The US Senate passed a Democrat proposed bill, called the Inflation Reduction Act (the “Act”). The Act will head to Democratic controlled House for a vote and is expected to be enacted into law. Contrary to the name of the Act, it includes provision for a massive spending on investments into green energy and Medicare. There are two notable provisions included in the Act that may have an impact to multinational corporations:
The Act allots $80 billion additional funding for the IRS over 10 years and the majority of the fund will be used to hire 87,000 new agents to improve tax enforcement. The government believes there is an estimated $1 trillion leakage in tax collections every year. The Democrats projects that enhancing IRS funding would add an extra $127 billion in federal revenue over the next decade by hiring more tax enforcers to limit tax evasions by taxpayers.
Businesses can expect an increased risk of audit selection and enforcement effort by IRS.
Alternative minimum tax on corporate book income
The Act includes the new alternative minimum tax on corporate book income (“AMT”) imposing a 15% minimum tax on “applicable financial statement income” for an “applicable corporation” effective for tax years beginning after December 31, 2022.
“Applicable financial statement income” generally is a financial statement income computed based GAAP or IFRS, reported to the SEC, or otherwise used for reporting to shareholders or credit purposes.
An “applicable corporation” is a C-corporation with a three-year average of adjusted financial statement income of $1 billion or more. A corporation that is a member of an international financial reporting group with a foreign parent must include the financial income of all foreign members of the group in applying the $1 billion test, but is an applicable corporation only if its three-year average financial income of US members and foreign subsidiaries of US members, exceed $100 million. IRC section 52(a) or (b) applies in determining aggregation rule.
Multinational corporation with a foreign parent should consult with their tax service advisor for the application and the potential impact in advance.