Media and Retail Groups Comment on Tax Proposals, Green Book

Liberty Media Corporation & Qurate Retail, Inc.

As a follow-up to our previous conversation regarding tax proposals and the issuance of the Green Book, we wanted to follow-up with updated comments. Please contact Tim Lenneman, Senior VP of Tax, at tim@libertymedia.com with any questions or for further discussion.

GILTI

• The current Global Intangible Low-Taxed Income (“GILTI”) regime does not benefit high tax foreign taxpayers such as Qurate. The imperfect nature of the GILTI foreign tax credit regime results in double taxation due to lack of carryforward or carryback of foreign tax credits, allocation of expenses to foreign subsidiary income, and the 20% haircut on GILTI foreign tax credits.

• The proposed changes to the GILTI regime will further increase double taxation for high tax foreign taxpayers such as Qurate because the increase to the GILTI tax rate and pure country-by-country approach will exacerbate the current imperfections in the GILTI foreign tax credit regime. Qurate's average foreign tax rate is anticipated to be 32% in 2021. The current GILTI regime results in an additional U.S. tax of 4% and the proposed changes to GILTI result in a further 4% of U.S. tax resulting in a 40% effective tax rate on foreign earnings (8% of which is double taxation).

• We believe the alternative high-tax/low-tax two basket approach proposed by the Wyden/Brown/Warner International Framework is reasonable in that it allows some blending, but also meets the policy goals for low taxed earnings.

  • However, the determination of high and low tax jurisdictions should take into account permanent and timing differences for losses and tax credits and there should be no haircut on GILTI foreign tax credits, otherwise, unfair double taxation results.

FDII

• The Foreign Derived Intangible Income (“FDII”) regime was created as an incentive to create and expand business in the U.S. and is a fundamental element of our international tax system.

• Our recommendation is to retain FDII and equalize the effective tax rates for FDII and GILTI.

Minimum Tax

• Although we appreciate the policy reasons for the Green Book's application of the 15% minimum tax based on book earnings to corporations with over $2 billion of book earnings and offsets for general business and foreign tax credits, financial statement income is not a good reflection of economic income and should not be used for tax purposes.

  • There are many significant and basic timing and permanent differences between financial statement income and taxable income that should be adjusted for to avoid conflicting tax policy and unfair taxation.

  • Financial statement treatment of income and expense items is subject to change by various governing bodies that are not looking or motivated to set U.S. tax policy and may lead to unanticipated issues.

Direct Pay for Renewable Tax Credits

• As long-time tax equity investors, we understand there may be a need for a direct pay program due to ambitious emissions goals and increasing tax credit incentive proposals.

• However, we believe that the direct pay proposals do not have enough guardrails which will result in abuse and contribute to a growing tax gap —

  • Opening up the tax credit market to any participant needs to be more carefully evaluated and structured.

  • There needs to be upfront approval and ongoing monitoring of projects by the IRS to ensure compliance with tax requirements.

  • There has been no similar program for production tax credits in the past. The 1603 grant program was abused through overstated valuations to increase credits.

  • The irrevocable direct pay election prior to construction is inflexible and locks-out potential corporate/tax equity investment. The election should allow for more flexibility and allow for the direct pay election prior to the project being placed in service or an annual election to encourage corporations to make long-term commitments to carbon capture even if they are not sure they have the capacity to use the tax credits.

  • Potential abuses include:

    • The direct pay proposals are not subject to at-risk and passive loss limitations which are fundamental to our tax system and are in the statute to limit tax shelter abuses. In this time of wealthy individuals and closely-held corporations avoiding taxes, it is not the time to forgo these basic tax policy limitations that have been in place for decades.

    • For the 45Q credit, taxpayers may fail to capture and/or dispose of carbon oxide as required by statute and regulations, leading to receipt of the tax benefit while not contributing toward carbon emissions goals of the Administration and Congress.

    • While the current carryover credit regime limits the tax benefits to the extent of tax liability, direct pay benefits will be “out the door” and difficult to collect in the event of noncompliance especially from undercapitalized partnerships, individuals and closely-held companies. Pre-filing safeguards could avert post-filing compliance and collection problems.

