A new corporate alternative minimum tax (“CAMT”) was enacted as part of the Inflation Reduction Act passed on August 16, 2022. The applicability of the CAMT under the most recent law is greatly diminished and was recently estimated to impact as few as 150 companies based on the Joint Committee of Taxation’s analysis. While at first glance US corporations may not consider CAMT if their financial income does not exceed $1 billion, CAMT may apply to unsuspecting foreign-owned US corporations.
The current legislation most commonly applies CAMT to US corporations with an average annual adjusted financial statement income (“AFSI”) for the prior three taxable years exceeding $1 billion. The aggregation rules of Sections 52(a) and 52(b) apply to determine what corporations are included in AFSI.
However, new Section 59(k) provides separate and distinct testing for determining whether a US corporation is a member of a foreign-parented multinational group when assessing whether CAMT applies to a US corporation. The definition of a foreign parented-multinational group is met for the taxable year if:
- At least one entity is a domestic corporation, and another entity is a foreign corporation;
- Such entities are included in the same applicable financial statement; and
- Either the common parent of such entities is a foreign corporation, or if there is no common parent, future regulations will identify a deemed foreign parent.
If a US corporation is a member of a foreign-parented multinational group for any taxable year, the AFSI of the foreign parent and any foreign subsidiaries is required to be included when assessing whether the three-year average AFSI exceeds $1 billion.
AFSI is defined as the net income or loss of the taxpayer set forth on the taxpayer’s applicable financial statement for such taxable year, with up to 15 adjustments as provided in new Section 56A. Some financial statement income adjustments include intercompany payments, federal and foreign income taxes, as well as adjusting the financials to reflect tax depreciation. For purposes of testing whether CAMT applies to a foreign-parented multinational group, the financial statement is not adjusted for net operating losses, limiting partnership income to a partner’s distributive share of the AFSI of the partnership, limiting foreign income to a taxpayer’s pro rata share, ECI, or pension benefit plans. The adjustments generally result in financial statement income of all the foreign corporations in the group, both upstream and downstream, to be included, plus partnerships in the section 52 grouping.
However, even if the foreign-parent multinational group exceeds the $1 billion three-year AFSI test, an additional test is required before the US corporation will be subject to CAMT. The second test requires a further analysis of the group, excluding the foreign parent from testing, to determine whether such limited group’s average annual AFSI for the 3-year taxable period is greater than $100,000,000.
In a simple example, assume a foreign manufacturer is a common parent, falls under the definition of a foreign-parented multinational group and has AFSI of $2 billion. In addition, its US holding company subsidiary consolidated group, including the US company’s controlled foreign corporations, has AFSI of $50 million. The US holding company and its domestic affiliates will not be required to pay CAMT.
Due to the elaborate aggregation testing required to determine whether US corporations must comply with CAMT, corporations will most likely spend an inappropriate number of hours just to determine whether CAMT is applicable. If there is any silver lining, if a corporation meets the requirements to be assessed CAMT they generally must continue to pay it regardless of future financial statement income with limited exceptions. However, if the corporation does not meet the requirements to apply CAMT, it must continue performing aggregation and testing yearly.
Corporations and tax professionals will need detailed regulations to properly assess whether CAMT applies and how to calculate CAMT correctly. The first tax year for which the new CAMT tax is due is the calendar year beginning January 1, 2023, for which returns will be due in 2024.
Many companies and tax professionals are hopeful that Treasury will produce some preliminary guidance by the end of 2022. After all, CAMT was forecasted to raise 39%, or $288 billion, of the total revenue under the Inflation Reduction Act. The significant number of outstanding questions will impede the revenue collection without additional guidance.
For more information on this topic, please contact a member of Withum’s Business Tax Services Team.