Illinois Loses First Shot at Interchange Fees on State and Local Taxes
Illinois enacted a law that prohibits a credit card holder’s bank from charging or receiving interchange fees on the portions of transactions that include Illinois state or local taxes and gratuities, in effect starting July 1, 2025. IL Interchange Fee Prohibition Act (“IFPA”) 815 ILCS 151/150-1 et seq. The Illinois Bankers Association and others collectively sought relief in the federal courts to prevent the IFPA from taking effect and asserted that the IFPA is preempted by federal laws, is unconstitutional under the Supremacy Clause of the United States Constitution, and is discriminatory under the dormant Commerce Clause of the United States Constitution because it imposes a regulatory measure that “benefit[s] in-state economic interests by burdening out-of-state competitors.” Compl. ¶ 202 to 224. They won a preliminary injunction that temporarily blocks the law while the challenge proceeds. Illinois Bankers Association’s et al. v. Kwame Raoul, in his official capacity as Illinois Attorney General, No. 24 C 7307 (N. D. Ill. Dec. 20, 2024).
A preliminary injunction in any court requires, at a minimum, the court to believe that the party seeking the injunction has a reasonable likelihood of success on the merits of the actual case and will suffer irreparable harm if application of the law is not stayed while the case proceeds. This means at least two things. First, you have to be prepared for a mini-proceeding on the case before you get to the trial stage at which you would put on your full case. That is, if you cannot demonstrate that you are likely to ultimately win and you would be harmed by not halting the law early, why would the court want to stay the application of a law at an early stage of your case? Second, if you win a preliminary injunction, you are more likely to ultimately prevail.
The court found that:
the IFPA prohibits charging or receiving interchange fees on the portion of a credit card transaction that includes Illinois state or local taxes or gratuities;
the IFPA defines an interchange fee as “a fee established, charged, or received by a payment card network for the purpose of compensating the issuer for its involvement in an electronic payment transaction[;]”
under the federal National Bank Act powers, banks are authorized to engage in any activity that is “incidental to the business of banking [;]”
Office of the Comptroller of the Currency guidance makes clear that processing credit and debit card transactions is part of the business of banking;
the IFPA directly regulates credit and debit card transactions by dictating the amount that banks can charge for a transaction; and
by barring a credit card issuer from charging interchange fees on state and local taxes and gratuities, the IFPA alters a bank’s right to determine how best to structure their non-interest fee arrangements with merchants.
The banks demonstrated irreparable harm by proving that costs to make changes to their payment processing systems (the current systems do not distinguish whether the transaction is for state and local tax or gratuities) would not be recouped if the law was later struck down.
The takeaway here is that a preliminary injunction and a challenge in federal court are powerful tools that can add leverage if the case is right for using them. Often state tax challenges are prohibited in federal courts under the Tax Injunction Act, which provides that federal courts “shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State.” 28 USC § 1341. However, if you can get there, make a federal case out of it!
2025 California Wildfires: Understanding Employers’ Obligations
As the Southern California wildfires rage on with devastating consequences, employers may be grappling to formulate an appropriate response.
Employers may have specific legal obligations as well as optional ways to provide assistance to affected employees. This publication addresses applicable employment laws that implicate pay, leaves, and other aspects of employment that may be impacted by the wildfires. Employers should also review our publication on special benefits they may wish to provide.
Employer Obligations
Notice Requirement for New Hires
California law requires employers to provide non-exempt employees with a wage theft notice upon hire. Among other requirements, employers must notify employees if there is a state or federal emergency or disaster declaration applicable to the county or counties where the employee will work issued within 30 days before the employee’s first day of employment that may affect their health and safety. Accordingly, employers in Los Angeles and Ventura counties will need to notify non-exempt employees starting employment within thirty days after January 7, 2025 that the Governor issued an Emergency Proclamation related to the wildfires if the emergency may affect their health and safety during their employment.
Disaster and Evacuation Zones
Except for certain essential personnel, employees are generally protected from retaliation by employers under a new California law if they refuse to work in unsafe conditions, including refusing to work in evacuation zones. The law also prohibits employers from preventing any employee from accessing their mobile or other communication device for seeking emergency assistance, assessing the safety of the situation, or communicating with a person to confirm their safety. California employers can monitor to see whether their worksites are subject to an evacuation order or evacuation warning through resources such as the California Department of Forestry and Fire Protection (CalFire)’s Emergency Incident website.
Addressing Wildfire-Related Workplace Closures
Employers in certain industries or specific circumstances may be subject to special rules governing their payroll and benefits obligations, as detailed in this section below. If in doubt about whether any of the following special rules or exceptions apply, and for information about additional wage and hour laws, California employers should seek counsel to ensure compliance. Several points are broadly applicable to employers whose normal operations are disrupted by the ongoing disaster.
Non-Exempt (Overtime-Eligible) Employees
Under normal circumstances, California requires employers to provide reporting time pay to non-exempt employees who report to work but are sent home early by the employer. Specifically, when a non-exempt employee reports for their shift and works less than half of their scheduled shift, they must be compensated for “reporting time” at their regular rate of pay for at least half of their scheduled hours, but in no event for less than two hours nor more than four hours.
However, no reporting time pay is due:
When the employer’s operations cannot begin or continue due to threats to employees or property, or when civil authorities recommend that work not begin or continue;
When public utilities fail to supply electricity, water, or gas, or there is a failure in the public utilities, or sewer system; or
When the interruption of work is caused by conditions not within the employer’s control (for example, a wildfire).
When a business must close due to a wildfire (as a result of a threat to employees or property, a public utilities failure, or on civil authorities’ recommendation), the reporting time pay requirements do not apply. In this limited scenario, an employer that sends non-exempt employees home early must only pay for the hours the employee actually worked. However, as noted below, employees may be entitled to access paid time off, such as vacation and paid sick time under an employer’s policies and applicable law to be compensated during the time not worked.
Similarly, retail employers operating in the City of Los Angeles that are subject to the Fair Work Week Ordinance should note that store closures due to the wildfires may qualify as a “force majeure” exemption from the ordinance’s predictive scheduling requirements, as described in Regulation 5.1 of the Rules and Regulations implementing the law.
Exempt (Overtime-Ineligible) Employees
Generally, under federal and California law, when an exempt employee performs any work during a workweek, they are entitled to their full pay for the workweek. Therefore, even if an exempt employee only works one day in a workweek before a business is closed due to a wildfire, the employer must generally pay the exempt employee for the entire workweek.
However, if a business is closed for a full workweek and the exempt employee performs no work, an employer is not required to pay the employee for that workweek (though an employer may still choose to do so). Employees who are not paid for a full week for this reason may be entitled to access paid time off, such as vacation and paid sick time under an employer’s policies and applicable law.
Wildfires’ Impact on Unemployment Benefits and Filing of Payroll Taxes/Reports
Employees who lose their jobs or have their hours reduced due to the wildfires may be eligible for unemployment insurance benefits through the State of California. The Governor’s Executive Order N-2-25 related to the wildfires waives the one-week waiting period for affected workers who qualify for regular unemployment benefits. The order also allows employers to request up to a 60-day extension to file state payroll reports or deposit payroll taxes.
In addition, individuals who lost their jobs due to the severe wildfires and winds, and who do not qualify for regular unemployment benefits, may now apply for federal Disaster Unemployment Assistance (DUA). DUA benefit claims must be filed by March 10, 2025.
Leave of Absence and Time Off Considerations
Employers in impacted areas will likely see employees taking time off from work for various wildfire-related reasons. In this regard, employers should keep the following laws in mind, including some recent amendments.
California and Los Angeles City Paid Sick Time
Employees who need time off due to wildfire-related reasons may be entitled to use paid sick time under state and local law. This can be for treatment or for preventative care. Employers should remember that covered “family members” include an employee’s parent, child, spouse, registered domestic partner, grandparent, grandchild, sibling or designated person. A “designated person” is anyone designated by the employee at the time of taking leave. While employees may be limited to one designated person per year under state law, the Los Angeles City paid sick leave law also covers as family members any individual related to the employee by blood or affinity whose close association with the employee is the equivalent of a family relationship.
The number of paid sick time hours to which employees are entitled under California law increased last year to 40 hours per year. Employers should also be mindful that employees working in the City of Los Angeles may be entitled to up to 48 (not 40) hours of paid sick time per year. More time may be required under both laws if the employer uses an accrual-based policy.[1]
The California Family Rights Act (“CFRA”)
Employers should also recall that, to the extent an eligible employee needs to take time off to care for their own serious health condition or a serious health condition of a family member, the California Family Rights Act applies where an employer has at least five employees (not 50, as under the FMLA), and that under CFRA, the definition of “family member” is broader than under the FMLA. Specifically, in addition to covering an employee’s spouse, parents, and minor children, CFRA also covers an employee’s child of any age, domestic partner, parent-in-law, grandparent, grandchild, or sibling with a serious health condition. As is the case with the paid sick leave law, there is also a “designated person” provision. Under this law, a designated person can be any individual related by blood or whose association with the employee is the equivalent of a family relationship.
Employers should also remember that even in cases where the FMLA and/or CFRA does not apply, the employer may be required to allow an employee to take time off as an accommodation for a disability under the federal ADA and/or the California Fair Employment and Housing Act.
Other Potentially Applicable California Leave Laws
California employers should also be mindful of the following leave laws that could be implicated by the fires. The State’s School Activities Leave Law may provide employees with the right to take time off in connection with school closures and other childcare emergencies, and to locate and enroll a child in a new school. Further, California’s recently expanded crime and victim leave laws may require that employees be given time off to testify or attend court proceedings related to certain crimes or obtain medical treatment and psychological counseling in connection with domestic violence. Finally, under California’s bereavement leave law, employers should be aware that they must provide up to five unpaid days off in connection with the death of certain family members of their employees.
Wildfire Smoke and Workplace Safety
The California Division of Occupation Safety and Health (Cal/OSHA)’s “Protection From Wildfire Smoke” regulation addresses the hazards employees may be exposed to from small particles in wildfire smoke, known as PM2.5.
Employers must comply with the regulation where applicable unless:
The worksite is a completely enclosed building or vehicle in which air is filtered by a mechanical ventilation system and the employer ensures that windows, doors, and other openings are kept closed except when it is necessary to open doors to enter or exit.
The employee’s exposure is limited to a total of one hour or less during a shift.
The employee is a firefighter engaged in wildland firefighting.
When an employer subject to the regulation should reasonably anticipate that employees may be exposed to wildfire smoke, the employer must:
Monitor the Air Quality Index (AQI) for levels of PM2.5, which can be monitored through resources such as the U.S. Environment Protection Agency’s AirNow website.
