New Alternative Minimum Corporate Taxes (“CAMT”) were enacted as part of the Inflation Reduction Act passed on August 16, 2022. Application of the CAMT Act has been greatly diminished under the most recent law, and it was recently estimated to affect fewer than 150 companies based on the Commission’s analysis Shared tax. While at first glance US companies may not consider CAMT if their financial income does not exceed $1 billion, CAMT may apply to US companies owned by unsuspecting foreigners.

Current CAMT legislation commonly applies to U.S. corporations with average annual income adjusted for financial statements (“AFSI”) for the previous three taxable years that exceeds $1 billion. The aggregation rules in Sections 52(a) and 52(b) apply to identify companies listed on the AFSI.

However, the new Section 59(k) provides a separate and distinct test for determining whether a US company is a member of a multinational group with foreign origins when assessing whether the CAMT test applies to a US company. The definition of a foreign multinational parental group for a tax year is met if:

  1. At least one entity is a domestic company, and another entity is a foreign company
  2. These entities are included in the same applicable financial statement, and
  3. Either the common parent of these entities is a foreign corporation, or if there is no common parent, future regulations will determine which foreign parent is considered

If a US corporation is a member of a multinational group with foreign assets for any taxable year, the AFSI of the foreign parent and any foreign subsidiaries must be included when assessing whether the three-year average AFSI exceeds $1 billion.

AFSI is defined as the taxpayer’s net income or loss set forth in the taxpayer’s applicable financial statement for that tax year, with up to 15 adjustments as set forth in new Section 56a. Some financial statement income adjustments include intercompany payments, federal and foreign income taxes, as well as adjusting financial statements to reflect tax depreciation. For purposes of testing whether CAMT applies to a multinational group with foreign assets, the financial statement is not adjusted for net operating losses, limiting the partnership income to the partner’s distribution share in the partnership’s AFSI, limiting foreign income to the taxpayer’s pro rata share, ECI, or Pension benefit plans. Adjustments generally result in the inclusion of financial statement income for all foreign companies in the group, both in the initial and downstream stages, as well as the partnerships in the Section 52 aggregation section.

However, even if the multinational parent foreign conglomerate passes the $1 billion three-year AFSI test, additional testing is required before the US company can undergo the CAMT test. The second test requires further analysis of the group, excluding the foreign parent from the test, to determine whether the average annual AFSI for this limited group for the 3-year taxable period is greater than $100,000,000.

In a simple example, suppose a foreign manufacturer is a common parent, falls under the definition of a multinational group of foreign parentage and has an AFSI of $2 billion. In addition, the consolidated group of the American holding company, including foreign companies controlled by the American company, has an AFSI of $50 million. The US holding company and its domestic subsidiaries will not be required to pay CAMT.

Given the detailed aggregate testing required to determine whether US companies should comply with CAMT, companies are likely to spend an inappropriate number of hours just to determine if CAMT is viable. If there is any upside, if a company meets the CAMT valuation requirements, it should generally continue to pay it regardless of future financial statement income with limited exceptions. However, if the company does not meet the requirements of the CAMT application, it must continue to perform the compilation and testing annually.

Businesses and tax professionals will need detailed regulations to assess whether the CAMT test applies correctly and how to calculate the CAMT correctly. The first tax year for which the new CAMT tax is due is the calendar year beginning January 1, 2023, and returns will be due in 2024.

Many companies and tax professionals hope that the Treasury will release some preliminary guidance by the end of 2022. After all, CAMT was expected to raise 39%, or $288 billion, of total revenue under the Inflation Reduction Act. A large number of pending questions will hinder revenue collection without additional guidance.