The Corporate Profits Minimum Tax Proposal – key elements
On October 26, 2021, Senators Elizabeth Warren (D-MA), Angus King (I-ME) and Ron Wyden (D-OR), with other senators as co-sponsors,* released a corporate profits minimum tax proposal (the CPM Tax Proposal) as part of the Build Back Better Act reconciliation bill. The CPM Tax Proposal intends to ensure that companies which report over $1 billion in profits to shareholders will pay a minimum tax of 15 percent on those profits.
In a press release accompanying the language of the proposal, the senators estimate that the tax would apply to approximately 200 companies and would raise hundreds of billions in revenue over 10 years.
The proposal appears to be satisfactory to Senators Kirsten Sinema (D-AZ) and Joe Manchin (D-WV) and is therefore likely to become part of the final reconciliation measure.
The most noteworthy tax elements of the CPM Tax Proposal are discussed below.
Corporate Alternative Minimum Tax
Effective for taxable years beginning after 2022, the proposed Corporate Alternative Minimum Tax (Corporate AMT) would apply to corporate taxpayers (other than S corporations, RICs or REITS) which meet certain average income thresholds for a three-year period. The net income threshold would be an annual average of $1 billion determined based on financial statements with certain adjustments (“adjusted financial statement income”).
The taxpayer’s tax liability for a year would equal the excess of the taxpayer’s proposed Corporate AMT liability over its regular tax liability for the year plus the taxpayer’s BEAT liability for the year, if any.
Rules to determine Adjusted Financial Net Income
The adjusted financial net income threshold of a taxpayer is determined including the income of controlled foreign corporations and non-consolidated (for tax purposes) entities. It is also increased to remove any deductions for US or foreign income taxes.
For foreign parented multinational groups, the $1 billion threshold is determined including all the income from the financial statements of the group. In addition, the Corporate AMT would only apply to foreign parented multinational groups if the average adjusted financial income of the US entities within the group (and foreign entities with ECI) equals or exceeds $100 million.
Adjustments for timing differences
The provision would provide for adjustment for timing differences, including the carry-forward of net losses in their adjusted financial income, FTCs and any Corporate AMT paid in a prior year.
Notably, US taxpayers would not be permitted to carry forward net losses that arose in years that began before December 31, 2022, which will penalize taxpayers with existing NOL carry-forwards.
In the case of CFC’s net financial losses, such losses would not reduce the net income of the US taxpayer, but instead would reduce the future adjusted financial income of such CFC in future years for purposes of the Corporate AMT.
Taxpayers are permitted to offset the amount of the Corporate AMT with foreign taxes that are included on the applicable financial statements (AMT FTCs). A carry-forward of excess AMT FTCs is generally permitted for five years with certain limitations.
In the case of Corporate AMT paid in a prior year, the provision would allow for indefinite carry-forward.
The proposal provides Treasury and the IRS with regulatory authority to carry out these provisions including regulations providing a simplified method to determine if a corporation meets the income thresholds and ownership changes.
Learn more about this evolving discussion by contacting either of the authors or your DLA Piper attorney.
*Senators Michael Bennet (D-CO), Ed Markey (D-MA) and Sheldon Whitehouse (D-RI)
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