CAMT, Double-Counting, and Treasury's Unwelcome Mr. Fix-It Role

The 1986 tax reform bill took years of hearings and negotiations to pass–and yet Congress spent much longer afterwards enacting tweaks and corrections, to smooth out errors or ambiguities in the law.

The Tax Cuts and Jobs Act and Inflation Reduction Act, by contrast, were finished in a matter of weeks, in mad rushes through the reconciliation process. So far, Congress hasn’t done much to change those regimes, even as complaints pile up.

Instead, the U.S. Treasury Department has emerged as the laws' primary mechanic, dealing with disconnects in the statutory language and areas where the concepts don’t meet the practice. This is thrusting the department and its career civil servants increasingly into policy questions that shouldn’t be its purview, but are difficult to avoid to make a functioning system.

Just how many problems are in the Inflation Reduction Act? The American Institute of Certified Public Accountants sent Treasury a letter in October outlining 40 potential issues in income definition for the 15% corporate alternative minimum tax. The CAMT uses adjusted financial statements as a tax base, meant to capture companies which manage to report low taxable income to the Internal Revenue Service while reporting high profits to shareholders.

But financial accounting and tax are two separate systems, filled with apples-to-oranges differences that makes lining them up difficult. The law includes a plethora of adjustments to financial taxable income, to smooth over differences and also reflect priorities established by Congress, such as credits for R&D and green energy. The situation is ripe for snags.

One prominent example is the potential that CAMT will double-count some foreign earnings of U.S. companies, resulting in a de facto 30% tax rate for those under the system. As I’ve noted in the past, CAMT is a worldwide tax system that’s supposed to capture foreign earnings that are exempted by the primary, quasi-territorial system. But it doesn’t seem like it’s supposed to tax them at a higher rate–and certainly not a rate that’s higher than the overall 21% corporate rate.

The issue has to do with the complexities of taxing under a financial accounting regime, and to avoid the off-shore deferral issues which hamstrung the pre-2017 international tax system. The CAMT rules require that earnings from foreign subsidiaries be included on a pro rata basis. But the rules also require that dividends from non-consolidated subsidiaries–possibly, those same foreign entities–be included as well. Because dividends are one way that a foreign subsidiary returns earnings to the parent organization, this could result in those earnings being taxed twice by Uncle Sam. (For more, you can read the final section of this report from the Congressional Research Service.)

Chances are this won’t happen, though. The law also includes a provision giving Treasury broad authority to adjust taxpayers’ CAMT income “to carry out the purposes of this section,” including “to prevent the omission or duplication of any item.” This seems like as good an example of “duplication” as you’re likely to come across–but it still requires some measure of judgment on Treasury’s part.

It also may not be as simple as it sounds, according to Wade Sutton, a former Treasury official and principal at PricewaterhouseCoopers LLP.

“You can imagine a simple rule would just say, ‘don't tax dividends from [controlled foreign corporations], because they're already taxed,” he told me. “But that would be underinclusive.”

A more expansive way to prevent double taxation while ensuring that some companies don’t get off scot-free would look more like a parallel system for previously taxed earnings and profits, what the current system has for income already taxed through Subpart F or other foreign taxes. But that could be difficult.

“The more bells and whistles you add to [book minimum tax], the harder it becomes to implement it, to administer it, just to comply with it,” he said.

The IRA’s delegation of authority to Treasury is striking, even when compared to similar provisions in the TCJA and elsewhere. It always gets squirrely to talk about a statute’s “purpose,” and there’s little in the Congressional history to help Treasury divine lawmakers’ intentions regarding the IRA. The arguments supporters used for the law’s passage have been criticized for sounding more like political rhetoric than any coherent logic.

Treasury’s unwanted position as de facto policy-fixer brings with it some harsh scrutiny. One memorable example is the high-tax exclusion to the tax on global intangible low-taxed income, which Treasury more or less created from scratch in 2019. The goal seemed reasonable enough, to give companies already paying high amounts of foreign tax some relief. It doesn’t seem like they were meant to be included in GILTI–”low-taxed” is in the name, for Chrissakes.

However reasonable the goal, Treasury could only get there using a surreal and hyper-literalistic reading of the statute, too convoluted to get into here. It almost certainly would have been challenged in court, if only there were anyone with standing to challenge it. But because the exception was optional–another aspect that didn’t seem supported by the law itself–there’s no one who can credibly claim to have been harmed by it.

This may seem like a technical issue. Highly taxed companies aren’t really the big problem in international taxes, or the problem which GILTI is supposed to fix. But it became controversial, generating both media coverage and inquiries from Congressional Democrats who had the TCJA in their sites from the moment it was proposed. It’s exactly the kind of political kerfuffle which federal departments try to avoid, if they can.

In our polarized era, it doesn’t look like the days of sober, extensive, bipartisan lawmaking will be coming back anytime soon. Parties have every incentive to get new tax legislation done quickly during the brief periods they’re in charge, through any means possible. More tax changes (or outright reversals) are almost certainly on the horizon, and Treasury will continue to be tasked with post-passage cleanup. Their biggest challenge will be to do so while maintaining credibility with taxpayers and the public.

DISCLAIMER: These views are the author's own, and do not reflect those of his current employer or any of its clients. Alex Parker is not an attorney or accountant, and none of this should be construed as tax advice.

LITTLE CAESARS: NEWS BITES FROM THE PAST WEEK

It's been a whirlwind week for European Union and Organization for Economic Cooperation and Development politics, hasn't it? First the EU announced it had finally broken its stalemate over the OECD's 15% global minimum tax, giving its member states the green light to move forward with implementing legislation. Then rumors trickled out that Poland, which had previously objected before rescinding its veto, was objecting again. But just as quickly after, the EU announced it had a full deal, with Poland and all. This....seems like it's been resolved? But never underestimate Europe's capacity to squabble.

The EU agreement would seem to put more pressure on the U.S. to move forward with the minimum tax implementation, or whatever its version of it is going to be. (To be clear, this has nothing to do with CAMT.) But Congressional Republicans, from both the House and Senate, sent U.S. Treasury Secretary Janet Yellen a scathing letter outlining their opposition to the tax and to the OECD agreement in general, as well as how the administration has handled the negotiations. These sorts of letters are common, but this one is unusual in both its breadth and detail, indicating that Republicans are gearing up for a fight on this. With the GOP about to take control of the House and its investigatory powers, this could be a central focus of their ire.

Remember the new foreign tax credit regulations? U.S. businesses certainly do, with many still worried that nixed credits will seriously dip into their foreign profits. The U.S. Chamber of Commerce released a public comment to the regulations on Wednesday, focusing on how the new regs could affect those doing business in Brazil, which has unique international tax laws in conflict with OECD standards. Those differences could make it much more costly to do transactions in and out of the jurisdictions under the new regs' harsher scrutiny of when tax credits can apply.

PUBLIC DOMAIN SUPERHERO OF THE WEEK

Black Cobra, premiering in Black Cobra #1 in 1954. The vigilante, an FBI agent whose real name is Steve Drake, uses a costume made from self-invented bullet-proof plastic to fight Russian Communists.