Treasury Signals Protections for Housing Credit in Implementation of Global Minimum Tax

In recent days, the Treasury Department has made public comments indicating protections for the Housing Credit and other tax credit investments as part of the implementation of a 15 percent global minimum tax. As previously reported by the AHTCC, serious concerns have arisen around the potentially major impact of the global minimum tax on multinational corporations’ appetite to invest in the Housing Credit and other community development tax credits. The AHTCC has been at the forefront of efforts to advocate for the protection of the Housing Credit as global minimum tax implementation guidelines are established, including by meeting with the Treasury Department and key congressional members and staff.

The primary issue is the way in which the Organization for Economic Cooperation and Development’s (OECD) Pillar Two model rules for implementing the global minimum tax would account for the Housing Credit and other business tax credits in effective tax rate calculations. If these credits are included in the calculation, it would bring the effective tax rate for many major investors well below the 15 percent threshold, at which point investors would be required to pay a top-up tax to foreign countries in which they also do business. According to an initial survey of major investors in the Housing Credit market, the investors whose appetite would be significantly impacted by the global minimum tax represent at least 48 percent of equity financing, and likely more. These concerns were conveyed to the Treasury Department in a letter sent last month, as part of a group of 30 national trade associations representing community development credits and financing tools.

After several months of uncertainty around how tax credits would be treated in the new OECD regime, recent public statements from Treasury Department officials have signaled protections for Housing Credit investments. Assistant Secretary for Tax Policy Lily Batchelder shared last week in remarks to the D.C. Bar Association that the tax policy team at the Treasury Department has been engaging with the OECD to "clarify the treatment of general business credits under the minimum tax." Batchelder said further, "We are confident that the value of many of our general business credits is preserved under the OECD rules, and we have established a process with the OECD for working towards additional clarifications…because of the way those investments are structured and accounted for, the income or loss and the income tax consequences of those investments typically will be excluded from the effective tax rate calculation — so those credits generally should not be impacted.

In addition, in an April 25 OECD public consultation meeting on Pillar 2 rules, the OECD stated, “when the equity method is applied to investments according to the relevant accounting standard… it would be inconsistent to include the tax consequences in the [effective tax rate] computation.”

Though we are awaiting further clarification from both the Treasury Department and the OECD, these comments and our engagement with the Treasury Department in subsequent meetings imply an interpretation of the model rules that would exclude any credits using the “equity method” from the OECD effective tax rate calculations, which would generally allow for Housing Credits to fall outside of these calculations. If the Treasury Department and the OECD make this clarification that the rules allow for the exclusion of Housing Credits using the equity method from the OECD effective tax rate calculations, and if the other countries participating in the global minimum tax agreement do not issue conflicting guidance, this interpretation could greatly mitigate the risk to Housing Credit investment that the global minimum tax would have posed.

While the Treasury Department initially indicated that a solution to this issue could be making the tax credits refundable in order to come into compliance with the OECD’s Pillar 2 model rules, the new statements suggest a change in approach that allows for accounting for the credits within existing rules without changing their fundamental structure.

The AHTCC will continue to work closely with the Treasury Department and the Housing Credit investor and accounting community to urge the protection of the Housing Credit in any regulations implementing a global minimum tax. As AHTCC Executive Director Emily Cadik recently stated in Bond Buyer (paywall), "Treasury has made some very encouraging statements in recent days indicating their intention that the Housing Credit and other credits would largely not be impacted by the Pillar 2 rules implementing a global minimum tax. However, additional clarity and guidance will be needed, and the details will be important to ensure continued robust investment in the Housing Credit."

Learn more about this issue and the AHTCC’s advocacy in our April 5 alert to members, Affordable Housing Finance, Bond Buyer (paywall), Bloomberg (paywall), and POLITICO Pro (paywall).

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