Tax Equity News

Transferable Tax Credits Treated Favorably Under the OECD’s Pillar Two

Posted in Blog article Renewable energy

On July 17, 2023, the Organization for Economic Cooperation and Development (the “OECD”) released favorable guidance on transferable tax credits under Pillar Two.[1] 

The OECD’s Pillar Two is a 15 percent global minimum tax agreed to by more than 140 member countries.  Pillar Two  is intended to ensure that large multinational enterprises (knows as “MNEs”) pay their fair share of taxes by imposing a minimum tax on the income earned in each jurisdiction in which a MNE operates. The minimum tax applies to MNEs with revenues in excess of €750 million annually.  Pillar Two is a “top-up tax,” topping up the tax rate in any jurisdiction where a MNE’s  effective tax rate (“ETR”)[2] is below 15 percent.  Typically, the top-up tax is paid to the MNE’s home country (e.g., France would impose a top-up tax on the French parent of a U.S. subsidiary if the subsidiary’s ETR in the U.S. was less than 15 percent).  Thus, the MNE’s home country is able to tax the MNE’s profits from low or no-tax jurisdictions.

The Biden administration agreed to Pillar Two, but Congress has yet to enact legislation implementing it and doing so faces still Republican opposition.  The prospects for Pillar Two in the U.S. may turn on the outcome of the 2024 election.  Nonetheless, it is a current concern for U.S. subsidiaries of foreign MNEs, and even MNEs headquartered in the U.S. that have operations outside the U.S.[3] 

There was a concern that energy tax credits extended and expanded under the Inflation Reduction Act of 2022 (“IRA”)[4] could reduce a MNE’s ETR below 15 percent, subjecting it to the Pillar Two top-up tax.  Pillar Two treats credits in one of two ways based on whether credits are refundable or non-refundable.  Refundable credits receive, relatively, favorable treatment under Pillar Two and are treated as additional income (i.e., increase the denominator of the ETR ratio).  Non-refundable credits, on the other hand, are treated as a reduction in taxes paid (i.e., a lower numerator in the ETR ratio) and result in the MNE having a lower ETR. 

Prior to the release of the guidance, it was not clear if transferable credits would be treated as refundable or non-refundable.  The new OECD guidance answers that question:  transferable credits are effectively treated the same as refundable tax credits, without explicitly being categorized as refundable tax credits. 

While the guidance does not explicitly provide that the IRA credits are refundable credits, it establishes a regime that affords transferable IRA credits the same favorable treatment as refundable credits.  According to the guidance, the transferable IRA tax credits are marketable tax credits in the hands of the seller, and non-marketable tax credits in the hands of the buyer. 

Marketable transferable credits are treated as generating additional income to the seller.  For example, if the seller sells $1.00 of tax credits for $.90, the seller has $.90 of additional untaxed income, rather than a reduction in taxes.  That is the $.90 increases the denominator of the ETR ratio, rather than reducing the numerator. The IRA credits are treated as marketable transferable credits in the hands of the taxpayer that generated them, whether or not the taxpayer sells the credits.  Even though the IRA credits are not explicitly called refundable credits, by treating the credits in the ETR calculation as giving rise to income rather than a reduction in taxes, the credits are given the same favorable treatment, which is a huge relief to MNEs operating in the U.S.

For the buyer, the IRA credits are considered non-marketable credits.  For non-marketable credits, the numerator  of the ETR ratio is only reduced by the discount on the credit. This means if a buyer purchases a $1 tax credit for $0.90, only the $0.10 is deemed to reduce the numerator of the ETR ratio.  By only treating the net discount as a reduction in taxes rather than the full $1, the buyer is effectively treated like it paid taxes equal to the other $.90.  The OECD guidance is seen as a win for MNEs operating in the U.S. as it provides needed certainty and favorable treatment for transferable IRA credits.


[1] Tax Challenges Arising from the Digitalisation of the Economy – Administrative Guidance on the Global Anti-Base Erosion Model Rules (Pillar Two), July 2023 (available at:

[2] An ETR is calculated by dividing taxes paid by income.

[3] See Cong. Research Service, The Pillar 2 Minimum Tax: Implications for U.S. Tax Policy (Jul. 6, 2023) (available at (“countries where other constituent entities (such as subsidiaries and branches) are located can collect the tax by denying deductions for those constituent entities through the undertaxed payments rule.”)

[4] For details on the tax credits added by the IRA and how they can be monetized, see and and


Tax Equity News reports on issues where renewable energy meets tax policy in the United States.


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