in the United States.

For example, if you are a European utility and you plan to own wind or solar projects in the United States, you would set up a U.S. corporation. And you would provide the capital it needs to make these investments by making a loan to it. That way, the earnings in the U.S. are paid back to Europe as a loan, and the interest is deductible. There is nothing to tax here.

All countries have limits on earnings strippings – including the United States, which has limits currently. In the search for revenue, both the House and Senate changed the current U.S. earnings strippings rules (in their tax reform bills) to new approaches. And the House has a different approach than the Senate.

The Senate approach is to require that companies that make cross-border payments to affiliates must add them back to taxable income. And then if they haven’t paid at least 10% of that broader definition of income, they should pay enough to get up to 10%.

That is the logic behind the Senate base-erosion tax. The trouble is that the way the calculation has been set up would potentially claw back tax investments that tax equity investors are entitled to for having invested in the past in renewable energy projects. It would also make some tax equity investors decide to fall out of the tax equity market.

The calculation is as follows: Any company with cross-border payments to affiliates must first calculate 10% of what the broader definition of income would be – you add back these cross-border payments – and then it must separately calculate its tax liability, minus the tax credits to which it is entitled. And if there is a gap between the two, if the second B is less than A, then the U.S. government will tax the entire amount – collect the entire amount as a tax.

So if you think about it, companies that are in danger of seeing their tax bills reduced below 10% of this broader definition of income have no incentive to make investments that entitle them to tax credits. Because every additional credit they get will create another dollar of gap, and the government will simply take it away.

This applies more broadly than foreign companies making inbound investments. It also applies to U.S. companies that have cross-border payments to their affiliates. Big banks: JP Morgan, Citibank, you name it.


pv magazine: Right. When you talk about those big banks, and other multinational companies, whether they are foreign companies or U.S. companies doing business here, how much of the available supply of tax equity financing do they represent?

Martin: It’s a hard question to answer – but in 2016, three banks accounted for more than 40% of the renewable tax equity market.


pv magazine: And I am guessing that all three of those were multinationals that would be affected by this provision? 

Martin: One I suspect would not – two would be. The three banks are JP Morgan, Bank of America and US Bank.


pv magazine: Do you foresee a possibility that other companies that might have fewer foreign transfers or for other reasons are not subject to this provision might enter the tax equity market? 

Martin: Probably not. It depends, but in general these tax credits are phasing out, so it may not be worth the brain damage to learn a new field. On the other hand if the gap between what can be earned in the tax equity market and what can be earned from other activities is great enough, then they will probably learn it.

It is just that anybody who wanted to come into the market has had the opportunity for 25 years. That’s how long the Production Tax Credit has been on the books. And the Investment Tax Credit has been in and out for solar.


pv magazine: Anything that I haven’t asked that you think our readers should know about this BEAT provision and renewable energy markets?

Martin: It makes it uncertain whether a tax equity investor will be able to claim the tax credits. Tax equity investors provide financing, but unlike lenders they are willing to be paid partly in tax benefits. If you now say that they tax equity investor may not know when he signs up for financing whether or not he will get the tax credit, it makes the whole process much more difficult.

The second thing is that this is retroactive in that it affects deals that have already funded and on which tax credits will be claimed in 2018 or later. Traditionally the U.S. government has not held out a carrot to induce people to do something and then pulled it away after they have already done it.

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