Financing and investing in energy, critical minerals and renewables in the Americas
Mary Harmon
Saul Ewing, Chicago
Report on a panel discussion at the 16th IBA/ABA US and Latin America Tax Practice Trends Conference in Miami
Friday 14 June 2024
Session co-chairs
Juan Carlos Garantón Torres Plaz & Araujo, Caracas
Keith Hagan Dickinson Wright, Miami
Speakers
Maximiliano Batista Martinez de Hoz & Rueda, Buenos Aires
Alejandro Barrera Basham, Ringe y Correa, Mexico City
Isabel Espinoza Fischer y Cia, Santiago
Ryan Rabinovitch Fasken Martineau, Montreal
Thais Rodrigues Mattos Filho, São Paulo
José Talledo Rodrigo, Elías & Medrano, Lima
Introduction
Juan Carlos Garantón began with a brief overview of relevant facts for the session, including that energy and extractives covers a broad range of activities in different industries and different stages of production. The relevance of any particular industry or activity varies from country to country throughout the Americas, as does the level of private participation, which also varies from industry to industry and even project to project.
Fiscal packages and governmental takings, including special taxes, contributions and contractual payments, are common and often significant. As countries grapple with the energy transition, if and how governments choose to incentivise renewables and disincentivise fossil fuels also creates new opportunities.
Keith Hagan then provided an overview of the agenda, which was broken down into three main categories:
- investment and finance;
- direct and indirect transfers; and
- incentives and disincentives.
Panel discussion
Key tax issues when investing in and financing energy, critical minerals and renewables
Thais Rodrigues kicked off the first segment of the panel discussion with an overview of the investing and finance landscape in Brazil, focusing on loans, debentures and incentivised bonds.
Interest paid on loans is generally subject to withholding tax, which may be increased if the recipient is in a low-tax jurisdiction or decreased if a tax treaty applies. For the payor to deduct the interest, it must be usual and necessary for the payor’s activities, and if the recipient is a related party or in a low-tax jurisdiction then the payment is subject to transfer pricing and thin capitalisation rules. Debentures and incentivised bonds allow for more favourable withholding, but have stricter requirements regarding the use of proceeds and, for incentivised bonds, which industries are allowed to take advantage (eg, they are no longer available for the oil sector). There are also interesting tax incentives for export prepayment structures (PPE).
Canada was next, with Ryan Rabinovitch discussing the popularity of certain alternative forms of financing in the country. He contrasted royalty agreements, under which payments are generally deductible by the payor and subject to a withholding tax, with metals streaming agreements, which are long-term purchase and sale contracts with an interest component. Under the streaming agreement, the payor of the embedded interest component is generally able to deduct that amount, and there is no withholding tax. Rabinovitch also noted that debt pushdowns are generally easy to achieve with an amalgamation of a Canadian acquiror and target.
Alejandro Barrera then discussed Mexico, with a focus on mining and similar extractive projects. There are a number of challenges for financing extractive projects, such as the nature of the commodity, the need for reserves, the costs of operating, environmental and political challenges, obsolescence of equipment used in extraction and the product being mined and management issues. Equity, including public, private, joint venture and quasi-capital, and debt structures are both used. Mexico also sees use of both mining royalty and metals streaming contracts, similar to Canada.
Maximiliano Batista covered Argentina, noting that joint ventures are very common in the energy space. Debt is often seen as impractical and bonds in the local market or from multilateral agencies, government agencies and financial institutions are generally used. Major concerns include the use of losses in the face of rampant inflation before the law was changed to allow adjusting losses for inflation, and the tax impact of the steady devaluation of Argentina’s currency.
Isabel Espinoza discussed the landscape in Chile, where debt is far more common due to the potential for a far lower withholding tax on outbound interest payments compared to dividends. Before 2024, a Chilean parent company could claim a refund for taxes paid on dividends received from the operating company if the taxable income would have been completely absorbed by losses at the parent level – such as from interest deductions – meaning the only tax paid in Chile would have been a withholding tax on interest of 4–10 per cent when the cash was sent to foreign lenders. That ability has been removed, and the viability of debt pushdowns (thus allowing the operating company to take the interest deductions) is uncertain, but infrastructure-heavy industries such as energy and mining may still benefit due to accelerated depreciation deductions at the operating company level.
José Talledo closed out the segment with a discussion of loans and bonds in Peru, particularly the variance in withholding taxes and VAT depending on whether the lender is related to the borrower or if certain qualifications are met (eg, no VAT is charged if the lender is a financial or banking institution). In particular, if a Peruvian company borrows funds from an unrelated party with an interest rate less than or equal to the secured overnight financing rate (SOFR) plus 7 per cent, and the loan proceeds enter Peru and are used in the borrower’s trade or business, then the withholding tax is reduced to 4.99 per cent. Garantón asked if this meant intercompany loans are uncommon, given the high withholding rate, but Talledo responded that intercompany loans are still fairly common when the related party is in a country with which Peru has a tax treaty.
Handling potential pitfalls in the (direct/indirect) transfer of mineral and project rights
Garantón opened the discussion on transfers of interests with a note on the importance of considering the nature of the rights being transferred. A direct transfer of mineral rights or an operating entity will often be treated significantly differently than an indirect transfer of a parent or intermediate entity.
In Brazil, Rodrigues noted, an operating company in the energy or mining space must be a Brazilian entity due to the regulated nature of the industries. Brazil currently does not tax the non-Brazilian seller of equity of non-Brazilian entities, but a purchaser may wish to use a Brazilian company to buy the Brazilian target to benefit from amortisation of target goodwill.
