New U.S. Book Minimum Tax Will Catch Some Non-U.S. Multinationals' U.S. Income

August 2022

BY

Monika LovingManaging Partner, International Tax Services

Michael MasciangeloManaging Director, International Tax Services

Tiffany IppolitoManaging Director, International Tax Services

As part of the Inflation Reduction Act, President Biden on Aug. 16 signed into law a new 15% alternative minimum tax on the adjusted financial statement income of certain large corporations. While broadly aimed at large, profitable U.S. corporations with low effective tax rates, the new tax also applies to certain large foreign-parented groups with U.S. income above a certain threshold.

The minimum tax applies to an “applicable corporation”, which means generally any corporation (with certain specified exceptions) that has three-year average annual financial statement net income, or “book” income, that exceeds $1 billion, after allowing for certain specified adjustments. The tax is effective for tax years beginning after December 31, 2022.

For a general discussion of the book minimum tax and other tax changes in the Inflation Reduction Act, see BDO’s Alert “Senate approves Inflation Reduction Act with changes to tax provisions.”
 

Application to foreign-parented multinational groups

The book minimum tax applies to U.S.-related income of a “foreign-parented multinational group” when the adjusted financial statement income of all members of the multinational group exceeds the $1 billion three-year average annual net income threshold. However, the tax will only apply when the net income in the U.S. equals or exceeds $100 million on average over a three-year period.
The legislation defines a foreign-parented multinational group with respect to any tax year as two or more entities that meet three specifications:
  1. At least one entity is a domestic corporation and at least one is a foreign corporation.
  2. The entities are included in the same applicable financial statement for the tax year.
  3. The common parent of the entities is a foreign corporation, or, if there is no common parent, the entities are treated as having a common parent that is a foreign corporation under applicable rules.
For these purposes, the legislation specifies that, in the case of a foreign corporation engaged in a trade or business in the U.S., the U.S. trade or business will be treated as a separate domestic corporation wholly owned by the foreign corporation.

The act directs the Treasury Department to issue regulations for determining when entities are treated as having a common parent that is a foreign corporation, the entities to be included in the foreign-parented group, and the common parent of the group.
 

‘Adjusted financial statement income’ and ‘applicable financial statement’

The act defines a corporation’s “adjusted financial statement income” for any tax year as the corporation’s net income or loss set out in their applicable financial statements, as adjusted in accordance with the provisions of the act.

For these purposes, an “applicable financial statement” generally includes:
  1. Statements certified as prepared in accordance with generally accepted accounting principles (GAAP) and required to be filed with the U.S. Securities and Exchange Commission.
  2. If no GAAP statements, statements prepared on the basis of international financial reporting standards (IFRS) and filed with the agency of a foreign government.
  3. If no GAAP or IFRS statements, other statements filed by the taxpayer with a regulatory or governmental body as specified by the Treasury.


Calculation of tax

The alternative minimum tax to be imposed equals the excess of the “tentative minimum tax” for the tax year over the sum of (1) the regular tax for the tax year and (2) any tax imposed under the base erosion and anti-abuse tax (BEAT) provisions. For applicable corporations, the tentative minimum tax equals 15% of the corporation’s “adjusted financial statement income” for the tax year minus the “corporate AMT foreign tax credit” (as defined in the legislation) for the tax year.

A corporation’s adjusted financial statement income for a tax year equals their income or loss as set out in the corporation’s applicable financial statements, with certain adjustments. The specified adjustments pertain to related entities, certain items of foreign income, disregarded entities, defined benefit plans and depreciation, among other items. There is also a deduction for financial statement net operating losses.