The appetite in the European Union (EU) and the USA to launch strategic industrial programs has significantly increased in the post-Covid era.
The European Green Deal is a comprehensive set of measures launched by the EU in June 2021 to transform the EU into a modern, resource-efficient and competitive economy.
In the summer of 2022, the USA enacted the Inflation Reduction Act (IRA) with a similar broad focus. The IRA is addressing inflation by reducing the national debt, healthcare costs and energy costs over the next ten years.
The EU Green Deal operates mainly with non-tax incentives. However, through the OECD GloBE rules, qualified refundable tax credits (QRTCs) are available, which might be claimed for projects which fit the EU Green Deal program.
The IRA, on the other hand, explicitly focuses on tax incentives in the form of transferable tax credits (TTCs) through the extension and expansion of numerous energy-related federal income tax credits.
For corporates with plans for innovation, industrialization and/or decarbonization, this means that they have the choice between applying for grants and loans in the EU or for tax credits in the US, depending on their own global growth strategies.
The EU Green Deal
The EU Green Deal is not one single program but rather an extension of existing EU programs which are complemented by new programs.
To achieve geopolitical, ecological and social goals, the EU is increasingly focusing on research, innovation, and sustainability, such as the expansion of renewable energies.
The EU Green Deal aims at creating a net-zero green economy by 2050, enhancing manufacturing and digital capacity in crucial industries and sustaining innovation leadership via scientific and technological investment.
Achieving these goals shall be facilitated by an unprecedented high volume of non-tax incentives, including EU funds, national funds and the EU's Covid-specific NextGen Fund (depending on clearance by the European Commission, EC), which can be directly disbursed by member states without requiring EU consent.
Key goals of the EU Green Deal include:
- Financing the development of low-carbon industrial manufacturing
- Support for lower income EU member states toward climate neutrality
- Promotion of research and development
- Establishing sustainable infrastructure in low income member states
- Focus on Important Projects of Common European Interest (IPCEI)
The US Inflation Reduction Act
The Inflation Reduction Act (IRA) includes USD 369 bn in incentives for energy and climate, mainly as corporate tax credits, valued at USD 270 bn. The act aims to steer private capital towards clean energy, transportation and industry. Many of these tax credits may be transferable or refundable through the direct pay mechanism. These new mechanisms allow for organizations to monetize the benefits regardless of their lack of federal tax liability.
The IRA complements other acts such as the CHIPS Act and the Infrastructure Investment and Jobs Act (“Infrastructure Act”), which aim to improve infrastructure or increase competitiveness and foster innovation.
While several different US federal agencies oversee distribution of IRA funds, the main part of IRA funding package is distributed via the U.S. Department of the Treasury (Internal Revenue Service), since the IRA is heavily focused on tax credits.
The IRA involves both modifying and expanding existing tax credits and new tax credits related to energy production and usage.
The target areas of these credits include renewable energy, advanced manufacturing, transportation, alternative fuels, and carbon capture, etc.
Eligible taxpayers include individuals, C corporations, S corporations, trusts, estates, and partnerships as well as tax exempts, certain state and local organizations and tribal nations. Focus areas of the IRA include transportation, renewable energy, carbon capture, advanced manufacturing and alternative fuels.