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|1. Report No.
|2. Government Accession No.||3. Recipient's Catalog No.|
|4. Title and Subtitle
Consideration of Tax Issues in Developing and Evaluating Public-Private Partnership Concessions for Transportation: A Discussion Paper
|5. Report Date
|6. Performing Organization Code
Susan Binder, Lucian Spatoliatore, Michael Mariani, Jim Ziglar, Valentin Villalbi, Ira Aghai, Colbye Prim, Michael Slawson
|8. Performing Organization Report No.|
9. Performing Organization
Name And Address
|10. Work Unit No. (TRAIS)|
|11. Contract or Grant No.
|12. Sponsoring Agency
Name and Address
United States Department of Transportation
Federal Highway Administration
Office of Innovative Program Delivery
1200 New Jersey Avenue, SE
Washington, DC 20590
|13. Type of Report and Period Covered|
|14. Sponsoring Agency Code|
|15. Supplementary Notes
Contracting Officer's Technical Representative: Patrick DeCorla-Souza, FHWA Office of Innovative Program Delivery
This paper highlights some key tax-related principles of public-private partnership (P3) structures in the U.S. for both public and private sector participants. The report focuses on key considerations for the public sector at different levels of government and different types of private sector entities. Such key considerations include the distinction between direct and indirect taxes in the context of transportation concessions, the choice of legal entity and other investor-specific tax considerations, and applicable state and local income/franchise taxes relevant to P3 transactions. The report also details tax considerations for transportation concessions, for both the toll concession and the availability payment concession. It makes general observations about the tax implications of each structure. The intended audience of this report is policy and decision makers who are involved in the delivery of transportation infrastructure.
|17. Key Words
Public private partnerships, toll roads, concession arrangements, tax analysis, competitive neutrality adjustment, value for money
|18. Distribution Statement
|19. Security Classif. (of this report)
|20. Security Classif. (of this page)
|21. No. of Pages
Form DOT F 1700.7 (8-72) Reproduction of completed page authorized
On July 17, 2014, the Build America Investment Initiative was implemented as a government-wide effort to increase infrastructure investment and economic growth. As part of that effort, the U.S. Department of Transportation (USDOT) established the Build America Transportation Investment Center (BATIC). The BATIC helped public and private project sponsors better understand and utilize public-private partnerships (P3s) and provided assistance to sponsors seeking to navigate the regulatory and credit processes and programs within the Department. In December 2015, the Fixing America's Surface Transportation Act (FAST Act) was enacted, which directed USDOT to establish a National Surface Transportation Infrastructure Finance Bureau, which was renamed the Build America Bureau (the Bureau).
Building upon the work of the BATIC, the Bureau was established in July 2016 as USDOT's go-to organization to help project sponsors who are seeking to use Federal financing tools to develop, finance and deliver transportation infrastructure projects. The Bureau serves as the single point of contact to help navigate the often complex process of project development, identify and secure financing, and obtain technical assistance for project sponsors, including assistance in P3s. The Bureau replaces the BATIC and is now home to DOT's credit programs, including Transportation Infrastructure Finance and Innovation Act (TIFIA), the Railroad Rehabilitation and Improvement Financing (RRIF) and Private Activity Bonds (PAB). The Bureau also houses the newly-established FASTLANE grant program and offers technical expertise in areas such as P3s, transit oriented development and environmental review and permitting. The Bureau is also tasked with streamlining the credit and grant funding processes and providing enhanced technical assistance and encouraging innovative best practices in project planning, financing, P3s, project delivery, and monitoring.
Working through the Bureau, USDOT has made significant progress in its work to assist project sponsors in evaluating the feasibility of P3s, and helping simplify their implementation. In response to requirements under the Moving Ahead for Progress in the 21st Century Act (MAP-21) and the FAST Act to develop best practices and tools for P3s, the Bureau, jointly with FHWA, is publishing this report on U.S. highway P3 concessions.
