The third quarter of 2022 is always a busy time for corporate tax departments and professionals as interim financial statements and extended tax return due dates collide. While the US did pass legislation including tax law changes, the changes in the Inflation Reduction Act will largely not come into play until 2023 and at that time will impact a relatively small set of corporations. The third quarter also brought some enacted changes and proposed laws from various US states and foreign jurisdictions. The following update provides insights on federal and international tax laws that may impact a company’s third quarter provision for 2022. Read more about state and local tax considerations in our companion alert: State tax law changes for the third quarter of 2022.
Inflation Reduction Act
President Biden signed the Inflation Reduction Act (IRA) into law on Aug. 16, 2022. The IRA includes a corporate minimum tax that applies to certain applicable corporations with average financial statement income in excess of $1 billion and U.S. corporations with foreign parents that have over $1 billion in financial statement income, that have at least $100 million in financial statement income. While only a small number of corporations are expected to owe tax under the new minimum tax, many more companies may have to go through calculations to evaluate whether they are subject to the tax.
There are a substantial number of questions regarding the calculation of the book minimum tax, including the various adjustments allowable to book income. The tax first applies to tax years beginning in 2023, so while companies may not have to file a tax return reflecting the minimum tax for a while, companies preparing quarterly provisions will need to begin evaluating the expected impact of the minimum tax on their income tax provision, keeping an eye out for new guidance as it becomes available and revising any estimates as necessary based on available guidance. Read more about the corporate minimum tax in RSM’s tax alert: The new corporate minimum tax: overview and highlights.
Another tax related item included in the Inflation Reduction Act is a new tax on publicly traded corporations that repurchase their stock. The tax on share repurchases is not an income tax accounted for under ASC 740 but likely accounted for in equity as part of the cost of repurchasing stock. Read more about the tax and various questions surrounding the impact of the tax in RSM’s alert: New tax on publicly traded corporations that repurchase their stock. There were also various clean energy incentives included in the bill, which you can read more about in RSM’s alert: Clean fuel incentives in the Inflation Reduction Act of 2022.
Section 174 required capitalization now effective
One of the hoped-for tax law changes that was not included in the Inflation Reduction Act was a delay in the effective date of required capitalization of specified research and experimental expenditures. The capitalization requirement, included as part of the Tax Cuts and Jobs Act (TCJA), is effective for tax years beginning after Dec. 31, 2021. Section 174 requires that companies capitalize and amortize domestic research and experimental expenditures over five years and foreign expenditures over 15 years. As companies continue to assess the impact of section 174 on their income tax return and provision, revisions to the forecasted annual effective tax rate used for interim provision calculations may be necessary. Companies should continue to evaluate the impact of section 174 with the possibility that the delay of required capitalization will not occur before year-end.
Changes in estimate
The fast-approaching corporate tax return deadline for extended calendar year returns also means it is time to revisit any changes in estimate from the related provision. Under ASC 250-10-45-17, changes in estimates, are accounted for prospectively in the period of change. As companies finalize their calculation of taxable income for return purposes, return-to-provision adjustments should be reflected in the period they are known. While companies may have identified return-to-provision adjustments that are appropriate to include in the third quarter as discrete adjustments, there may be other effects of individual adjustments, such as impacts on interest expense limitations and state taxes, that may support waiting until the fourth quarter to record these changes in estimate.
Updates from the Financial Accounting Standards Board (FASB)
FASB issued one accounting standards updates (ASU) during the third quarter of 2022 related to disclosure of supplier finance program obligations and has issued four ASUs year-to-date.
The Board issued a proposed ASU that would expand the applicability of the proportional amortization method available to companies that invest in certain tax credit structures. Previously, the proportional amortization method was only available to investments in Low-Income Housing Tax Credit structures. The proposed ASU would allow companies to use the proportional amortization method to account for investments in other tax credit programs provided certain criteria outlined in the guidance are met.
The Board continues to discuss the proposed accounting standards update for enhancements to income tax disclosures. The FASB revised the scope and objective of the project scope during the first quarter of 2022 and has been seeking feedback from stakeholders on the revised scope. The Board’s objective for the project is to improve the transparency and decision usefulness of income tax disclosures. The targeted improvements include proposals to require additional information around cash taxes paid by jurisdiction and additional information around the rate reconciliation, including additional detail on the impacts of various jurisdictions on the rate.
Pennsylvania enacted corporate rate reductions along with other corporate tax changes on July 8, 2022. The new law reduces the corporate tax rate from 9.99% to 4.99% under a phased approach, with the 4.99% rate applying to years beginning Jan. 1, 2031. Companies with material Pennsylvania activity should assess the impact of the tax rate reduction on their deferred taxes and reflect any benefit or expense as a discrete item in the quarter that includes the enactment date. Due to the phase in of the rate over a number of years, companies may need to consider scheduling the reversal of deferred tax items to appropriately quantify the impact of the tax rate reduction. Read more about Pennsylvania’s corporate tax changes and other state and local tax considerations in our companion alert: State tax law changes for the third quarter of 2022.
The Australian Commissioner of Taxation has released an updated ruling on the effective lives of depreciating assets. This ruling is issued annually. New effective life determinations have been issued for assets used in clothing manufacturing, wooden furniture and upholstered seat manufacturing, salt manufacturing and refining, and casino operations.
