Ørsted A/S – Annual report – 31 December 2019
Industry: utilities, energy
5.1 Tax policy and tax regimes
Our tax policy
We recognise the key role that tax plays in society and in the development of the countries where we operate. We also believe that a responsible approach to tax is essential to the long-term sustainability of the societies where we have activities and of our business across the globe.
The world’s governments have defined the greatest challenges for our societies towards 2030 through the UN Sustainable Development Goals (SDGs). At Ørsted, we are committed to running our business in a way that contributes to the SDGs. Tax payments contribute both directly and indirectly to most of the SDGs, in particular target #16.6 on the development of effective, accountable and transparent institutions.
Tax is a core part of our corporate responsibility and governance and is overseen by the Board of Directors. The Board of Directors is accountable for the tax policy, and the responsibility for tax risk management lies with the CFO and is overseen by the Audit & Risk Committee.
Our ambition is to apply best practices at all times and act in accordance with applicable legislation on tax computation and tax reporting to ensure that we pay the right amount of tax at the right time in the countries where we operate. We continuously evaluate our processes and controls to ensure that we are compliant with local and international standards relevant to our business.
Our attitude to tax planning
We only use business structures that are driven by commercial considerations, aligned with business activity, and which have genuine substance.
We make use of incentives and tax reliefs where they apply in areas where we have commercial substance.
We seek, wherever possible, to develop cooperative relationships with tax authorities, based on mutual respect, transparency and trust.
In line with our belief in transparency, we provide regular information to our stakeholders – including investors, policy makers, employees, civil society and the general public – about our approach to tax and taxes paid.
Read more about our tax policy at https://orsted.com/taxpolicy
At the end of 2019, our major activities were in Denmark, the UK, Germany, the Netherlands, the US and Taiwan.
US tax equity partnerships
We have entered into several tax equity partnership agreements in the US. For more information on our tax equity partnership structure, see note 4.5 ‘Tax equity liabilities’.
The expected value of the deferred tax liability related to property, plant and equipment at the ‘flip date’ in the tax equity partnership agreement is included in our accounts when the tax equity partnership is established.
Local taxes paid
Our taxes paid in Denmark for 2019 were affected by the completed construction agreement related to the Hornsea 1 Offshore Wind Farm in the UK.
We have made significant investments in offshore wind farms in the UK, Germany and the Netherlands, resulting in the accumulation of large tax assets in recent years. Accordingly, we have not paid significant taxes in these countries prior to 2019. This is changing, as the offshore wind farms are commissioned and are generating positive tax results, resulting in paid taxes in the UK and in Germany. We expect to start paying corporate tax in the Netherlands in 2021.
We are currently making significant investments in the US, and we do therefore not expect to pay any material corporate income tax in the foreseeable future.
We are also making material investments in Taiwan, and we expect to start paying corporate tax in 2022/2023. We expect to start paying withholding taxes on dividends in Taiwan in 2020.
Danish CFC taxation
Denmark has proposed to introduce the CFC rules in the EU Anti Tax Avoidance Directive with the most likely entry into force being on 1 July 2020. The overarching purpose of the CFC rules is to prevent companies undermine the domestic tax base by moving mobile income to low tax jurisdictions. In such a case, the CFC rules will ensure that the income will still be subject to domestic taxation.
A foreign subsidiary shall be considered to be a CFC company if 1/3 or more of its income stems from CFC income, which now also includes ‘other income from intangible property’. There is very little guidance on what is included in other income from intangible property.
The EU directive contains an exception for companies which have real commercial activity, or which are not situated in a low tax jurisdiction. However, Denmark has chosen not to make use of any of these exceptions. This means that operational foreign subsidiaries which are located in countries with the same or a higher tax rate than Denmark, and which have been established for commercial purposes,
can be considered to be CFC companies. We see this as a risk.
4.5 Tax equity liabilities
In the US, we have several wind farms with tax equity partners. During 2019, we commissioned one onshore wind farm, Lockett (184MW), with a tax equity partner.
We have four additional wind farms, three onshore and one offshore, with tax equity partners. These wind farms were commissioned during 2018 or prior to our acquisitions of Lincoln Clean Energy and Deepwater Wind.
Description of tax equity partnerships
Tax equity partnerships are characterised by a tax equity partner who contributes an upfront payment as part of the initial project investment and does not have an operational role in the project. The partner receives a contractually agreed return on the contribution. In order to ‘repay’ the initial contribution and the return, a disproportionate share of the production tax credits (PTCs) and other tax attributes (accelerated tax depreciation and other taxable results) are allocated to the partner during the first part of the project’s lifetime. The partner also receives some cash payment-based percentages specified in the partnership agreements. Once the partner receives the agreed return, the agreement ‘flips’, and the partner is typically entitled to a minor part of the cash distributions from the project, unless we repurchase this right from them, which is highly likely.
When a tax equity partnership is formed, we evaluate if the company should still be fully consolidated based on our right to variable returns as well as our ability to exercise influence on financial and operational decisions impacting those returns. Due to the operational and financial nature of the projects, and the influence normally given to tax equity partners in such agreements, we normally have the influence to fully consolidate companies that have tax equity partners.
The terms of the tax equity partner’s contribution are evaluated to determine the accounting treatment. The contribution generally has the characteristics of a liability as the initial contribution is repaid, including an agreed return, and the partner does not share in the risks of the project in the same way as a shareholder. As such, the contribution is accounted for as a liability and measured at amortised cost.
The liability is based on the expected method of repayment and is divided into:
– a net working-capital element to be repaid through PTCs and other tax attributes
– an interest-bearing debt element expected to be repaid through cash distributions.
The partner’s agreed return is expensed as a financial expense and is recognised as an increase of the tax equity liability. PTCs and other tax attributes transferred to the tax equity partner are recognised as other operating income. Tax attributes allocated to the tax equity partner are deferred and recognised on a straight-line basis over the estimated contractual length of the partnership structure, while PTCs are recognised in the periods earned, similar to recognition of our own PTCs.
In addition to the above, we recognise a liability for the expected purchase price for the partner’s post-flip rights to cash distributions. This liability is recognised at fair value, and adjustments are expensed as a financial item. This recognition reflects the intention and high likelihood that we will purchase the partner’s post-flip rights, and they are part of the financial costs of the arrangement.
If we choose not to buy the partner’s right to post-flip rights, the tax equity partner will be entitled to part of the company’s returns in the post-flip period. At that point, the partner will share in the risks and rewards in the company as a shareholder and will be considered a non-controlling interest.
Key accounting judgements
Assessment of recognition of tax equity partner
On formation of a tax equity partnership, we assess the appropriate recognition of the partner’s contribution as well as the method of recognition for the elements used to repay the partner, such as PTCs and tax attributes.
In assessing the recognition of the partner’s contribution, we look at:
– the expected flows of PTCs, tax attributes and cash payments to the partner
– the rights and obligations of both us and the tax equity partner.
The deferral of the income related to tax attributes and the recognition of the contribution as working capital or interest-bearing debt, are affected by our expectation to the size, method and timing of repayments.