Yellen Faces Criticism from GOP on Taxes, China Renewables and the Inflation Reduction Act

Janet Yellen

Treasury Secretary Janet Yellen faced a round of questioning that saw the Democrats applaud her, and the Republicans admonish her for a little over two hours during Tuesday’s House Ways & Means Committee hearing.  

The two main topics were the Tax Cuts and Jobs Act (TCJA), expiring next year, and the OECD tax treaty, expected to be complete at some point this summer.  

During the question and answer session, Chairman Jason Smith (R-MO) chose to focus on individual tax rates rising if the TCJA tax cuts lapsed. Yellen reiterated the White House position that no family earning under $400,000 annually will face a tax hike. It seemed the Committee Republicans just assumed corporate taxes were going up. 

This brings us to the OECD treaty. In 2021, 130 countries representing more than 90% of global GDP joined a statement establishing a new framework for international tax reform. According to the announcement, the “framework updates key elements of the century-old international tax system, which is no longer fit for purpose in a globalized and digitalized 21st-century economy.” 

This represents a positive step towards eliminating the ability of multinational companies to avoid paying U.S. corporate tax by shifting profits offshore to tax havens.

The treaty creates a global corporate minimum tax and would allow the U.S. to tax multinationals at the minimum rate if they were not paying a certain amount of taxes in their home country. 

CPA’s chief economist Jeff Ferry and tax policy director David Morse wrote about the Organization for Economic Cooperation and Development treaty in 2022.

“The U.S. has been the only country until this agreement was signed to impose a tax on the overseas profits of its multinationals (repatriated global revenues) and with this agreement secured, all countries will tax profits of their multinationals abroad,” Yellen said. “The OECD treaty creates a level playing field for American companies and the U.S. will benefit by adopting the minimum tax consistent with Pillar II of that agreement,” she said.

Brad Wenstrup (R-OH) said tax policy was “an important way to compete”. He brought up Yellen’s favorite term: ‘friend-shoring’.  

“We have to do something to counter China’s subsidies and our tax proposals are an important tool in that,” Wenstrup said. “The TCJA made our tax rate more competitive with other countries. We need to build on that and not impose tax hikes on American businesses. Take pharmaceuticals, for instance. The Chinese have a monopoly on generic medication down to key starting materials to make active pharmaceutical ingredients. How do we compete if our taxes with them go up?” he asked, unconvinced the OECD tax treaty would help if TCJA expired and led to higher C-corp rates domestically.  

Yellen said building domestic supply chains was as important to her as friend-shoring.  

“We need domestic capacity for generic drugs so we are not reliant on China and other countries,” she said, adding that the OECD Pillar II agreement would impose taxes on Chinese multinationals.  “Countries that adopt Pillar II will be able to apply taxes on China’s companies up to this minimum tax to level the playing field. China said they would implement the deal and if they don’t we can tax them through the undertax payment rule,” she said.

Wenstrup doubted the value of China’s word on this treaty.

The Inflation Reduction Act (IRA) was the next tax matter up for debate. Here, Yellen said Treasury was working with other government agencies to write rules that will make it harder for China’s renewable energy corporations to benefit from these historic tax credits.

The IRA was signed into law in 2022. It was immediately dubbed Biden’s Green New Deal as it targets renewable energy sectors like solar, and the building of a post-fossil fuels transportation system. The law did not stop China’s dominant solar companies from setting up shop in the U.S., meaning they will qualify for tax benefits like any other multinational or American company.

China’s Renewable Industry Giants & IRA Benefits

Rep. Carol Miller (R-WV) said Biden’s signature renewable energy law lacked barriers to these so-called foreign entities of concern (FEOC). For the IRA, the only country that matters as an FEOC is China. The foreign entity of concern rule does not outright ban Chinese companies, however. It only bans those who have been sanctioned by Treasury or have a majority ownership by the state.  This is the lynchpin of guidance on tax credits going forward – Treasury and others are coming up with the exact definition of who qualifies as an FEOC.

“Does the Biden administration support taxpayer dollars going to Chinese companies?,” Miller asked.

“When it comes to tax benefits for EVs, a foreign entity of concern designation will come into effect this year and next year will almost prevent entirely the participation of Chinese firms in producing EV battery components,” Yellen said, though private companies like CATL, the world’s leading EV battery maker, may be able to get away with it if they are set up outside of China or have less than 25% of its board from the government, for example. 

Miller asked about the 45X tax credit, which would impact the minerals going into battery cells for EVs as well as early supply chain components for solar, like polysilicon and solar wafers. 

Here again, Yellen reiterates that concerning 45X, an intra-agency group was “working on proposed rules” to define who qualifies. 

“My main concern is that all of these tax incentives going to China discourages U.S. companies from developing technologies themselves,” Miller said. “IRA credits are deepening China’s influence in these industries. I remain skeptical on this,” she said, mentioning two bills – the Protecting American Advanced Manufacturing Act, and the End Chinese Dominance of EVs Act. Both bills go after the 45x and the maximum $7,500 30D clean energy consumer tax credit. Sen. Marco Rubio has similar legislation in the Senate, introduced in December.

“Current rules establish a dangerous precedent where our auto and other (renewable) industries are reliant on foreign technology,” Miller said. “Chinese multinationals will receive billions of U.S. tax dollars yearly.” 

CPA estimates a $125 billion tax windfall for the dominant Chinese solar companies building factories in the U.S. because of the IRA. CPA supports the Rubio-Miller bills.

“The Inflation Reduction Act is an important industrial policy aimed at reducing U.S. dependence on China while building out renewable energy manufacturing at home,” said CPA CEO Michael Stumo in December when the bills were introduced. “It has already led to billions of dollars of investment in domestic U.S. solar production, but it still has a serious loophole that allows China to reap its benefits. Congress must act to prohibit Chinese companies from receiving Inflation Reduction Act tax credits.”

IRA Tax Credits Getting Defined, But Still a Work in Progress

China companies account for six of the top 10 EV battery brands. The others are Japanese and South Korean.

Rep. Brian Fitzpatrick (R-PA) asked Yellen about another important part of the EV battery supply chain: the critical minerals that go inside the battery cells. Where those critical minerals are made from FEOCs, the $7,500 consumer tax credit is cut in half.

“Starting this year, EV battery components made in China cannot be included in any car that receives the 30D credit, and next year that will include battery cells made from minerals processed by foreign entities of concern,” Yellen said.

Rep. Dan Kildee (D-MI) said the current 45x tax credit guidance also “leaves out critical pieces of the solar supply chain.”  

Congressman Kildee said he wanted the onshoring of the “full U.S. solar supply chain that reduces our dependence on China for components like polysilicon and solar wafers.”  

Solar wafers are small micro-chip-like squares that get plugged into a solar cell, which ultimately is installed into a solar module, what most people refer to as a solar panel.

“We have some initial guidance on domestic solar content that qualifies for the credits,” Yellen told Kildee. “We have received a lot of public feedback. Much of it is from stakeholders throughout the solar supply chain and we are taking that into account as we revise these regulations,” Yellen said.


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