Over the past year, it’s become clear that Democratic lawmakers want to change U.S. tax rules for big business. However, as the proposals have been debated in recent months, there have been clear divisions between the US proposals and the global minimum tax rules.
Before we get too deep into the weeds, it should be noted that I’m not a fan of minimum taxes and it would be nice if Congress changed the underlying tax code to limit credits or deductions they deem too generous rather than complicate matters further with new definitions of income and opaque rules. Simplicity matters.
The Inflation Reduction Act (IRA) recently passed by the Senate includes an alternative minimum corporate tax that, at first glance, may appear to be modeled (or at least resemble) the global minimum tax. Both taxes target large businesses, use financial accounting rules for the tax base, and apply a rate of 15%. This is where the similarities end.
However, these similarities might lead some to suggest that the United States is adopting measures consistent with the global minimum tax, but that is not entirely accurate.
As shown in the following table, there are several differences between the policies. In some areas, policies take directly opposite approaches. In short, the policy of the Inflation Reduction Act favors tax credits and write-offs for capital investments, while the Global Minimum Tax is stingy with tax credits.
If the Cut Inflation Act is passed in the United States and the global minimum tax is passed elsewhere, policy differences could still lead to tax credit greed for bigger corporations.
The global minimum tax is part of an agreement between more than 130 jurisdictions that was reached in 2021. In December 2021 model rules were published that described how the rules were supposed to work.
The rules have three main layers. The first applies to purely domestic income (Qualified Domestic Minimum Top-up Tax), the second applies to foreign income in a company’s subsidiaries (Income Inclusion Rule), and the third applies to income from entities foreign countries which are not subject to previous tax. two rules (the under-taxed profits rule).
The Global Minimum Tax applies to companies with revenues over €750 million (US$769 million) and levies a minimum rate of 15% on a company’s book income after several adjustments , including adjustments for taxes already paid.
The alternative minimum corporate tax provided for in the Inflation Reduction Act was first revealed in a presidential campaign campaign proposal of Senator Elizabeth Warren (D-MA). It was also included in the Build Back Better Act that was passed by the House of Representatives in the fall of 2021. This all happened before the Global Minimum Tax Model rules were released.
The current proposal for the Reducing Inflation Act applies to companies with more than $1 billion in financial profits (averaged over the last three years) and levies a 15% rate on adjusted book income .
The main differences between the policies lie in the adjustments to the accounting result. As a reminder, the financial result is what companies declare to their shareholders and is calculated according to the accounting rules established by those responsible for accounting standards (the Financial Accounting Standards Board in Norwalk, Connecticut). Taxable income is calculated according to different rules (as defined in Title 26 of the US Code).
If pure financial accounting income were adopted, the policy would erode tax credits and deductions for capital investments that can push tax rates below the 15% minimum in years when companies invest heavily in things like research and development or building factories and buying a lot of equipment. .
The Alternative Minimum Corporate Tax provided for in the Reducing Inflation Act provides relief from tax credits and capital investment costs. This means that even if a tax credit or a large purchase of machinery pushes a company’s tax rate on its financial statements below 15%, those credits and deductions would not be clawed back by minimum tax.
However, the overall minimum tax only provides an exemption for certain tax credits, including those due to companies (also called refundable tax credits). If a company receives US research and development credit, however, it will be clawed back.
The Global Minimum Tax treats capital investment differently in two ways. First, capital investment allowances are measured at a tax rate of 15% rather than being deducted at a country’s corporate tax rate. In addition, the Global Minimum Tax has a tangible asset exception that reduces the amount of additional tax a business might have to pay even if its tax rate is below 15%.
The Global Minimum Tax has an additional exception for payroll costs that is not reflected in the Inflation Reduction Act Alternative Minimum Corporate Tax.
The mismatches between the policies mean businesses could find themselves facing both taxes. If a foreign jurisdiction that has adopted global minimum tax rules seeks to tax a U.S. corporation that benefits from tax credits or deductions protected by the Reduction of Inflation Act, then additional tax may be owed to that foreign jurisdiction. In this case, tax credits and capital investment allowances could be covered by the two separate rules.
Three areas of U.S. tax law that do not benefit from special exemptions from the alternative corporate minimum tax are stock-based compensation, income that would otherwise be offset by losses from years prior to 2019, and income taxed at a lower rate because of foreign derivative intangibles. Income (FDII).
In general, the Inflation Reduction Act does not mirror the global minimum tax rules, but rather represents an additional layer of taxation on large corporations. Put these two layers of tax together, in addition to normal corporate taxes, and we would now have three layers of complex and opaque tax rules that American businesses would have to deal with, each distorting business investment decisions somewhat differently and contributing to the overall tax burden on business investment in the United States.
|Curbing Inflation Act: Alternative Minimum Corporate Tax||Global Minimum Tax: Qualified Additional National Minimum Tax|
|Exclusion for tangible capital assets||Capital cost allowances are excluded||8% gradually reduced to 5% over the first five years|
|Exclusion of payroll costs||None||10% gradually reduced to 5% over the first five years|
|Carry forward losses||Capped at 80% of adjusted financial result and limited to losses after 2019||Included in deferred tax asset|
|Foreign tax treatment||Provides a credit for foreign taxes||Deferred tax asset restated at the rate of 15%|
|Jurisdictional calculation||Applies to US business worldwide income||Applies to national income|
|Application threshold||$1 billion in financial benefits||€750 million (US$769 million) in worldwide revenue|
|Definition of income||Financial profits as defined by accounting standards and adjusted to approximate taxable profits||Financial profits as defined by accounting standards and adjusted to approximate taxable profits|
|Treatment of tax credits||Provides an exclusion for US tax credits||If a credit is not refundable, it will be reclaimed|
|Treatment of capital investments||Capital investment deductions are reclaimed||Included in the deferred tax asset assessed at the rate of 15%|
Source: Author’s analysis of the Inflation Reduction Act as adopted by the United States Senate and the Global Minimum Tax Model Rules, https://www.oecd.org/tax/beps/tax-challenges-arising-from-the-digitalisation-of-the-economy-global-anti-base-erosion-model-rules-pillar-two.pdf.