Implement a system for communicating wildfire smoke hazards in a language and manner readily understandable by all employees.
Provide relevant training.
Control harmful exposures to employees, including but not limited to, providing NIOSH-approved respirators (such as N95s) to employees for voluntary use when AQI for PM2.5 is between 151 to 500; and for mandatory use when AQI for PM 2.5 exceeds 500.
Cal/OSHA maintains an informative “Worker Safety and Health in Wildfire Regions” webpage, including a fact sheet for employers.
Additional Ways to Assist Employees
Provide your employees with information from the State and County regarding wildfire resources and recovery.
Provide your employees with a 401(k) or other benefits plan that allows for hardship distributions for disaster-related expenses and losses, or remind them of existing distribution options.
Work with tax advisers to explore the feasibility of providing employees with non-taxable payments to assist with disaster-related expenses or establishing a charitable foundation to provide disaster relief assistance to employees.
Consider donating to or collaborating with an existing charitable relief organization to aid employees, clients, and other stakeholders in need.
Add an Employee Assistance Program (EAP) as a benefit, which includes counseling and other social services to assist employees and families in crisis. If the company already maintains an EAP, remind employees of its existence and benefits provided.
ENDNOTES
[1] Recent changes to the California paid sick time law include an expansion of the use of paid sick time for “safe time” purposes and clarification of the preventative care reasons for which agricultural employees may use paid sick time. We wrote about that here.
Proposed Texas Senate Bills Have Potential Negative Impacts on Wind and Solar
Renewable energy developers should be aware of the proposed legislation in Texas that, if passed, will significantly impact existing wind and solar facilities as well as development-stage projects. Senate Bill 819 (SB 819) was filed on 16 January 2025, and if approved unchanged, would impose additional permitting requirements for Texas wind and solar projects. Also, Senate Bill 714 (SB 714) was filed recently and, if enacted, would require the Electric Reliability Council of Texas (ERCOT) and the Public Utility Commission of Texas (PUCT) to adopt rules, operating procedures, and protocols to eliminate or compensate for any distortion in electricity prices in ERCOT caused by federal tax credits under 26 U.S.C. § 45.
SENATE BILL 819 REPACKAGES FAILED SENATE BILL 624 FROM LAST YEAR’S SESSION
SB 819 appears to be an updated version of Senate Bill 624 (SB 624), which was introduced during the 2023 Texas legislative session, but ultimately failed. SB 624 would have: 1) required all (including existing) renewable facilities in the state to obtain a permit from the Texas Commission on Environmental Quality, which included submitting detailed plans, conducting various studies, and complying with strict regulations, and 2) afforded local governments more authority to approve or deny permits for renewable energy projects.
SB 624 proposed several burdensome requirements that would have been costly to the renewable energy industry, and experts at the time anticipated that a similar bill would be reintroduced potentially in a future legislative session.
AS PROPOSED, SENATE BILL 819 WOULD IMPACT EXISTING AND NEW WIND AND SOLAR PROJECTS
Similar to SB 624, SB 819 proposes several new restrictive requirements on wind and solar (renewable) energy generating facilities. Renewable energy facilities with a capacity of 10 MW or more would have to obtain a previously unrequired permit to interconnect to a transmission facility, unless the PUCT approves the construction by order. A wind or solar facility interconnected prior to 1 September 2025, must apply for a permit if that facility increases its electricity output by 5 MW or more, or if there are any material changes to the placement of the facility.
The application to obtain this permit would require key information, including the location and type of facility and an environmental impact review prepared by the Parks and Wildlife Department. Details around the scope of the environmental impact review are to be determined by the PUCT, but at a minimum, the format of review must establish certain processes for application, criteria for the PUCT to evaluate the environmental impact, methods to determine an environmental impact score, fees to conduct the review, and guidelines for use of mapping applications.
After receipt of the permit application, SB 819 would require the PUCT to provide public notice of the application to county judges within 25 miles of the boundary of the renewable energy facility, hold a public meeting, and publish two consecutive publications in a newspaper in each county in which the renewable energy facility will be or is located. The proposed bill provides further instructions to the PUCT on information to be provided and other minimum requirements for the public notice and public meeting.
When considering the permit application, the PUCT would assess the applicant’s compliance history, whether the issuance of the permit would violate any state or federal law, and whether the permit holder has any vested right in the permit. Permits are to be issued with several conditions prescribed by the PUCT, including boundary lines, the maximum number of renewable energy generation facilities authorized under the permit, and monitoring and reporting requirements.
SB 819 also considers decommissioning and removal of renewable energy generation facilities. Each permit holder would be required to pay an annual environmental impact fee, which would be deposited into a new renewable energy generation facility cleanup fund, assessed by the PUCT based on several factors including the efficiency and the area and size of the renewable energy generation facility, the environmental impact score provided under the environmental impact review, and any expenses necessary to implement the renewable energy generation facility cleanup fund. This bill also allows the PUCT to seek funding from the US Environmental Protection Agency for costs to remove decommissioned facilities.
Finally, SB 819 would prohibit the governing body of a taxing unit to exempt from taxation a portion of the value of real property on which a renewable energy generation facility is located or of tangible personal property located or planned to be located on the real property during the life of the facility.
SENATE BILL 714
Separately, Senate Bill 714 (SB 714) was also recently filed, and if enacted, would require ERCOT and the PUCT to adopt rules, operating procedures, and protocols to eliminate or compensate for any distortion in electricity prices in ERCOT caused by federal tax credits under 26 U.S.C. § 45, which provides tax credits for renewable energy produced. Essentially, the bill would require rules to be adopted to ensure that costs imposed on the ERCOT system by the sale of electricity from facilities eligible for a section 45 federal tax credit are paid by the parties that impose those costs. As an example, the bill cites “costs of maintaining sufficient capacity to serve load at the summer peak caused by the loss of new investment from below-market prices”. SB 714 specifically authorizes the PUCT and ERCOT to eliminate any rules or protocols that “attempt to adjust electricity prices to reflect the value of reserves at different reserve levels based on the probability of reserves falling below the minimum contingency level and value of lost load”. If enacted, SB 714 would take effect on 1 September 2025.
CONCLUSION
If passed, SB 819 and SB 714 are likely to stifle renewable development at a time when the state cannot keep up with increased energy demands. SB 819 would impose costly regulatory burdens on the renewable energy industry in Texas. If passed in its current form, SB 819 is likely to have a chilling effect on investors’ appetites to finance new projects or expand existing facilities and will likely negatively impact renewable projects that are operating within the state. SB 714 would erode the pricing benefits that correspond to the tax credit, including the ability of renewable facilities to offer negative pricing to the ERCOT market. Both bills would slow the growth of the renewable energy industry in Texas.
Property Tax Relief for Southern California Property Owners Affected by the Recent Palisades, Eaton, and Other Fires and Windstorm Conditions
Recent fires in Southern California, including the Palisades, Eaton, and Sunset fires, have collectively burned tens of thousands of acres and devastated communities across the Greater Los Angeles area. More than 12,000 structures have been destroyed or damaged, including homes and businesses, and initial estimates have placed this emergency among the most destructive in California history. On Jan. 7, 2025, Governor Newsom proclaimed a state of emergency in Los Angeles and Ventura Counties due to the Palisades Fire and windstorm conditions.
Below we highlight property tax relief measures that may be available to property owners whose properties have been damaged or destroyed by these recent events. As discussed further below, for most affected property owners, property tax relief options include a temporary reduction in the damaged or destroyed property’s assessed value, deferral of property taxes, and/or one or more options to transfer the damaged or destroyed property’s base year value to replacement property. A recently issued executive order also provides for a limited suspension on the imposition of penalties, costs, or interest for the failure to pay property taxes or file a personal property tax statement. Each of these relief measures, and the related eligibility and filing requirements, are discussed in more detail below. Additionally, in certain situations, additional relief options may be available, depending on the specific facts in each case. Property owners should seek the advice of their professional advisors to understand how the options may apply to their particular circumstances.
Samuel Weinstein Astorga also contributed to this alert
Continue reading the full GT Alert.
IRS Roundup January 6 – 10, 2025
Check out our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of January 6, 2025 – January 10, 2025.
January 6, 2025: The IRS released Internal Revenue Bulletin 2025-2, which includes Announcement 2025-2. The announcement states that, if finalized, certain portions of proposed regulations on required minimum distributions under Section 401(a)(9) of the Internal Revenue Code (Code) will not apply before the 2026 distribution calendar year.
January 7, 2025: The IRS reminded taxpayers that final 2024 quarterly estimated tax payments are due January 15, 2025.
January 7, 2025: The IRS announced that the IRS Free File Guided Tax Software is now available through eight private-sector partners for taxpayers with adjusted gross income of $84,000 or less in 2024. One partner will offer a product in Spanish.
January 7, 2025: The IRS reminded taxpayers that IRS-certified volunteers are available to help qualified individuals file federal tax returns. Taxpayers can also sign up to volunteer with the Volunteer Income Tax Assistance or Tax Counseling for the Elderly programs.
January 8, 2025: National Taxpayer Advocate (NTA) Erin M. Collins released her 2024 Annual Report to Congress. The report identifies the 10 most serious problems involving taxpayers’ interactions with the IRS and makes administrative and legislative recommendations to address said problems. NTA Collins found overall improvement in the IRS’ service to taxpayers but also acknowledged persistent challenges, including delays in processing Employee Retention Credit claims and resolving Identity Theft Victim Assistance cases.
January 8, 2025: The IRS issued Revenue Ruling 2025-3, which addresses whether Section 530 of the Revenue Act of 1978, Pub. L. No. 95-600, as amended (Section 530) (addressing controversies involving whether individuals are employees for purposes of employment taxes), or the reduced rates of Code Section 3509 apply in five factual situations articulated in the ruling. The ruling also addresses whether the IRS will issue a notice of employment tax determination under Code Section 7436 in these same five situations.
The IRS also issued Revenue Procedure 2025-10 to provide updated guidance regarding the implementation of Section 530.
January 8, 2025: The IRS issued Revenue Procedure 2025-11, which provides the process under Code Section 48E(h) to apply for an allocation of capacity limitation as part of the Clean Electricity Low-Income Communities Bonus Credit Amount Program for 2025 and subsequent years. Receipt of an allocation increases the amount of the clean electricity investment credit determined under Section 48E(a) for the taxable year in which the applicable facility, with which the allocation of capacity limitation is associated, is placed in service. The revenue procedure provides guidance regarding the application process, including application review, documentation requirements, and placed in service reporting requirements. It also provides information on requirements specific to the Additional Selection Criteria application options, including documentation submission requirements, and describes how the capacity limitation will be divided across the facility categories.
