What is the effect of TD 2022/9?
In short, TD 2022/9 means that multinationals with US and Australian operations can potentially be subject to double taxation. This can include where deductions may be denied in Australia under the hybrid mis-match rules if the same amount is also claimed offshore, notwithstanding there are corresponding amounts taxed under the US GILTI rules.
That said, the hybrid mis-match rules are significantly complex. There may be other provisions available under the rules to avert the potential double taxation impact of TD 2022/9, for which expert advice should be sought.
Does the recent Inflation Reduction Act (“Act”) in the US provide relief from double taxation caused by the interplay of US GILTI rules and Australia hybrid mis-match rules?
The Biden administration had proposed that the US GILTI rules be reformed to increase the rate of tax on profits of subsidiaries of US companies from 10.5 percent to 15 percent. Further, it was proposed that this be implemented at a country-specific level to align more closely with the OECD “Pillar Two” global minimum tax deal that was agreed to by 136 countries, including the US, in October of 2021. Ideally, the proposed changes might have provided some relief from the aforementioned Australia and US hybrid mis-match driven double taxation.
Australia is an example where US companies with Australian subsidiaries may have double taxation issues related to the US GILTI rules, though this fact may cause similar double taxation risk in other jurisdictions if other foreign taxing authorities take the same view as the ATO.
With President Joe Biden signing the Inflation Reduction Act of 2022 (“Act”) into law on August 16, 2022, the key tax law change imposing a 15 percent minimum tax on certain US corporations is now more clearly defined. The new 15 percent minimum tax rule did not address factors that underpin the US GILTI and Australia hybrid mis-match rule double taxation issue, but the structure of the 15 percent corporate minimum tax may pose additional complexity and difficulty in the context of US alignment with the OECD’s global minimum tax framework, commonly referred to as “Pillar Two”.
How is the US 15 percent minimum tax rule structured?
The Act amends the alternative minimum tax (AMT) under IRC Section 55, effective January 1, 2023, to impose a “tentative minimum tax” on “applicable corporations” equal to the excess of:
- (1) 15 percent of the “adjusted financial statement income” (AFSI) over
- (2) the corporate AMT foreign tax credit for the subject tax year.
If an applicable corporation’s tentative minimum tax exceeds its regular tax liability, then it must pay the difference as AMT.
What constitutes an Applicable Corporation?
An applicable corporation is generally any corporation (other than an S corporation, a regulated investment company, or a real estate investment trust) with an average annual AFSI of more than $1 billion for the three preceding taxable years ending with the subject tax year. This annual AFSI test is applied to tax years ending after December 31, 2021.
In determining whether a corporation meets the $1 billion threshold, the AFSI of all persons treated as a single employer with such corporations under IRC Section 52 generally is treated as the AFSI of the subject corporation. The income is determined without regard to the adjustments for partnerships under Section 56A(c)(2)(D)(i) and defined benefit pensions under Section 56A(c)(11).
For corporations in existence for less than three tax years, the threshold test applies to the period in which the corporation has existed. For short tax years, AFSI is annualized.
A corporation can be exempted from the minimum tax if it has a number of taxable years (to be specified by regulation) in which its AFSI does not meet the threshold and the Treasury Secretary determines that it would not be appropriate to apply the minimum tax. The Treasury Secretary’s determination would not apply if the corporation meets the three-year average annual AFSI threshold for any taxable year beginning after the first taxable year for which the exemption was granted.
Certain foreign-owned corporations with AFSI over $100 million are also subject to the minimum tax.