On August 16, 2022, President Joe Biden signed the Inflation Reduction Act of 2022 (the “Act”) into law. The Act represents a significantly scaled back version of the Build Back Better Act of 2021 which was not ultimately passed by Congress.
The Act resurrects the corporate alternative minimum tax (CAMT) which was eliminated by the Tax Cuts and Jobs Act of 2017. However, the resurrected version of CAMT is significantly different in structure and is only applicable to select corporate taxpayers as outlined below.
The CAMT implemented under The Act is based on Financial Statement Income (book income) as opposed to taxable income and/or AMT taxable income. The new CAMT regime is effective for tax years beginning after December 31, 2022 (i.e. tax year ending December 31, 2023 for calendar-year taxpayers).
In summary, the CAMT imposes a 15% minimum tax, based on Adjusted Financial Statement Income (“AFSI,” defined below), for corporations with average annual AFSI, over a three-year period, in excess of $1 billion (referred to as an “Applicable Corporation”). Specific rules are applied in calculating AFSI involving consolidated groups and ownership in non-consolidating entities such as non-U.S. corporations and partnerships. Other adjustments are made for foreign tax and other general business credits (“GBCs”).
Importantly, a U.S. corporate subsidiary in a foreign-parented group can be subject to the AMT if (1) combined AFSI of all members of the group exceeds the $1 billion threshold and (2) the U.S. subsidiary has $100 million of AFSI, for this purpose aggregating the AFSI of all U.S. consolidated groups under common control of the foreign parent and including any U.S. effectively connected income of foreign corporations in the group. For purposes of the income test, the Act generally treats AFSI of all persons considered a single employer with a corporation under Internal Revenue Code Sections 52(a) or (b) as AFSI of the corporation.
In what many view as a win for the private equity industry, the provision does not include an expanded aggregation rule, which ensures that the provision does not apply to unrelated companies that might otherwise satisfy the $1 billion threshold as a result of being under common ownership of an investment fund.
Observation: If a corporation has not satisfied the $1 billion annual average AFSI requirement, then the corporation is not subject to the revised AMT regime. However, careful consideration must be given to foreign-owned U.S. corporations as the criteria for meeting the AFSI requirements is significantly lower.
Similar to the pre-2018 corporate alternative minimum tax regime, the computed tentative minimum tax is then compared to the Applicable Corporation’s regular tax plus BEAT (if applicable) to determine if an increase to the taxpayer’s overall tax obligation is necessary. To the extent that an Applicable Corporation is required to increase its current year tax liability to equal the tentative minimum tax, a CAMT credit carryforward is generated. The CAMT credit may be carried forward indefinitely and claimed against regular tax in future years to the extent regular tax exceeds the CAMT plus BEAT.
Differences Between the Corporate Alternative Minimum Tax and Pillar Two
It is currently unclear how the CAMT will interact with the OECD Pillar Two 15% minimum tax. Key differences from the Pillar Two rules include:
- Population of taxpayers subject to rules (i.e. €750 million Pillar Two threshold vs. $1 billion AFSI threshold for CAMT).
- Pillar Two rules use a jurisdictional computation while the CAMT uses a worldwide aggregate tax base.
- Pillar Two rules consider deferred income taxes when determining whether a taxpayer is required to pay a top-up tax. The statute provides for Treasury to issue regulations to provide for adjustments for deferred taxes in the calculation of the CAMT, so the exact mechanism is currently unknown.
- Treatment of NOLs. Pillar Two rules use a deferred tax asset mechanism and provide a broad transition rule while the CAMT provides a deduction for AFS NOLs with a limited transition rule.
- Treatment of temporary differences. Pillar Two rules use deferred tax accounting while the CAMT provides a credit carryforward mechanism.
- Treatment of tax credits. For example, Pillar Two rules generally do not provide protection for GBCs while the AMT generally protect GBCs.
- Pillar Two allows for an exclusion amount for fixed returns on payroll and tangible assets.
Given the variety of differences outlined above, the CAMT may be neither a qualified domestic minimum top-up tax nor satisfy the qualified income inclusion rule for Pillar Two purposes.
A taxpayer that pays CAMT likely has increased its ETR for Pillar Two, thus reducing the likelihood of the undertaxed payments rule applying to its U.S. operations. However, in a subsequent year where CAMT credit carryforwards are applied against the taxpayer’s regular U.S. tax liability, the ETR for Pillar Two purposes would then be reduced. In other words, Pillar 2 rules could result in a non-creditable minimum tax in a given year while for U.S. tax purposes the CAMT is likely just a temporary item.
There are several additional uncertainties with respect to the interaction of Pillar Two and the CAMT:
- Is the CAMT a CFC regime for Pillar Two purposes?
- If so, how should the CAMT be apportioned between domestic and foreign operations, and among foreign jurisdictions?
- Will the CAMT credit for purposes of Pillar Two be treated as a covered tax under Pillar Two?
Given the significant amount of uncertainty around the interaction of the CAMT with Pillar Two, added to the existing lack of clarity on the interaction between the U.S. GILTI rules and Pillar Two, taxpayers should closely follow developments from Treasury as it works to implement the CAMT. Taxpayers should also incorporate the CAMT into their Pillar Two modeling/planning ahead of the CAMT’s applicability in 2023.
Click below to watch a 20-minute bonus video for an additional overview of Pillar Two presented by Raymond Wynman.
To learn more about GTM’s International Tax Services or to speak with someone who can guide you through these latest legislative updates, contact us.