The budget that President Clinton sent Congress in February has many provisions that would affect the project finance community | Norton Rose Fulbright
THE BUDGET THAT PRESIDENT CLINTON SENT CONGRESS in February has many provisions that would affect the project finance community.
Most are proposals he made last year but that Congress failed to enact. However, three new proposals are interesting.
Most US power companies with foreign projects own their projects through offshore holding companies in Holland or in the Cayman Islands, Bermuda and other tax havens. Clinton said the US Treasury will publish a list of “identified tax havens” that “facilitate tax avoidance and evasion . . . through strict confidentiality rules and restrictive information exchange practices.” He proposes to deny US tax deferral, foreign tax credits and foreign sales corporation, or “FSC,” benefits for earnings run through such tax havens.
The proposal may have the effect of encouraging tax havens to make more information available to the US authorities even if the proposal is not enacted ultimately by Congress. For example, Cayman Islands officials went to London in December for talks with the British government about steps to take to avoid being targeted by a similar OECD (Organization for Economic Cooperation and Development) effort aimed at discouraging use of tax havens.
The budget also takes aim at certain cross-border lease transactions where the lessor is in the United States. Owners of power plants, telecom equipment and rail cars in Europe, for example, have entered into so-called “Pickle-service contract leases” with US lessors as a way of getting value for US tax depreciation on their assets. Since a US lessor must depreciate assets located outside the United States over the “class life” or 125% of the lease term, whichever is longer, the trick is to keep the lease term as short as possible and then convert to a “service contract” after the lease ends. For example, a power plant in Germany might be leased for a short term from a US lessor and then, after the lease ends, the German lessee might continue buying the output.
Clinton proposes to treat the service contract as part of the lease term for purposes of calculating US tax depreciation. The change would apply to leases entered into after the date of “first committee action.” Even if Congress goes for the proposal — which it may not — the “first committee action” would probably not occur before June.
Finally, Clinton wants to extend a so-called section 45 tax credit of 1.7 cents a kWh for generating electricity from wind and closed-loop biomass and also expand the list of eligible fuels. “Closed-loop biomass” refers to plants grown specifically for use as fuel in a power plant. Credits can be claimed for 10 years from when a power plant is placed in service.
Clinton would broaden the credit so that it could also be claimed by power generators using other types of biomass or landfill gas, or co-firing with biomass and coal. The credits for landfill gas would be at a reduced rate. The rate is 1.0 cents per kWh in cases where the landfill is already obligated by federal “new source performance standards” the US Environmental Protection Agency issued in 1996 to dispose of the gas. It would be 1.5 cents per kWh for gas from other landfills.
Lobbyists for biomass groups tried to persuade the Clinton administration — so far without success — to let projects that qualify potentially for section 45 credits use lease financing. Section 45 requires that the owner of the power plant also be the same person using it to generate electricity. A memo from a lobbyist to a Treasury official shortly before the budget was released said, “We hope you have not TOTALLY ruled [this] out.”
Clinton proposed a cogenerator tax credit in each of the last two years, but the proposal failed to gain any traction on Capitol Hill. It was not included in this year’s budget.
The summary of the Clinton tax proposals was 153 pages two years ago, 198 pages last year, and 221 pages this year. This is a sign of how little in the budget the Republican Congress has been willing to enact. Past proposals keep being reproposed each year with a few new additions.