US Subsidiaries of Foreign-Based Multinationals May Be Subject to the 15% Corporate Minimum Tax

After a whirlwind final day on Aug. 7, 2022, the United States Senate voted to pass the Inflation Reduction Act bill. As President Biden is expected to sign the bill into law on Aug. 9, 2022, executives and officers of multinational businesses should watch closely. Why? The bill’s highly touted new 15% corporate minimum tax may apply to foreign corporations through their US business activity.

The bill starts by looking at the overall level of income generated by a domestic corporation. If that corporation earns more than one billion dollars in “adjusted financial statement income” (a brand-new calculation requirement), then it will be subject to the 15% minimum tax. So, the multinational executive may be thinking that his or her company can safely avoid the new tax because their US activity is below that threshold. However, special rules apply to foreign entities or groups with US business activity.

It’s a two-prong approach.

1. First, to figure out the adjusted financial statement income, the bill requires the entities to add in all the income of the foreign group – parents, subsidiaries, sibling entities, both foreign and domestic – to see whether the entire group exceeds the one billion dollars threshold.
2. Second, run the calculation a second time, but only for the US subsidiary or branch to see whether its adjusted financial statement income exceeds one hundred million dollars. If the answer is “yes” to both prongs, then the business will be subject to the 15% corporate minimum tax.

As an example, suppose a Swiss parent company has subsidiaries in Germany, the Netherlands, and the United States, with the US corporation earnings averaging around $110 million USD. By itself, the revenue of the US corporation is not enough to trigger the new tax, but if the entire group of companies exceeds the one-billion threshold worldwide, then get ready to pay that new corporate minimum tax.

To prepare for this potential new tax impact, contact Moore Doeren Mayhew’s international tax advisors today.

Contacts:

Jim Miesowicz

Robert Hanson