With a new corporate minimum tax due to take effect on Jan. 1, U.S. companies affected by it are seeking additional guidance from the government on its potential impacts, the Wall Street Journal reported.
A provision of the Inflation Reduction Act, the looming levy of 15 percent will apply to U.S.-based companies that report income to shareholders averaging at least $1 billion over three years, causing many to try to determine if they are one of the estimated 150 companies that meet that threshold. Those business that do must calculate their taxes with the existing 21 percent corporate income tax and under a 15 percent rate based on their book or financial statement income, paying the higher amount of the two.
The law, which is expected to raise about $222 billion over the next decade, also aims to target large profitable companies that pay relatively little in taxes. Fewer than 80 publicly traded U.S. companies would have paid any corporate minimum tax in 2021 had the tax been in effect, a study by the University of North Carolina’s Tax Center found, but companies subject to it would have included Amazon.com Inc., Berkshire Hathaway Inc. and Ford Motor Co.
One of the concerns about the new tax is its impact on split-off transactions, in which shareholders can choose between keeping current shares in the parent company or exchanging them for shares in a new subsidiary. That reduces their share count and decreases the impact of the transaction on earnings per share and dividends. These transactions, which could come about as a result of a reorganization, could cause a company to become subject to minimum tax, or increase their tax liability by making it subject to the book tax.
The Alliance for Competitive Taxation, which represents companies including Alphabet Inc. (the parent company of Google), Coca-Cola Co. and Walmart Inc., fears that the new tax would make these transactions less attractive. It recommends regulations that exclude a financial reporting gain or loss stemming from a split-off when calculating adjusted financial statement income.
Business are also voicing concern about the potential for higher tax burdens because of ownership changes, as well as the possibility of double taxation in some instances due to taxable dividends from subsidiaries that are not consolidated.
“It’s casting a very wide net,” David Rievman, a partner at law firm Skadden, Arps, Slate, Meagher & Flom LLP, said of the minimum tax. “I think the effects are going to be broader, or potentially could be.”
Tax executives and lawyers in the process of tax planning for 2023 said that they need additional clarifications from the government soon. The IRS is working on it, but the Treasury Department has not provided updates on the timing of any guidance, the Journal reported.