Barrera then said that in Mexico, direct transfers are very uncommon. An indirect transfer may be subject to Mexican tax if more than 50 per cent of the value of the transferred company is from immovable property within Mexico, but there is an argument that the most valuable asset of the company will be the concession it has received from the government. A concession is inherently intangible and therefore movable, absent a provision of law specifically labelling it as immovable (which Mexico does not have), so a seller may be able to claim that more than 50 per cent of the value of the target is not from immovable property. Barrera also noted that Canadian parent entities are common because a Canadian amalgamation is not seen as a transfer – instead, under Canadian law, it is viewed as two streams joining as one, and Mexican law respects that view.
Batista focused on the VAT implications of certain transfers in Argentina. An indirect sale via the assignment of rights in a joint venture is generally not subject to VAT, but a direct transfer of wells may be. The government at least has argued that it is, but this position does not appear to be followed in practice. Indirect transfers of non-Argentinian entities are also theoretically subject to tax, but the Argentinian government has no mechanism by which to enforce this obligation, so it is generally not respected in practice.
Espinoza then returned to the earlier discussion of the categorisation of concessions as it relates to Chile, which imposes a reduced withholding tax on a direct transfer of interests in a Chilean company when less than 50 per cent of the value of the company is attributable to infrastructure. In Chile, the question of whether a concession is immovable property is undecided: it is the subject of much debate among tax professionals in the industry. Also unsettled is whether indirect transfers are subject to tax under tax treaties provisions not expressly allowing Chile (source country) to tax transfers of controlled Chilean companies. The treaties usually do not address indirect transfers explicitly; the government takes the position that it is allowed to tax indirect transfers, while taxpayers naturally take the opposite position. A recent court judgment has confirmed the taxpayers' criteria.
Garantón noted that the differences between how countries treat the same issue can be fascinating, using the classification of concessions as an example. Talledo echoed this, noting that in Peru concessions are generally deemed to be immovable property. Continuing with the discussion of Peru, Talledo noted that direct transfers generally are subject to a 30 per cent withholding tax, but tax treaties may reduce this amount. Indirect transfers will only be subject to tax in Peru in certain situations, generally focusing on either transfers of foreign entities who control the Peruvian company or when the value of the shares of the Peruvian company attributable to the interest in the foreign entity being transferred meet a certain threshold. For those selling interests in Peruvian companies, whether directly or indirectly, Talledo stressed the importance of obtaining an acquisition cost certificate. Otherwise, the seller will not be able to subtract their basis from the purchase price for Peruvian tax purposes.
Returning to the concession discussion, in Canada, Rabinovitch said in a sale of assets, concessions are generally considered ordinary income assets rather than capital gains. When stock of a Canadian company is sold, directly or indirectly, Canada will impose tax if more than half of the value of the company is derived from Canadian resource properties (ie, immovable property). However, there is a crucial exception in some (but not all) of the tax treaties to which Canada is party: property used in a trade or business in Canada is not immovable property. Notable, the tax treaty between Canada and the United States does not contain this exception, and the principal purpose test in the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting has had a significant impact on the ability of taxpayers to treaty shop.
Tax incentives and disincentives: maximising the use of investment and green credits
Hagan opened the segment on incentives and disincentives with an explanation of the investment tax credit (ITC) and production tax credit (PTC) available in the US for renewable energy projects. These are not new credits, and taxpayers have long utilised partnership structures to monetise the credits. However, recent legislation has adjusted the credits to support domestic employment and manufacturing goals and, crucially, allowed the ITC and PTC to be sold directly for cash without incurring income tax. There are also credits for domestic production of a number of critical minerals and, beginning in 2025, for clean fuel production, both of which may be sold for cash as well.
Rabinovitch noted that Canada recently enacted renewable energy incentives, including refundable tax credits, as an explicit copy of the US model in hopes of retaining investment, but the Canadian credits are not transferable and do not allow for tax equity financing. He also noted that the new refundable tax credits are income when calculating the taxpayer’s Global Anti-Base Erosion (GloBE) Rules income, but not for Canadian income tax purposes: a taxpayer may have a large amount of Pillar Two income but no Canadian income, and wind up paying tax on the credit.
In Brazil, Rodrigues said the significant tax reform recently enacted has embraced a principle of protecting the environment. In connection with this, there are new reductions for green fuels and new taxes on oil and gas. Companies in the oil sector are also no longer allowed to take advantage of incentivised bonds, as discussed in the investment and financing segment.
Barrera said that Mexico does not have any incentives, but there are some extra taxes on mining silver and gold. The tax position on stripping costs is also uncertain, as the government says they must be capitalised or are otherwise non-deductible.
Argentina also does not have many incentives, Batista noted, other than a few exceptions and special tax regimes for mining. There is a new law currently being debated in the legislature that may add new incentives, though, so by the time of the 2025 conference this may have changed.
Espinoza discussed the new copper mining royalty in Chile, which replaces the specific mining tax enacted in 2006. It includes an ad valorem tax and an income tax, which will result in a general increase in tax on mining companies, but it also includes a global limit on the taxes a copper mining company will have to pay. Because of this limit, the industry has generally accepted the new tax regime.
Talledo ended the panel with a brief mention of Peru’s new VAT refund regime. This allows mining concession holders carrying out mining exploration activities, if they sign an agreement with the government, to recover VAT paid on imports or local purchases of certain goods and on certain services and construction contracts, in each case as long as production on the mine has not begun yet.
Conclusion and final remarks
The sheer volume of content in this panel meant the delivery of substantive information went right to the end and there was no time for a Q&A. This is an extremely active area, as governments in the region consider how to tax new industries and how to approach the energy transition. The subject of this panel could have easily filled another session, and developments in this area will undoubtedly fuel similar panels at conferences to come.