What multinational businesses should know about the US Inflation Reduction Act

21 September 2022
On 16 August 2022, US President Biden signed into law the Inflation Reduction Act of 2022. In addition to targeting inflation, the act includes legislation aimed at corporate tax reform, climate change, federal budget deficits and more. It goes into effect January 2023.

The act began as the Build Back Better Act but was renegotiated after more than a year of debate and wavering support. While the renamed act is narrower in scope and cost, it remains the largest US investment in climate change to date.

Much of the act and related press has focused on how its changes will affect US citizens and corporations. The act also has ramifications for multinationals headquartered outside the US that have US-based operations. This article summarises key points from the act that are important for multinationals to know.

A new corporate alternative minimum tax

The Inflation Reduction Act imposes a 15 percent corporate alternative minimum tax (AMT) on US-based entities with an adjusted financial statement income (i.e. book income) averaging US$1 billion or more during three consecutive years. It’s important to note that, despite the AMT provision, the act does not change the current US corporate tax rate. Certain entities, including regulated investment companies, S corporations and real estate investment trust (REITs), are exempt from the new tax.

The Joint Committee on Taxation estimates the new tax will increase the tax burden of some 150 multinationals — that is, the world’s largest companies. They may be required to include income from their non-US subsidiaries, which will affect their taxable income and AMT.

Companies that fall within the scope of the Inflation Reduction Act must review their past US corporate tax obligation, compare that with the 15 percent AMT, and pay whichever of the two is larger.

While the 15 percent alternative minimum tax may seem similar to the proposed OECD global minimum corporate tax under its Pillar Two model rules, there are significant differences between the two. The AMT doesn’t preclude the US from potentially implementing the proposed global minimum tax. It does, however, signal that adoption of it is unlikely under the current administration, at least by the OECD’s anticipated early adoption date of January 2023.

A new excise tax on stock buybacks

A new 1 percent excise tax will be levied on the fair market value of any stock of a “covered corporation” that is repurchased during the tax year. A covered corporation is any domestic corporation whose stock is traded on an established securities market. The statute applies to buybacks made after 31 December 2022.

The practice of a public company purchasing shares of its own stock or making an offer to shareholders — a stock buyback — saw a surge in recent years. Buybacks have been criticised as a way for large corporations to avoid taxes while driving up stock values. The new excise tax may curb the practice.

This provision does not provide a rule regarding repurchases that were pre-authorized on or prior to the effective date. It’s possible that companies may attempt to complete buybacks before the rule goes into effect, which may influence the stock prices of US parent companies of international groups. Any non-US subsidiaries of the US parent would not be directly affected, but there may be some indirect impact if any compensation or other items are based on the stock price of the US company.

Environmental and green energy incentives

The Inflation Recovery Act plans to reduce carbon emissions by 40 percent by 2030. To help achieve that goal, the act includes a host of environmental and green energy tax credits for corporations across a wide variety of industries, as well as provisions aimed at increasing depreciation deductions for energy-efficient commercial properties.

Specific incentives are provided for manufacturers, and there are broad incentives related to fuel and vehicle purchases. There are also new tax credits for emissions-free electricity sources and storage-qualifying properties eligible for credits, including credits for energy-storage technology, qualified biogas property and microgrid controllers.

Some of the provisions create new credits and others expand pre-existing credits. For example, the act expands eligibility qualifications for different types of solar property and fuel cell property.

US corporations, and non-US-based multinationals with existing or planned subsidiaries in the US, may benefit from all of these provisions.

Increased IRS funding

A provision that may indirectly affect non-US corporations is US$80 billion in new IRS funding. This increased budget is earmarked for new IRS workers (including auditors) and technology, which should in turn yield additional IRS revenue. The IRS may have greater resources to scrutinize the earnings of non-US-based subsidiaries and non-US investments to ensure that there are proper disclosures and reporting of taxable income.

Moving forward

The Inflation Reduction Tax Act may increase the taxes of some of the largest US multinational companies. For smaller companies — including the US subsidiaries of non-US based multinationals — the act may provide opportunities to save on taxes. For example, they may invest in subsidiaries that can benefit from the act’s clean energy credits and deductions.

It’s important to emphasise that the act does not change the US corporate tax rate, which is good news for many non-US firms with US subsidiaries. As always in this kind of situation, a non-US-based multinational with US legal entities should seek third-party tax expertise to understand the act’s provisions, how to comply with the act, and how to optimise their US and global tax positions.