Executive summary: Considerations for 2023 tax provisions
While only a few days into 2024, due to the arrival of Pillar Two effective dates, the year already has all of the hallmarks of being an interesting (some might say frustrating) year in the tax world. While many countries took steps to enact Pillar Two directives into law in the fourth quarter, these laws largely impact 2024 and will need to be considered in first quarter provisions. The significant complexity of Pillar Two looms large in relation to many of the following tax and accounting updates related to 2023 year-end provisions. The following update provides a few updates on the state of Pillar Two while also highlighting insights on other federal, state and local, and international tax laws that may impact a company’s 2023 provision. For information on ASC 740 developments from prior quarters, please see our separate articles from the first, second and third quarters of 2023.
Income tax provision consideration for 2023 tax provisions
Corporate Alternative Minimum Tax (CAMT)
The IRS issued several notices throughout 2023 related to the CAMT, which was enacted as part of the Inflation Reduction Act in 2022. The notices cover a variety of issues, including some guidance for companies on the determination of adjusted financial statement income (AFSI). While the number of corporations expected to be subject to CAMT is small, companies will likely need to go through an analysis as part of their year-end provisions to ensure they are not an applicable corporation. Companies may be able to avail themselves of the safe harbors outlined in Notice 2023-7, which provides a simplified method to determine whether a corporation is an applicable corporation.
While many questions regarding the determination of AFSI remain unanswered, and companies are still waiting for regulations, Notice 2023-64 indicates that any forthcoming proposed regulations would apply to taxable years beginning on or after Jan. 1, 2024, permitting taxpayers to rely on guidance in the notices issued over the last year for 2023 tax years and until proposed regulations are issued.
The IRS has released a draft of Form 4626 Alternative Minimum Tax – Corporations with instructions which provide some insight into calculating the CAMT liability and filing requirements for corporations.
Direct pay and transferability of energy credits
On June 14, 2023, the IRS and Treasury issued proposed regulations for direct pay and transferability of energy credits. Under the proposed guidance, a direct-pay election is made on the taxpayer’s original annual tax return. The proposed regulations provide guidance for transferrable credits on how to make a valid transfer between taxpayers and specifies that credits that have been transferred under section 6418 are ineligible for direct pay and cannot be transferred more than once. Under ASC 740, refundable credits where a taxpayer can use the credits without regard to taxable income, such as credits eligible for direct pay, generally fall outside the scope of ASC 740. The FASB staff indicated in a technical inquiry that transferable credits fall within the scope of ASC 740, however there continues to be diversity in practice regarding accounting for nonrefundable transferrable credits. Read more about the recent proposed regulations on the energy credits in RSM’s article: IRS and Treasury release guidance on the monetizing energy credits.
Required capitalization of research or experimental expenditures
The 2023 tax year will be the second year of required capitalization of research and experimental expenditures under section 174. Earlier in 2023, the IRS released Notice 2023-63 regarding required capitalization of specified research or experimental (SRE) expenditures under section 174 that was first effective for tax years beginning after Dec. 31, 2021. Notice 2023-63 describes costs that are includible in SRE expenditures, costs excludible from SRE expenditures, activities considered software development and how to recover the SRE expenditures. Forthcoming proposed regulations will apply to taxable years ending after Sept. 8, 2023; however, taxpayers may choose to rely on the guidance in the notice provided they rely on all the rules and apply them in a consistent manner. Read more about the specifics of the notice in the article: IRS releases initial rules for expenditures under section 174.
In December 2023, the IRS released Notice 2024-12 which clarifies and modifies Notice 2023-63. This notice further clarifies the treatment of costs paid or incurred by a research provider for research performed under contract, which has been one of the more discussed questions related to section 174 over the past year. The notice also clarifies that if a taxpayer chooses to rely on the rules promulgated by Notice 2023-63, the taxpayer must apply all of the rules as described in the notice sections 3 through 9. Notice 2024-12 is applicable to taxable years ending after Sept. 8, 2023. Read more in the article: New guidance on section 174 research expenditures.
Expiration of favorable treatment for meals at restaurants
As part of the Consolidated Appropriations Act, 2021, companies were allowed to temporarily deduct 100% of the cost of food or beverages provided by a restaurant for the 2021 and 2022 calendar years. Beginning on Jan. 1, 2023, the cost of food and beverages at restaurants was once again subject to the 50% limitation under section 274(n)(1). Companies will need to ensure 2023 provisions reflect the appropriate limitations on meal expenditures.