January 10, 2025: The IRS announced that individuals and businesses in southern California affected by wildfires and straight-line winds designated by the Federal Emergency Management Agency, including taxpayers in Los Angeles County, now have until October 15, 2025, to file federal individual and business tax returns and make tax payments. The new deadline applies to:
Individual income tax returns and payments normally due April 15, 2025
2024 contributions to individual retirement accounts (IRAs) and health savings accounts
2024 quarterly estimated income tax payments normally due January 15, 2025, and estimated tax payments normally due April 15, June 16, and September 15, 2025
Quarterly payroll and excise tax returns normally due January 31, April 30, and July 31, 2025, among other filings.
Additionally, qualifying individuals and businesses that suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2025 return normally filed next year), or the return for the prior year (2024).
The announcement also reminds taxpayers that qualified disaster relief payments are generally excluded from gross income, and that affected taxpayers who participate in a retirement plan or IRA may be eligible to take a special disaster distribution that would not be subject to the additional 10% early distribution tax.
January 10, 2025: The IRS announced that the 2025 tax season will start January 27, 2025. Direct File will open on that date for taxpayers in 25 states. Taxpayers can use the Where’s My Refund? tool within 24 hours of e-filing to check the status of their 2024 income tax refund. Refund information is normally available after four weeks for taxpayers who filed a paper return.
January 10, 2025: The IRS issued Notice 2025-10, announcing forthcoming proposed regulations that will address the clean fuel production credit determined under Code Section 45Z. This credit applies to eligible transportation fuel that is produced domestically after December 31, 2024, and sold by December 31, 2027. The notice also provides draft text for forthcoming proposed regulations and requests public comments.
The IRS also issued Notice 2025-11, providing additional guidance on fuel emissions rates for purposes of the Section 45Z credit and contains the initial emissions rate table described in Code Section 45Z(b)(1)(B)(i).
January 10, 2025: The IRS published final regulations that modify the rules for classifying digital asset transactions. The final regulations also provide rules for the classification of cloud transactions. These rules apply for purposes of the international provisions of the Code and are effective January 14, 2025.
The IRS issued Notice 2025-6 in connection with these final regulations. The notice requests comments on any potential implications if the characterization rules currently contained in Treasury Regulation §§ 1.861-18 and 1.861-19, as amended and added by the 2025 final regulations, are expanded to apply to all provisions of the Code.
January 10, 2025: The IRS issued final regulations that identify certain partnership transactions that trigger basis adjustments under Code Sections 734 and/or 743 as transactions of interest (a type of reportable transaction). Under the final regulations, material advisors and certain participants in these transactions are required to file disclosures with the IRS and are subject to penalties for failure to disclose. The final regulations contain a six-year lookback period and can require disclosure of transactions dating back to January 1, 2019. Additionally, the final regulations contain significant concessions in response to comments supplied to the original proposed version of the regulations. However, in the authors’ view, these concessions do not go nearly far enough, and the IRS may take the position that the final regulations are broad enough to apply to certain commonplace transactions that have little or no resemblance to the apparent abuse that the government seeks to curb.
January 10, 2025: The IRS issued proposed regulations, setting forth guidance for retirement plans that permit participants who reached age 50 to make additional elective deferrals that are catch-up contributions. The proposed regulations reflect statutory changes made by the SECURE 2.0 Act of 2022, including the requirement that catch-up contributions made by certain catch-up eligible participants be designated after-tax Roth contributions. The proposed regulations would affect participants in, beneficiaries of, employers maintaining, and administrators of certain retirement plans.
January 10, 2025: The IRS issued proposed regulations, setting forth guidance on automatic enrollment requirements that apply to retirement plans under Code Sections 401(k) and 403(b). The proposed regulations provide that, unless an employee opts out, a plan must automatically enroll the employee at an initial contribution rate of at least 3% of the employee’s pay and automatically increase the initial contribution rate by one percentage point each year until it reaches at least 10% of pay.
The Trump Administration’s Day-One Executive Actions: Impacts on Energy and Environmental Policy and More
On January 20, 2025, President Trump re-assumed the presidency with a flurry of executive orders and memoranda, many of which directly impacted energy and environmental issues. These orders included a production-minded strategy entitled “Unleashing American Energy,” a short-term regulatory freeze, a declaration of a national energy emergency, a specific order regarding wind energy and an order establishing the new Department of Government Efficiency (DOGE). Other topics may have profound impacts on energy, like the trade executive order which may impact the supply chain for energy projects.
Bracewell’s Policy Resolution Group has prepared a source book of analytical material on all the executive orders and more. We invite you to read through the material and contact us with questions. It has been said that so many orders came out on Day One precisely to shield any one order from too much criticism. In any event, the process of addressing all these executive actions is ongoing and iterative.
To get a sense of all that has happened, we have broken out a series of answers to frequently asked questions. Below is our thinking, although it is not yet dispositive.
1. What is an executive order anyway, and how far can it move the needle?
A presidential executive order is a signed directive from the president to federal agencies and officials of the executive branch, carrying the force of law. These orders allow presidents to move quickly on policy matters without congressional approval, making them powerful tools for implementing the president’s agenda.
However, executive orders face significant limitations. First, they must be rooted in powers granted to the president by the Constitution or delegated by Congress through federal law. Presidents cannot simply create new laws or override existing ones through executive orders. Second, executive orders can be challenged in federal courts if they exceed presidential authority or violate constitutional rights. The Supreme Court has struck down executive orders multiple times throughout history.
Additionally, future presidents can easily revoke or modify previous executive orders with a stroke of a pen. This means that policies implemented through executive orders may lack permanence compared to legislation passed by Congress. Congress can also pass laws that explicitly override executive orders or deny funding for their implementation.
Finally, executive orders only apply to the federal government and its employees. They cannot directly regulate private citizens, businesses, or state governments unless specifically authorized by the Constitution or federal law.
2. I see the president signed an executive order implementing a regulatory freeze. What does that mean for rules already final? What does it mean for sub-regulatory actions like guidance?
A regulatory freeze like the one described in President Trump’s recent executive order could be applied to regulations and to guidance documents or other sub-regulatory notices. Such freezes are fairly commonplace during presidential transitions between administrations of different political parties. In brief, the executive order, titled “Regulatory Freeze Pending Review,” directs executive departments and agencies to halt the proposal or issuance of any rules until they are reviewed and approved by a department or agency head appointed or designated by the president after January 20, 2025.
For rules that are recently finalized and effective, the executive order may still impact their implementation depending on their status and significance.
The order directs agencies to consider suspending or extending the effective dates of recently issued rules to allow for further review by the new administration. This review ensures alignment with the administration’s priorities and provides an opportunity to re-evaluate rules for their legal, economic, and policy implications.
If deemed inconsistent with the administration’s objectives, such rules could be modified, repealed, or replaced. However, exemptions may apply to rules critical to public health, safety, or national security.
As a result, agencies and stakeholders may face delays or uncertainty regarding the enforcement of these recently finalized regulations. This process underscores the administration’s focus on recalibrating the regulatory landscape to reflect its goals while maintaining flexibility for urgent matters.
The executive order establishes a temporary halt on the issuance, proposal, or implementation of new regulations and guidance by executive departments and agencies. It applies to rules and regulatory actions, including those defined under the Administrative Procedure Act (5 U.S.C. § 551(4)), Executive Order 12866, and Executive Order 13891, encompassing guidance documents and policy interpretations.
The order mandates that no regulatory action be proposed or finalized without review and approval by a department or agency head appointed by the president after January 20, 2025. It also calls for the withdrawal of regulations that have been submitted to the Federal Register but have not yet been published, as well as the suspension or extension of effective dates for recently issued rules to allow for additional review.
This freeze aims to ensure that pending or new regulations align with the incoming administration’s priorities, allowing for comprehensive evaluation of their economic, legal, and policy implications. Exemptions may be granted for rules critical to public health, safety, or national security, as determined on a case-by-case basis.
3. What did the president mean when he declared a “National Energy Emergency” and what are the practical implications?
President Trump declared a “National Energy Emergency,” citing insufficient energy production, transportation, refining, and generation as critical threats to the US economy, national security, and foreign policy. The key elements of that declaration included: (1) an order designating vulnerabilities in energy infrastructure and supply as unusual and extraordinary threats, justifying the use of broad emergency powers; (2) a directive to agencies to expedite the leasing, permitting, siting, production, transportation, refining, and generation of energy resources, including on federal lands; and (3) invoking specific authority, like the Defense Production Act (DPA) and Section 202(c) of the Federal Power Act (FPA).
What does it all mean?
DPA grants the federal government authority to direct industrial production to address national security needs, which now include energy infrastructure. Theoretically, it could compel companies to prioritize contracts for energy infrastructure, including pipelines, refineries, and other projects. Pursuant to DPA authority, the government might offer loans, grants, or subsidies to increase the domestic manufacturing of critical energy components like turbines, batteries, and transformers. DPA could even be used to increase capacity for refining fossil fuels or producing biofuels.
FPA Section 202(c) enables the secretary of energy to direct power plants or transmission systems to operate during emergencies to ensure grid reliability, potentially keeping coal, natural gas, and nuclear power plants operational by overriding environmental or regulatory restrictions.
By leveraging emergency tools like DPA and Section 202(c), the administration could expedite projects and mitigate regulatory delays, reshaping the US energy landscape. But use of the authority in this manner is still somewhat untested.
4. There has been so much discussion on permitting reform, particularly in Congress relating to the National Environmental Policy Act (NEPA). What do the executive orders do to advance the permitting reform agenda? Does it obviate the need for congressional action?
Unleashing American Energy: The executive order entitled “Unleashing American Energy” addresses NEPA when it calls for streamlined environmental reviews and permitting processes for energy projects. It directs federal agencies to ensure that NEPA reviews are completed within specified timeframes and limits their scope to avoid delays in energy development.
The order likely improves efficiency by reducing bureaucratic hurdles and establishing clearer timelines, but its effectiveness candidly will depend on agency implementation and potential legal challenges.
The order may well expedite permitting administratively, but it does not eliminate the need for legislation to codify broader reforms or address more complex permitting barriers, such as litigation risks or inter-agency conflicts. Without Congress acting, the order’s impact may be limited to short-term procedural improvements rather than lasting, comprehensive changes.
National Energy Emergency: Unlike past administrations prioritizing renewable energy (e.g., President Biden’s clean energy investments), this order emphasizes fossil fuels and traditional energy infrastructure as critical to national defense. The “National Energy Emergency” executive order’s directive to federal agencies to expedite the leasing, permitting, and siting of energy projects, including on federal lands, also could streamline the approval process for energy infrastructure. By invoking emergency authorities like DPA, the government can prioritize energy projects deemed critical to national security and provide financial incentives to accelerate production and infrastructure development. Additionally, FPA Section 202(c) authority could be fashioned to override environmental or regulatory constraints in certain circumstances.
