On August 12, the House of Representatives voted side-by-side (220-207) to approve the Inflation Reduction Act of 2022 (“IRA”), a fiscal reconciliation program of about $740 billion. dollars that includes targeted increases in corporate taxes, a big increase in funding for the Internal Revenue Service (“IRS”), incentives to promote climate change mitigation and clean energy, and provisions to promote affordability of health care. The House vote follows a vote, also strictly partisan, in the Senate (51-50) less than a week earlier on August 7. The IRA should now be forwarded to President Biden for his signature.
When it comes to taxes, the IRA is a slimmed down version of the legislation that preceded it, the Build Back Better Act (“BBBA”), which passed the House in November 2021 and then stalled in the Senate where Sen. Joe Manchin (D-WV) declined to fully support the measure due to concerns about the inflationary impact of the legislation. After many felt the chances of moving the legislation forward were slim, Senate Majority Leader Charles Schumer (N-NY) and Sen. Manchin, in a move that surprised many, unveiled compromised legislation on July 27.
The IRA incorporates significant changes at the request of Senator Kyrsten Sinema (D-AZ), who expressed reservations about specific tax provisions in the original version and whose support was essential in getting the package through a Senate as well Split.
The main tax provisions of the IRA relate to a minimum corporate tax of 15% for companies with profits over $1 billion and an excise tax of 1% on share buybacks by listed companies in stock exchange. The IRA is also notable for the provisions it does not include: namely, any increase in corporate and personal income tax rates, international tax provisions (including proposals contained in BBBA which would have aligned US tax rules with OECD BEPS Global Pillar 2 minimum tax), tightened rules governing the tax treatment of deferred interest income and additional limitations on the deductibility of interest expense.
The main corporate tax provisions contained in the IRA are summarized as follows:
The IRA requires a new accounting minimum tax that imposes a minimum tax of 15% on the “adjusted financial statement income” (“AFSI”) of an “applicable corporation”. Conceptually, this provision targets companies that report significant income in their financial statements but pay little or no federal income tax in the United States.
Under this provision, an “applicable company” is generally any company (other than an S corporation, regulated investment company, or real estate investment trust) with a three-year average annual AFSI greater than $1 billion. AFSI is generally a company’s income as reported in its applicable financial statements – typically, audited financial statements prepared for Securities and Exchange Commission reports or other non-tax purposes. Specific rules are applied in calculating AFSI involving consolidated groups and interests in non-consolidated entities such as non-US corporations and partnerships. Other adjustments are made for foreign tax and other general business credits.
Importantly, and in what many see as a victory for the private equity industry, the provision does not include an expanded aggregation rule, which ensures that the provision does not apply to unrelated companies that might otherwise reach the USD 1 billion threshold due to being under the common ownership of an investment fund.
The applicable minimum tax of the company is equal to the excess of the provisional minimum tax on the regular income tax of the company for the year, increased by the tax of the company under the provisions of the Base Erosion Anti-Abuse (“BEAT”) Tax.
The new minimum tax applies to tax years beginning after December 31, 2022.
Excise tax on share redemptions
This provision, which is substantially similar to the version included in the BBBA, provides that a “target corporation” is subject to a tax equal to 1% of the fair market value of any shares of the corporation which are redeemed by such corporation at during any taxation year (subject to certain exceptions).
A “covered company” means a domestic US company whose shares are traded on an established stock exchange. For tax purposes, the fair market value of the redeemed shares is reduced by the fair market value of any shares issued by the target company during the tax year, including shares issued or provided to employees target company and employees of certain affiliates. Purchases of shares of Covered Companies by Specified Affiliates would be treated as repurchased by the Covered Company.
For purposes of this provision, a “redemption” is broadly defined to include a redemption as defined by United States federal income tax law (generally, an acquisition of stock by a corporation in exchange for cash or property other than the company’s own shares or purchase rights) and any other economically similar transaction.
The new excise tax applies to share redemptions made after December 31, 2022.
Other tax provisions
Various other tax provisions are contained in the IRA relating to, for example, increased IRS funding to improve taxpayer compliance, energy related tax credits, clean energy tax incentives and an increase in the amount of research tax credit that can be used against payroll tax for certain small businesses.
Although the IRA contains only a limited number of corporate tax provisions, particularly when compared to the tax provisions contained in the version passed by the House of the BBBA, taxpayers subject to these provisions could be subject to to significant additional taxes. As the corporate minimum tax provisions will come into effect for calendar year taxpayers on January 1, 2023, taxpayers are advised to assess whether they are a “relevant corporation” as soon as possible. and plan accordingly. Further, given the potentially broad application of excise tax on share buybacks coupled with an effective date of January 1, 2023 (regardless of when a buyback program was authorized and approved), taxpayers are advised to review a series of contemplated transactions that may be subject to this provision.
For more information, contact one of the China-based US tax professionals listed below or your usual Deloitte contact.
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+852 2852 6536
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+86 21 2316 6602
+86 10 8520 7760