Public Private Partnerships (P3s) represent a growing trend as a project delivery option for infrastructure projects in the United States (U.S.). The relative cost savings, risk transfer and project acceleration delivered by private sector participants in infrastructure development make P3s an attractive proposition for many transportation agencies. However, P3s require transactions that often involve extensive negotiations of financial, structural, and legal agreements. An important consideration in these negotiations is the treatment of taxes and the impact of that treatment on project value.
While tax considerations are important for private sector bidders as well as city, state, and federal P3 sponsors, there is currently no specific federal legislation or policy that details the tax treatment of P3 projects. This is primarily because each P3 is unique by nature, pursued in light of the specifics of local economic and political conditions, and structured to match the desired amount of private sector involvement with respect to that particular project. In addition, many of the taxes that might be incurred by a P3 are state and local taxes, and each state has a different tax regime. The choice of legal structure is also heavily reliant on location and the relevant applicable tax laws at federal, state, or local levels.
This paper, therefore, seeks not to define a particular approach to tax implications and considerations for P3s, but attempts to highlight some key tax-related principles of P3 structures in the U.S. for both public and private sector participants. As such, we have kept language and descriptions broadly applicable where possible. The intended audience is policy and decision makers who are involved in the delivery of transportation infrastructure.
Below, we describe the objectives and key observations of each section.
Section 1 - In Section 1, we discuss some key considerations relevant to public sector sponsors of P3 projects, including the types of taxes that they may consider, the performance of P3s versus initial projections, and the impact of P3s on economic activity. Key observations of this section include:
Section 2 - In Section 2, we discuss key income tax considerations for private sector bidders, including the types of entities that may be used in the P3 investment structure. Generally, most P3 investment structures with multiple investors utilize a Delaware limited liability company (constituting a partnership for U.S. federal income tax purposes) as the investment vehicle in order to minimize entity-level income taxes and have taxable income "flow through" to the investors. 1 We also discuss investor-specific tax considerations, as well as state and local income / franchise taxes relevant to P3 transactions.
Section 3 - In Section 3, we discuss key tax considerations for two common forms of P3 transactions - toll concessions and availability payment concessions. The discussion focuses on the income tax aspects of such arrangements, as well as relevant state non-income tax aspects. The tax treatment of both types of concessions is subject to some uncertainty but general observations may be made for each.
Section 4 - In Section 4, we discuss key principles for tax revenue valuation. This includes a discussion that places taxes in the broader context of project evaluation, including the Benefit Cost Analysis (BCA) typically performed to evaluate whether to proceed with a project, and the Value for Money (VfM) analysis typically conducted to select a project delivery method. With this background, we discuss the Competitive Neutrality Adjustment (CNA) component of the VfM, which specifically addresses tax revenue valuation. The discussion also raises key considerations and caveats from practitioners who regularly perform and assess these analyses. These considerations center on how these analytical tools are used by entities at different levels of government to analyze various project delivery options. We end with a discussion of the trade-off between taxes levied on a P3 and the value received by the government sponsor, and how these tax streams are typically modeled. Key observations include:
|AMT||Alternative Minimum Tax|
|ASC||Accounting Standards Codification|
|BCA||Benefit Cost Analysis|
|BLS||Bureau of Labor Statistics|
|CNA||Competitive Neutrality Adjustment|
|DCF||Discounted Cash Flow|
|DOT||Department of Transportation|
|EBITDA||Earnings Before Interest, Taxes, Depreciation and Amortization|
|ECI||Effectively Connected Income|
|FASB||Financial Accounting Standards Board|
|FHWA||Federal Highway Administration|
|FIRPTA||Foreign Investment in Real Property Act|
|FTE||Full -time Equivalent|
|GDS||General Depreciation System|
|IRC||Internal Revenue Code|
|IRS||Internal Revenue Service|
|LLC||Limited Liability Company|
|MACRS||Modified Accelerated Cost Recovery System|
|NOL||Net Operating Loss|
|O&M||Operations & Maintenance|
|P&I||Principal and Interest|
|PCM||Percentage Completion Method|
|PSC||Public Sector Comparator|
|SPV||Special Purpose Vehicle|
|UBIT||Unrelated Business Income Tax|
|UBTI||Unrelated Business Taxable Income|
|USRPI||United States Real Property Interest|
|VfM||Value for Money|