Missed RSM’s Federal Tax Forum? It’s not too late to catch the recording! Register and watch the ASC 740-trends and updates session to catch up on many of the topics included below. For updates on other key tax areas, catch the recordings of all of the sessions from the Federal Tax Forum page.
Purchase of transferable energy credits
In the first half of 2024 there has been an uptick in the interest in transferrable energy credits enacted as part of the Inflation Reduction Act (IRA). The ability to transfer credits to another taxpayer has created a market for taxpayers generating various green energy credits to monetize the credit by selling to another taxpayer. The buyer of the credits often benefits by purchasing the tax credits at a discount and then using the credits to offset their income tax liability in lieu of cash tax payments. On April 25, 2024, the IRS released final regulations related to the transferability of these credits. The final regulations are effective starting on July 1, 2024. Please see RSM’s article on the final regulations
Under ASC 740, an entity purchasing tax credits accounts for the credit under ASC 740 which can result in various technical issues, including the evaluation of a need for a reserve for unrecognized tax benefits. A more detailed overview of the accounting issues is included in the Federal Tax Forum session referenced above.
Proposed regulations on stock buybacks
On April 9, 2024, the IRS and Treasury issued proposed regulations related to the 1% excise tax on corporate stock buybacks that was enacted as part of the IRA. The excise tax is effective for stock repurchases occurring after Dec. 31, 2022. The IRS and Treasury also issued final regulations with an effective date of June 28, 2024, that cover the procedural and administrative aspects of reporting and paying the excise tax.
In general, the stock buyback tax is a 1% excise tax that is assessed when a covered corporation, or certain affiliates of that corporation, repurchases its own stock. A covered corporation is typically a corporation whose stock is publicly traded and may also include certain foreign corporations. More information regarding the proposed regulations can be found in RSM’s article: Stock buyback excise tax: Proposed regulations.
As a reminder, this excise tax does not constitute an income tax under ASC 740 and should not be accounted for as such. Rather, the tax should likely be accounted for as a reduction to shareholders’ equity as a cost of repurchasing the stock.
Updates from the Financial Accounting Standards Board (FASB)
The FASB did not issue any accounting standards updates (ASUs) during the second quarter of 2024. The focus of most tax departments continues to be on ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, released in December 2023. ASU 2023-09 focuses on income tax disclosures around effective tax rates and cash income taxes paid and is effective for public business entities for annual periods beginning after Dec. 15, 2024 (generally, calendar year 2025), and effective for all other business entities one year later.
While entities have some time to comply with the additional disclosure requirements, entities should begin reviewing their provision process and ensure those processes are designed to collect the necessary data to comply with the requirements. For additional information on the income tax disclosure ASU, read our article: ASC 740: FASB releases ASU 2023-09: Improvements to Income Tax Disclosures.
State tax
It was a busy quarter for state and local tax law changes, including significant changes to state taxation in several states. Read more about these state and local tax law changes in our companion article: State tax law changes for the second quarter 2024.
International tax
Pillar Two now effective
Pillar Two aims to enact a global minimum corporate tax rate of 15% of adjusted net income on multinational enterprises (MNE) with €750 million or more in consolidated revenue regardless of the locations of the business’ headquarters or jurisdictions in which the business operates. There are several charging mechanisms in the Pillar Two framework to collect any required top-up tax, including the Qualified Domestic Minimum Top Up Tax (QDMTT), the Income Inclusion Rule (IIR) and the Undertaxed payments/profits rule (UTPR). In tax jurisdictions that enacted the Pillar Two legislation in 2023, QDMTTs and the IIR are generally effective for years beginning on or after Dec. 31, 2023 (commonly this would be calendar year 2024), with the UTPR effective for years beginning on or after Dec. 31, 2024 (commonly this would be calendar year 2025).
Many countries have enacted legislation aimed at enshrining the Pillar Two framework into their tax law while many more countries have committed to enacting such legislation. As noted above, the QDMTT and IIR rules are now generally effective, however it is important to note that only legislation enacted as of the balance sheet date is applicable for an income tax provision under GAAP. The FASB also indicated during 2023 that taxes under Pillar Two would be viewed as similar to an alternative minimum tax as discussed in Topic 740, Income Taxes. Under ASC 740, deferred taxes would not be recognized or adjusted for the future effects of the minimum taxes. Ultimately, companies will need to evaluate the laws that are enacted and reflect any effects on the income tax provision in the period in which the legislation is enacted.
The analysis required of the impacts of Pillar Two on multinational entities can be quite significant, however, entities must consider the potential effects of Pillar Two tax liabilities and reflect their best estimate of Pillar Two in their second quarter estimated annual effective tax rate.
