According to experts, the proposed minimum tax would conflict with the OECD's pillar two regime and put other nations at risk of leaving.
According to tax experts, the most recent US corporate tax rate is in conflict with the world regulations set forth in the OECD's pillar two framework and may endanger the stability of those rules.
The Senate-backed Inflation Reduction Act of 2022, which includes a 15 percent corporate alternative minimum tax (CAMT), may pass the House by the end of the week and possibly become law by the end of August.
Despite the fact that pillar two's global minimum tax is also set at 15%, there are a number of differences with the CAMT that could create uncertainty in the global tax environment and affect business decisions as the cost of corporate investment rises.
The outcomes under the proposals are still being modelled, according to a direct tax manager at a technology company that is subject to both minimum tax rules, but the outcomes appear to be different.
"Although both taxes target big businesses, use financial accounting principles as their tax base, and have a 15% rate, that is where the similarities between them end.
"If the modelling exercise shows our tax liabilities increase, then we have less money to invest in boosting productivity, and that trickles down to fewer benefits for employees," he continues.
Adjustments to financial accounting income, which is primarily disclosed to investors in quarterly and annual financial reports, are one source of some of the variations between the proposals. The tax accounting numbers typically provided to the Internal Revenue Service and other tax administrations to examine a company's margins are different from these income figures.
"Some future policy decisions will fall to accounting boards as the CAMT follows accounting profits," the manager continues.
All tax credits and deductions that can reduce taxes below the OECD's minimum rate of 15 percent would be eliminated if accounting boards demand that the CAMT only consider pure financial accounting income. In 2023, when businesses are planning to invest in R&D and factories to address global supply chain issues, these tax treatments may become clear.
The two minimum taxes have significant distinctions, according to Daniel Bunn, executive vice president at the Tax Foundation in Washington, DC.
"The policies are not even close, and in some cases take opposite approaches. The Inflation Reduction Act is kind to tax credits and stingy toward write-offs for capital investments, while the global minimum tax is stingy toward credits but kind to write-offs for investments."
The inconsistencies between the proposals could force businesses to deal with the worst aspects of both taxes, increasing the risk of double taxation and decreasing investment opportunities.
Technically, the CAMT is a 15% tax on consolidated corporate profits, but it deviates from the OECD global framework, which calls for country-by-country taxation. The devil, according to advisors, is in the details, so it is uncertain for the time being whether the OECD will accept the CAMT as a qualified minimum tax under pillar two.
For tax years beginning after December 31, 2022, the CAMT targets the accounting income of specific large corporations with at least $1 billion in adjusted pre-tax income on their consolidated financial statements. The model rules of the OECD, which focus on businesses with revenues over €750 million ($762.9 million), do not align with this.
Only 150 taxpayers in the US would be subject to the CAMT, according to a report released on August 3 by the Congressional Research Service and the Joint Committee on Taxation. The report also noted that over a ten-year period, the tax would generate an additional $313 billion in revenue, at least half of which would come from manufacturing firms.
Whenever accounting income exceeds taxable income in a given year, according to advisors, companies subject to the tax are required to pay a top-up. This problem typically occurs when taxpayers significantly alter how they create financial accounting reports for shareholders.
According to Maury Passman, managing director at KPMG in Washington, DC, "CAMT only applies to the largest US multinationals, such as Amazon and Nike, and is not applied on a country-by-country basis." He also claims the US minimum tax may even undermine the OECD's version.
While the CAMT gives US businesses a national tax floor, the global intangible low-taxed income (GILTI) rules already impose a minimum tax on the profits of multinational corporations' foreign subsidiaries.
According to some consultants, GILTI rate adjustments and the CAMT may both be eligible for the pillar two regime. The GILTI rate, however, is only 10.5 percent, and the rules of the regime permit rate blending, which enables foreign income with low taxes from tax havens and high taxes from other nations to be averaged for advantageous tax treatment.
GILTI is not OECD compliant as a result, and the Inflation Reduction Act contains no amendments to make this right.
Furthermore, due to partisan political obstacles, there is little chance that GILTI changes will occur later this year. In the upcoming midterm elections in October, the Republicans are expected to prevail, and they are completely opposed to the proposed minimum tax changes.
According to Jose Endara, senior tax director at multinational conglomerate Honeywell in Arizona, "the US CAMT is not compliant [either], not even close."
iHe continues by saying that "if the US will not change its GILTI this year, then that means there is no pillar two implementation, unless you argue that CAMT is an income inclusion rule."
According to him, "many US companies want the OECD to recognise the GILTI regime as a different form of the same set of rules."
The CAMT has two main components, whereas the global minimum tax rules under pillar two of the OECD have three. The first of these is a qualified domestic minimum top-up tax, the second is an income inclusion rule that targets foreign profits made by subsidiaries, and the third is the undertaxed profits rule (UTPR), which is applicable to foreign entities' income that is not covered by the first two rules.
Both the CAMT and OECD proposals have different exemptions. Although the OECD's proposal has a carve-out provision for financial services, the most recent draft of the Inflation Reduction Act does not.
If enough legislators opt to reject the OECD's two-pillar strategy, the backstop provided by the UTPR will be rendered ineffective. The rules of pillar two were intended to only be effective if at least half of the 137 parties to the agreement adopted them, which would put direct pressure on the other parties to do the same.
In terms of pillar two, the US has the most multinational corporations, and as a result, it has a significant impact on how other nations adopt the regulations.
There is a chance that some of the signatory nations to the OECD two-pillar solution will stray from the model guidelines or postpone implementation past the target date of the end of 2023.
The OECD model rules are already beginning to be modified by some nations to fit their own conditions. The UK has released a partial set of draft changes, but the UTPR backstop is still missing from the 116 pages. To track how the US and other significant jurisdictions are implementing the regulations, several lawmakers are gradually introducing pillar two measures.
On top of the model rules, members of the European Parliament are also pushing for additional measures. Because of this, the European Commission is advancing its debt-equity bias reduction allowance (DEBRA) to increase the minimum tax framework and expand the options for financing investments.
Canada and India continue to have back-up measures in their domestic tax laws, which are only temporarily suspended to give pillar two enough time to begin by the OECD's deadline in December 2023.
lOne head of tax at an Ontario telecommunications company says, "let other countries proceed, but as for Canada, it is high time the government put job creation and economic growth ahead of political gesturing,” says one head of tax at a telecommunications company in Ontario."
"I think more than a few colleagues are hoping to see Canada withdraw from the initiative since it will have disproportionate effects on specific industries and unintentionally penalise investment," he continues.
Similar opinions on recalling the agreement have been expressed by other tax heads, or at the very least, they have expressed interest in further simplification of pillar 2.
The final straw that persuades other nations to postpone finalizing the framework by 2023, a deadline that now very much seems in doubt, may be the discrepancies between the CAMT and pillar two.
By fLEXI tEAM