who qualify as “disqualified persons” under Section 1603 Grant rules and provisions of the Internal Revenue Code. While such transfers are generally within our control, and we would seek to avoid such transfers, there is some risk that we inadvertently structure a sale of our interests in our facilities in a way that results in such a transfer. Moreover, this risk could arise in connection with the sale or transfer of the B units in Terra LLC in connection with the SunEdison Bankruptcy or any potential transaction that we undertake if the Merger failed to close.
Congress and the Trump Administration have also expressed substantial interest in reducing corporate tax rates and making other changes to the Internal Revenue Code, including, among other potential proposals, permitting the immediate expensing of capital expenditures and no longer allowing the deduction of interest expense on indebtedness. These tax law changes may have an economic impact on our existing portfolio of renewable energy facilities. To date, however, no legislation has been passed by either the U.S. House of Representatives or the U.S. Senate, and so it is difficult to predict with any certainty whether these changes will have a positive or negative impact on our business, financial condition or results of operations as it relates to our existing portfolio. In light of this uncertainty, we cannot give any assurances that the combined impact of these changes will not have a negative impact on our business, financial condition or results of operations. Moreover, any reduction in the corporate tax rates would be expected to reduce the value of certain of the tax benefits currently available for renewable energy facilities. Assuming those benefits are not also changed, the reduction of corporate tax rates may, all other things being equal, reduce the amount of new renewable energy generation that is constructed, which may increase competition to acquire the facilities that are completed.
Changes in foreign withholding taxes could adversely affect our results of operations.
We conduct a portion of our operations in Canada, the United Kingdom and Chile, and may in the future expand our business into other foreign countries. We are subject to risks that foreign countries may impose additional withholding taxes or otherwise tax our foreign income. Currently, distributions of earnings and other payments, including interest, to us from our foreign facilities could constitute ordinary dividend income taxable to the extent of our earnings and profits, which may be subject to withholding taxes imposed by the jurisdiction in which such entities are formed or operating. Any such withholding taxes will reduce the amount of after-tax cash we can receive. If those withholding taxes are increased, the amount of after-tax cash we receive will be further reduced.
Our future tax liability may be greater than expected if we do not generate Net Operating Losses, or “NOLs,” sufficient to offset taxable income.
We expect to generate NOLs and NOL carryforwards that we can utilize to offset future taxable income. Based on our portfolio of assets that we expect will benefit from an accelerated tax depreciation schedule, and subject to tax obligations resulting from potential tax audits, we do not expect to pay significant United States federal income tax in the near term. However, in the event these losses are not generated as expected (including if our accelerated tax depreciation schedule for our eligible renewable energy facilities is eliminated or adversely modified), are successfully challenged by the IRS (in a tax audit or otherwise), or are subject to future limitations as a result of an “ownership change” as discussed below, our ability to realize these future tax benefits may be limited. Any such reduction, limitation, or challenge may result in a material increase in our estimated future income tax liabilities and may negatively impact our business, financial condition and operating results.
Our ability to use NOLs to offset future income may be limited.
Our ability to use existing NOL carryforwards and NOLs generated in the future could be substantially limited if we were to experience an “ownership change” as defined under Section 382 of the Internal Revenue Code. In general, an ownership change occurs if the aggregate stock ownership of certain stockholders (generally 5% stockholders, applying certain look-through and aggregation rules) increases by more than 50% over such stockholders’ lowest percentage ownership over a rolling three-year period. If a corporation experiences an ownership change, its ability to use its pre-change NOL carryforwards and other pre-change deferred tax attributes to offset its post-change income and taxes may be limited. Future sales of our Class B common stock by SunEdison, as well as future issuances by us or trades of stock amount our other 5% stockholders, could contribute to a potential ownership change. During 2015, we believe that an ownership change occurred at a point when the trading price of our stock was at a level that would not impact the ability to use our tax attributes. During 2016, we believe a second ownership change occurred when the stock price had lowered. Our initial analysis suggests that the limitation under the Section 382 rules, including the associated built-in gain rules, would not limit our ability to utilize our tax attributes at the time of the change. Should another ownership change occur in the future, it is possible that we may be in a position such that the ability to utilize tax attributes could be limited due to the incremental NOL generated in 2016. Additional ownership changes may occur as a result of shareholder activity and/or in connection with the closing of the Merger.