With the Inflation Reduction Act (IRA) passed in 2022, executives and officers of multinational businesses should be aware of the new 15% corporate minimum tax that may apply to foreign corporations through their U.S. business activity.

The IRA starts by looking at the overall level of income generated by a domestic corporation. If that corporation earns more than $1 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 their company can safely avoid the new tax because their U.S. activity is below that threshold. However, special rules apply to foreign entities or groups with U.S. business activity.

It’s a two-prong approach:

1. Figure out the adjusted financial statement income, as the IRA 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 $1 billion dollars threshold.
2. Run the calculation a second time, but only for the U.S. subsidiary or branch to see whether its adjusted financial statement income exceeds $100 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 U.S., with the U.S. corporation earnings averaging around $110 million U.S. dollars. By itself, the revenue of the U.S. 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.

Contact our international tax advisors below to learn more today.