The American Public Power Association recently asked the Treasury Department for clarifying guidance related to new foreign prohibited entity rules that may limit the ability of public power utilities to claim energy tax credits.
Specifically, foreign prohibited entity rules enacted as part of the One Big Beautiful Bill Act (OBBBA) would prohibit any entity that had issued more than 15 percent of its debt to a “specified foreign entity” – primarily China – from claiming an energy tax credit.
This new rule applies to credits sought in taxable years beginning after July 4, 2025. So, for a public power utility operating on a calendar year basis, after December 31, 2025. This would affect utilities seeking to claim the investment tax credit, production tax credit, existing nuclear tax credit, or carbon capture tax credit.
In its Dec. 2 letter to Treasury Assistant Secretary for Tax Policy Ken Kies, APPA suggests that publicly offered debt be treated as not having been issued to a specified foreign entity.
This treatment best recognizes:
- The limited ownership of publicly offered debt by foreign entities (let alone specified foreign entities)
- The extremely limited circumstances under which an entity to which publicly offered debt has been issued (the issuee) may exert influence over the issuer;
- The proportionally limited value of tax credits indirectly flowing to the issuee; and
- The potential impossibility of determining whether an issuee is, or ever was, a specified foreign entity.
Failing such guidance, APPA suggests guidance to clarify that:
- The underwriter – the first bona fide owner of the debt – should be the entity to which debt is considered issued for purposes of the test.
The alternative would be considering the issuee to be the beneficial owners to whom the underwriter (or other subsequent financial intermediary) sold the debt.
Of particular concern is that roughly half of all municipal bonds are owned by households directly, and tracking each down to determine that they are not (or perhaps were not at the time of issuance) a specified foreign entity would be a practically impossible task.
Some will suggest that the underwriter or other subsequent financial intermediary could use a process similar to the “know your customer” regime for purposes of this test. That assumes, however, that the test will apply prospectively, which is not necessarily the case, APPA noted.
The debt test should be applied prospectively, preferably only to debt issued during the taxable year for which a credit is being sought.
The language of the statute is ambiguous with one clear reading being that the test should apply to debt issued during the taxable year for which a credit is being sought.
Another reading is that the test would apply to all debt ever issued by the entity.
- Such a test would be unworkable, APPA said.
- Nonetheless, APPA wanted to robustly comment so as to provide a clear case for prospective application of the test.
APPA said that the issuer should be considered to be the direct obligor under the credit facility, not other involved entities such as the offtakers of power from the credit facility.
This is an issue raised by the Edison Electric Institute in relation to parent and subsidiaries, but could also affect public power, including joint action agencies and utilities that are associated with a city, but issue debt on their own behalf.
Also, the issuer must be able to meet the debt test through reasonable due-diligence requirements.
APPA has been working with the Securities Industry and Financial Managers Association (SIFMA) and other stakeholders on this issue. The group had not yet reached consensus on the details of such a regime in time for APPA’s comments.
APPA said it continues to work closely with these groups with the hope of reaching consensus around a single approach or at the very least a directionally similar approach.
APPA does not believe that any public power utility is issuing debt to specified foreign entities, but its concern is that in tax matters the burden of proof falls on the taxpayer, i.e., the issuer of the debt.
APPA noted that it identified this issue while the bill was being drafted and has worked continuously to make the case for a reasoned approach to its implementation including in conversations with staff of the taxwriting committees prior to enactment and in conversations with Treasury officials in relation to guidance for the section 45U nuclear tax credit.
