The 15% minimum tax on billion-dollar corporations in the Inflation Reduction Act that President Biden signed into law in August shouldn’t be confused with the 15% global minimum tax on multinational companies that the Treasury Secretary Janet Yellen has been encouraging countries to approve, but it’s no surprise there is some confusion.
The Organization for Economic Cooperation and Development has developed a two-pillar model as part of its framework for combating corporate tax avoidance and deterring base erosion and profit shifting to low-tax countries by multinationals. The U.S. is among the 136 countries that have signed onto it. Pillar One expands a country’s ability to tax revenue if a company’s goods or services are being used or consumed there, even if there’s no physical presence in that nation, while Pillar Two sets a global minimum tax of 15% for large multinationals.
“There’s a lot of confusion,” said Kate Barton, global vice chair of tax at Ernst & Young. “The Inflation Act clearly has a domestic minimum tax, but it does not address the requirements of Pillar Two to have a global minimum tax.”
The Tax Cuts and Jobs Act of 21017 contained several provisions that were supposed to rein in corporate tax avoidance by multinational companies, including the Section 965 repatriation tax on deferred foreign earnings, and the Global Intangible Low-Tax Income and Foreign-Derived Intangible Income provisions. But coming up with the regulations for Section 965, GILTI and FDII took years at the IRS and the Treasury Department amid intense lobbying by corporate interests and extensive input from the tax community. The Section 965 repatriation tax has brought in far less than originally estimated, according to a report from the Treasury Inspector General for Tax Administration (see story). That’s probably true of the GILTI provisions as well, which weren’t altered by the Inflation Reduction Act to align them with the OECD global minimum tax.
“We already have the GILTI provisions as part of the Trump reform,” said Barton. “Right now, the GILTI regime would be at a 13% tax rate, and in order for it to conform with Pillar Two requirements, it has to have two things. The rate’s got to move up to 15%. That was not done as part of the inflation bill. The inflation bill has a totally separate regime to subject companies to a domestic minimum, but they did not deal with the international provisions or make any of the necessary changes to GILTI.”
Foreign tax credits weren’t changed either by the Inflation Reduction Act. “Currently, you can amalgamate all countries and put them in an overall basket for crediting purposes,” said Barton. “Under Pillar Two, the regime requires that each country have its own foreign tax credit calculation, so you’ll end up with potentially more excess credits that you can’t use because they’re on a country by country basis. That was not changed in the code, so we have two things that are out of whack on Pillar Two for the United States. The U.S. was leading the charge with both Joe Biden and Janet Yellen’s comments, so it’s a very difficult position for them to be in, not to be leading the charge on conformity.”
Ironically it was U.S. leaders like Yellen who persuaded the finance ministers in other OECD countries to go along with the 15% minimum tax on corporations.
“We’re all at the table and we’re talking about a global minimum tax,” said Tifphani White-King, national tax practice leader at Mazars U.S. “We’re focused on limiting what everyone was calling this race to the bottom. You have a constant competition among all the nations as to who can offer the best incentives and the lowest rates for foreign direct investments in a country. The Inflation Reduction Act puts out a form of a minimum tax, but is it the same as a global minimum? No, there are remarkable differences if you take the time to go through both. Can they both apply at the same time? Yes.”
White-King pointed to overlaps in the Tax Code that could potentially lead to double taxation, which tax treaties are supposed to avoid. “I actually question whether we in the profession need to stop and say, rather than simplifying everything by having such a minimum tax, are we actually creating a multitiered approach here to taxation and thereby really not simplifying anything?” she said. “That’s something to consider, especially in the realm of incentives and tax credits.”
The Inflation Reduction Act contains a separate provision mandating a 1% excise tax on share buybacks by corporations. “We’re seeing companies that are scrambling before the end of the year really changing their strategies and saying, let me do my buybacks now because I don’t want to be subject to a 1% excise tax rate,” said White-King. “It’s modeling the impact of what’s your strategy, what’s your vision, where is the business going, what’s your effective tax rate today? As you’re thinking about any transactions that may be occurring, how can any of the provisions that are in the Inflation Reduction Act impact you? If we focus purely on the transactional and you’re thinking through the strategy for your company, buybacks are one of the things that you may be thinking through because of future consolidations, mergers, and further investment opportunities or giving money back to shareholders.”
Foreign tax credits are supposed to play a role in avoiding double taxation, and they could play a part in calculating the 15% minimum tax on book income for billion-dollar corporations under the Inflation Reduction Act.
“The Inflation Reduction Act has a domestic minimum tax, and it’s going to apply to companies with over $1 billion in income,” said Barton. “A lot of people are saying it’s targeted at 150 of the largest U.S. multinationals, but what’s also interesting is it’s based on the book income, so it’s yet another compliance requirement because it doesn’t use the regular taxable income. It’s a big undertaking from a compliance perspective, and I wouldn’t underestimate that. That’s what a lot of our clients are complaining about is how that’s going to work.”
The regulations and guidance from the Treasury Department and the Internal Revenue Service will be a key part of helping companies comply with the brand new requirements.
