North American Development Bank
North American development bank loans are not “subsidized energy financing,” the IRS said.
TheNorth American Development Bank is a bi-lateral development bank that was capitalized by the US and Mexican governments, but that raises money to make loans by issuing debt in the US capital markets. The bank lends long-term debt at fixed rates to help finance projects up to 62 miles north and 186 miles south of the US-Mexican border. It lends to projects that help with potable water supply, wastewater treatment, water conservation, municipal solid waste management, air quality improvement, energy efficiency, renewable energy and public transportation.
A US utility building a wind farm in the US worried that if it borrowed from the bank to finance its project, the IRS might say the loan is “subsidized energy financing.” That would lead to a reduction in the amount of production tax credits that could be claimed on the project.
The IRS said the bank’s loans are not subsidized energy financing because they are not loans under a federal, state or local program a principal purpose of which is to provide subsidized financing for projects that conserve or produce energy. The bank has a broader mandate. Also, there is no subsidy to the borrower. The bank finances its own activity in the capital markets. It borrows at a low rate, without the benefit of a government guarantee, and relends at a higher rate intended to earn a profit.
The IRS addressed the issue in Private Letter Ruling 201308021. The ruling was released to the public in late February.