Corporate AMT: Unanswered questions about its foreign tax credit

Editor: Alexander J. Brosseau, CPA

This item provides a brief overview of the key components of the corporate alternative minimum tax (corporate AMT), including what it is, who is subject to it, and the base on which liability for it is computed. The discussion then turns to the corporate AMT’s foreign tax credit (corporate AMT FTC), focusing on unanswered questions as of December 2022 (when this item was written).

The Inflation Reduction Act, P.L. 117-169, was signed into law on Aug. 16, 2022. The act imposes a 15% corporate AMT based on the adjusted financial statement income (AFSI) of an applicable corporation. The corporate AMT is primarily a revenue raiser and will apply to tax years beginning after Dec. 31, 2022.

On Dec. 27, 2022, Treasury and the IRS released Notice 2023-7, which provides taxpayers with interim guidance on the corporate AMT. Taxpayers may rely on the guidance provided in Sections 3 through 7 of the notice until the issuance of forthcoming proposed regulations.

The basics of the corporate AMT Under the act, an applicable corporation’s AMT is equal to the amount by which the tentative minimum tax exceeds the sum of the corporation’s regular U.S. federal income tax liability, plus its liability for the base-erosion and anti-abuse tax. The corporation’s tentative minimum tax is a 15% tax on its AFSI for the tax year (computed taking into account financial statement net operating losses (NOLs)), to the extent it exceeds the corporate AMT FTC for the tax year.

As under the rules applicable to the regular corporate income tax, AFSI may be reduced by financial statement NOLs, not to exceed 80% of AFSI, determined before taking into account such NOLs. Financial statement NOLs are determined by taking into account adjusted financial statement losses for tax years ending after Dec. 31, 2019.

In addition to the corporate AMT FTC, corporations are eligible to claim a tax credit for corporate AMT paid in prior years against regular income tax, to the extent regular tax exceeds the tentative minimum tax for such tax year. Further, general business credits of a corporation (such as research and development, clean energy, and housing tax credits) may generally offset up to approximately 75% of the sum of a corporation’s normal income tax and corporate AMT.

Definition of an ‘applicable corporation’

An applicable corporation is generally any corporation (other than an S corporation, regulated investment company, or a real estate investment trust) the average annual AFSI of which exceeds $1 billion for any three consecutive tax years preceding the tax year (the AFSI test). Under the act, a corporation can first qualify as an applicable corporation in a tax year ending after Dec. 31, 2021. Section 5 of Notice 2023-7 provides a safe-harbor method for determining whether a corporation is an applicable corporation for the first tax year beginning after Dec. 31, 2022.

Once a corporation is determined to be an applicable corporation, it remains an applicable corporation unless, as a result of an ownership change or a consistent reduction in AFSI below a yetto- be-determined applicable threshold, the IRS determines that it would not be appropriate to continue to treat such corporation as an applicable corporation. Very generally, for purposes of determining whether a corporation is an applicable corporation, Notice 2023-7 provides rules for certain corporate acquisitions and dispositions.

When applying the AFSI test, AFSI of persons treated as a single employer with such corporation under Sec. 52(a) or (b) is treated as AFSI of such corporation. For a corporation that is a member of a foreign-parented multinational group, the AFSI test is applied by aggregating the AFSI for all members of the foreign-parented multinational group in which the applicable corporation is a member. For purposes of this rule, the term “foreign-parented multinational group” means, with respect to any tax year, two or more entities if:

1. At least one entity is a domestic corporation (or a foreign corporation engaged in a U.S. trade or business);
2. Such entities are included in the same applicable financial statement with respect to such year; and
3. The common parent 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 regulations prescribed by the IRS.

Additionally, a domestic corporation (or foreign corporation with a U.S. trade or business) that is a member of the foreign-parented multinational group must meet an additional $100 million threshold by looking solely to its U.S.-related income. Thus, the foreign-parented multinational group must meet the AFSI test, and the domestic corporation (or foreign corporation with a U.S. trade or business) must meet the separate $100 million threshold.

Rules for calculating AFSI

Sec. 56A defines “adjusted financial statement income” of a corporation (taxpayer) as the taxpayer’s net income or loss reported in the taxpayer’s applicable financial statement (as defined in Sec. 451(b)(3)), with adjustments for certain items. If a taxpayer’s financial results are reported on the applicable financial statement for a group of entities, the act treats that consolidated financial statement as the taxpayer’s applicable financial statement. Special rules apply for cooperatives, Alaska Native corporations, and mortgage servicing companies. Sec. 56A(c) provides a number of specific adjustments in arriving at AFSI to essentially (1) align the members of the financial statement group with the members of the tax filing group and (2) to account for various tax items.

