The Inflation Reduction Act of 2022 (IRA), signed into law on August 16, 2022, is a comprehensive piece of legislation to tackle critical challenges facing the United States. Its primary goals include reducing carbon emissions, lowering healthcare costs, funding the Internal Revenue Service, and enhancing taxpayer compliance.
One of the act’s main focuses is promoting domestic investments in manufacturing capacity, encouraging the procurement of critical supplies from free-trade partners or within the country, and accelerating the development and adoption of cutting-edge technologies like carbon capture and storage and clean hydrogen. Additionally, it ensures that funds are allocated to address environmental justice priorities and mandates recipients of various funding streams to demonstrate equity impacts.
Interestingly, foreign businesses have emerged as significant beneficiaries of the IRA in the United States. The incentives provided by the act have stimulated substantial investments in clean energy technologies from overseas firms, according to an analysis by The Wall Street Journal.
The IRA allocates nearly $394 billion for climate and clean energy initiatives, offering investment and production credits for various clean energy sources like solar, wind, battery manufacturing, and storage, as well as funding for energy research and clean energy technology manufacturing, such as wind turbines and solar panels.
According to a report by McKinsey and Company, “most of the energy and climate funding is in the form of tax credits. Corporations are the biggest recipients, with an estimated $216 billion in tax credits. These are designed to catalyze private investment in clean energy, transport, and manufacturing. Many of the tax incentives in the bill are direct pay, meaning that an entity can claim the full amount even if its tax liability is less than the credit.”
Since the tax credits are often tied to output volumes, businesses based abroad, investing in large-scale production, have reaped significant rewards, accounting for over 60% of the $110 billion in announced clean energy projects within one year of the act’s passing.
In response to the IRA’s provisions, certain U.S. states have been actively seeking European clean energy and clean technology companies to invest in American production and operations, thereby leveraging the benefits of the act’s clean energy provisions.
Looking ahead, the Inflation Reduction Tax Act may lead to increased taxes for some of the largest U.S. multinational corporations. However, smaller companies, including U.S. subsidiaries of non-U.S.-based multinationals, may find opportunities to save on taxes by investing in subsidiaries eligible for the act’s clean energy credits and deductions.
It’s important to note that the act does not alter the U.S. corporate tax rate, which can be advantageous for non-U.S. firms with U.S. subsidiaries. Nevertheless, in such circumstances, non-U.S.-based multinationals with U.S. legal entities should seek tax advice to thoroughly understand the act’s provisions, ensure compliance, and optimize their U.S. and global tax positions.
Why are we telling you this? The IRA presents an excellent opportunity for foreign companies looking to expand in the US in the area of clean energy technology. We have a great deal of experience guiding clients through the complexities of setting up a US entity and establishing a US presence, raising funds, and executing transactions. If you need help or have questions, please drop us a line at +1 212 545 8022 or visit our website – www.rooney.law.
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