5. What about the pause on federal spending under the Inflation Reduction Act?
Section 7 is the provision within the “Unleashing American Energy” executive order which purports to “terminate the Green New Deal.” We’re still thinking it through. But in any event, Section 7 appears to be about disbursement of federal funds or loan guarantees, and not about tax credits taken on a corporate income tax return to offset a tax liability. An argument could be made that if the Treasury is providing a direct payment to an entity that has no tax liability (like a tax-exempt entity), that could be regarded as a disbursement. This issue is not squarely addressed in the executive order.
Even with its limited scope, Section 7 of the executive order contains directives that may raise legal and contractual concerns, particularly under the Impoundment Control Act (ICA) and regarding federal contractual obligations.
Section 7(a) mandates the following:
Immediate Pause of Funds: All agencies are directed to pause disbursements of funds appropriated under the Inflation Reduction Act of 2022 (Public Law 117-169) and the Infrastructure Investment and Jobs Act (Public Law 117-58).
Review Process: Agencies must review their processes and programs for issuing grants, loans, contracts, or any financial disbursements to ensure alignment with the executive order’s policy.
Reporting Requirement: Agency heads must report their findings within 90 days to the National Economic Council (NEC) and the Office of Management and Budget (OMB), including recommendations for policy alignment.
Conditional Disbursement: Funds cannot be disbursed until the OMB Director and the Assistant to the President for Economic Policy approve them as consistent with the executive order.
Are there legal limits on this? Yes. This provision could run afoul of the Impoundment Control Act which requires congressional acquiescence for refusal to allocate appropriated funds. Also, the federal government can be subject to legal remedies associated with violation of contracting rules. If challenged, this section of the executive order might be subject to scrutiny by Congress, the GAO, inspectors general, or federal courts, as it arguably encroaches on Congress’s power of the purse and may undermine federal obligations.
6. What is DOGE and its range of motion?
The executive order establishing DOGE tasks it with modernizing federal technology and enhancing governmental efficiency. The order restructures the United States Digital Service (USDS) within the Executive Office of the President, renaming it the United States DOGE Service. Additionally, a temporary organization — the US DOGE Service Temporary Organization — was created to execute the president’s 18-month agenda, set to conclude on July 4, 2026. Federal agencies are also required to establish DOGE Teams to collaborate with USDS in implementing this agenda.
The structure evades lots of oversight, but not all. For example:
Freedom of Information Act (FOIA): FOIA applies to federal agencies as defined in 5 U.S.C. § 551, which excludes the Executive Office of the President and its components. Since DOGE operates within the Executive Office, it is generally not subject to FOIA.
Administrative Procedure Act (APA): The APA governs federal agencies’ rulemaking and adjudication processes. Entities within the Executive Office of the President that solely advise and assist the President are exempt from the APA. DOGE’s advisory role likely places it outside the scope of the APA.
Open Meetings Requirements: The Sunshine Act mandates open meetings for federal agencies headed by a collegial body. Since DOGE is led by an administrator rather than a multimember body, this act does not apply.
Federal Register Publications: Agencies must publish certain information in the Federal Register. However, components of the Executive Office of the President that solely advise and assist the President are typically exempt from these requirements. DOGE is not obligated to publish its findings or recommendations in the Federal Register.
Annual Federal Appropriations: DOGE’s activities depend on funding through annual appropriations. The implementation of its initiatives is subject to the availability of appropriated funds, as stated in the executive order.
Other Legal Limitations: DOGE must operate within the bounds of existing laws and regulations. The executive order specifies that its provisions should not impair or affect the authority granted by law to executive departments or agencies, nor the functions of the Office of Management and Budget. Implementation is subject to the availability of appropriations and applicable law.
While DOGE may claim exemptions from FOIA or the APA, any action that directly impacts individuals or organizations outside the Executive Office could be subject to judicial review. This could expose DOGE to lawsuits that compel disclosures or constrain its activities.
Questions remain, too, related to rules governing conflicts of interest for agency officials. For example, senior officials must file public financial disclosure reports under the Ethics in Government Act (EGA) to identify potential conflicts of interest between their financial interests and official duties. Meanwhile, the Conflict of Interest Statutes (18 U.S.C. §§ 201-209) prohibit officials from participating personally and substantially in government matters affecting their financial interests and from receiving outside compensation for government-related matters. Finally, the Office of Government Ethics may require divestitures, recusals, or waivers to address conflicts of interest for senior officials.
At the same time, if DOGE were to rely on external advisors, rules requiring disclosure of relevant financial interests would apply. Further, if DOGE forms a formal advisory group, the Federal Advisory Committee Act (FACA) then applies, which similarly requires public disclosure of members’ financial interests, open meetings unless exceptions apply, and publication of reports and advice in the Federal Register, among others. Informal consultations or individual advisors generally do not trigger FACA, but structured advisory groups would. In fact, on the same day as President Trump’s inauguration, various public interest groups filed lawsuits that alleged DOGE’s structure and operation violated FACA.
Can DOGE avoid congressional oversight?
While DOGE may have some structural features that limit direct congressional oversight, it cannot entirely avoid scrutiny due to the checks and balances inherent in US governance. Oversight mechanisms and potential limitations include budget and appropriations, congressional hearings, investigations or audits by the Government Accountability Office, or congressional legislation targeting DOGE’s structure, functions, or findings.
Frank V. Maisano, Paul Nathanson, George D. Felcyn, Joseph A. Brazauskas, Anna B. Karakitsos, Liam P. Donovan, Dylan Pasiuk, and Kyle J. Spencer also contributed to this article.
Mexico 2025: Foreign Trade Outlook | What to Expect in Terms of Foreign Trade?
Mexico 2025: Foreign Trade Outlook | What to Expect in Terms of Foreign Trade?
Panorama Mexicano 2025, ¿Qué podemos esperar en materia de comercio exterior?
Collection forecast and tax collection plan In view of the “success” in terms of foreign trade taxes collection during 2024, the Federal Government approved for the 2025 fiscal package an increase in absolute terms of more than 40% with respect to the goal set for the previous fiscal year, amounting to MX$151,789.7 million for fiscal year 2025 (approximately US$7,404.4 million considering an exchange rate of MX$20.50 per US dollar). The above, without considering other contributions that could also be collected by the tax and customs authorities as a result of their verification powers. In connection with this collection goal, it is important to point out that the Federal Government also released its Master Plan for fiscal year 2025, which summarizes the points that will make up the central axes for collection by the Federal Tax Authorities. As expected, some foreign trade issues are once again on the collection agenda of the tax and customs authorities, including the following: – Verifying the return of temporarily imported goods;– Combat apparent abuses in foreign trade authorizations, particularly VAT and Excise Tax Certification, and as a result, initiate cancellation procedures;– Verify the correct customs valuation that could lead to omissions in the payment of taxes; and– Correct interpretation and application of free trade agreements Constitutional reform related to Ex-officio preventive detention Despite criticism from various human rights organizations and even from the Office of the United Nations High Commissioner for Human Rights in Mexico, on January 1, 2025, the constitutional reform that provides for Ex-officio preventive detention went into effect. Through this reform, the Mexican State is legitimized so that judges may order Ex-officio preventive detentions. Of particular relevance is the addition of contraband to the list of crimes that may give rise to this type of precautionary measure. It is important to point out that the crime of contraband includes diverse activities that go beyond the simple illegal introduction of goods into the country and that may be committed as a result of omissions of compliance in the foreign trade operations of companies. This reform further obliges companies to implement appropriate controls to mitigate, in addition to administrative infractions, a possible criminal process that could follow against the representatives and boards of directors of companies leading to deprivation of their liberty. Online inventory control system for temporary imports At the end of 2024, the Tax Administration Service published a series of measures applicable to companies that have an IMMEX Program and also have a VAT and Excise Tax Certification. Particularly, the obligation of the companies in question was established to allow the Tax Authorities the remote and practically simultaneous consultation of their temporary importation operations registered in their inventory control systems, commonly known as Annex 24. On this issue, some modifications to this obligation were recently published, aimed at providing clarity. Although the modifications may have dispelled some doubts for companies, many foreign trade players are still concerned with the correct handling of the sensitive data and information involved in complying with this obligation. In this sense, it is likely that, during this year, the measure in question will evolve in terms of its surveillance and, therefore, the Tax Administration Service will initiate more inspection procedures, as well as more inspections to review the level of compliance in terms of VAT and Excise Tax Certification. It is important to remember that failure to comply with an inspection visit in a timely manner may result in the initiation of the cancellation of the VAT and Excise Tax Certification, which not only represents a future impact(benefit of importing without paying value added tax), but could also trigger the obligation to pay value added tax on the credit that has been applied by the companies. Mexico Plan: IMMEX 4.0 As a result of recent official statements, the Federal Government is expected to implement a series of investment and infrastructure measures. As part of these measures, the Federal Government is planning a series of industrial policy and development measures for the different areas of the country. A series of modifications to authorizations within IMMEX Programs were announced, apparently with a view to simplifying and reducing the time required to obtain them by 50%. It will be important to monitor whether this could trigger new obligations or modifications that affect companies in any way. Trade War Mexico has been the subject of multiple accusations and criticisms by its North American trading partners, among others, that Mexico: (1) has been lax in counteracting the exponential growth of China, even allowing product triangulation; (2) has failed to contain the advance of illegal migration; and (3) is not effectively combating its drug trafficking problems. This has given rise to positions on the establishment of tariffs on the importation of goods from Mexico. In the face of such pressures, Mexico has raised its tariffs considerably, with the textile sector (155 tariff items) being one of the sectors most affected by these recent measures, even to the extent prohibiting temporary importation by IMMEX companies (for which an exception mechanism has already been implemented so that they can continue importing these types of goods on a temporary basis under the IMMEX Program). Likewise, the Federal Government has increased security measures to counteract drug trafficking, as well as the illegal entry of people into the country. It will be important to closely monitor the measures established by the new administration in the United States regarding foreign trade, as there is a possibility that Mexico will increase tariff and even non-tariff regulations, in order to align its trade policy with the agenda of the countries that make up the North American region. GMO Corn At the end of 2024, an arbitration panel constituted under the USMCA resolved the dispute brought by the U.S. Government against the Mexican Government in connection with the publication of the Decrees aimed at prohibiting the use and consumption of genetically modified corn. Although the Mexican Government defended its position under the banner of cultural protection position, the Arbitral Panel ruled that the measures implemented by Mexico were inconsistent with the USMCA. Consequently, the Panel issued a recommendation to the Mexican Government to eliminate the prohibition in question. As of this date, the Mexican Government has not eliminated the Decrees in question. It should be noted that Mexico and the United States have a period of 45 days, which is currently elapsing, to agree on a solution. Otherwise, the U.S. Government would have the authority under the USMCA to suspend the application of benefits (retaliation). Judicial Reform In 2024, the Mexican Government approved a package of constitutional reforms aimed at structurally modifying the organic composition of the Judiciary branch. Undoubtedly, this reform is the most significant change in decades, mainly highlighting the mechanism for the election of judges and magistrates. According to the reform in question, on June 1, 2025, elections will be held to elect the above public officials, who must be assigned to the corresponding judicial bodies no later than September 15, 2025. In this sense, the second half of 2025 will mark the beginning of a new era in the administration of justice in Mexico, whose main question is whether this new model of popular election will in any way affect impartiality in the administration of justice. USMCA Renegotiation Under the USMCA, the governments of the United States, Canada, and Mexico agreed that the Treaty would remain in effect for 16 years after its entry into force. However, prior to that date, it was agreed that on the sixth anniversary of its entry into force (June 1, 2026), the parties would carry out a joint review of (i) the operation of the Treaty; (ii) the recommendations for action submitted by the parties; and (iii) decide on any other measures deemed appropriate. The purpose of this is to define whether it is the desire of the Parties to extend the validity of the Treaty for an additional16 years. During this year, it is very likely that the contracting parties will lay the groundwork for the negotiations that will officially take place during the second half of 2026. Conclusion of the Mexico-European Community Treaty negotiations On January 16, 2025, the European Community issued a press release informing that negotiations between the Ministry of Economy of Mexico and the Commissioner for Trade and Economic Security of the European Community were concluded. The official release of the texts of this Treaty are still pending, as well as the conclusion of the approval and ratification processes by the contracting parties. In any case, it will be important for companies that maintain or intend to trade products between the European Community and Mexico, keep the corresponding texts in perspective. Among other issues that will arise as a result of the above, we can highlight that companies will have to reevaluate whether the products exchanged still qualify as originating products under the Treaty in question. Likewise, the modernization of the Treaty represents a new opportunity to verify whether products that previously did not qualify as originating products may now be eligible for tariff preferences.
