Explore the intricacies of US minimum tax with a comparison of Corporate Alternative Minimum Tax (CAMT) and BEPS Pillar Two.
As might be expected given its dominance on the world stage, when it comes to international tax, the United States often chooses to pursue its own path, working in parallel with its international peers whilst at the same time protecting its own interests.
Global Intangible Low-taxed Income (GILTI) regime and the Base Erosion and Anti-Abuse Tax (BEAT)
The development over the past few years of the OECD’s Pillar Two anti-base erosion measures is no exception. Rather than straightforwardly pursuing the Pillar Two path, the US has opted to create its own Corporate Alternative Minimum Tax (CAMT) for US-based multinationals, supplementing previous measures such as the Global Intangible Low-taxed Income (GILTI) regime and the Base Erosion and Anti-Abuse Tax (BEAT), both introduced by 2017’s Tax Cuts and Jobs Act to stop US-based businesses from sending tax dollars overseas via foreign related parties.
Both CAMT and the Qualified Domestic Minimum Top-up Tax (QDMTT) pursue a 15% minimum tax rate
Both the CAMT and the Qualified Domestic Minimum Top-up Tax (QDMTT) - a key plank of the Pillar Two regime - include a 15% minimum tax rate, and are imposed on large multinational corporations. However, there are also significant divergences in terms of scope, impact, and outcome, and there is the potential for the two to interact in an unhelpful way, not least with regard to their treatment of tax credit carryforwards.
In this current transitional period for both systems, multinationals should be aware of the compliance obligations in all jurisdictions in which they operate. This means that the tax and finance functions within US-based groups need to keep a close eye on developments relating to both the CAMT and the QDMTT. With this in mind, let’s take a broad look at both taxes.
Corporate Alternative Minimum Tax in a nutshell
Introduced as part of the Inflation Reduction Act in 2022, the CAMT applies for tax years that began from December 31, 2022, with liability based on the adjusted financial statement income (AFSI) of “applicable corporations” for the three taxable years prior. Applicable corporations are generally those with an average annual AFSI in excess of $1B USD, although a safe harbor provision is built in. Where the corporation is part of a foreign-parented MNE group, aggregated group AFSI in excess of $1B USD and profit exceeding $100M USD for the US entity will bring the company into scope. S corporations (closely-held corporations), Real Estate Investment Trusts (REITs), and regulated investment companies are not subject to CAMT, as their profits are taxed on a passthrough basis.
In addition to raising revenue, the CAMT aims to ensure that businesses pay their fair share of corporate tax; unlike the broader BEPS minimum tax, however, it is designed only to impact the largest and most profitable businesses in the United States.
How CAMT is calculated
In terms of calculating CAMT liability, once it has been determined whether an entity is an ‘applicable corporation,’ AFSI (representing worldwide financial statement income and loss) must be calculated, with the minimum tax representing the excess of AFSI over 15%. Once permitted foreign tax credits are taken into account, the excess is able to be carried forward.
BEAT liability must also be factored in. BEAT is a 10% minimum tax calculated by dividing deductions claimed in relation to ‘base eroding’ payments to related foreign parties by the entity’s total deductions for the taxable year. Its inclusion can reduce CAMT liability. However, in the final analysis, if the minimum tax exceeds the entity’s regular tax and BEAT liability, the excess represents the CAMT liability.
For BEPS Pillar Two purposes, the CAMT does not count as a domestic minimum top-up tax, or fall under the Income Inclusion Rule. The jurisdiction in which the Ultimate Parent Entity is located can create a liability in a lower-taxed operating location.
Qualified Domestic Minimum Top-up Tax (QDMTT) has a broader scope
The Pillar Two QDMTT applies to multinational enterprises (MNEs) with a global turnover of more than €750M EUR. Like the CAMT, there are exceptions. For QDMTT, it is international shipping groups, businesses in the extractives industry, and certain types of regulated financial services providers.
The 15% minimum corporate tax rate is calculated by identifying the effective tax rate imposed on profits (via the gathering of localized information from each jurisdiction in which the MNE operates), and – where income is subject to a lower tax rate in a particular jurisdiction, imposing a top-up tax to bring the overall rate up to the minimum level. In addition to the QDMTT, which applies for accounting periods from December 31, 2023, other mechanisms for accomplishing this include the aforementioned Income Inclusion Rule, the Undertaxed Profits Rule, and the Subject to Tax Rule.
Closing thoughts
Although the targets of the two measures are different, and the CAMT is imposed on a worldwide aggregated tax base, while the QDMTT is computed on a jurisdictional basis, it is possible for a US-based business to find itself caught between the two, for example, because of the different ways in which they account for items such as tax credits, temporary items, deferred taxes, and operating losses.
A key concern for US-based shareholders of Controlled Foreign Corporations (CFCs) was recently addressed. However, regarding the potential double-counting of CFC income for the purposes of calculating AFSI, including dividends received and some other types of foreign income, albeit on an aggregated basis, the most recent interim guidance, Notice 2024-10, published in December 2023, outlined rules providing a significant degree of relief in this area. However, it is worth noting that not all types of dividend payments are covered.
US-based MNEs awaiting full clarity on the potential interactions between the two measures may have to wait a little longer. Though something is already clear—US-based MNEs with operations in counties enforcing BEPS Pillar Two have to start reporting in 2024. Wolters Kluwer was one of the first providers to develop a global minimum tax solution that addresses every step of the OECD's guidance, harmonizes data, and simplifies reporting. Learn more about the only pre-configured software for BEPS Pillar Two at CCH® Tagetik Global Minimum Tax.
Interim guidance published since the inception of the new tax in the IRA has cleared up some issues and should be followed in the meantime, but the waters are still fairly muddy, and investment in monitoring, data collection and analysis, and reporting is likely to be necessary to come into compliance and remain so. This is especially the case given the near impossibility of in-scope businesses escaping the CAMT dragnet once they have first been caught.