With just over two months to go until the new minimum corporate tax takes effect, companies are asking the US government for guidance on its scope and the potential impact of business deals such as spin-offs.
Starting Jan. 1, 2023, the tax will apply to large U.S. corporations that average at least $1 billion in publicly reported annual profits over three years. The tax, which is part of the Climate, Health and Taxation Act called the Curbing Inflation Act, requires these companies to calculate their taxes with the existing 21% levy on corporate income as it is currently defined in the tax code and under a rate of 15% based on their accounting or financial income. The new law states that companies pay the higher of the two and seeks to address concerns about large, profitable companies facing low tax burdens.
General Electric Co.
Las Vegas Sands Corp.
in their most recent tax returns, the impact of the tax will depend on the government’s future directions. “The Internal Revenue Service has been granted broad authority to issue regulations or other guidelines that may clarify how these taxes will be applied,” said Las Vegas Sands, an operator of casinos and resorts. , in a filing with regulators.
The Joint Committee on Taxation, which provides nonpartisan analysis of tax legislation for Congress, projects the tax will raise a total of about $222 billion over a decade. By analyzing past securities filings, researchers at the University of North Carolina Tax Center found that fewer than 80 publicly traded U.S. companies would have paid minimum corporate tax in 2021 if the tax had been in effect. However, the tax would have been applied to
Berkshire Hathaway Inc.
Ford engine Co.
among others, the researchers found.
In recent weeks, companies including media company Liberty Media Corp. have requested additional information from the Treasury Department and the Internal Revenue Service about the implications of the tax.
“It casts a very wide net,” David Rievman, a partner at the law firm Skadden, Arps, Slate, Meagher & Flom LLP, said of the minimum tax. The Joint Committee on Taxation predicted the tax could affect about 150 businesses, but the universe of businesses affected could go far beyond that, said Rievman, who worked with Liberty Media last month on drafting the report. a tax comment letter. “I think the effects are going to be broader, or could be,” he said.
Among the concerns of businesses is that reorganizations could result in a business being subject to minimum tax or increase its liability to tax. Indeed, without more clarity from the government, some business transactions could result in gains or losses in the financial statements that would be subject to the tax on the books, said Tim Lenneman, Liberty’s senior vice president of tax. Media, in a Sept. 29 letter to the IRS. and Cash.
This includes spin-off transactions in which shareholders can choose between keeping current shares of the parent company or exchanging them for shares of a new subsidiary, Mr. Lenneman said in the letter. Liberty Media declined to say whether it expects to be affected by the new tax.
The Alliance for Competitive Taxation, which represents companies such as
Coca Cola Co.
expressed similar concerns about the implications of the tax. Companies find splits attractive because they allow them to reduce their number of shares, which lessens the impact of the transaction on earnings per share and dividends. In a Sept. 30 letter, the alliance warned that including gains or losses from a spin-off in the calculation of adjusted financial statement earnings could remove the attractiveness of such transactions. The group recommends that the Treasury Department write regulations stipulating that a gain or loss in financial reporting resulting from a spin-off must be excluded when calculating the earnings of adjusted financial statements.
Alphabet, Las Vegas Sands and Walmart did not immediately respond to requests for comment. Coca-Cola, Snap and GE declined to comment.
Tax practitioners and lawyers have said that companies need further clarification from the government soon, as they are in the process of planning their taxes for 2023. The IRS is working to prioritize “day one issues” on which businesses need advice as soon as possible, William Burhop, Technician senior examiner at the agency, said at a conference Tuesday, without specifying what those problems are. The Treasury Department has no updates to share on the timing of any guidance, a spokeswoman said.
Other areas of concern include the possibility of a higher tax burden due to ownership changes. Liberty Media said a company with voting rights in another company that exceeds or falls below a 50% threshold must conduct a reassessment of the ownership for accounting purposes. This can create unrealized losses or gains and result in large accounting minimum tax liabilities, unless the government exempts such transactions, according to the company. As of July 31, Liberty Media had stakes in the owner of the Atlanta Braves, a professional baseball team and satellite radio company.
Sirius XM Funds Inc.
Additionally, companies could be double taxed in some cases due to the new law, Lenneman said in his letter. Corporations in the United States that own shares of a subsidiary that is not part of a consolidated group for tax purposes are generally allowed to deduct at least a portion of the dividends they receive from the subsidiary when assessment of their taxable income. The aim is to avoid double taxation since the funds companies allocate to dividends are already taxed, he said. Without the deduction, the company would pay another level of corporation tax on that dividend.
“If you have a lot of taxable dividends from subsidiaries that are not consolidated, that gives you a lot more book income than you would have had for ordinary income tax purposes, and so could be a significant factor. to get you started in the business. [alternative minimum tax] diet,” Mr. Rievman said.
Write to Jennifer Williams-Alvarez at [email protected]
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