US congress passes 15% corporate alternative minimum tax

On August 12, the House of Representatives voted along party lines (220-207) to approve the Inflation Reduction Act of 2022 (“IRA”), a roughly USD 740 billion budget reconciliation package that includes some targeted corporate tax increases, a large increase in funding for the Internal Revenue Service (“IRS”), incentives to promote climate change mitigation and clean energy, and provisions to promote health care affordability. The vote by the House follows a vote, also strictly along party lines, in the Senate (51-50) less than a week earlier on August 7. The IRA is now expected to be passed to President Biden for his signature.

With respect to taxes, the IRA is a slimmed-down version of its predecessor legislation, the Build Back Better Act (“BBBA”), which was passed by the House in November 2021 and then stalled in the Senate where Senator Joe Manchin (D-WV) withheld full support of the measure due to concerns regarding the inflationary impact of the legislation. After many people considered the chances of advancing the legislation slim, Senate Majority Leader Charles Schumer (N-NY) and Senator Manchin, in a move that surprised many, unveiled a compromised legislation on July 27.

The IRA incorporates some significant modifications at the behest of Senator Kyrsten Sinema (D-AZ), who expressed reservations about specific revenue provisions in the original version and whose support was essential in getting the package through an evenly divided Senate.

The key tax provisions of the IRA relate to a 15% corporate minimum tax on companies with profits greater than USD 1 billion and a 1% excise tax on stock repurchases by publicly traded companies. The IRA is also notable for the provisions that it does not include: namely, any increase in headline corporate and individual income tax rates, international tax provisions (including proposals contained in BBBA that would have aligned US tax rules with the OECD BEPS Pillar 2 global minimum tax), tightening of rules governing the tax treatment of carried interest income, and additional limitations on the deductibility of interest expense.

The key corporate tax provisions contained in the IRA are summarized as follows:

Corporate minimum tax

The IRA exacts a new book minimum tax that imposes a 15% minimum tax on “adjusted financial statement income” (“AFSI”) of an “applicable corporation”. Conceptually, this provision targets companies that report significant financial statement income but pay little to no US federal income tax.

Under the provision, an “applicable corporation” generally is any corporation (other than an S corporation, regulated investment company, or a real estate investment trust) with a three-year average annual AFSI that exceeds USD 1 billion. AFSI is generally a corporation’s income as reported on its applicable financial statements – generally, audited financial statements prepared for Securities and Exchange Commission reporting or other non-tax purposes. Specific rules are applied in calculating AFSI involving consolidated groups and ownership in non-consolidating entities such as non-US corporations and partnerships. Other adjustments are made for foreign tax and other general business credits.

Importantly, and 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 USD 1 billion threshold as a result of being under common ownership of an investment fund.

The applicable corporation’s minimum tax is equal to the amount by which the tentative minimum tax exceeds the corporation’s regular income tax for the year increased by the corporation’s tax under the base-erosion anti-abuse tax (“BEAT”) provisions.

The new minimum tax is effective for taxable years beginning after December 31, 2022.
 

Excise tax on stock buybacks

This provision, which is substantially similar to the version included in the BBBA, provides that a “covered corporation” is subject to a tax equal to 1% of the fair market value of any stock of the corporation that is repurchased by such corporation during any taxable year (subject to certain exceptions).

A “covered corporation” means a domestic US corporation, the stock of which is traded on an established securities market. For purposes of calculating the tax, the fair market value of the repurchased stock is reduced by the fair market value of any stock issued by the covered corporation during the taxable year, including stock issued or provided to employees of the covered corporation and employees of specified affiliates. Purchases of covered corporation stock by specified affiliates would be treated as repurchased by the covered corporation.

For purposes of this provision, a “repurchase” is broadly defined to include a redemption as defined under US federal income tax law (generally, an acquisition of stock by a corporation in exchange for cash or property other than the corporation’s own stock or stock rights) and any other economically similar transaction.

The new excise tax applies to repurchases of stock made after December 31, 2022.
 

Other tax provisions

Various other tax provisions are contained in the IRA related to, for example, increase in IRS funding to improve taxpayer compliance, energy-related tax credits, clean-energy tax incentives, and an increase in the amount of research tax credit that can be used against payroll tax for certain small businesses. 
 

Although the IRA contains only a limited number of corporate tax provision, especially compared to the tax provisions contained in the House-passed version of the BBBA, taxpayers that are subject to these provisions could be subject to significant additional taxes. Given that the provisions of the corporate minimum tax will become effective for calendar year taxpayers on January 1, 2023, taxpayers are advised to assess whether they are an “applicable corporation” as early as possible and plan accordingly. In addition, given the potentially broad application of the excise tax on stock buybacks coupled with an effective date of January 1, 2023 (irrespective of when a repurchase program was authorized and approved), taxpayers are advised to review a range of transactions under consideration that could be subject to this provision.

For further information, contact any of the China-based US tax professionals listed below or your regular Deloitte contact.

Candy Chan
Partner
+852 2852 5886
cancha@deloitte.com.hk

Sharon Lam
Partner
+852 2852 6536
shalam@deloitte.com.hk

David Allgaier
Partner
+86 21 6141 2788
dallgaier@deloitte.com.cn

Judy Xie
Partner
+86 21 2316 6602
judxie@deloitte.com.cn

Joyce Song
Director
+86 10 8520 7760
joysong@deloitte.com.cn