Foreign tax credits
Multinational taxpayers will need to evaluate the effect on the company’s income tax provision of temporary relief granted by the IRS regarding the calculation of foreign tax credits. In July, the IRS has granted relief to taxpayers in Notice 2023-55 in determining whether a foreign tax is eligible for a foreign tax credit under sections 901 and 903. Many taxpayers had raised concerns after the 2022 final regulations were published that foreign taxes that were previously creditable would no longer qualify for a credit. The temporary relief allows taxpayers to largely apply the former version of the regulations in place as of Apr. 1, 2021. This relief is likely to result in the ability for a company to claim additional foreign tax credits, particularly related to foreign withholding taxes and certain foreign income taxes that may have not totally conformed with the U.S. tax system. Read more about the relief granted in the article: Temporary relief granted for the foreign tax credit.
The relief provided by the initial notice is available for tax years beginning on or after Dec. 28, 2021, and ending on or before Dec. 31, 2023. In December, the IRS issued Notice 2023-80, extending the relief provided by Notice 2023-55 until modified or revoked. Notice 2023-80 also addresses various foreign tax credit issues related to the implementation of Pillar Two and the global minimum tax. Read more about the intended forthcoming guidance in the article: IRS releases guidance on the foreign tax credit and GloBE.
Updates from the Financial Accounting Standards Board (FASB)
The FASB issued four accounting standards updates (ASU) during the fourth quarter of the year, including ASU 2023-06 - Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative; ASU 2023-07 - Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures; ASU 2023-08 - Intangibles – Goodwill and Other – Crypto Assets (Topic 350-60): Accounting for and Disclosure of Crypto Assets; and ASC 2023-09 – Income Taxes (Topic 740): Improvements to Income Tax Disclosures. In total, the FASB issued nine ASUs during 2023.
On Dec. 14, 2023, the Financial Accounting Standards Board (FASB or Board) issued accounting standard update (ASU) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The ASU focuses on income tax disclosures around effective tax rates and cash income taxes paid. The ASU largely follows the proposed ASU issued earlier in 2023 with several important modifications and clarifications discussed below. The ASU 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
There were several significant state tax law changes during 2023, including changes to tax rates, apportionment methodologies and updates to conformity with the Internal Revenue Code. Read more about state and local tax considerations in our companion article: State tax law changes for the fourth quarter of 2023. For information on state ASC 740 developments from prior quarters, please see our separate article from the first, second and third quarters of 2023, and download our comprehensive 2023 state and local tax year-end guide.
International tax
Pillar Two
Pillar Two aims to enact a global minimum corporate tax of 15% percent of adjusted net income on large international businesses regardless of the locations of the business’ headquarters or jurisdictions in which the business operates. Many countries have announced support for the Pillar Two initiative and during the fourth quarter of 2023, many countries have come forward with proposed or enacted legislative changes to adopt the objectives of Pillar Two. It is important to note that only legislation enacted as of the balance sheet date is applicable for an income tax provision under GAAP and that the Pillar Two legislation is generally effective for tax years beginning on or after Jan. 1, 2024. The FASB also indicated earlier this year 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.
While the effective dates and GAAP application largely mitigate the effect of Pillar Two on Dec. 31, 2023 financial statements, the analysis required of the impacts of Pillar Two on multinational entities can be quite significant and therefore companies are encouraged to begin the analysis without delay, particularly to the extent there may be an impact to provisions in the first quarter of 2024. As part of that analysis, companies should consider the OECD’s administrative guidance released during the third quarter that included transitional safe harbor rules for the adoption of Pillar Two. This guidance applies to tax years that begin on or before Dec. 31, 2025, and end before Dec. 31, 2026. For additional information on the safe harbor guidance, read RSM’s tax article: Transitional Pillar Two safe harbor.
Australia
As part of the 2023-24 Federal Budget, the Federal Government announced the implementation of the Pillar Two rules proposed by the OECD, with effective dates as follows:
- The income inclusion rule, effective for income years commencing on or after Jan. 1, 2024; and
- the under-taxed profits rule, effective for income years commencing on or after Jan. 1, 2025,
Additionally, the Australian Government announced that it will implement a Domestic Minimum Tax (DMT) of 15%, with effect from income years commencing on or after Jan. 1, 2024. Under the DMT, where an Australian member of an ‘in-scope’ multinational enterprise (MNE) group has a top-up tax obligation, rather than the jurisdiction of the relevant parent entity collecting the tax under the Pillar Two rules, the rules will operate to ensure that Australia has priority taxing rights. The expectation is that where top up tax is payable under the DMT, there should be no additional top up tax payable under the GloBE Rules, but there will still be reporting obligations under both.
The adoption of Pillar Two and the DMT will give rise to a significant increase in tax compliance obligations for ‘in-scope’ MNE Groups, including additional return filing and financial statement reporting obligations.
