A straightforward clarification of accounting, fiscal and taxation issues

The interaction between an ESCO and its client has accounting, fiscal and taxation implications on both sides of the contract. Oftentimes, the specific wording of the contract determines particularly how the contract is going to be perceived not only by the contract parties, but by third party authorities determining how accounting and fiscal treatments will be applied and how and when taxes will be applied. This can often be linked to the way assets transfers are treated. A central issue in that regard is whether the assets are on- or off-balance sheet for the client – and vice-versa for the ESCO, and what are the implication associated with each.

As this particular issue at times is a driving force behind EPC, a straightforward clarification must be established with the national tax authorities. It must follow specific national guidance preventing a case-by-case determination with uncertain outcomes.

The Global ESCO Network recommends that accounting, fiscal and tax experts with particular knowledge of EPC and ESCOs and in a targeted country are consulted for the clarification and that their advice be incorporated into the recommended standard-based contract models in each jurisdiction for the benefits of all stakeholders.

In this regard, the standard-based contract to be used in a specific legislation is of essence (see the Standard Based Contract recommendation), designed to specifically clarify such accounting, fiscal and tax issues. The model contract must specifically indicate which clauses are critical for optimizing its treatment.

In most jurisdictions, such clarification and national guidance must also take into consideration the IFRS16 guidance (International Financial Reporting Standard promulgated by the International Accounting Standards Board (IASB)). IFRS16 ‘establishes principles for the recognition, measurement, presentation and disclosure of leases, with the objective of ensuring that lessees and lessors provide relevant information that faithfully represents those transactions.’ As it stands, it is now near impossible to structure an EPC transaction as off-balance sheet for the client, which is not a positive development for the industry. For this reason alone, the engagement of accounting, fiscal and tax experts with particular knowledge of EPC and ESCOs to (re-)establish this benefit of energy performance contracting is paramount. (Global ESCO Network, 2023)

It is essential that the clarification on accounting, fiscal and tax treatment issues is both dynamic, accommodating new market and contract trends, as well as non-retroactive, i.e. that it does not reclassify already existing contracts (Global ESCO Network, 2023).