The Australian Commissioner of Taxation has released a Taxation Determination in relation to the interaction of Australia’s hybrid mismatch rules and the US GILTI rules. In the Commissioner’s opinion, income taxed in the US under the GILTI provisions is not dual inclusion income and therefore has no effect on whether a deduction/non-inclusion outcome arises under Australia’s hybrid mismatch rules. Read more from RSM Australia in ATO provides guidance on hybrid mismatch rules
The Australian Government has passed legislation to reduce the reporting threshold for corporate tax entities to A$100 million. In essence, where a company has a total income of A$100 million or more for an income year, the Australian Commissioner of Taxation is required to publish information about the entity. This includes the entity’s name, Australian Business Number, total income, taxable income and tax payable. This applies to Australian resident companies, members of wholly owned foreign groups, and companies that are more than 50% owned by foreign entities.
On Sept. 27, 2022, the Irish Minister for Finance presented Ireland’s Budget 2023 proposals. The Minister’s Budget speech highlighted that work was continuing to give effect to the OCED Pillar Two minimum effective corporate tax rate. The Minister noted the continuing importance of Ireland’s corporation tax regime as a core element of Ireland’s economic policy. Ireland’s headline corporate tax rate remains unchanged at 12.5%. This is in the context of Ireland securing an agreement in October 2021 with the EU and OECD to a 15% global minimum level of taxation for multinational groups.
The Knowledge Development Box (KDB) is an intellectual property (IP) regime which provides for an effective 6.25% rate of corporation tax on certain income from qualifying IP assets. The KDB is being extended a further 4 years, to allow the relief to be available for accounting periods commencing before Jan. 1, 2027. The KDB will be impacted by changes in the international tax environment, specifically the Subject to Tax Rule (STTR), which is part of the OECD Pillar Two agreement. To prepare for implementation of the agreement, legislation for an increase in the effective rate of the KDB to 10% is being introduced. The intention is that it will be brought into effect by Ministerial commencement order once agreement is reached at the OECD/G20 Inclusive Framework on STTR implementation.
The Research and Development (R&D) tax credit provides a 25% tax credit for all qualifying R&D expenditures. To align with new norms in international tax, a number of changes to the operation of the R&D tax credit regime were announced. These changes are all adjustments to the timing of payment of the credit. No changes are being made to the quantum of credit that a company may receive. Currently, R&D tax credits may be offset against corporate tax liabilities and payable in installments over three years. This is being changed to a new fixed three-year payment system. A company will have an option to call for payment of their eligible R&D tax credit or to request for it to be offset against other tax liabilities, and existing caps on the payable element of the credit are being removed. The first €25,000 of a claim will now be payable in the first year, to provide a cash-flow benefit for smaller research and development projects and to encourage more companies to engage with the regime. Transitional measures will be in place for one year, to smooth the transition to the new payment system for companies that are already engaged in research and development activities.
In late September, the Netherlands released proposed legislation via the Dutch Budget Day. The proposed legislation would increase the 15% corporate income tax rate to 19% and reduce the threshold for the first income tax bracket beginning on Jan. 1, 2023. The 15% rate currently applies to the first bracket of taxable income up to EUR 395,000. This first bracket will also be lowered from EUR 395,000 to EUR 200,000. In summary, per Jan. 1, 2023 the brackets will be:
- 19% on income between €0 – €200,000
- 25.8% on income in excess of €200,000
Additionally, the Dutch government has announced that it is contemplating a change to the fiscal investment institution regime. The Dutch fiscal investment institution regime allows for a 0% tax rate when certain conditions are met. The proposed change would result in businesses operating through a Dutch legal entity in the Dutch real estate market no longer being eligible for the regime from Jan. 1, 2024.
A noteworthy absence is a legislative proposal in relation to the 15% global minimum taxation (Pillar 2). A draft European Union directive was published in December 2021 but no unanimity was reached among member states. In response, the Netherlands and several other EU jurisdictions published a joint statement on Sept. 9, 2022 stating a commitment to implement Pillar 2 in 2023, even without unanimity on an EU level. On Sept. 20, 2022 however, a legislative proposal was absent. Pillar 2 is another important movement within a wider trend of the Dutch government’s commitment to counteract harmful tax practices.
The legislative proposals above are still subject to parliamentary debate and are expected to be enacted during the fourth quarter of 2022.
During the new Chancellor of the Exchequer’s fiscal event on Sept. 23, 2022, dubbed his ‘Growth Plan 2022’, Kwasi Kwarteng announced that he intends to cancel the scheduled increase of the main rate of UK corporation tax from the current rate of 19% to 25%. This change is due to take effect on April 1, 2023. The Government commands a majority in the legislature and therefore the Chancellor’s changes are expected to pass into law in due course, albeit the timetable for the enactment and substantive enactment of such legislation is currently unclear. The scheduled increase was enacted into UK law in Finance Act (FA) 2021 and, at the time of writing, further legislation to repeal the relevant clauses of FA 2021 has not yet been enacted or substantively enacted, and therefore the necessary criteria to reflect this change for tax accounting purposes under relevant UK, international or US accounting standards have not been met.
Further commentary from RSM UK on the proposed changes to corporation tax rates and other tax measures, including a permanent increase to £1m in the annual investment allowance for capital expenditure on qualifying plant and machinery, announced in Growth Plan 2022 is available in the alert: Mini-Budget: The Growth Plan announcements 2022 – a summary.