The European Union’s response to the United State’s Inflation Reduction Act could end up placing extra burdens on companies. Even funding that is legal under the Foreign Subsidies Regulation (FSR), may have to go through a notification process.
The FSR started to apply on 12 July 2023 and is widely seen as the European Union’s reaction to the United States Inflation Reduction Act (IRA).
US President Joe Biden signed the IRA into law on August 16, 2022. The ACT sets out funding, programmes and incentives to accelerate the transition to a clean energy economy. While many climate activists around the world hailed its aims, some measures, in particular, “Made in America” requirements for cars and batteries, have come under severe criticism with accusations of protectionism being levelled.
But according to the White House, the IRA is “the most significant action Congress has taken on clean energy and climate change in the nation’s history.”
As the White House sees it, Biden “redefined American leadership in confronting the existential threat of the climate crisis” while simultaneously relaunching American innovation to lower consumer costs and drive the global clean energy economy.
Transatlantic dispute
Nonetheless, the IRA has sparked a severe trans-Atlantic dispute. The European Parliament’s ECON committee was so concerned it requested a full briefing which is scathing of local-content requirements.
The ECON briefing noted: “Although the IRA [is] a valuable alignment on the worldwide trend to fight climate change, the amounts involved as well as several of the instrument’s specifications sent shock waves through the EU.”
“The first impression was that a new, major shock was about to hit the EU,” stated the report, noting that after the turbulence of COVID-19 and the Russian invasion of Ukraine, the inking of IRA led to numerous calls for Europe to react.
It also warned that the local content requirements might have consequences not only for the bilateral trade relations and a possible diversion of direct foreign investments but also have the potential to undermine the free trade principles that are at the core of the World Trade Organisation (WTO).
Addressing distortions
The primary reaction was the FSR. According to the European Commission, the new set of rules “enables the Commission to address distortions caused by foreign subsidies and allows the EU to ensure a level playing field for all companies operating in the Single Market while remaining open to trade and investment.”
The Commission perceived a problem in foreign subsidies that appeared to give their recipients an unfair advantage to acquire companies or obtain public procurement contracts. Within the EU subsidies granted by EU Member States are subject to strict State Aid rules, but before the FSR subsidies granted by non-EU governments were un-monitored.
According to the Commission, these foreign subsidies caused distortions and undermined the level playing field of the internal market. The FSR therefore extends existing EU state aid rules to jurisdictions outside the EU, including incentives such as those provided by the IRA.
The IRA’s State aid instruments are primarily tax credits and tax deductions, but it will also provide grants, and loans as well as offer loan guarantees.
“The main difference between the US and EU is that the IRA doesn’t create funds, and even less so debt financed funds, while the EU is mainly relying on funds, and these are being financed by debt. Yet, in case of a large uptake of the programmes in the US, massive tax reliefs may create a substantial reduction in government tax collection which needs to be compensated by sovereign debt,” explained the ECON briefing.
Philosophical differences
“The different approaches reflect a difference in philosophy. The US administration is trying to reallocate existing resources within its budget, by cutting on old priorities in favour of new ones, in this case, climate. The EU’s approach is adding policy priorities without cutting on old ones, with the additional expenses mainly being burdened on taxpayers in some distant future,” it continued.
The other burdens that have been highlighted in relation to the FSR, are those faced by companies adhering to the notification procedure.
Form FS-CO contains an exemption for investment funds by which they are not required to disclose the FFCs received by their non-acquiring funds under certain conditions, alleviating the burden for private equity firms. Nonetheless, layers of red tape have been added.
Invest Europe has called for further streamlining of FSR implementation. “A clearly defined simplified procedure … would provide the relevant parties subject to FSR the legal clarity needed, far beyond individual waivers which by themselves are not sufficient to limit administrative burden for notifying parties,” said the organisation which represents Europe’s private equity, venture capital and infrastructure sectors, as well as their investors.
“With regard to private equity / investment fund undertakings, it would be advisable to state explicitly that investment commitments by limited partners (who invest in a range of investment funds controlled by a single fund manager) by definition are presumed to be granted “under normal market conditions”, as they are offered under comparable terms to private investors investing in the same fund,” said Invest Europe.
So-called ‘unforeseen consequences’ have a habit of tripping up the European Commission even when the best of intentions are behind new regulations. Meanwhile promises to reduce red tape come thick and fast – including one last April to simplify procedures for reviewing concentrations under the EU Merger Regulation. When reacting to the IRA, the Commission may want to look closely at outcomes.
[By Jennifer Baker I Edited by Brian Maguire | Euractiv’s Advocacy Lab ]
