With just over two months before the new corporate minimum tax is set to go into effect, companies are asking the U.S. government for guidance on its scope and the potential impact of business transactions such as split-offs.
From Jan. 1, 2023, the tax will apply to large U.S. companies averaging at least $1 billion in publicly reported annual profit over three years. The tax, which is part of the climate, healthcare and tax law called the Inflation Reduction Act, requires those businesses to calculate their taxes with the existing 21% levy on corporate income as currently defined in the tax code and under a 15% rate based on their book or financial statement income. The new law stipulates companies pay the higher of the two and looks to address concerns around large profitable companies that face low tax burdens.
General Electric Co.
Las Vegas Sands Corp.
in their most recent earnings statements said any impact from the tax will depend on future guidance from the government. “The Internal Revenue Service has been granted broad authority to issue regulations or other guidance that could clarify how these taxes will be applied,” Las Vegas Sands, a casino and resort operator, said in a filing with regulators.
The Joint Committee on Taxation, which provides nonpartisan analysis of tax legislation for Congress, projects the tax will raise a total of about $222 billion over the course of a decade. Analyzing past securities filings, researchers from the University of North Carolina’s Tax Center found that fewer than 80 publicly traded U.S. companies would have paid any corporate minimum tax in 2021 had the tax been in effect. However, the tax would have applied to
Berkshire Hathaway Inc.
Ford Motor Co.
, among others, the researchers found.
Businesses, including media company Liberty Media Corp., in recent weeks have pressed for additional information from the Treasury Department and the Internal Revenue Service on the implications of the tax.
“It’s casting a very wide net,”
a partner at law firm Skadden, Arps, Slate, Meagher & Flom LLP, said of the minimum tax. The Joint Committee on Taxation has projected that the tax could hit around 150 companies, but the universe of affected businesses could go well beyond that, said Mr. Rievman, who worked with Liberty Media last month on drafting a comment letter on the tax. “I think the effects are going to be broader, or potentially could be,” he said.
Among the concerns from businesses is that reorganizations could cause a company to become subject to minimum tax, or increase their tax liability. That is because without additional clarity from the government, certain business transactions might cause financial statement gains or losses that would be subject to the book tax,
Liberty Media’s senior vice president of tax, said in a Sept. 29 letter to the IRS and Treasury.
This includes 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, Mr. Lenneman said in the letter. Liberty Media declined to comment on whether it expects to be affected by the new tax.
The Alliance for Competitive Taxation, which represents companies including
has voiced similar concerns about the implications of the tax. Companies deem split-offs attractive because they allow them to reduce their share count, which decreases the impact of the transaction on earnings per share and dividends. The alliance in a Sept. 30 letter cautioned that including the gains or losses from a split-off when calculating adjusted financial statement income could take away the appeal of these transactions. The group recommends that the Treasury Department write regulations saying that a financial reporting gain or loss stemming from a split-off should be excluded when calculating adjusted financial statement income.
Alphabet, Las Vegas Sands and Walmart didn’t immediately respond to requests for comment. Coca-Cola, Snap and GE declined to comment.
Tax executives and lawyers said companies need additional clarifications from the government soon, as they are in the process of tax planning for 2023. The IRS is working to give priority to “day one issues” that companies need guidance on as quickly as possible,
a senior technician reviewer at the agency, said at a conference Tuesday, without spelling out what those issues are. The Treasury Department doesn’t have updates to share on the timing of any guidance, a spokeswoman said.
Other areas of concern include the potential for higher tax burdens because of ownership changes. Liberty Media said a company with voting ownership in another business that goes above or below a 50% threshold has to do a revaluation of the ownership for book accounting purposes. This can create unrealized losses or gains and might result in large book minimum tax liabilities unless the government exempts these transactions, according to the company. As of July 31, Liberty Media had ownership stakes in the owner of the Atlanta Braves, a professional baseball team, and satellite radio company
Sirius XM Holdings Inc.
Moreover, companies could be doubly taxed in some instances because of the new law, Mr. Lenneman said in his letter. Companies in the U.S. that own stock in a subsidiary entity that isn’t part of a consolidated group for tax purposes are generally allowed to deduct at least some of any dividends they receive from the subsidiary when assessing their taxable income. The goal is to avoid double taxation given that the funds that companies allocate for dividends are already being taxed, he said. Without the deduction, the company would pay another level of corporate tax on that dividend.
“If you have a lot of taxable dividends from subsidiaries that aren’t consolidated, it gives you much more book income than you would have had for regular income tax purposes, and therefore could be a big factor in throwing you into the corporate [alternative minimum tax] regime,” said Mr. Rievman.
Write to Jennifer Williams-Alvarez at [email protected]
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