How the new corporate AMT affects foreign-owned U.S. companies

ARTICLE | November 29, 2022

Authored by RSM US LLP

The Inflation Reduction Act of 2022 (IRA)¹, which President Joe Biden signed into law on Aug. 16, 2022, is sweeping legislation that contains significant tax changes, including a new corporate alternative minimum tax of 15% for certain large corporations meeting financial statement income thresholds. With passage of the IRA, foreign-owned U.S. companies should analyze whether the 15% new AMT will apply to tax years beginning after Dec. 31, 2022.

In general, the new AMT provision imposes a tentative minimum tax equal to the excess of 15% of certain applicable corporations’ adjusted financial statement income (AFSI) over their corporate AMT foreign tax credit (FTC). However, U.S. companies will be liable only for the portion of tentative minimum tax that exceeds the regular tax liability plus the base erosion and anti-abuse tax ("BEAT") liability. Like the now-repealed corporate AMT rules, the new AMT acts as a way of ensuring certain corporations with significant income, deductions, and tax preferences still pay a minimum level of tax.²

The new AMT generally applies only to applicable corporations with average annual AFSI exceeding $1 billion for the prior three consecutive tax years. In the case of foreign-owned U.S. companies, an additional test applies. An applicable corporation's average annual AFSI must also be at least $100 million from the U.S. subgroup for the prior three consecutive years.

The new AMT’s reliance on financial statement income may pose a challenge for some foreign-owned U.S. companies, and special attention should be given to such companies to properly assess the reporting requirements and tax ramifications.

Applicable corporations and the annual AFSI test

 The new AMT imposes a 15% tax on certain so-called applicable corporations that meet a $1 billion average annual AFSI test. An applicable corporation is defined as any corporation (other than an S corporation, a regulated investment company, or a real estate investment trust) that meets the average annual AFSI test for one or more taxable years that are prior to the relevant taxable year, and end after Dec. 31, 2021.

The average annual AFSI test is met if the average AFSI for the prior three consecutive tax years is greater than $1 billion. The $1 billion average annual AFSI takes into account the income of certain related entities within a controlled group as defined in section 59(k)(1)(D). Once a corporation is deemed an applicable corporation, it remains an applicable corporation unless an exception is met.

Foreign-parented multinational groups

Corporations that are members of so-called foreign-parented multinational groups (FPMG) adhere to special rules and must apply a two-part test in determining applicable corporation status.

First, the FPMG must meet the $1 billion AFSI test, which includes the income of all members, including foreign corporations, of the FPMG.

Second, the average annual AFSI of the U.S. subgroup for the three-tax-year period must be $100 million or more.³ A FPMG includes two or more entities if:

1. At least one entity is a domestic corporation, and another entity is a foreign corporation.
2. Both entities are included in the same applicable financial statement for such year.
3. Either the common parent of such entities is a foreign corporation, or, if there is no common parent, the entities are treated as having a common parent that is a foreign corporation under guidance as provided by the secretary of the U.S. Department of the Treasury.⁴

For foreign corporations engaged in a trade or business within the U.S., such trade or business will be treated as a separate domestic corporation wholly owned by the foreign corporation for purposes of the new AMT.⁵

For the $100 million average annual AFSI threshold, the same controlled group rules from section 59(k)(1)(D) apply. Solely for purposes of the $100 million calculation, AFSI does not include income from partnerships, subpart F income, income effectively connected with a foreign corporation under section 882, and income from defined benefit pensions.⁶

New AMT foreign tax credit

 The IRA introduced a complex set of rules relating to the new AMT foreign tax credit (FTC). Applicable corporations can elect to reduce their new AMT by using the new AMT FTC. The amount allowed as a new AMT FTC is generally equal to the sum of:

1. The lesser of:
   1. The sum of section 901 creditable foreign income taxes paid or accrued by the applicable corporation’s controlled foreign corporations (CFCs), taken into account on the CFCs’ financial statement, or 
   2. 15% of the CFC's AFSI included in the taxpayer's AFSI, and
2.  Section 901 creditable foreign income taxes paid or accrued by the applicable corporation, taken into account on the applicable corporation’s financial statement.  

Any excess taxes generated by the applicable corporation’s CFCs may be carried forward for the next five taxable years.  

Treatment of CFCs and foreign disregarded entities under the new AMT

Under section 56A(c)(3), if a corporation is a U.S. shareholder of one or more CFCs, the AFSI of such corporation is adjusted to take into account the corporation's pro-rata share (determined under rules similar to section 951(a)(2)) of the CFC(s) adjusted financial statement net income or loss regardless of whether such income is currently included in income by the corporation (e.g., subpart F, global intangible low-taxed income (GILTI), section 245A). To the extent the net impact would yield a negative adjustment, no adjustment shall be made for the current year; rather, the adjustment will be carried forward to the succeeding tax year.⁷

AFSI shall be adjusted to take into account any AFSI of a disregarded entity owned by the applicable corporation.⁸

Conclusion 

As the new rules from the IRA go into effect after Dec. 31, 2022, foreign-owned U.S. companies should take time now to determine if they may be subjected to the new AMT by reviewing the AFSI of all members in their controlled group.