Hollywood May Feel a Financial Sting From the Global Minimum Tax

Several US states grant transferable, nonrefundable state income tax credits for movies and other filmmaking activities. For example, Georgia grants about $1.3 billion annually in state income tax credits to producers of movies (such as “Creed III”), TV shows, music videos, and commercials filmed in Georgia. Producers often sell their credits to buyers that can include Fortune 500 banks and insurance companies, typically after the buyers negotiate a discount (perhaps 10%) from the credits’ face value.

Under the Georgia program, credit buyers can’t resell or otherwise retransfer the credits—the buyer must use them currently or carry them forward within a few years after issuance. The buyers can use the credits only through applying them against a Georgia income tax liability.

The IRS concluded in PLR 200951024 that when a corporation buys income tax credits and applies them at their face value, it’s the same as paying corporate taxes for the full amount of the liability satisfied. The IRS treats the corporation as simultaneously recognizing taxable gain in the amount of the purchase discount from face value (such as the 10%).

For corporations not subject to the corporate alternative minimum tax, but rather only to the regular tax, the marginal federal corporate income tax increase from using the purchased credits is generally about 21% of the discounted purchase. However, because of how various other tax provisions interact, corporations seeking to quantify the implications of a proposed purchase of state income tax credits need to prepare projections.

A 2022 study indicates that many projected CAMT payors, like many reported buyers of state income tax credits, are large banks and insurance companies. For CAMT purposes, state income taxes are a deduction from income, like for regular federal corporate income tax purposes, but unlike for Pillar Two purposes. For a CAMT taxpayer, the marginal current federal tax increase from using the purchased credits is generally about the 15% CAMT tax rate applied to the purchase discount.

The proposed global minimum tax under the OECD’s Pillar Two generally would apply to a US group of a multinational corporations having more than about $830 million of worldwide sales, if that US group is subject to an overall effective US corporate tax rate of less than 15%, and if that US group has pretax GAAP income in excess of a US-payroll and US-tangible-asset based substance exclusion.

Also generally, and subject to numerous adjustments, the Pillar Two tax is 15% of US pretax GAAP income in excess of the substance exclusion, but less a dollar-for-dollar offset. This offset is roughly the GAAP covered taxes times a percentage, equal to 100% minus the percentage that the substance exclusion bears to US pretax GAAP income. Covered taxes include US state income taxes, as well as regular and CAMT federal income taxes, as determined by GAAP.

A 2022 Deloitte publication concluded that when a corporation applies state tax credits purchased at a discount, it recognizes GAAP state income tax expense in the discounted amount. Favorably, as in PLR 200951024, GAAP state income taxes (and thus covered taxes) are increased—notwithstanding that neither the buyer nor seller of the credits ever pays any cash tax to the state government.

However, the reduction of GAAP state income taxes by the purchase discount contrasts with the IRS’ conclusion in PLR 200951024, which treated the purchase discount as generating a separate income item—not as reducing the corporation’s state corporate income tax expense. Absent favorable clarification from the OECD or implementing jurisdictions, Pillar Two may unfavorably treat the purchase discount as a dollar-for-dollar reduction in the buyer’s covered taxes by incorporating GAAP.

Such a reduction in the Pillar Two tax offset relating to covered taxes would have a far more adverse mathematical effect on Pillar Two tax liability than if the purchase discount was merely treated as a separate income item that increased 15% taxable Pillar Two taxable US pretax GAAP income, as in PLR 200951024.

Viewed another way, if the adjustment for the substance-based exclusion is immaterial, the Pillar Two tax is approximately 15% of US pretax GAAP income, minus GAAP covered taxes. Reducing covered taxes could cause the purchase discount, net of any additional 21% regular federal corporate tax or 15% federal CAMT caused by the reduction in the deduction for state corporate income taxes, to almost equally increase the Pillar Two tax.

A benefit from buying state corporate income tax credits at a discount is often only modestly reduced by the buyer’s additional 21% regular federal corporate tax or additional 15% CAMT resulting from that discount. But where the substance exclusion is small, a corporation’s GAAP state income tax liability can almost equally reduce its Pillar Two tax.

Accordingly, a large majority of the benefit from buying state corporate income tax credits at a discount could be eliminated. It would be helpful if the OECD clarified its view on the buyer’s treatment of purchased nonrefundable corporate income tax credits.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Alan S. Lederman is a shareholder at Gunster, with a focus on income tax planning and controversies, including those related to international transactions.

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