Additionally, the Australian Taxation Office has updated its guidance on when a foreign-incorporated company will be treated as an Australian tax resident. The changes refine the Australian Taxation Office’s ongoing compliance approach to include additional circumstances where the risk of the company being a resident are considered “very low” and add a risk-assessment framework.
Brazil
During the second quarter of 2023, Brazil published Law No. 14,596/23 which changes the Brazilian transfer pricing legislation to align with OECD guidelines. Final regulations were published on Sept. 29, 2023 and the new rules will become mandatory in 2024, with companies having the option to apply the rules in 2023 as long as they made a decision to do so by Dec. 31, 2023. One goal of the new transfer pricing legislation was to comply with rules for the recognition of foreign tax credits in the United States since the disparity in the transfer pricing legislation of the two countries represented an obstacle to qualifying for a foreign tax credit. Read more about the impacts in: Transfer pricing rules in Brazil finalized.
Canada
Bill C-59 has been introduced to enact much of Canada’s 2023 Fall Economic Statement. Many of the provisions in the bill were first introduced in the 2023 Budget earlier in the year. As of Dec. 31, 2023, Bill C-59 was still being considered by Parliament. Read more from RSM Canada in: Federal economic statement 2023
The bill would amend the General Anti-Avoidance Rule (GAAR) to eliminate the presumption of misuse or abuse. Instead, the lack or absence of economic substance is an important consideration in determining misuse or abuse.
Bill C-59 introduces new rules to for the Hybrid Mismatch Arrangement (HMA) under which interest paid by a Canadian corporation to a non-resident that is not deductible under the hybrid mismatch arrangement rules will be deemed to be a dividend for withholding tax purposes. The bill also introduces a new filing requirement when a corporation has received dividends from a foreign affiliate that are not deductible under the hybrid mismatch arrangement rules.
The bill provides additional clarity provided on when a share is deemed to be mark-to-market property for purposes of the financial institution’s dividend received deduction limitation.
The bill introduced the Carbon Capture, Utilization and Storage Investment Tax Credit (CCUS ITC), the Clean Technology Investment Tax Credit (Clean Tech ITC) and addresses various requirements for claiming these credits.
Additionally, Bill C-59 amends certain parts of the Digital Services Tax Act (DSTA). Read more about the DSTA in: The future of digital taxation in Canada: A comparative analysis. However, Bill C-59 does not address certain concerns (e.g., the DSTA’s retroactive application to 2022 and the inability to credit the DSTA against income taxes payable). As a result, the DSTA is expected to result in instances of double taxation and therefore increase the effective tax rates for certain revenue of digital businesses, particularly certain U.S.-based MNEs operating highly digitized businesses.
France
On Dec. 30, 2023, the Law No. 2023-1322, the 2024 Finance Act, was published in the French Official Gazette. The incorporation of Pillar Two directives into French law was accomplished as part of the 2024 Finance Act.
Additionally, the 2024 Finance Act introduces a new incentive measure with the Tax Credit for Investment in Green Industry, commonly known as C3IV. This tax credit aims to promote the renewable energy production sector. The measure targets four key sectors of the energy transition: batteries, wind power, photovoltaic panels, and heat pumps.
The 2024 Finance Act also introduces significant changes to transfer pricing, which is effective beginning Jan. 1, 2024. The Act lowers the threshold for triggering the transfer pricing documentation obligation to
€150 million gross annual turnover or total gross assets (currently €400 million). The Act also increases requirements around transfer pricing documentation and makes such documentation binding on the taxpayer. This will place the burden of proof on the company itself to prove, by any means, compliance with the arm’s length principle and demonstrate that no unjustified advantages were provided in intra-group transactions. As a result, taxpayers will need to pay closer attention to the content and quality of their transfer pricing documentation, particularly regarding the amounts of intra-group transactions and financial reconciliations. The Finance bill will increase the minimum fine for failure to submit transfer pricing documentation to €50,000 per fiscal year (from the current €10,000).
The 2024 Finance Act also extends the statute of limitations from 3 years to 6 years for the transfer of hard to value intangibles, which are defined as intangibles or rights to intangibles for which, at the time of the transaction, no reliable comparable existed and projections of future cash flows expected to be derived from the transferred intangible or assumptions used in valuing the intangibles were highly uncertain. It will also allow tax authorities to proceed to a tax audit even if the fiscal year in which the transaction took place has already been subject to a full general tax audit.
Germany
On Dec. 15, 2023, the German Federal Council gave its approval to the Minimum Tax Directive Implementation Act, which implements the Pillar Two objectives for Germany. In addition to the introduction of the Minimum Tax Act, the law includes changes to international tax law and commercial law. Read more in: Implementation of the Global Minimum Tax in Germany.