One such adjustment is to take into account certain items of foreign income. Sec. 56A(c)(3) provides that, in the case of a corporation that is a U.S. shareholder of a controlled foreign corporation (CFC), AFSI includes the corporation’s pro rata share of the AFSI of such CFC (the CFC AFSI adjustment). For this purpose, the AFSI of CFCs is aggregated globally, and a loss by one CFC may offset income of another CFC. However, net overall losses of CFCs may not reduce AFSI of a U.S. corporation but may be carried forward and used to offset the global CFC AFSI in future years.

In addition to the adjustments expressly provided in Sec. 56A, the IRS is also granted regulatory authority to provide adjustments to (1) prevent the omission or duplication of any item; (2) appropriately address corporate liquidations and reorganizations; and (3) appropriately address transactions related to partnership contributions and distributions.

Taxpayers and practitioners have been eagerly awaiting guidance on myriad open questions with respect to the corporate AMT. The next section of this item provides an overview of the corporate AMT FTC and examines some unanswered questions about it as of this writing.

The corporate AMT FTC

Tentative minimum tax may be reduced by a corporate AMT FTC if the applicable corporation chooses to claim an FTC for the tax year. The corporate AMT FTC is the sum of:

1. Foreign income taxes (within the meaning of Sec. 901) paid or accrued by an applicable corporation; and
2. The lesser of:
   1. The amount of foreign income taxes (within the meaning of Sec. 901) taken into account on the applicable financial statement of each CFC and paid or accrued by the CFC for U.S. federal income tax purposes, or
   2. The applicable corporation’s pro rata share of the CFC AFSI adjustment multiplied by 15%.

Thus, foreign income taxes paid or accrued by CFCs are subject to a limitation equal to the applicable corporation’s CFC AFSI adjustment multiplied by 15%, while foreign income taxes paid or accrued directly by a domestic corporation, such as withholding taxes or the taxes paid on income of a foreign activity conducted directly by the corporation, are not subject to a limitation.

Foreign income taxes are taken into account for purposes of the corporate AMT FTC only if a two-prong test is met (i.e., the foreign income taxes must be taken into account on the relevant applicable financial statement and be paid or accrued, for U.S. federal income tax purposes, by the relevant corporation).

Excess corporate AMT FTCs attributable to CFCs may be carried forward for five years. As drafted, the corporate AMT FTC carryforward appears to apply only to CFC-level foreign taxes in excess of the CFC-specific limitation, rather than global foreign taxes in excess of the overall corporate AMT liability. As a result, it does not appear that any foreign income taxes paid or accrued directly by a domestic corporation would be allowed as a carryforward. The corporate AMT FTC does not include any limitations under Sec. 904 — such as separate category income or loss, overall foreign loss, overall domestic loss, or loss recapture provisions — in determining the credit. Additionally, it is not determined on a country-by-country basis, nor does it matter if taxes paid by CFCs are deemed paid or attributable to inclusions under Sec. 951 or 951A.

The IRS is granted regulatory authority to provide regulations or other guidance as is necessary to “carry out the purposes of this subsection.”

The examples below illustrate the mechanics of the corporate AMT FTC:

Example 1: Assume USP, a domestic corporation, is an applicable corporation and wholly owns each of CFC1 and CFC2, both foreign corporations in countries X and Y, respectively. CFC1 and CFC2 have net income of $500 million and $200 million, respectively, none of which is considered effectively connected income (ECI). CFC1 and CFC2 have $150 million and $15 million, respectively, of foreign income taxes that are (1) income taxes within the meaning of Sec. 901; (2) taken into account on the applicable financial statements; and (3) paid or accrued for federal income tax purposes by CFC1 and CFC2. Thus, CFC1 and CFC2’s foreign income taxes qualify for the corporate AMT FTC. USP has no foreign income taxes that qualify for the corporate AMT FTC. USP chooses to claim an FTC for the tax year. USP’s corporate AMT FTC is the lesser of the pro rata share of the foreign income taxes ($165 million) or 15% of the CFC AFSI adjustment (15% of $500 million + $200 million, or $105 million). Thus, even though blending of CFC1 and CFC2’s foreign income taxes is allowed, USP is allowed to claim only $105 million of a corporate AMT FTC in the current year. The remaining $60 million of taxes paid by CFC1 and CFC2 are carried forward for up to five years.

Example 2: Assume US1, a domestic corporation, is an applicable corporation and wholly owns FB1, a foreign branch in country X. FB1 has net income of $500 million, none of which is considered ECI, and has $150 million of foreign income taxes that are (1) income taxes within the meaning of Sec. 901; (2) taken into account on the applicable financial statements; and (3) paid or accrued for federal income tax purposes by US1. Thus, FB1’s foreign income taxes qualify for the corporate AMT FTC. Because FB1 is a foreign branch of US1, no limitation applies on the foreign income taxes paid by FB1. Thus, US1 is allowed to claim $150 million of a corporate AMT FTC in the current year.