Pronóstico de recaudación y plan de fiscalización En vista del “éxito” en materia de recaudación en materia de impuestos al comercio exterior durante 2024, el Gobierno Federal aprobó para el paquete fiscal de 2025 un incremento en términos absolutos de más del 40% con respecto a la meta fijada para el ejercicio anterior, quedando en 151,789.7 millones de pesos para el ejercicio 2025 (aproximadamente 7,404.4 millones de dólares considerando un tipo de cambio de 20.50 pesos por dólar de los Estados Unidos de América).[1] Lo anterior, sin considerar otras contribuciones que igualmente pudieran recaudarse por parte de las autoridades fiscales y aduaneras como resultado del ejercicio de sus facultades de comprobación. En relación con dicha meta recaudatoria, es importante señalar que el Gobierno Federal también dio a conocer su Plan Maestro para el ejercicio fiscal 2025 que resume los puntos que constituirán los ejes centrales en la recaudación por parte de las Autoridades Fiscales Federales. Como era de esperarse, algunos temas de comercio exterior nuevamente se mantienen en la agenda recaudatoria de las autoridades fiscales y aduaneras destacando las siguientes: – Verificar el retorno de mercancías de importación temporal– Combatir aparentes abusos en las autorizaciones de comercio exterior, particularmente de la Certificación en materia de IVA e IEPS y como consecuencia de ello, iniciar procedimientos de cancelación.– Verificar la correcta valoración aduanera que pudieran dar lugar a omisiones en el pago de impuestos,– Correcta interpretación y aplicación de tratados de libre comercio Reforma Constitucional en materia de prisión preventiva oficiosa Pese a las críticas de diversas organizaciones en materia de derechos humanos e inclusive de la propia Oficina en México del Alto Comisionado de las Naciones Unidas para los Derechos Humanos, el 1 de enero de 2025 entró en vigor la reforma constitucional que prevé la prisión preventiva oficiosa. Así, a través de la Reforma en cuestión se legitima al Estado Mexicano para que los jueces puedan ordenar la prisión preventiva de manera oficiosa. Cobra especial relevancia, la incorporación del delito de contrabando dentro del catálogo de delitos que puede dar lugar a este tipo de medida cautelar. Resulta importante precisar que el delito de contrabando comprende actividades diversas que van más allá de la simple introducción ilegal de mercancías al país y que puede actualizarse con motivo de omisiones de cumplimiento en las operaciones de comercio exterior de las empresas. Así las cosas, la presente reforma obliga aún más a las empresas a que implementen controles apropiados para mitigar, además de infracciones administrativas, un eventual proceso penal que pudiera seguirse para los representantes y consejos de administración de las empresas con privación de su libertad. Sistema de control de inventarios de importaciones temporales en línea A finales de 2024, el Servicio de Administración Tributaria publicó una serie de medidas aplicables a las empresas que cuentan con un Programa IMMEX y que además contaran con la Certificación en materia de IVA e IEPS. Particularmente, se estableció la obligación de las empresas en cuestión de permitirle a las Autoridades Fiscales la consulta remota y prácticamente de manera simultánea, de sus operaciones de importación temporal registradas en sus sistemas de control de inventarios comúnmente conocido como Anexo 24. Sobre el presente tema, en fechas recientes se publicaron algunas modificaciones a dicha obligación, tendientes a dar claridad. Si bien con las modificaciones podrían haberse disipado algunas dudas por parte de las empresas, aún sigue la inquietud de muchos actores del comercio exterior en cuanto al correcto manejo de los datos e información sensible que representa el cumplimiento de esta obligación. En ese sentido, es probable que, durante el presente año, la medida en comento madure en cuanto a su vigilancia y, por ende, el Servicio de Administración Tributaria, detone el ejercicio de mayores procedimientos de fiscalización, así como visitas de inspección para revisar su nivel de cumplimiento en materia de la certificación en materia de IVA e IEPS. Es importante recordar que, el no atender oportunamente una visita de inspección, puede dar lugar al inicio de la cancelación de la Certificación en materia de IVA e IEPS, lo cual no solo representa una afectación hacia futuro (beneficio de importar sin el pago del impuesto al valor agregado), sino también pudiera detonar la obligación de pago del impuesto al valor agregado, respecto del crédito que se haya aplicado por las empresas. Plan México: IMMEX 4.0 Derivado de los recientes comunicados oficiales, se proyecta que el Gobierno Federal implemente una serie de medidas en materia de inversión e infraestructura. Como parte de dichas medidas, el Gobierno Federal proyecta una serie de medidas de política industrial y desarrollo de las distintas zonas del país. Particularmente, se anunciaron una serie de modificaciones en materia de autorizaciones a los Programas IMMEX, aparentemente con miras a simplificar y reducir los tiempos en su obtención en un 50%. Será importante vigilar si esto pudiera detonar nuevas obligaciones o modificaciones que afecten de alguna manera a las empresas. Guerra comercial México ha sido objeto de múltiples señalamientos y críticas por parte sus socios comerciales de Norteamérica, entre otras, con respecto a que México: (1) ha sido laxo para contrarrestar el crecimiento exponencial de China, permitiendo inclusive la triangulación de producto, (2) ha fallado en contener el avance en la migración ilegal; (3) no está combatiendo eficazmente sus problemas de narcotráfico. Lo anterior ha dado lugar a posicionamientos sobre el establecimiento de aranceles a la importación de mercancías provenientes de México. Ante dichas presiones, México ha elevado considerablemente sus aranceles, siendo el sector textil (155 fracciones arancelarias) uno de los sectores que más afectados se han visto con estas recientes medidas, inclusive al grado de prohibirse su importación temporal por las empresas IMMEX (respecto de las cuales ya se implementó un mecanismo de excepción de tal forma que puedan seguir importando este tipo de mercancías de manera temporal al amparo del Programa IMMEX). De igual manera, el Gobierno Federal ha incrementado las medidas de seguridad tendientes a contrarrestar el tráfico de drogas, así como, la entrada ilegal de personas al país. Será importante vigilar muy de cerca las medidas que establezca la nueva administración en los Estados Unidos de América en materia de comercio exterior, pues existe la posibilidad de que México, incremente las regulaciones arancelarias e inclusive, las no arancelarias, a fin de alinear la política comercial con la agenda de los países que integran la región de Norteamérica. Maíz OGM A finales de 2024, un panel constituido con arreglo al TMEC resolvió la disputa promovida por el Gobierno estadounidense en contra del Gobierno Mexicano con motivo de la publicación de los Decretos tendientes a prohibir el uso y consumo de maíz genéticamente modificado. Si bien el Gobierno Mexicano defendía su postura bajo un estandarte de protección cultural; el Panel arbitral resolvió que las medidas implementadas por México resultaban ser incompatibles con el TMEC. Por consiguiente, el Panel emitió la recomendación al Gobierno Mexicano para que eliminara la prohibición en cuestión. A la fecha del presente, el Gobierno Mexicano no ha eliminado los Decretos en cuestión. Conviene señalar que México y los Estados Unidos cuentan con un plazo de 45 días que actualmente se encuentra transcurriendo para acordar una solución. De lo contrario, el Gobierno de los Estados Unidos estaría facultado conforme al TMEC para suspender la aplicación de beneficios (retaliación). Reforma Judicial En el año 2024, el Gobierno Mexicano aprobó un paquete de reformas constitucionales tendientes a modificar de manera estructural la composición orgánica del Poder Judicial. Sin duda, esta reforma resulta ser el cambio más significativo en décadas, destacando principalmente el mecanismo de elección de los juzgadores y magistrados. Conforme a la reforma en cuestión, el próximo 1 de junio de 2025, se llevará a cabo la jornada electoral en donde se elijan a los citados funcionarios públicos, quienes deberán quedar adscritos a los órganos judiciales correspondientes a más tardar el 15 de septiembre de 2025. En ese sentido, el segundo semestre de 2025 iniciará una nueva era en la impartición de justicia en el país cuya principal interrogante radica en si a través de este nuevo modelo de elección popular, se afecta de alguna forma la imparcialidad en la procuración de justicia. Renegociación TMEC Conforme al TMEC, los Gobiernos de Estados Unidos, Canadá y México acordaron que la vigencia del Tratado sería de 16 años a partir de su entrada en vigor. Sin embargo, previo a dicha fecha, se acordó que al sexto aniversario de la entrada en vigor (1 de junio de 2026), las partes llevarían a cabo una revisión conjunta en torno a (i) el funcionamiento del Tratado, (ii) las recomendaciones en torno a las medidas presentadas por las partes y (iii) decidir sobre cualquier otra medida que se estime apropiada. Ello con la finalidad de definir si será el deseo de las Partes el prorrogar la vigencia del Tratado por otros 16 años adicionales. En ese sentido, dentro del presente año muy seguramente veremos que las partes contratantes “preparen el terreno” para las negociaciones que se llevarán a cabo oficialmente durante el segundo semestre del año 2026. Conclusión en las negociaciones del Tratado México – Comunidad Europea El pasado 16 de enero de 2025, se dio a conocer un comunicado de prensa por parte de la Comunidad Europea en el que informan que se concluyeron las negociaciones entre la Secretaría de Economía y el Comisario de Comercio y Seguridad Económica de la Comunidad Europea. Aún está pendiente de que los textos de dicho Tratado sean oficialmente liberados, así como que las partes contratantes concluyan sus procesos para su aprobación y ratificación. De cualquier forma, será importante que las empresas que mantengan o tengan intenciones de intercambiar productos entre las regiones Comunidad Europea – México, tengan en perspectiva los textos correspondientes. Entre otros temas que surgirán con motivo de lo anterior, podemos destacar que las empresas deberán reevaluar si los productos intercambiados, siguen calificando como originarios al amparo del Tratado en cuestión. De igual manera, la modernización del Tratado representa una nueva oportunidad para verificar si productos que anteriormente no calificaban como originarios, puedan ahora sí ser elegibles para acceder a preferencias arancelarias.