On Nov. 17, 2023 the Financing for the Future Act was passed by the German Federal Parliament. On Nov. 24, 2023 the German Federal Council also gave its approval to the law. Among other things, the law extends the relief for the taxation of employee share-based compensation as of Jan. 1, 2024. Read more in: Financing for the Future Act passed by the Bundestag and Bundesrat.
Ireland
Ireland’s Finance Act 2023 was signed into law on Dec. 18, 2023. The highlights below are discussed more in depth in the article from RSM Ireland: Budget 2024.
To ensure Ireland meets its obligations under the EU Pillar Two Directive, Finance Act 2023, incorporates the Pillar Two rules into Irish legislation effective for accounting periods commencing on or after Dec. 31, 2023.
Additionally, as part of Finance Act 2023, new legislation in respect of outbound payments of interest, royalties and dividends has been introduced. The new taxation measures will restrict the operation of certain domestic withholding tax exemptions in respect of in-scope payments. Under the new withholding regime, the payments of interest, royalties and dividends by an Irish tax resident company to associated, affiliated, connected or related entities, that is resident or incorporated in a “specified territory” will be subject to domestic withholding of 20% for interest or royalties and 25% for dividends. These rules will be effective from April 1, 2024, however grandfathering provisions are available, which provide that the new measures will only apply to payments made from Jan. 1, 2025.
Ireland’s tax regime operates as a worldwide tax regime, and typically provides that all profits, both domestic and foreign source, of an Irish resident entity will be within scope of Irish taxation, with a double tax relief available for foreign tax suffered on foreign source profits, up to the amount of domestic tax payable on the same income. Ireland is currently a significant outlier, being the only EU country and one of a very small number of OECD countries that does not operate some form of participation exemption for foreign dividends, instead using a “tax and credit” system. The Irish Revenue have commenced a consultation paper in respect of the introduction of a Dividend Participation Exemption and it is anticipated that the participation exemption for foreign sourced dividends will be implemented as part of FY2024 Finance Bill and will take effect from 2025.
Italy
Beginning with 2024, tax credit rates for innovation and design activities are decreased from 10% to 5%. However, the tax credit rate for research and development activities remains unchanged at 10% until Dec. 31, 2031, with a fixed maximum annual limit.
For 2024, the tax credit for investments in certain intangible assets including software, systems and system integration, platforms and applications connected to investments in tangible assets, will decrease from the current rate of 20% to 15%. However, investments made by June 30, 2025, where the order is accepted by the seller and a down payment is made in an amount of at least 20% of the acquisition cost by Dec. 31, 2024, will also qualify for the 15% credit. Beyond 2025, this tax credit will further decrease to 10%.
Italy has also incorporated the EU Pillar Two Directive via Legislative Decree 209 which was published in the Italian Office Gazette on Dec. 27, 2023. The global minimum tax comes into effect in Italy as of Jan. 1, 2024.
United Kingdom
The Chancellor of the Exchequer delivered his Autumn Statement on Nov. 22, 2023, with the associated Finance Bill published later that month. The Finance Bill is still working its way through parliament.
The Finance Bill proposed to make full expensing, whereby qualifying capital expenditure by companies on most new plant and machinery qualifies for 100% tax relief in the year of acquisition, permanent. Full expensing had been due to be withdrawn on March 31, 2026. An initial 50% first year allowance for expenditure by companies on certain other new plant and machinery with an expected life of at least 25 years will also be made permanent. These measures will provide more certainty for companies making long-term decisions on capital investment.
There are numerous developments in relation to enhanced research and development (R&D) tax relief, most notably the introduction for accounting periods beginning on or after 1 April 2024 of a new merged scheme of relief for companies of all sizes based on the current refundable R&D expenditure credit regime applicable to large companies. This merged regime will provide a credit equal to 20% of qualifying expenditures, amounting to a net benefit of 15% after corporation tax for companies subject to the main rate of corporation tax of 25%. Loss-making companies will be able to obtain a payment in cash equal to just over 16% of their qualifying expenditure. A more generous relief for R&D intensive loss-makers that qualify as small and medium-sized enterprises will be retained. The rules regarding the subcontracting of R&D activities between companies will also be modified and relief will be restricted where certain R&D activities are undertaken outside the UK.
The Chancellor also confirmed that the ‘authorized surplus payment’ tax charge payable by pension trustees when assets of an overfunded defined benefit pension scheme are returned to the sponsoring employer will be reduced from 35% to 25% with effect from April 6, 2024.
Read more analysis from RSM UK regarding the Autumn Statement 2023.