As with many aspects of the act, several questions and issues are left unanswered as they relate to the corporate AMT FTC. The next section of this item examines unanswered questions related to the scope of foreign income taxes that are available for the corporate AMT FTC, what taxes are “taken into account,” timing issues, foreign tax redeterminations issues, and transition and carryforward issues.

Unanswered questions

Foreign taxes “taken into account”: As mentioned, Sec. 59(l) provides that, for purposes of the corporate AMT FTC, foreign income taxes must be “taken into account” on the relevant applicable financial statement and “paid or accrued (for federal income tax purposes)” by the relevant corporation. Thus, foreign income taxes are eligible for the corporate AMT FTC only if a two-prong test is met.

As currently drafted, it is unclear what “taken into account” on the relevant applicable financial statements means for purposes of the corporate AMT FTC. For example, does this refer to the current tax expense on the financial statements, or the total tax expense on the financial statements (that includes both current tax and deferred tax expense/benefit)? Sec. 56A(c)(5) — the rule that provides that AFSI shall be adjusted to disregard federal income taxes, or income, war profits, or excess profit taxes (within the meaning of Sec. 901) with respect to a foreign country or possession of the United States that are taken into account on the taxpayer’s applicable financial statements — provides that “[t]he Secretary shall prescribe such regulations or other guidance as may be necessary and appropriate to provide for the proper treatment of current and deferred taxes for purposes of this paragraph, including the time at which such taxes are properly taken into account.”

Further, some income items are reported on the applicable financial statements as a single, net-of-tax item, and foreign taxes may be reported net of an FTC benefit in the effective tax rate rather than reported separately as a gross income item and a corresponding tax expense. As drafted, it is unclear whether taxes that are reported on a net rather than gross basis are considered “taken into account” for purposes of the corporate AMT FTC.

Timing differences: As mentioned, the second prong of the two-prong test requires that the foreign income taxes are “paid or accrued (for federal income tax purposes)” by the relevant corporation. However, it is unclear whether, to be eligible for the corporate AMT FTC, foreign income taxes must accrue in the same tax year of the applicable corporation for financial statement and tax return purposes. Thus, it is unclear how differences in foreign tax, U.S. tax, and U.S. financial statement year ends may affect such qualification. In many circumstances, the timing of the accrual of foreign income taxes will differ for financial statement and U.S. federal income tax purposes. Further, in certain countries (e.g., India), some companies are required to have a fiscal year end for local tax purposes that differs from the U.S. tax year required under Sec. 898.

These timing differences could create particular issues in the very first year of corporate AMT applicability. For example, assume an applicable corporation has a financial statement and U.S. federal income tax year end of Dec. 31 and a foreign income tax year end of June 30. The corporate AMT provisions are first effective for the U.S. tax year ended Dec. 31, 2023. For purposes of the corporate AMT FTC, the foreign income taxes paid for the period July 1, 2022, to June 30, 2023, are taken into account (at the end of such tax year and in the first effective corporate AMT year), as these taxes have been both (1) accrued for financial statement purposes and (2) accrued for U.S. federal income tax purposes as of June 30, 2023. However, the income subject to the corporate AMT provisions would be Jan. 1, 2023, through Dec. 31, 2023.

Notably, during the legislative process, Finance Committee Chairman Sen. Ron Wyden, D-Ore., clarified in a colloquy (168 Cong. Rec. 4166 (2022)) with Sen. Bob Menendez, D-N.J., that Treasury will have regulatory authority to address potential issues with foreign income taxes relating to nonconforming foreign tax years and how that impacts FTCs in the corporate AMT, including rules for utilization of FTCs in the first year.

Foreign tax redeterminations: A foreign tax redetermination under Sec. 905(c) may change the amount of a corporate AMT FTC previously claimed and an applicable corporation’s tentative minimum tax for the tax year in which the corporate AMT FTC was claimed.

A foreign tax redetermination generally occurs if there is a change in a taxpayer’s foreign tax liability that affects a taxpayer’s previously claimed FTC. For example, assume a taxpayer claims an FTC in year 1 based on foreign taxes paid or accrued in year 1. In year 3, the taxpayer is audited by the foreign country, and the taxpayer’s original tax liability for year 1 is adjusted. Such a redetermination impacts the amount of FTC claimed in year 1.