[1] Aunque es importante considerar que algunas calificadoras pronostican que el peso podría alcanzar los 21 pesos por dólar de los Estados Unidos de América.
Trump Administration Disavows the OECD Global Tax Deal
On January 20, 2025, the White House issued a memorandum (the “Memorandum”)[1], announcing that the “Organization for Economic Co-operation and Development (OECD) Global Tax Deal” (the “Global Tax Deal”) has “no force or effect in the United States” and disavowing “any commitments” previously made by the United States with respect to the Global Tax Deal, absent an act of Congress. The Memorandum also directs the Secretary of the Treasury to develop and present to the President a list of “protective measures or other options” towards foreign countries that are either “not in compliance with any tax treaty” with the United States or have (or are likely to have) tax rules that are “extraterritorial or disproportionately affect American companies”.
While the Memorandum does not specifically reference previously published Internal Revenue Service (“IRS”) guidance with respect to aspects of the Global Tax Deal, it is unclear whether some or all of such guidance would be considered a “commitment” of the United States that is repudiated by the Memorandum. Additionally, the Memorandum specifically calls on the Secretary of the Treasury to consider whether U.S. tax treaty partners are in compliance with their obligations under tax treaties. All potentially affected multinational enterprises and their related stakeholders should monitor closely U.S. tax policy developments related to the issues set forth in the Memorandum. The balance of this blog post provides background on the Memorandum and summarizes its provisions.
Background and Summary of Provisions
The Global Tax Deal, in very basic terms, is the outcome of over a decade of negotiation by various members of the OECD and other countries to address the perceived abuses of “base erosion and profit shifting” (“BEPS”) by multinational corporations to reduce their overall effective tax rate. An important element of the Global Tax Deal is an agreement to impose a global minimum tax of 15% on corporate profits through very complicated mechanics, including by granting countries in certain circumstances the ability to impose a “top-up tax” on very large multinational groups to ensure that profits derived in that country are subject to the global minimum tax – even if that multinational would not otherwise be subject to tax on those profits in that country (either by application of a treaty or under the general corporate tax laws of that country).
While the Memorandum does not address this global minimum tax specifically (or any other particular provision of the Global Tax Deal), the Memorandum characterizes the Global Tax Deal as allowing “extraterritorial jurisdiction over American income” (presumably, for example, by allowing the imposition of a top-up tax by another country), as well as limiting the ability of the United States to enact “tax policies that serve the interests of American businesses and workers” (presumably, for example, policies that might allow American multinationals to achieve an effective tax rate below the BEPS global minimum tax rate, such as R&D credits). The Memorandum further asserts that American companies might be subject to “retaliatory international tax regimes” if the U.S. does not comply with “foreign tax policy objectives”. The Memorandum explicitly states the Administration’s view that American “economic competitiveness” and “sovereignty” are enhanced by clarifying that the Global Tax Deal has “no force or effect in the United States”. Section 1 of the Memorandum instructs the Secretary of the Treasury and the Permanent Representative of the United States to the OECD to (i) notify the OECD that any commitments made by the “prior administration” on behalf of the United States in respect of the Global Tax Deal have no force or effect, absent an act of Congress adopting the relevant provisions of the Global Tax Deal and (ii) otherwise take “all additional necessary steps” to otherwise implement the findings of the Memorandum. Left unclear by the Memorandum is whether the Trump Administration intends for the Secretary to withdraw prior published guidance by the IRS (e.g., Notice 2025-4), or what the effect of those components of OECD BEPS authority incorporated by reference in published guidance does, or does not, still have.
Additionally, the Memorandum instructs the Secretary to investigate, in cooperation with the United States Trade Representative, whether “any foreign countries” are either “not in compliance with any tax treaty” with the U.S. or have (or are likely to have) tax rules that are “extraterritorial or disproportionately affect American companies”. While the Memorandum does not single out any particular country and does not specify what might fall within the scope of an “extraterritorial” or “disproportionate” tax rule, these tax rules likely include both rules implementing the global minimum tax describe above, as well as various “digital services taxes” that have been proposed or implemented by various non-U.S. jurisdictions, including certain U.S. tax treaty partners. The Memorandum further instructs the Secretary to develop “protective” measures or actions that may be taken in response to those tax treaty noncompliance or tax rules. The Secretary is instructed in the Memorandum to deliver findings and recommendations to the President within 60 days.
[1] Available at https://www.whitehouse.gov/presidential-actions/2025/01/the-organization-for-economic-co-operation-and-development-oecd-global-tax-deal-global-tax-deal/, last visited January 21, 2025.
Stuart Rosow also contributed to this article.
US Treasury and IRS Unveil Proposed Regulations for Commercial EV Tax Credit, Sparking Questions on Recapture Provisions
On January 10, the US Treasury Department (Treasury) and the US Internal Revenue Service (IRS) released proposed regulations under Section 45W of the US Internal Revenue Code of 1986, as amended (the Code), which provides a US federal income tax credit (Commercial EV Credit) for the purchase and placing in service of a qualifying commercial electric vehicle (EV) after 2022 and before 2033. The Inflation Reduction Act of 2022 (P.L. 117-169) added the Commercial EV Credit to the Code along with two other EV tax credits: the current new clean vehicle tax credit under Code Section 30D (originally enacted in 2008) and the previously owned clean vehicle tax credit under Code Section 25E. The proposed regulations, among other things, would provide rules with respect to determining the qualification of an EV for the Commercial EV Credit, the amount of the Commercial EV Credit for a qualifying vehicle, and the situations in which the Commercial EV Credit would be unavailable or subject to recapture. Certain requirements of the Commercial EV Credit under Code Section 45W and under the proposed regulations are discussed more fully below.
The proposed regulations leave many important questions open, especially with respect to the recapture provisions. In the last section below, we discuss these issues and others that will likely become topics for taxpayer comments on the proposed regulations, which are due by March 17.
Commercial EV Credit, Generally
The Commercial EV Credit provides for a US federal income tax credit in an amount equal to the lesser of (x) 15 percent of the taxpayer’s basis in the commercial EV (30 percent in the case of a commercial EV not powered by a gasoline or diesel internal combustion engine (ICE)), or (y) the “incremental cost” of the commercial EV. The “incremental cost” of a “qualified commercial EV” is an amount equal to the excess of the purchase price for the EV over the purchase price of a comparable ICE vehicle in both size and use. The Commercial EV Credit for each qualified commercial EV cannot exceed $7,500 in the case of an EV with a gross vehicle weight rating (GVWR) of less than 14,000 pounds, or $40,000 in the case of a heavier commercial EV.
The Commercial EV Credit is a general business tax credit under Code Section 38. It is available for qualified commercial EVs that are “placed in service” by a taxpayer during the taxable year. The proposed regulations would provide that a qualified commercial EV is considered “placed in service” on the date that the taxpayer takes possession of the EV.
Qualified Commercial EVs
Under Code Section 45W, a “qualified commercial EV” for purposes of the Commercial EV Credit includes a commercial EV that:
is made by a qualified manufacturer that has registered as such with the IRS;
is acquired for use or lease by the taxpayer and not for resale;
either is a motor vehicle for purposes of title II of the Clean Air Act, or is manufactured primarily for use on public streets, roads and highways, or is mobile machinery;
either is propelled to a significant extent by an electric motor that draws electricity from a battery that has a capacity of not less than 7 kWh (for a commercial EV with a GVWR of less than 14,000 pounds) or 15 kWh (for a commercial EV with a higher GVWR) and is capable of being recharged from an external source of electricity, or is a motor vehicle that is a new qualified fuel cell motor vehicle; and
is used by the taxpayer in a trade or business in the United States (and, therefore, is subject to an allowance for depreciation).
Incremental Cost
Code Section 45W provides that the “incremental cost” of a qualified commercial EV is an amount equal to the excess of the purchase price for the EV over the purchase price of a comparable ICE vehicle in both size and use. The IRS released safe harbors for determining the incremental cost of commercial EVs in 2023 and 2024 (Notices 2023-9 and 2024-5).
Under the proposed regulations, incremental cost is determined by multiplying the manufacturer’s cost of the components necessary for the powertrain of the qualified commercial EV by the retail price equivalent (RPE) of that EV and then subtracting from that amount the product of the manufacturer’s cost of the powertrain of the comparable ICE vehicle and the RPE of the comparable ICE vehicle. The IRS stated that it intends to determine incremental cost based on the propulsion technologies of the vehicles while eliminating, to the extent possible, any cost differences unrelated to those propulsion technologies. The IRS further stated that it intends to issue RPE safe harbors for different vehicle market segments.
