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1 1 (August 1, 2022)

handle is hein.crs/goveiah0001 and id is 1 raw text is: Congressional Research Service Inforrming th Iegislative debate since1914 The Corporate Minimum Tax Proposal August 1, 2022 The Inflation Reduction Act of 2022 (H.R. 5376) would impose a minimum tax of 15% on the adjusted financial statement income of large corporations. Corporations would pay the larger of the minimum tax or the regular tax. This tax would apply to taxable years beginning after December 31, 2022. Coverage of Firms The minimum tax would apply to corporations with $1 billion or more in average annual earnings, calculated over a three-year period, in any of the previous three years. In the case of U.S. corporations that have foreign parents, it would apply only to income earned in the United States of $100 million or more, calculated over a three-year period (and apply when the international financial reporting group has income of $1 billion or more). It would apply to a new corporation in existence for less than three years based on the earnings in the years of existence. The provision would exclude Subchapter S corporations (corporations with a limited number of shareholders that elect to be taxed under the individual income tax). It would also exclude regulated investment companies (RICs, such as mutual funds) and real estate investment trusts (REITs). These entities also pass through income to individual investors to be taxed under the individual income tax. Tax Based on Financial (Book) Income The tax would be based on financial statement or book income, with some adjustments. Firms that file consolidated tax returns would include income allocable to the firm from related firms, including controlled foreign corporations (and any disregarded entities); for other related firms, dividends would be included. The provision would allow special deductions for cooperatives and Alaska Native Corporations. It would make adjustments to conform financial accounting to tax accounting for certain defined benefit pension plans. It would apply with respect to items under the unrelated business income tax for tax-exempt entities. The additional tax would equal the amount of the minimum tax in excess of the regular income tax plus the additional tax from the Base Erosion and Anti-Abuse tax. Financial statement income would be increased by federal and foreign income taxes to place income on a pretax basis. Losses would be allowed in the same manner as with the regular tax. Under the regular income tax, losses are carried over to offset income in future years, with loss carryovers limited to 80% of taxable income. Losses would also be carried over under the minimum tax, limited to 80% of financial income. Credits Allowed Credits would be allowed for the minimum tax. Domestic credits under the general business tax (such as the R&D credit) would be allowed to offset up to 75% of the combined regular and minimum tax. Foreign tax credits would be allowed based on the allowance for foreign taxes paid in a corporation's financial statement. A credit for additional minimum tax could be carried over to future years to offset regular tax when that tax is higher. Revenue Effects The corporate minimum tax is a major revenue raiser in the proposed legislation, projected to raise $313 billion over 10 years. It is the largest revenue raiser in the bill, where total revenue raised is approximately $450 billion. Scope of Effects Relatively few corporations would be affected by the tax. An analysis by the Joint Committee on Taxation estimated that about 150 taxpayers would be subject to the minimum tax each year. These results indicate that about 30% of the Fortune 500 could be subject to the minimum tax. About half the tax would be collected from manufacturing (with about 16% from chemical manufacturing) and about 11% each from information and holding companies. Based on projections of $4,755 billion in corporate revenues for FY2023-FY2032 by the Congressional Budget Office, the $313 billion revenue projection indicates an increase in corporate tax revenues of 6.7%. Precedents and Other Examples of a Minimum Tax on Financial Income A corporate alternative minimum tax was imposed in various forms beginning in 1969, although it was repealed in 2017. During most of this period, the tax base was not financial statement income but was the regular income tax base with various preferences added back. A minimum tax on financial statement or book income was included as part of the corporate AMT preferences in 1986. It was intended to be temporary and applied for three years, 1987-1989. Currently, the global minimum tax (GLoBE) proposed by the Organisation for Economic Development and Co- operation (OECD) and the G-20 would be based on financial statement income. See CRS Report R47174, The Pillar 2 Global Minimum Tax: Implications for U.S. Tax Policy, by Jane G. Gravelle and Mark P. Keightley, for a discussion.

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