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August 19, 2022
Report on recent US international tax developments – 19 August 2022
United States (US) President Joe Biden on 16 August signed the Inflation Reduction Act of 2022 (IRA) (H.R. 5376) passed by the US Congress earlier in the month. The legislation finances climate and energy provisions and an extension of enhanced Affordable Care Act subsidies with a 15% corporate alternative minimum tax (CAMT) on adjusted financial statement income for corporations with profits over US$1 billion,1 a stock buyback tax, a two-year extension of the excess business loss limitation through 2028, increased Internal Revenue Service (IRS)enforcement funding, and Medicare’s new ability to negotiate prescription drug prices.
The new CAMT will require applicable corporations to compute two separate calculations for federal income tax purposes and pay the greater of the CAMT or their regular tax liability (regular tax liability plus Base Erosion and Anti-abuse Tax (BEAT) liability). Companies will need to assess their structures to identify applicable corporations, taking into account the special rules for common employer groups and foreign-parented multinational groups.
The CAMT will apply to tax years beginning after 31 December 2022. The Act directs Treasury to issue guidance to resolve certain CAMT issues not addressed in the Act's text. Pending that guidance, companies will have to take positions and file returns based solely on the statute as enacted. See EY Global Tax Alert, US Inflation Reduction Act includes 15% corporate minimum tax on book income, dated 17 August 2022 for details.
The stock buy-back provision in the IRA adds a new Internal Revenue Code2 Section 4501, which will impose a 1% excise tax on publicly traded US corporations for the value of any of its stock that is repurchased by the corporation during the tax year. The new provision applies to repurchases of stock after 31 December 2022. The term "repurchase" is defined broadly, and so the tax could apply not only to redemptions under stock repurchase program but a range of corporate transactions. Publicly traded corporations considering redemptions or economically similar transactions therefore should consider its potential application after that date and possible action before that date.
Embedded in the IRA is $369 billion in climate and energy-related provisions, which are designed to: (i) incentivize and accelerate the buildout of renewable energy; (ii) advance the adoption of EV technologies; and (iii) improve the energy efficiency of buildings and communities. The Act's energy- and climate-related provisions are a monumental and unprecedented investment in the adoption and expansion of renewable and alternative energy sources. Many of the Act’s provisions with respect to energy transition and renewable energy investments are expected to spur development and investment; however, the new rules can be very complex, and it is important for taxpayers to understand the rules and how they apply to their particular projects.
In addition, the IRA also allocates nearly $80 billion in new funding for the IRS. Of that $80 billion, more than $45 billion is for enforcement (including the determination and collection of "owed taxes”), more than $25 billion is for operations, nearly $5 billion for systems modernization, and over $3 billion for customer service, among other expenses. The Congressional Budget Office estimates the enforcement-related funding will raise $204 billion in additional revenue. The increased funding for IRS enforcement will likely shift the current audit landscape and significantly increase the IRS’s scrutiny of transfer pricing cases. Accordingly, taxpayers should consider enhancing their transfer pricing documentation so they can support their intercompany tax positions. EY Global Tax Alert, US | Increased IRS funding from Inflation Reduction Act will likely affect transfer pricing cases, dated 19 August 2022 provides details.
The IRS this week in Notice 2022-34 announced that it is again deferring the applicability date of the final Section 987 foreign currency regulations that were issued in 2016 for an additional year. According to the notice, Treasury and the IRS plan to amend the applicability date of the 2016 regulations and related 2019 final regulations to taxable years beginning after 7 December 2023.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (United States), International Tax and Transaction Services, Washington, DC