The proposed regulations provide that a vehicle powered solely by a gasoline or diesel ICE is comparable in size and use to a qualified commercial EV if the vehicles have substantially similar characteristics, including GVWRs, number of doors, towing capacity, passenger capacity, cargo capacity, mounted equipment, drivetrain type, overall width, height and ground clearance, and trim level. Where a qualified manufacturer produces an ICE vehicle and a qualified commercial EV of the same model and model year with substantially similar characteristics, such ICE vehicle will be the only comparable vehicle to determine incremental cost. If no comparable ICE vehicle exists for a qualified commercial EV, the proposed regulations would provide that a taxpayer may use the incremental cost safe harbors that the IRS may publish on an annual basis. If a qualified manufacturer discloses its incremental cost calculation for a qualified commercial EV, then taxpayers may rely upon that incremental cost calculation to determine the amount of Commercial EV Credit. In addition, taxpayers may rely on the incremental cost safe harbors in Notices 2023-9 and 2024-5, as any subsequent safe harbors issued by the IRS.
Previously Owned Commercial EVs
Unlike the EV tax credit under Section 30D, the Commercial EV Credit under Code Section 45W is not limited to “new” commercial EVs. The proposed regulations would provide that the incremental cost of a qualified commercial EV previously placed in service by another person is calculated by multiplying the incremental cost of that EV when new by a residual value factor determined by the age of the vehicle and as provided in the residual value factor table in the proposed regulations. The proposed regulations also would provide that the age of such a vehicle is determined by subtracting the vehicle’s model year from the calendar year in which the taxpayer places the vehicle in service as a qualified commercial EV.
Although a previously used commercial EV may be eligible for the Commercial EV Credit under Code Section 45W, the Commercial EV Credit is only allowed once per EV, and the Commercial EV Credit is not allowed for any EV for which an EV tax credit under Code Section 30D was previously allowed. A taxpayer claiming the Commercial EV Credit under Code Section 45W for an EV previously placed in service must maintain evidence in their books and records sufficient to establish that no EV tax credits under Code Sections 30D or 45W have been allowed previously with respect to the EV, and in the case of any prior EV tax credit allowed under Code Section 25E, the amount of such prior credit and the taxpayer must provide such information to the IRS upon request. That evidence may include signed attestations from all previous owners of an EV that a credit was not claimed with respect to that EV.
Ineligibility for the Commercial EV Credit and Recapture
Cancelled Sales. If the sale of a qualified commercial EV is cancelled before the taxpayer places the EV into service, then the proposed regulations would provide that the taxpayer cannot claim the Commercial EV Credit for that EV and a subsequent buyer of that EV will not be required to apply the proposed residual value rules applicable to previously owned commercial EVs in determining the incremental cost of the EV.
Returned Commercial EVs. If a taxpayer returns a qualified commercial EV to the seller within 30 days of placing that EV into service, then the proposed regulations would provide that the taxpayer cannot claim the Commercial EV Credit for the returned EV, the returned EV may still be eligible for the Commercial EV Credit, and a subsequent buyer of that EV must apply the proposed residual value rules applicable to previously-owned commercial EVs in determining the incremental cost of the EV.
Commercial EVs Sold Within 30 Days. If a taxpayer sells a qualified commercial EV within 30 days of placing that EV into service, then the proposed regulations would provide that the taxpayer is treated as having acquired the EV with the intent to resell, the taxpayer cannot claim the Commercial EV Credit for that EV, the EV may still be eligible for the Commercial EV Credit, and a subsequent buyer must apply the proposed residual value rules applicable to previously-owned commercial EVs in determining the incremental cost of the EV.
Commercial EVs With Less Than 100 Percent Business Use. If a taxpayer’s trade or business use of a qualified commercial EV for the taxable year that the taxpayer places the EV into service is less than 100 percent of the taxpayer’s total use of that EV for that taxable year (other than incidental personal use, for example, a stop for lunch on the way between two job sites), including because the EV is sold or otherwise disposed of, then the proposed regulations would provide that the EV is ineligible for the Commercial EV Credit.
General 18-Month Recapture Rule. If a taxpayer ceases to use the qualified commercial EV for 100 percent trade or business use during the 18-month period beginning on the date that the EV is placed in service — including because the EV is sold or otherwise disposed of — then the taxpayer cannot claim the Commercial EV Credit for that EV (and if the taxpayer already claimed the Commercial EV Credit for that EV then the credit is recaptured), the EV may still be eligible for the Commercial EV Credit. A subsequent buyer must apply the proposed residual value rules applicable to previously owned commercial EVs in determining the incremental cost of the EV.
Reporting Requirements
Code Section 45W provides that no Commercial EV Credit is allowed for an EV unless the taxpayer includes the vehicle identification number (VIN) of such EV on the taxpayer’s tax return for the taxable year the EV is placed in service by the taxpayer. To report the VIN, the proposed regulations would provide that the taxpayer must attach to its US federal income tax return for the year the qualified commercial EV is placed in service, a completed IRS Form 8936, Clean Vehicle Credits, along with a completed IRS Form 8936 Schedule A, Clean Vehicle Credit Amount.
The proposed regulations would provide that the Commercial EV Credit may only be claimed by a single taxpayer, and the credit cannot be allocated or prorated if a qualified commercial EV is placed in service by multiple individual taxpayers who do not file a joint tax return. In the case of a qualified commercial EV placed in service by a grantor trust, the Commercial EV Credit is allocated among the trust’s grantors. In the case of a qualified commercial EV placed in service by a partnership or S corporation, the Commercial EV Credit is allocated among the partners or shareholders under the partnership tax rules or S corporation rules, respectively.
Comments and Public Hearing
Written or electronic comments on the proposed regulations under Code Section 45W must be received by March 17, 2025. A public hearing on the proposed regulations is scheduled for April 28, 2025.
Effective Date
The proposed regulations under Code Section 45W will generally apply to qualified commercial EVs placed in service in taxable years ending after the date that final regulations are published in the Federal Register and to taxpayers’ taxable years ending after the date that final regulations are published in the Federal Register.
Further Considerations and Subjects for Taxpayer Comments
Code Section 45W(d)(1) provides that rules similar to the rules of Code Section 30D(f), including the recapture rules under Code Section 30D(f)(5), shall apply for purposes of Code Section 45W. The recapture rules in the proposed regulations deviate from Code Section 30D(f)(5) in several significant ways. For example, the regulations under Code Section 30D provide for the recapture of that credit if a sale is cancelled or if an EV is returned or sold within 30 days. That credit does not otherwise provide for recapture upon a later sale or other disposition of the EV. The proposed regulations, however, would provide for recapture if a commercial EV is not used for 100 percent business use (other than incidental personal use) or if the commercial EV is sold or otherwise disposed of within 18 months of the date of the commercial EV is placed in service. This longer and broader recapture provision raises several questions:
Why is the proposed recapture period 18 months? The notice of proposed rulemaking states that Treasury and the IRS considered longer and shorter periods of time to require as a minimum period for the vehicle to be used in a trade or business. “Based on knowledge of commercial vehicle leasing practices (fleet leasing), the Treasury and the IRS determined that it was appropriate to require a qualified commercial clean vehicle to be used for 100 percent trade or business use for 18 months after it is placed in service.” The drafters’ focus on fleet leasing does not seem to take into account the practices of the large consumer lease market. A recapture period ending after 12 months of business use would be less burdensome for taxpayers and still prevent the “lease for sale” abuses that could occur with a shorter recapture period (e.g., 30 days). A 12-month period coordinates well with depreciation rules and “pull ahead” incentives sometimes offered to consumer lessees.
Why are there no reasonable exceptions from recapture for certain sales or dispositions occurring in fewer than 18 months? When most leased vehicles come off-lease and are returned to the lessor, they are not re-leased and are sold to third parties. The proposed recapture rule does not take into account or provide reasonable exceptions for many common events that result in a consumer lessee returning a vehicle (that will then be sold) in less than 18 months. Casualty losses: EVs are moveable property and often are subject to casualty losses such as accidents and weather events. These can happen at any time and are not indicative of the lessor’s intention to sell the vehicle or to stop using the vehicle for a commercial purpose. Death of the lessee: Most consumer leases are terminated at the lessee’s death. Upon termination of the lease and return of the vehicle, the vehicle generally will be sold. Recapture in this circumstance doesn’t serve the purpose of incentivizing uninterrupted business use of the vehicle. SCRA: The Servicemembers Civil Relief Act allows active duty military members to terminate consumer lease obligations. Upon termination of the lease and return of the vehicle, the vehicle generally will be sold. Recapture in this circumstance doesn’t serve the purpose of incentivizing uninterrupted business use of the vehicle. Similar exceptions were allowed under the regulations issued under former Code Section 30 (Credit for Qualified Electric Vehicles) and apparently were not considered for inclusion in the proposed regulations.
Why are there no exceptions for certain returned commercial EVs? If a lessee leases a vehicle and immediately regrets the transaction, the lessee often may return the vehicle to the lessor within a fairly short period. Sometimes the lease agreement is cancelled then as a matter of courtesy, and other times, it is required to be cancelled under state law (i.e., during a 3-5 day contract rescission period). That vehicle may then go on to be leased again as a “new” vehicle because of its excellent condition and low mileage; however, the proposed regulations would treat that vehicle as a previously owned vehicle for the purpose of determining the Commercial EV Credit.
New TTB Standard of Fill No Place for Kegged Cocktails
Big changes are coming to the alcohol industry this new year. On Jan. 10, 2025, the Alcohol and Tobacco Tax and Trade Bureau (“TTB”) implemented a final rule that expands the “standards of fill” for wine and distilled spirits. This long-awaited update adds significant flexibility for producers, with the introduction of 28 new container sizes: 13 for wine and 15 for distilled spirits. This move is designed to address the evolving needs of the alcohol industry and provide consumers with a wider variety of purchasing options.
Standards of fill are relatively obscure laws which limits the size a manufacturer can “fill.” Even before these new standards were approved, kegged cocktails were illegal and remain illegal under the new regulations. Unfortunately, even a small sixtel keg, which is almost 20 liters, does not come close to the largest “standard of fill” for spirits or wine.
For wine, new approved standards include sizes such as 180, 300, and 473 milliliters (the popular 16-ounce size), as well as larger formats like 1.8 and 2.25 liters. Distilled spirits now have additional standards like 187, 355, and 570 milliliters (19.2 ounces), and even larger options like 3.75 liters. The rule removes distinctions between standards of fill for distilled spirits in cans versus other types of containers, simplifying regulations for ready-to-drink (“RTD”) products. These changes are a direct response to industry feedback and aims to help both domestic and international producers thrive by offering products in sizes that appeal to a broader market.
While these rule changes provide greater flexibility, it is crucial to remember that standards of fill refer to the quantity of liquid in a container, not the overall size or format. This distinction is at the heart of why certain packaging options remain off-limits for some products, most notably, kegged cocktails.