Australia
As of March 27, 2024, Australia’s new thin capitalisation rules have been passed by the Australian Parliament, with a retrospective effective date of July 1, 2023. This means they will apply for the first time for companies with a year-end of June 30, 2024. The legislation also included provisions on the debt deduction creation rules, which limit the deductibility of some related party debts and are effective from July 1, 2024.
Brazil
On May 28, 2024, Brazil enacted law No. 14.871/24, which aims to stimulate the modernization and renewal of production processes, by allowing for accelerated depreciation for machines and equipment acquired during 2024.
Canada
On June 20, 2024, Bill C-69 attained royal assent implementing certain amendments including (but not limited to) excessive interest and financing expenses limitation, general anti-avoidance rules, global minimum tax and alternative minimum tax. For additional information related to Bills C-59 and C-69, read the article from RSM Canada: Bills C-59 and C-69: Top seven tax changes for the middle market.
Canadian Federal Budget 2024 proposes to increase the existing capital gains inclusion rate effective June 25, 2024, which would result in the corporate capital gains inclusion increasing from one-half to two-thirds.
On June 10, 2024, the Ministry of Finance released a Notice of Ways and Means Motion (NWMM) to implement the Budget 2024 initiative. The draft legislation introduces transitionary measures to identify how the inclusion rate will apply to the capital gains realized before and on or after June 25, 2024. A few key considerations in light of the proposed rules include:
- Capital gains reserve: The reserve allows taxpayers to defer the recognition of capital gains when the proceeds of the disposition of capital property are received over several years. Under the new rules, the reserve will be included in the taxable income on the first day of the taxation year.
- Net capital losses (NCLs): NCLs can be carried back three years and forward indefinitely to offset capital gains in other years. Following the amendment, the value of NCLs will be adjusted to reflect the applicable inclusion rate.
- Business investment loss (BIL): Currently, half of a BIL (when the amount owed by a small business corporation (SBC) becomes irrecoverable or shares of a bankrupt SBC are disposed of) is deductible and referred to as Allowable Business Investment Loss (ABIL).The proposed deduction for ABIL will decrease from one-half to two-thirds for a BIL realized on or after June 25, 2024. When carried back, the value of ABILs will not be adjusted to reflect the new inclusion rate.
Germany
On June 14, 2024, the German Federal Council approved the draft of an application law for the BEPS Multilateral Instrument (BEPS MLI), which was presented by the German government on Feb. 7, 2024. Provided that the subsequent notification to the OECD also takes place this year, the changes are applicable from 2025 forward. The law affects the application of the provisions in double taxation agreements with several countries. Read more from RSM Ebner Stolz in German Legislator adopts MLI Application Act.
Hong Kong
The Inland Revenue (Amendment) (Tax Concessions for Intellectual Property Income) Bill 2024 was published in the gazette on March 28, 2024. The Government aims to encourage the innovation and technology (I&T) sector to actively engage in more R&D activities and create intellectual property by introducing a concessionary tax rate set at 5% (as opposed to the normal profits tax rate of 16.5%).
Additionally, the Inland Revenue (Amendment) (Tax Concessions and Two-tiered Standard Rates) Bill 2024 was published in the gazette on May 31, 2024. As part of the bill corporations will benefit from the waving of profits tax for the 2023/2024 year of assessment by 100%, subject to a ceiling of $3,000 per case.
Italy
On May 20, 2024, the Italian Ministry of Economy and Finance issued a decree, published in the Official Gazette on May 28, 2024, outlining the implementation provisions for simplified transitional safe harbors for multinational and national groups subject to global minimum tax rules. At the option of the reporting entity, the amount of Pillar Two tax due for a fiscal year within the relevant period for a multinational group in relation to a country, or a national group in relation to Italy, is considered zero if the group meets one of the following criteria for that fiscal year and country: the transitional de minimis requirement, the simplified effective tax rate requirement, or the routine profit requirement. The publication of implementation decree may affect U.S. companies’ compliance with global tax regulations and their potential tax liabilities in different jurisdictions.
In ruling no. 14925 of May 28, 2024, the Court of Cassation addressed the deductibility of a non-repayable transfer between sister companies. The court established the legal principle that, for tax purposes, a free capital transfer without the obligation of repayment, voluntarily made between two companies within the same group, is considered a donation. The expense borne by the “donor” company is not deductible because is not mentioned in the list of deductibles “liberal donations" of the Article 100 of the Italian Income Tax Code. This ruling will affect the tax treatment of financial transfers within multinational groups.
