Mexico gives companies a 30 percent tax credit on investments in research and development of solar energy projects. France offers a partial tax reduction on bioethanol production. And China waives VAT and customs taxes on equipment imported for wind farms, hydropower plants and biofuel projects.
Amid concerns about global warming and rising oil prices, governments around the world are passing laws giving companies tax incentives to spur the growth of the renewable energy industry and encourage corporations to implement green business practices like recycling, reducing energy use and using eco-friendly products.
In the US, for example, Congress included $92 billion for investment in the renewable energy sector as part of the American Recovery and Reinvestment Act of 2009 (ARRA), the $787-billion stimulus package designed to rebuild the US economy following the financial crash.
Among the ARRA incentives is a cash grant program
that offers renewable energy companies 30 percent of the eligible project costs to build wind, solar, biomass, geothermal and hydropower production plants. It also provides a 30 percent tax credit for companies that manufacture renewable energy equipment, such as wind turbine generators and solar power inverters.
The purpose of the incentives is to bolster US manufacturing, create jobs and bring back investment in the renewable energy sector after the big investment banks pulled out amid the recession.
“These incentive programs have been extremely popular,” says Pat McDonald, a tax partner in Baker & McKenzie’s Chicago office who has been advising renewable energy companies and investors on the energy cash grant program and tax credits. “It is critical, however, that an application be complete and contains all of the requested information to avoid any risk of rejection.”
To help clients qualify for financial incentives like those offered under the ARRA as well as structure investments in renewable energy and carbon emission reduction projects around the world, Baker & McKenzie has created a group of more than 50 lawyers who advise clients on green tax issues.
The lawyers — members of the firm’s tax, project finance, energy and corporate practices in the US, Europe and Australia — work in various teams to help companies, financial institutions and investors with issues such as structuring funds that invest in carbon credits
and minimizing domestic and foreign taxes
on gains and losses from buying or selling those credits.
They also help developers of renewable energy projects create capital and ownership structures that enable them to attract investors by passing along tax credits to investors. And they advise foreign companies investing in US renewable energy projects how to structure their investments to minimize US taxes.
In a recent case, McDonald and energy and project finance partner Jose Moran led a cross-practice Baker & McKenzie team that helped Ingeteam
, the US subsidiary of a Spanish company that makes wind turbine generators and inverters, qualify for a USD1.66 million manufacturing tax credit to build a factory in Milwaukee.
The tax credit, provided under the ARRA, will help Ingeteam finance the cost of the USD15 million factory, which is expected to create 275 jobs and help the company increase its global market share of the wind power components industry from 12 percent to 20 percent by 2015.
Although the manufacturing tax credit program has expired and the cash grant program requires applicants to place property into service or start construction by Dec. 31, 2010 to be eligible, Congress is already considering legislation that will reinstate and expand the economic incentives.
Even without these initiatives, however, renewable energy companies can still apply for tax credits under current US tax laws. These credits include a 30 percent investment tax credit for solar developers and a production tax credit for wind developers equal to 1 cent to 2 cents per kilowatt of energy produced.
As a pioneer in climate change law and international tax issues, Baker & McKenzie is uniquely positioned to help clients take advantage of the financial incentives governments are increasingly offering.
“Renewable energy as a policy matter in this country is so significant that I don’t see the financial and tax incentives going away,” McDonald says. “It’s just a question of what form they will take.”
No matter the form, Baker & McKenzie's green tax team can help.