Kegged cocktails have grown in popularity at bars and events, but they remain illegal under TTB regulations. Why? Because kegs are not an approved standard of fill for distilled spirits. Since the largest standard of fill is 3.75 liters for spirits, kegs that hold multiple gallons do not fit within the approved categories. Thus, keg cocktails are illegal under federal law at present.
There is also significant confusion about alcohol infusions which many bars display and use to survive. In Pennsylvania for example, a vodka infused with fresh orange slices that sits in a large glass container on the bar top for more than 24 hours technically means the bar is acting as a distillery and would need a distillery license. These infusion containers are typically 3 gallons and utilizing them without a distillery license means the bar is violating state law and potentially federal law including standards of fill regulations.
The new rule does little to change this reality for kegged cocktails. While the addition of sizes like 475 and 570 milliliters offers exciting opportunities for RTD cocktails in cans, larger formats for dispensing like kegs remain non-compliant. Producers and retailers interested in exploring new packaging options should stick to approved standards of fill to avoid potential TTB violations especially with increased enforcement. As always, understanding the nuances of TTB regulations and staying compliant with reporting change of owners, registering COLAs, and submitting formulas will keep your operations on the right side of the law and your products in the hands of consumers.
Treasury Issues Final Guidance on Clean Hydrogen Production Tax Credit
Go-To Guide:
Treasury finalizes clean hydrogen tax credit rules, clarifying Carbon Intensity calculations.
New regulations address additionality, hourly matching, and deliverability for zero-carbon electricity.
Annual matching allowed until 2030, with hourly matching required thereafter.
Renewable Natural Gas treated similarly to electricity, with monthly matching and single-region deliverability.
Potential impacts of new administration and Congress on 45V regulations remain uncertain.
The U.S. Treasury Department has issued final regulations for clean hydrogen production tax credits, which may significantly impact the renewable energy sector. These regulations implement the Section 45V clean hydrogen tax credit. Critical to developers of hydrogen production projects, they determine the requirements to qualify for the Section 45V credit and resolve disagreements over how to calculate the Carbon Intensity (CI), or life cycle greenhouse gas emissions, for clean hydrogen production projects.
The CI is a key factor in determining whether hydrogen produced by a clean hydrogen project qualifies for a 45V credit, as well as the amount of that credit. The regulations also cover other important aspects, such as:
the petitioning process for provisional emissions rates,
rules for verifying clean hydrogen production, sale, or use,
rules for modifying or retrofitting existing qualified clean hydrogen production facilities,
rules for using electricity from certain renewable or zero-emissions sources to produce qualified clean hydrogen, and
options for treating part of a clean hydrogen production facility as energy property eligible for the Section 48 energy credit.
I.
How the Carbon Intensity that Dictates Section 45V Credit Value is Determined
Under the final regulations, the CI of hydrogen will be determined based on life cycle emissions through the point of production, known as “well-to-gate.” This determination will use the most recent Greenhouse gases, Regulated Emissions, and Energy use in Transportation (GREET) model developed by Argonne National Laboratory. The well-to-gate system boundary includes several types of emissions. It covers emissions associated with feedstock growth, gathering, extraction, processing, and delivery to a hydrogen production facility. It also includes all emissions resulting from the facility’s hydrogen production process. This encompasses the production of mixed gas or impurities, electricity used by the hydrogen production facility, and any capture and sequestration of carbon dioxide generated by the facility. Emissions from activities that occur after the facility’s hydrogen production process is complete, such as liquefaction, storage, or transport, are generally beyond the well-to-gate system boundary. However, there is an exception: emissions from certain purification activities that occur downstream of the facility’s qualified clean hydrogen production process are considered within the well-to-gate system boundary.
II.
Treasury Resolves Issues Over ‘The Three Pillars’
In the case of clean hydrogen produced from zero carbon electricity, three issues critical to measuring CI have emerged: (1) additionality – whether the electricity must be produced by newly constructed renewable generation facilities; (2) hourly matching – whether the electricity must be produced in the same hour, or under a more lenient standard, the same year in which it is consumed to produce hydrogen; and (3) deliverability – whether the electricity must be generated in the same region where the hydrogen is produced. The final rules adopt less restrictive standards than initially proposed on many of these issues.
Additionality
The final rules address additionality by finding that the newly constructed renewable generation facility’s generation must begin commercial operations within 36 months of the facility being placed into service. However, Treasury also adopted an exception to this general rule that will allow up to 200 MW of nuclear generation capacity at risk of retirement to be considered incremental. In addition, when clean power is sourced from states with stringent emissions caps, such as California and Washington, that ensure continued growth in renewable generation capacity, the electricity will be considered incremental. Finally, electricity produced by a generation facility that has added carbon capture and sequestration within 36 months will be considered incremental.
Hourly Matching
The regulations on Hourly Matching give hydrogen producers more time to adapt. They can use annual matching until 2029, with hourly matching required in 2030. This extends the transition period by two years.
After 2030, when hourly matching is mandatory, any electricity use not covered by a qualifying Energy Attribute Certificate (EAC) will be assessed based on the regional electricity grid’s default emissions intensity. The Section 45V credit amount varies based on the produced hydrogen’s CI. To qualify, hydrogen must have an annual average CI below 4 kilograms of CO2 per kilogram of hydrogen. The credit value increases as CI decreases: $0.60 for CI between 2.5 and 4.0, $0.75 for CI between 1.5 and 2.5, $1.00 for CI between 0.45 and 1.5, and $3.00 for CI below 0.45.
The final rules allow taxpayers to optimize their credit value. If the annual average CI is below 4.0 for all hydrogen produced in a calendar year, they can choose to calculate emissions from electricity use on an hourly basis to potentially increase their 45V credit.
Deliverability
The final regulations largely adopt the proposed rules for EACs and deliverability. An EAC meets the deliverability requirement if the associated electricity is generated by a facility in the same grid region as the hydrogen production facility. The National Transmission Needs Study (DOE Needs Study), which the DOE released on Oct. 30, 2023, defines these regions. Alaska and Hawaii, as well as each U.S. territory, are considered separate regions.
The final regulations amend the proposed regulations to allow an eligible EAC to meet the deliverability requirement in cross-region deliveries where the generation’s deliverability can be tracked and verified.
Hydrogen Produced from Renewable Natural Gas
The adopted regulations seek to treat methane similarly to hydrogen produced from electricity. They introduce gas EACs to track emissions from RNG used in methane production. Qualified EAC registries will manage these EACs.
The regulations also require monthly matching and treat the contiguous United States as a single region for deliverability purposes. However, the regulations do not adopt a “first productive use” requirement to address incrementality. A first productive use requirement would have required the taxpayer to establish that the biogas has not been previously used for another productive application, such as electricity generation or transportation.
III.
Potential Impacts of a New Administration and Congress
It is uncertain how the new administration and Congress may impact the 45V regulations. The incoming administration and Republican Congressional majority have expressed opposition to various grants and tax credits adopted under the Inflation Reduction Act, such as those relating to electric vehicles and offshore wind facilities. But they may also be aware of the substantial U.S. investments that have already been made, additional investments and employment that might be unleashed, and support for hydrogen some Republicans, Democrats, and fossil fuel companies have expressed. Additionally, while the final regulations could also be revised by the incoming administration, this would require a lengthy regulatory process.
Inflation Reduction Act Domestic Content Bonus Update: IRS Issues Updated Guidance with First Updated Elective Safe Harbor
On January 16, 2025, the IRS released Notice 2025-08, modifying its prior guidance issued as Notice 2023-38 and Notice 2024-41, for taxpayers seeking to qualify for the domestic content bonus tax credit amounts under the Inflation Reduction Act of 2022 (IRA). The IRA amended §§ 45 and 48 of the Internal Revenue Code and enacted §§ 45Y and 48E of the Internal Revenue Code to provide domestic content bonus tax credits for certain qualified energy facilities or projects.
Notice 2025-08 introduces the First Updated Elective Safe Harbor, providing new tables for solar photovoltaic, land-based wind, and battery energy storage system projects that modify the New Elective Safe Harbor tables provided in Notice 2024-41. Our initial post on the New Elective Safe Harbor is available here.
A summary of many of the modifications introduced by the notice is provided below:
The safe harbor table for solar PV systems has been split into two separate tables: one for ground-mount and one for rooftop. The Assigned Cost Percentages for module and inverter Manufactured Product Components (MPCs) have generally increased, but the Assigned Cost Percentages for production have generally decreased or remain unchanged. Notably, the Assigned Cost Percentage for production for a ground-mounted system with tracking decreased from 11.5 to 4.7.
Solar PV projects that install modules with domestic crystalline silicon cells and wafers (only applicable to modules) are valued higher (e.g., with an Assigned Cost Percentage of 51.6 for ground-mounted projects with tracking technology and 66.6 for ground-mounted fixed-tilt projects) than solar PV projects with only domestic cells (e.g., with an Assigned Cost Percentage of 38 for ground-mounted projects with tracking technology and 53.2 for ground-mounted fixed-tilt projects).
The First Updated Elective Safe Harbor table is significantly restructured for BESS projects, notably with a much higher Assigned Cost Percentage of 52 for cells for grid-scale projects (up from 38).
The notice adjusts various MPCs and Applicable Project Components (APCs):
“Steel or iron rebar in foundation” is modified to be “steel or iron reinforcing products in foundation.”
For PV modules, “Adhesives” have been removed as an MPC, intended to be covered by Edge Seals and Pottants.
For inverters, the former “Climate Control” is modified to be “Thermal Management System,” and “Enclosure” is modified to be “Enclosure & Skids.”
For trackers, the former “Slew Drive” is modified to be “Drive System,” and “Motor” is modified to be “Actuator.”
For wind projects, “Material” is modified to be “Preform.”
For BESS, “Battery Pack” has been narrowed to “Battery Pack/Module,” now containing only “Cells and Packaging.”
For BESS, “Inverter” is modified to be “Inverter/Converter.”
For BESS, the “Battery Container/Housing” APC remains, but is expanded to include what has been excluded from the original “Battery Pack” APC (Battery Management System and Thermal Management System for Battery Container/Housing).
The notice provides definitions for MPCs and APCs that clarify the classification of equipment and components, providing more certainty for taxpayers seeking to use the safe harbor.
The notice also expressly permits projects subject to the 80/20 Rule (allowing certain qualified facilities or energy property to be treated as originally placed in service even with some used components) to qualify for the domestic content bonus using the First Updated Elective Safe Harbor.
Taxpayers may rely on the notice for any applicable project beginning construction before the date that is 90 days after any future modification, update, or withdrawal of the notice.
Overall, the First Updated Elective Safe Harbor is likely to provide greater clarity in the interpretation of requirements necessary to obtain the domestic content bonus tax credit pursuant to the IRA.
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