“Companies with big depreciation expenses, research and development credits, net operating losses, maybe due to substantive operational issues as they come out of COVID, want to be able to use their NOL carryforwards and the like,” said Barton. “All of that will have an impact on their alternative minimum tax, so it makes some companies have to study and scrub their financial statements.”
When the Inflation Reduction Act was signed into law on Aug. 16 by President Biden, many companies were in the middle of a fiscal quarter. “If you’re a calendar year corp, the quarter ends on Sept. 30, and you have to do a lot of testing of your deferred tax assets and liabilities on your balance sheet to make sure they’re fairly stated,” said Barton. “If you were thinking that you were going to get a 21% benefit on some of those deductions, or you thought you were going to be taking things into income at 21%, it could be that now you’re subject to a 15% rate and you could have financial statement detriments because of this new law. So there’s an immediate action because of the quarter end and having a new law in the middle of the quarter end.”
The Inflation Reduction Act contained a provision that potentially doubles the amount that companies can claim on the research tax credit, from $250,000 to $500,000 per year, against payroll taxes (see story). However, it also left out a much sought provision reversing a provision from the Tax Cuts and Jobs Act of 2017 that eliminated the ability of companies to write off their R&D expenses in the year they’re incurred (see story).
“They basically are allowing companies to have a longer period,” said Barton. “They just took one of the provisions that was in the law and have made it go longer in terms of research and development expenditures so that you can still get a current deduction for those. It’s just an extension. What was interesting in this bill is what didn’t get in there.”
Meanwhile, the OECD has been working to get holdout countries such as Hungary onboard with approving the 15% minimum tax.
“There is still significant political momentum around the global minimum tax,” said Barton. “We’ll see what happens this autumn. The U.K. announced plans to implement the global minimum tax beginning in 2024. I think the EU will pick it up in the autumn timeframe. It will be interesting to see if they can pull it off. Hungary was the only holdout this spring. These negotiations are continuing on whether or not we can get them all aligned. The Czech Republic now has the presidency of the EU, so a lot of people feel that with that change, maybe they’ll be able to get the Hungarians in line and get this done for the European Union. And if that happens, that’s 27 countries at once. That then puts a lot of pressure on the U.S. and the U.K., but I still think we have to watch the EU and see if they can actually get this done. The rules would be effective beginning in 2024.. There are still so many things that are being ironed out: the interpretive guidance, the administrative matters, potential simplifications. The outcome of that work could be important.”
The outcome could have political ramifications. “Where the world is going politically, people want to try to be fair and create this 15%,” said White-King. “We’re targeting these big multinational enterprises. And as we’re looking at that, are we conscious of the provisions that are being enacted in our Tax Codes where maybe in an ideal world, they were destined to be operational in a unilateral way? But in actuality, when we do apply these provisions to certain fact patterns, they overlap each other and there’s a multitiered tax. What we try to avoid in an ideal world is double taxation and even triple taxation in the international tax world. Now is it becoming a multitiered tax approach, and how do we work our way around that or within that framework to ensure fairness? That’s where I’m seeing lots of discussion around the treatment of the tax credits, and will the systems respect the tax credits? How does that play out in the modeling? Having something like a global minimum tax, what does that do for the world of incentivizing investment? Does that go away from a tax perspective? Do we look to other areas of incentivizing within the business world that are non-tax? And what does that do to our modeling? Those are some of the areas that I’m really curious to see how it develops.”
The recent announcement of the retirement of Pascal Saint-Amans as director of the Center for Tax Policy and Administration at the OECD casts further uncertainty on the direction of the global minimum tax, she noted (see story).
“With the Inflation Reduction Act and the U.S. view on this minimum tax, we are taking into account these credits and these incentives,” said White-King. “When you look at the global minimum tax, it’s very different, and you have to look at it on a credit by credit basis and on an incentive by incentive basis by country. That’s some of the difference between the two. Some may immediately look at this just on its face, very superficially on the surface and think it’s 15% under both the U.S. and the global minimum, but it’s not equal. And how it works and how we arrive at that is very different. And one of those areas is certainly tax incentives and credits. Really understanding that and the workings of that and modeling that out is paramount. When people ask me, what are companies doing? This is one big modeling exercise, and it’s been this way since we changed over the code in 2017. It’s modeling every iteration that we possibly can, every scenario that we can possibly think about, to really understand the implications and be ready either way.”
In comparison, Barton believes implementation of the Pillar One part of the plan will take place even further out than the global minimum tax in Pillar Two.
“I think people are pretty exhausted just even trying to get this global minimum tax,” she said. “And I think getting this Inflation Act done in the U.S. without the requisite provisions has taken a little steam out of the project. It’s great to think that you want a multilateral agreement, but what this is showing is multilateralism and tax are very difficult to achieve. A lot of heads of taxes all wanted this and worked hard with the OECD, sending contingencies of their tax departments to Paris, really trying to get out their point of view. And then they opened up the documentation, the hundreds and thousands of pages that hit us in December, and it was like, ‘Oh, my gosh, I didn’t ask for this. I don’t want what’s in this package.’ So I guess it’s a lesson of being careful what you wish for.”