On September 12, Treasury and the IRS released additional preliminary guidance on the CAMT. Among other items, Notice 2023-64 addresses rules for determining applicable financial statements (AFS) and financial statement income (FSI), the treatment of controlled foreign corporations (CFC) and foreign tax credits, adjustments for certain taxes, and additional guidance on section 168 property. In contrast to earlier notices, Treasury and the IRS no longer anticipate issuing regulations that will be binding for tax years that begin in 2023. The Notice announces that forthcoming proposed regulations would apply for tax years starting in 2024. Taxpayers may rely on the Notice, as well as the prior interim guidance described in the Notice, for any tax year that begins before 2024. Comments are due October 12, 2023.

Of particular significance, the Notice offers guidance on:

  • Determining a Taxpayer's AFS
    • The Notice imposes a requirement on members of foreign-parented multinational groups (FPMG) and U.S. tax consolidated groups to use the group's consolidated AFS and then determine the portion of FSI attributable to the taxpayer, even if the taxpayer has a separate AFS of equal or higher priority. For example, a U.S. subsidiary of a FPMG with audited U.S. generally accepted accounting principles (GAAP) financial statements must use the consolidated financials of its foreign parent as its AFS, even if those financials would otherwise be of a lower priority because they were prepared using International Financial Reporting Standards (IFRS).
  • General Rules for FSI
    • FSI generally includes all items of income and expense, including nonrecurring items and net income or loss from discontinued operations.
    • FSI excludes Other Comprehensive Income (OCI) and equity accounts, such as retained earnings.
      • However, any cumulative adjustment to retained earnings from a change in financial accounting principle must be accounted for in Adjusted Financial Statement Income (AFSI).
      • Treasury "continues to study" the treatment of unrealized marked-to-market gains and losses.
  • The AFSI of CFCs
    • The Notice confirms that the adjustment is to take into account items of CFC income in a U.S. shareholder's AFSI is determined on an aggregate basis, rather than CFC-by-CFC. Under this approach, a financial statement loss at one CFC may offset financial statement income at a different CFC. The Notice confirms that a CFC's net income includes its pro rata share income from partnerships and disregarded entities and is not limited to its U.S. effectively connected income.
    • While the Notice states that a taxpayer includes both its pro rata share of CFC net income and any dividends from its foreign subsidiaries, it does not provide rules to prevent the duplication of CFC income, notwithstanding the statutory directive in section 56A(c)(15)(A) to issue guidance "to prevent the omission or duplication of any item."
      • In the Notice's request for comment, Treasury and the IRS acknowledged this "potential duplication of income with respect to a CFC by reason of the application of § 56A(c)(2)(C) and (c)(3)" and requested comments as to approaches that should be considered to address this issue.
  • Rules for Financial Statement Net Operating Losses (FSNOL)
    • Under the Notice, the amount of an FSNOL carried forward to the first taxable year a corporation is an "Applicable Corporation" is determined without regard to whether the taxpayer was an Applicable Corporation for any prior taxable year.
    • As such, for taxpayers that are Applicable Corporations in 2023, the amount of an available FSNOL incurred in 2020 is reduced by any positive AFSI in 2021 and 2022.
  • Determining Applicable Corporation Status
    • The Notice confirms that for purposes of the determining whether the FPMG meets the average $1 billion AFSI test that causes the U.S. subsidiary to be subject to the CAMT, the taxpayer must include the AFSI of each member of the FPMG and the AFSI of persons treated as a single employer under the section 52 aggregation rules.
  • General Rules for Foreign Tax Credits (FTC)
    • Foreign income tax can be claimed as a CAMT FTC in the taxable year in which it is paid or accrued for federal income tax purposes by either an Applicable Corporation or a CFC with respect to which an Applicable Corporation is a U.S. shareholder, provided the foreign income tax has been taken into account on the AFS of such Applicable Corporation or CFC.
      • As such, foreign income taxes may be claimed as a CAMT FTC in a different year from the year in which the foreign income tax was taken into account on an AFS.
    • The Notice also applies the "relation back" doctrine and requires CAMT FTCs resulting from foreign tax redeterminations to be claimed in the taxable year to which the foreign tax redetermination relates (and only if the taxpayer was an Applicable Corporation in the "relation back" year).
    • The Notice confirms that an Application Corporation or CFC that is a partner in a partnership may credit its share of foreign income taxes paid or accrued by the partnership but refrains from providing guidance on the allocation of such partnership creditable foreign tax expenditures.
  • Additional Guidance on Substitution of Tax Depreciation for Book Depreciation for Certain Property
    • The substitution of tax depreciation for book depreciation for section 168 property was addressed in earlier interim guidance in Notice 2023-07. Among other items, this Notice offers additional guidance on section 481(a) adjustments and tax disposition events.
    • The Notice does not address taxpayer requests for a transition rule and affirms through an example the proposed rule in Notice 2023-7 that the substitution of tax depreciation for book deprecation would apply to property in which tax depreciation deductions were claimed in any taxable year, including the years prior to January 1, 2023.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.