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When Taxes Collide: Can Book Tax, Global Minimum Tax Play Nice?

Nov. 22, 2022, 9:45 AM

The Treasury Department, Congress, and big US companies are wondering about how best to fit a domestic-tax square peg into an international-tax round hole.

They face two overlapping but distinct corporate minimum taxes coming down the pike—the new US minimum tax on book income and the pending global minimum tax—that aren’t consistent with each other. There’s been no sign that the US tax will be accepted as part of the global system, and Treasury officials say there’s only so much they can do to make the two mesh together.

That is leaving companies in the dark about how to prepare, with fears that some firms will have to pay both taxes, and will face a big, expensive burden in complying with both regimes.

“I think it’s a tough uphill climb for companies,” said Anne Gordon, vice president for international tax policy at the National Foreign Trade Council.

It’s still possible to get the two taxes more in tune with each other, but it’s going to take much more work to make it happen, on both the US side and the global side. “There’s a lot of wood to chop,” said Kimberly Blanchard, a partner at Weil Gotshal & Manges LLP.

Attempts to Align

The US did try to get in tune with the global regime, by attempting to enact changes in the US’s own minimum tax on foreign income—global intangible low-taxed income, or GILTI—that would have aligned it with the global minimum tax. But those changes never made it through Congress, and what emerged instead was the corporate alternative minimum tax, called CAMT. The levy is a 15% tax on adjusted financial-statement income on big US companies that aren’t already paying that much.

CAMT may carry the same 15% rate as the global tax, which is part of the 2021 international tax pact agreed to by nearly 140 countries. But it doesn’t conform to the global system—notably, CAMT will be calculated based on a “blended,” worldwide version of a company’s income, while the global minimum tax will be calculated country by country.

“They sound the same, but they’re not,” said Benjamin Shreck, tax counsel for the Tax Executives Institute.

International officials have largely been silent on whether CAMT would conform to the Pillar Two system, but they’ve previously indicated that any US regime that isn’t country-by-country wouldn’t pass muster. In September, Paolo Gentiloni, the EU’s economy commissioner, told a European Parliament committee that while CAMT was “positive and interesting,” it was “not fulfilling and implementing what we need for Pillar Two.”

And if CAMT and the global minimum tax don’t fit together, some fear that many companies may end up having to pay both taxes. “That’s the big issue. The problem is double tax,” Blanchard said.

Others hope double taxation can be avoided, through other countries ultimately allowing credit for taxes paid under CAMT. Michael Plowgian, a Treasury senior policy adviser, said at a Practising Law Institute event last month that “it’s absolutely critical from our perspective that US taxpayers be given credit for the taxes that they’re paying.”

Dealing with both regimes would pose a huge compliance headache for companies—doubling the filing obligations, and requiring more spending on compliance resources like personnel and technology.

“It’s a nightmare,” Shreck said. “This is going to be a hard slog for the foreseeable future.”

‘Lots of Questions’

Most companies haven’t said much publicly about what sort of impact they expect from the collision of CAMT and Pillar Two. In part, that’s because they’re waiting for Treasury to issue guidance that will clarify key issues about CAMT—which companies will be subject to it, and what will and won’t be included in calculating it.

“We’re layering on a new tax with lots of questions and very few answers at this point,” Gordon said.

For their part, Treasury officials say they’re trying their best to coordinate the two taxes—both in writing regulations to clarify and implement CAMT, and in discussions with the Organization for Economic Cooperation and Development, which oversees the global agreement. The first tranche of Treasury guidance is expected by the time CAMT takes effect Jan. 1.

But Treasury has to hew to US law in writing its regulations, so it can go only so far in getting CAMT as close as possible to Pillar Two. Isaac Wood, an attorney-advisor in Treasury’s Office of Tax Policy, said last month that “it’s not going to be possible in all cases” to avoid complications in how the two taxes interact.

A Treasury spokeswoman declined to comment beyond Wood’s and Plowgian’s remarks.

All the questions and uncertainty make it very hard for companies to plan for the future. It “creates a fog for companies on decisions,” said Daniel Bunn, president and CEO of the Tax Foundation. “It makes it much more difficult for companies to know the cross-border implications of their investments.”

What companies can do as they wait, Bunn said, is to gather all the data they can, in the knowledge they’ll ultimately be able to put the information to use when they know more about how things are going to play out. Many companies are trying to work through this, he said.

To contact the reporter on this story: Michael Rapoport in New Jersey at mrapoport@bloombergindustry.com

To contact the editors responsible for this story: Meg Shreve at mshreve@bloombergindustry.com; Vandana Mathur at vmathur@bloombergtax.com