The Inflation Reduction Act (IRA) was signed into law on August 16, 2022. Among its many provisions is a corporate alternative minimum tax of 15% of financial statement income, effective for tax years beginning after December 31, 2022. The tax applies to U.S. corporations other than S corporations that have more than $1 billion in annual earnings over the previous three years.
The 15% corporate tax in the IRA wasn’t intended to match the same percentage of tax set forth in the still-in-progress global tax deal — or one could say it was no longer intended to do so since the White House and lawmakers scrapped an earlier bill that could have harmonized the two measures.
Officials in the Biden administration have admitted privately that prospects for near-term adoption of the global corporate minimum tax in the United States died when the Build Back Better (BBB) plan was abandoned in favor of the scaled-back IRA.
The BBB had been the medium through which the Biden administration intended to amend Internal Revenue Code changes caused by the Tax Cuts and Jobs Act (TCJA) and ensure the revised provisions matched terms of the global tax deal negotiated through the Organization for Economic Cooperation and Development (OECD). The BBB would have modified the TCJA’s base erosion and anti-abuse tax and raised the global intangible low-taxed income (GILTI) rate on offshore earnings from its original 10.5%.
Once Senate Majority Leader Chuck Schumer reached an agreement with Democratic Sen. Joe Manchin of West Virginia to proceed with the IRA, the BBB finally succumbed after languishing on life support since November of 2021, when the House of Representatives passed it, but the Senate refused to act.
For much of this year, officials of the U.S. Department of the Treasury have been hoping for another bill that would amend the TCJA measures and make them compliant with the global deal. However, the IRA doesn’t allow for this.
One way the IRA does match the global tax deal is that the U.S. law’s 15% corporate tax applies to “book income,” an alternate term for financial statement income, as opposed to tax income. The tax will apply to U.S. corporations that typically qualify for tax credits and deductions.
The second of two “pillars” of the OECD-brokered deal would also set a 15% global minimum corporate tax rate for large multinational corporations based on their adjusted financial statement — that is, book — income. However, multinationals would be required to disclose, in disaggregated fashion, the income earned in each taxing jurisdiction where they operate. In contrast, the IRA’s 15% corporate tax doesn’t mandate country-by-country reporting.
Bar Association’s Report
Other key differences between how the IRA’s tax and its global counterpart are structured have been noted by various experts, including the New York State Bar Association.
In an 86-page report issued July 21 — before the Schumer-Manchin breakthrough — the bar association’s tax section criticized Pillar Two for deviating from international tax norms by not requiring a corporation to have a physical presence or other taxable nexus in a jurisdiction. Instead, Pillar Two allows taxes to be imposed on the offshore earnings of a company if it’s a member of the same multinational group as one that has nexus.
According to the New York State Bar Association’s report, which was sent to top U.S. Treasury Department and IRS officials, the GILTI regime in Section 951A of the Internal Revenue Code shouldn’t be considered a qualifying income-inclusion regime (IIR) under the OECD’s model tax rules. The Paris-based body had issued the rules in December of 2021. They include both an IIR and an undertaxed-profits rule (UTPR) as mechanisms to enable a tax jurisdiction to cover any gap that might arise when a multinational corporation in its purview pays less than 15% in income tax abroad. The rule is designed to serve as a backup if members of a single multinational group are taxed below the 15% threshold once the IIR is calculated, according to the OECD.
Instead, said the report, GILTI should be treated as a regime for controlled foreign corporations (CFC) under the OECD rules. It shouldn’t qualify as a so-called top-up tax under the IIR, members of the bar association’s tax section wrote.
Some added that GILTI should never be deemed both a CFC regime and a top-up tax under an IIR. Pillar Two would let a country or territory impose top-up taxes on the book income of a domestic member of a multinational group, in lieu of having to collect tax from the other group members outside its supervision.
Additional Report Suggestions
The New York State Bar Association’s report also said that, if the United States were to adopt a qualified domestic minimum top-up tax (QDMTT) for U.S. entities in a multinational group, that regime should allow a credit for the qualified top-up taxes of those entities in later years, when no top-up tax or QDMTT would be due.
In addition, the report addressed the interaction of other OECD model rules with U.S. tax law — particularly Sec. 951’s Subpart F regime and the foreign tax credit limitation under Sec. 904.
Business and individuals, as well as their respective tax advisors, are still adjusting to the changes brought forth by the IRA. Meanwhile, as of this writing, the global tax deal continues its slow progress toward full adoption. Contact us to determine how your tax situation has been affected — and how it could be impacted further.
The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.