Description of tax policies and tax regimes, tax equity liabilities

Ørsted A/S – Annual report – 31 December 2018

Industry: utilities, energy

5.1 Tax policy and tax regimes
Our tax policy
We recognise the key role that tax plays in society and 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 overseen by the Audit and Risk Committee.

Compliance
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.

Transparency
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

Tax regimes
At the end of 2018, our major activities were in Denmark, the UK, Germany, the Netherlands and the US.

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.

International joint taxation
For the income year 2017 and going forward, we opted to exit the international joint taxation scheme. The retaxation liability was transferred to tax payable and has been settled.

Local taxes paid
In terms of taxation, we were affected in Denmark by completed construction agreements in connection with the construction of offshore wind farms in the UK and Germany in 2018.

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. Going forward, this will change as the offshore wind farms are commissioned and will be generating positive results.

We expect to start paying more significant corporate tax in the UK in 2019, in Germany in 2019 and 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.
4.5 Tax equity liabilities

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We have entered into several tax equity partner agreements in the US. These agreements are characterised by a tax equity partner who contributes an upfront payment of a part of the initial project investment. The partner does not have an operational role in the project. The partner receives a contractually agreed return on the contribution. The initial contribution and the return is ‘repaid’ by receiving almost all of the production tax credits (PTCs) the project generates as well as the majority of other tax attributes (accelerated tax depreciation and other taxable results) from the project in the first part of the project’s lifetime as well as some cash payments. Once the contribution has been repaid, the agreement ‘flips’, and the partner is typically entitled to a minor part of the cash distributions from the project unless we purchase this right from them, which is highly likely.

We have three onshore wind farms with tax equity partners. The first two are Amazon (253MW) and Willow Springs (250MW), which were operational at the time of the acquisition of Lincoln Clean Energy. The third is Tahoka (300MW) where we signed a tax equity agreement in Q4 2018, and which was commissioned in December 2018. In addition we have one offshore wind farm with a tax equity partner. This is Block Island (30MW), which was operational at the time of the acquisition of Deepwater Wind.

Accounting policies
When a tax equity partner contributes to a US company, we evaluate our right to variable returns as well as our ability to exercise influence, including our ability to influence financial and operational Decisions influencing these returns, to determine if the company should be fully consolidated. Due to the operational and financial nature of the projects, and the influence normally given to tax equity partners in such agreements, it is normally possible for us to 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. As the initial contribution of the tax equity partner is repaid, including an agreed return, and as they do not share in the risks of the project in the same way as a shareholder, the contribution has the characteristics of a liability, is accounted for as such and is 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 partner structure, while PTCs are recognised in the periods earned, similarly to recognition of our own PTCs.

In addition to the above, we recognise a liability for the expected purchase price for the partners postflip rights to return. This 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 right, and that this is part of the financial cost of the arrangement.

If we choose not to buy the partner’s right to postflip returns, the tax equity partner will be entitled to part of the company returns in the post-flip period, and they will share in the risks and rewards in the company as a shareholder. This interest will be considered a non-controlling interest.

Key accounting judgements
Assessment of recognition of tax equity partner
On recognition of a tax equity partner, we assess the appropriate recognition of their contribution as well as the method of recognition for the elements used to repay the partner, such as PTCs and tax attributes.

In assessing recognition of tax equity partners, we look at:
– the expected flows of PTCs, tax attributes and cash payments expected 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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