While EU countries welcome the new commitment to energy transition, they fear the $430 billion Inflation Reduction Act (IRA) will unfairly disadvantage their companies relative to rivals in the United States.
What is Inflation Reduction Act 2022?
- The Inflation Reduction Act of 2022 (IRA) is a landmark United States federal law which aims to curb inflation by reducing the deficit, lowering prescription drug prices, and investing into domestic energy production while promoting clean energy.
- It is a reduced version of the Biden administration's proposed Build Back Better Act.
- At the end of a decade, according to Democrats, the U.S. will realize a deficit reduction of more than $300 billion while lowering inflation, investing in energy production, and reducing healthcare costs. Of the $737 billion in revenue raised, the legislation calls for $222 billion from a 15% corporate minimum tax.
- The legislation stands to be the single largest investment in climate and energy in the U.S. to date.
Why Europe is concerned?
- The 27 EU countries are worried their companies will be cut off from U.S. tax credits for components used in renewable energy technologies like electric cars, offered under the new law on condition they are made in North America.
- EU countries consider that some 200 billion euros ($207 billion) of the U.S. subsidies are tied to locally produced content provisions that potentially violate World Trade Organization (WTO) rules.
- Not only do the tax breaks put European companies at a disadvantage to U.S. rivals, but EU state aid rules in their current form prevent member countries from offering similarly generous tax breaks to companies looking to set up factories.
Q1) What is a tax credit?
A tax credit is an amount of money that taxpayers can subtract, dollar for dollar, from the income taxes they owe.Tax credits are more favourable than tax deductions because they reduce the tax due, not just the amount of taxable income. There are three basic types of tax credits: non-refundable, refundable, and partially refundable.
Source: Indian Express