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Modify Corporate AMT to Avoid Double Taxation, Writer Says

UNDATED

Modify Corporate AMT to Avoid Double Taxation, Writer Says

UNDATED
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Proposed Corporate Alternative Minimum Tax Should be Modified to Remedy Inappropriate Double Taxation of Foreign Income

The proposed Corporate Alternative Minimum Tax (Section 138101 of the Build Back Better framework being considered by the House Rules Committee) contains anomalies that can result in inappropriate double taxation of foreign income of domestic corporations that are subject to the minimum tax. The proposal should be modified to remedy these anomalies by providing for a corporate AMT foreign tax credit for foreign income taxes paid or accrued regardless of whether the taxpayer elects to claim a foreign tax credit for purposes of determining its regular tax liability, and by clarifying that the creditability of foreign income taxes for purposes of the corporate AMT foreign tax credit is determined without regard to the allocation of foreign income taxes to income groupings under Code section 960.

Proposed Corporate AMT — Background

  • The proposed corporate AMT would impose a 15 percent minimum tax on adjusted financial statement income (AFSI) for applicable corporations. Under the proposal, an applicable corporation's minimum tax would be equal to the amount by which the tentative minimum tax exceeds the corporation's regular tax. AFSI is reduced by financial statement net operating losses (NOLs) incurred after December 31, 2019.1

  • Tentative minimum tax would be determined by applying a 15 percent tax rate to the corporation's AFSI, and reducing that amount by a corporate AMT foreign tax credit.

  • The corporate AMT foreign tax credit would only be available, however, “if an applicable corporation chooses to have the benefits of subpart A of part III of subchapter N for any taxable year,” i.e., if the applicable corporation elects to claim the foreign tax credit in determining its regular tax liability.

  • The corporate AMT foreign tax credit would apply to foreign income taxes (within the meaning of section 901) that are taken into account on the taxpayer's applicable financial statement and paid or accrued for federal income tax purposes. In the case of a U.S. shareholder of a controlled foreign corporation (CFC), foreign income taxes are subject to a limitation of 15 percent of the net aggregate AFSI of all CFCs.

Corporate AMT Foreign Tax Credit Should Be Allowed Independently of Election to Claim Foreign Tax Credit Against Regular Tax Liability

  • The corporate AMT foreign tax credit should be made available to applicable corporations that do not claim the foreign tax credit in determining regular tax liability. The result under the proposal as currently drafted is inequitable to corporations that do not claim a foreign tax credit in determining regular tax liability, for example because they have net operating losses that reduce taxable income.

  • If the proposal as currently drafted were enacted, it would result in double taxation of foreign income for applicable corporations. For example, assume a U.S. taxpayer with 100 of pre-tax AFSI, 20 with respect to its U.S. operations and 80 with respect to its foreign operations. Assume further that the U.S. corporation pays an effective rate of foreign income tax of 20% on its foreign income (for a tax of 16). Finally, assume that the U.S. corporation has pre-2016 NOLs that reduce U.S. regular taxable income in the year to zero. Under the proposal as currently drafted, the U.S. taxpayer would be subject to an AMT of 15, with no credit for foreign taxes paid, even though it paid foreign taxes in excess of the AMT rate, and even though it would have owed no AMT on its foreign income if it had no NOL carryover.

  • Prior to repeal of the corporate AMT in 2017, the corporate AMT permitted a corporate AMT foreign tax credit without regard to whether the corporation elected to claim a foreign tax credit against regular tax liability. It is unclear why the election to claim a foreign tax credit in the regular tax system should have any impact on the ability to claim a corporate AMT foreign tax credit in the minimum tax system, particularly in cases where the taxpayer with AFSI had no regular taxable income for the year.

  • Alternatively, if there is a desire in general to permit a corporate AMT foreign tax credit only where the taxpayer elects to claim a foreign tax credit against regular tax liability, that rule should not apply to the extent a taxpayer has no regular tax liability against which to credit foreign taxes.

Corporate AMT Foreign Tax Credit Should Be Clarified to Confirm that Foreign Income Taxes Are Taken into Account Without Regard to Section 960 Income Groupings

  • In addition, the proposal should clarify that foreign income taxes (within the meaning of section 901) are taken into account in determining the corporate AMT foreign tax credit without regard to whether such foreign taxes are attributable to any particular income grouping for purposes of section 960.

  • For example, an applicable corporation that is a U.S. shareholder in a CFC may not be entitled to claim a foreign tax credit against regular tax liability with respect to foreign income taxes paid by a CFC because it has claimed the high-tax exclusion under section 954(b)(4) or the GILTI regulations with respect to that CFC's income. The CFC's financial statement income, however, would be included in AFSI without regard to the high-tax exclusion. If the corporate AMT were to deny a foreign tax credit with respect to attributable foreign income taxes, the result would be double taxation of the CFC's financial statement income, which is already subject to a high rate of foreign tax.

FOOTNOTES

1While we welcome the extension of the financial statement NOL carryforward rule to NOLs incurred after Dec. 31, 2019, we believe it would be more equitable to permit financial statement NOLs incurred in prior periods to be carried forward to the extent the taxpayer can prove amount of the NOL, based on prior period applicable financial statements described in section 451(b)(3)(A)(i), to the satisfaction of the Secretary.

END FOOTNOTES

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