  • Direct pay should not be fully reimbursed so that tax equity participants can compete on projects and the business and financial risks of projects can be considered.

    • Tax equity has supported renewables for many decades and will do so in the future especially with a higher corporate tax rate and stable tax incentive regimes.

    • Tax equity plays an important role in making sure that good projects are funded and bad projects are not.

    • Corporations who are looking to meet sustainability goals will be less likely to participate in projects if direct pay is fully reimbursed without any guardrails.

    • The 85% refundable direct pay proposal in the Green Act is reasonable.

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Direct Pay and IRC 49 and 469

Direct Pay proposals appear to allow taxpayers otherwise subject to the at-risk and passive loss rules to benefit from the full amount of Direct Pay. As the Administration and Congress continue their work on Direct Pay proposals, consideration should be given to whether this result is intended.

These slides are intended to summarize the at-risk and passive loss rules and certain Direct Pay proposals and their interaction.

Section 49 (“At-risk” rules for credits) in Summary

• Applies to individuals and C corps that are 50% or more owned by 5 individuals or less

• Credit Base for investment tax credits (i.e., sections 45, 47, 48A, 48B and 48C) is reduced by nonqualified nonrecourse (NQNR) financing

  • Special rule for certain energy properties

• For partnerships and S corps, determination of whether a partner's or shareholder's allocable share of financing is NQNR financing is at partner or shareholder level

  • Special rule for S corporations

Section 469 (“Passive Activity” rules) in Summary (as to credits)

• Applies to individuals, estates, trusts, C corps that are 50% or more owned by 5 individuals or less and personal service corporations

• Credit from passive activities not allowed in excess of passive tax liability

  • Applies to credits from passive activities allowed under sections 30B, 30C, 30D, and 38 to 45T (where section 38 also includes credits under sections 46, 51, 1396, and 5011 and where section 46 includes credits under sections 47, 48, 48A, 48B and 48C)

Clean Energy for America Act Direct Pay Proposal

(Section 101(a) of the Clean Energy for America Act, specifically subsection 45U(h))

(Section 102(a)(1) of the Clean Energy for America Act, specifically subsection 45D(i))

(Section 103(c)(4)(B) of the Clean Energy for America Act, adding subsection (i) to Section 45Q of the Code)

• Amount of the credit “determined under subsection(a)” shall be treated as a payment made by the taxpayer against the tax imposed by chapter 1

• For partnerships or S corporations:

  • Treated as a payment without regard to the fact that no tax is imposed by chapter 1 on such partnership or corporation;

  • Each partner's or shareholder's distributive or pro rata share of the credit shall be deemed to be zero

Intersection of Clean Energy for America Act Direct Pay and Sections 49 and 469

• Under the language of the proposed statute, projects held by partnerships and S corporations are not subject to Sections 49 and 469 and, so, direct pay to partnerships and S corporations are not limited by these provisions

• Projects held by individuals and closely held corporations (and others subject to Section 469), including in disregarded entities, arguably are not limited by Section 49 and 469 because the direct pay is the amount determined under the relevant subparagraph (a) and not under the full Code

ACCESS 45Q Direct Pay Proposal Carbon Capture, Utilization, and Storage Tax Credit Amendments Direct Pay Proposal

(Section 3 of each Act)

• Amount of the credit “which would (without regard to this section) be determined under section 45Q” shall be treated as a payment made by the taxpayer against the tax imposed by subtitle A

• No rule partnerships or S corporations

Intersection of 45Q Direct Pay and Sections 49 and 469

• Projects held by individuals and closely held corporations (and others subject to Section 469), including in disregarded entities, arguably are not limited by Section 49 and 469 because the direct pay is the amount determined under section 45Q and not under the full Code

Example

• Operation of section 49

  • Assume an individual has an initial tax basis in solar energy property that qualifies for a 30% energy percentage credit under section 48 of $1M but borrowed $900k in NQNR financing

  • Credit would be 30% of $100,000 (i.e., $30,000)

• Operation of 469

  • Assuming the same individual has no passive income, the entire credit will be disallowed (and carried forward to next year)

• Direct Pay (under above proposals)

  • Direct pay would be 30% of $1M (i.e., $300,000)