Sec. 905(c) specifies three main types of foreign tax changes that result in a foreign tax redetermination: (1) if foreign income taxes paid or later adjusted differ from amounts accrued by the taxpayer and claimed as an FTC; (2) if accrued foreign income taxes are not paid within two years after the close of the tax year to which the taxes relate; or (3) if there is a refund of foreign income taxes previously paid. Sec. 905(c) and the regulations thereunder provide specific rules as to when and how any adjustments to a taxpayer’s foreign income tax liability are taken into account for purposes of the FTC.

It is unclear how foreign tax redeterminations will be taken into account for purposes of the corporate AMT FTC. The foreign income taxes might not be taken into account on the applicable financial statement of the relevant corporation in the year to which the foreign income taxes relate (i.e., they might be taken into account on the applicable financial statement in the tax year in which the redetermination occurs).

Foreign taxes paid by partnerships: The statute’s language suggests that corporate AMT FTCs are available only for foreign taxes paid by the corporate taxpayer and its CFCs. Although nothing in the language of the corporate AMT statute addresses the creditability of foreign taxes paid by a partnership in which the corporate taxpayer is a direct or indirect partner, Sec. 56A(c)(2)(D)(i) is clear that a corporate taxpayer that is a partner in a partnership takes into account in AFSI the corporate partner’s distributive share of the partnership’s AFSI. Thus, corporate partners bear the economic burden associated with their distributive share of the partnership’s AFSI for purposes of computing the corporate AMT liability, as well as their share of foreign taxes paid by the partnership. However, as the law is drafted, it is unclear whether the corporate partners would receive a proportionate share of such taxes for purposes of computing the corporate AMT FTC.

For example, consider Example 2, but instead assume FB1 is a partnership. As the law is currently drafted, US1 would take into account its distributive share of FB1’s net income in computing its corporate AMT liability; however, it is unclear whether the taxes paid by FB1 would be eligible for the corporate AMT FTC.

Sec. 59(l)(3) provides that the IRS shall provide for such regulations or other guidance as necessary to carry out the purpose of Sec. 59(l). Further, Sec. 56A(c)(15)(A) provides that the IRS shall issue regulations or other guidance to provide for such adjustments to AFSI as the IRS determines are necessary to carry out the purposes of Sec. 56A, including adjustments to prevent the omission or duplication of any item. Notice 2023-7 provides guidance on certain issues under the corporate AMT regarding Subchapter K of Chapter 1 of the Internal Revenue Code and the determination of applicable corporation status in circumstances involving certain partnerships; however, it does not provide any guidance on this issue.

Transition/carryforward issues: There are also many questions related to the corporate AMT FTC upon transition to the corporate AMT rules, as well as questions on the carryforward of credits under the corporate AMT FTC.

First, as mentioned, excess corporate AMT FTCs attributable to CFCs may be carried forward for five years. Sec. 59(l) is silent on the amount of corporate AMT FTC carryforward from the preceding five years before the effective date of the corporate AMT (i.e., 2023) or from the five years before a taxpayer first becomes an applicable corporation. Sec. 56A(d) provides a transition rule for financial statement NOLs for tax years ending after Dec. 31, 2019. Similarly, transition relief was provided for the implementation of the branch basket in Sec. 904 as part of the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, under Regs. Sec. 1.904-2(j)(1)(iii).

Second, Sec. 59(l) is silent on whether the carryforward amount exists even if a taxpayer does not pay the corporate AMT in a particular year. In other words, if a taxpayer has excess FTCs under this rule but ultimately pays regular tax, does the taxpayer have an excess carryforward account on an “as if paid” basis?

Lastly, there does not seem to be a rule to determine the ordering where there are current taxes and carryforward taxes (i.e., Sec. 59(l)(2) provides that excess taxes increase the amount of taxes in Sec. 59(l)(1)(A)(i) in any of the first five succeeding tax years, but it does not provide an ordering). Ordering rules could be significant in terms of a taxpayer’s ability to utilize corporate AMT FTC carryforwards.

Taxpayers will need guidance As mentioned, the corporate AMT applies to tax years beginning after Dec. 31, 2022. The corporate AMT represents a significant departure from the regular U.S. federal income tax system and the alternative minimum tax in place prior to the enactment of the TCJA. Key issues related to the corporate AMT FTC are unsettled and could have a significant effect on a taxpayer’s corporate AMT liability. Taxpayers will need guidance on how to appropriately account for the corporate AMT regime.

The author thanks Chris Trump, Reed Kirschling, Chad Hungerford, Ryan Bowen, and John Franco for their guidance and input on this item.

Editor Notes

Alexander J. Brosseau, J.D., CPA, is a senior manager in the Tax Policy Group of Deloitte Tax LLP’s Washington National Tax office.Unless otherwise noted, contributors are members of or associated with Deloitte Tax LLP. For additional information about these items, contact Mr. Brosseau at 202-661-4532 or abrosseau@deloitte.com.

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional adviser. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.