As discussed in our alert earlier this week, the recently announced proposed reconciliation package—the Inflation Reduction Act of 2022, H.R. 5376 (the "Bill")—would impose a new 15% minimum tax on the adjusted financial statement (or "book") income of "applicable corporations" (the "Book Minimum Tax"). If enacted, the Book Minimum Tax would take effect for taxable years beginning after December 31, 2022, and apply to corporations (other than S corporations, RICs and REITs) that report average book profits over $1 billion over a three year testing period, determined on a group-wide basis.

A growing list of questions remains to be answered about the Book Minimum Tax. If enacted, the Treasury Department ("Treasury") will have to devote significant resources to address many challenging technical issues, which would likely take several years. We consider below how the treatment of controlled foreign corporations ("CFCs")1 under the Book Minimum Tax might interact with Pillar 2 of the G20/OECD Inclusive Framework on BEPS (the "Inclusive Framework"), as well as the interaction between the Book Minimum Tax and the narrowed definition of creditable foreign income taxes adopted by Treasury and the Internal Revenue Service ("IRS") in the final foreign tax credit ("FTC") regulations published earlier this year.

Book Minimum Tax and Pillar 2

On December 20, 2021, the Inclusive Framework published the model Global Anti-Base Erosion (or "GloBE") rules to provide countries with an implementation roadmap for a coordinated tax system that imposes a minimum level of taxation on large multinational enterprises ("MNEs"). The GloBE rules achieve their aim by imposing top-up taxes on MNE profits arising in a particular country if the effective rate, determined with respect to such country, is below the minimum rate (expected to be 15%). Like the Book Minimum Tax, the GloBE rules require top-up taxes to be calculated on the basis of financial accounting income of entities in an MNE group. Unlike the Book Minimum Tax, however, the GloBE rules require a country-by-country top-up tax computation. In contrast, the Book Minimum Tax is calculated based on a corporation's worldwide book income or loss, including a pro rata share of the income of its CFCs. This difference, among others, requires a closer look at the two regimes.

Taxpayers have been focused on whether the U.S. global intangible low-taxed income ("GILTI") regime would be a qualifying Income Inclusion Rule ("IIR") or, alternatively, a qualifying Controlled Foreign Company Tax Regime ("CFC Tax Regime")2 for purposes of Pillar 2.

Under the GloBE model rules, a tax imposed under a CFC Tax Regime on a U.S. shareholder with respect to its share of a CFC's income would be allocated back to the CFC for purposes of determining the CFC's covered taxes in a particular year. The allocation of such tax back to a CFC may increase the effective tax rate in the CFC's country under the GloBE rules and reduce the incidence of a non-U.S. top-up tax imposed on such CFC's book income.

Without legislative changes requiring the GILTI tax to be determined on a country-by-country basis, it is generally believed that the GILTI tax would not be a qualifying IIR. We would expect that the Book Minimum Tax, as applied to a U.S. shareholder's pro rata share of a CFC's book income, would not be a qualifying IIR for the same reason.

On the other hand, many believe that GILTI would be a qualifying CFC Tax Regime under the GloBE rules.3 However, Treasury and the OECD will have to issue guidance addressing how GILTI taxes are allocated back to CFCs for purposes of Pillar 2 because GILTI is calculated on an aggregate, rather than country-by-country, basis.4 Because the Book Minimum Tax would require U.S. shareholders in the MNE group to include a pro rata share of their CFCs' book income in the minimum tax computation, we would expect the tax on CFC income under the Book Minimum Tax to be a CFC Tax Regime for the same reasons that the GILTI would be such a regime. If correct, Treasury and the OECD also would presumably need to provide guidance addressing the appropriate method for allocating Book Minimum Tax back to CFCs for purposes of Pillar 2. Considering the Book Minimum Tax's general reliance on certain subpart F principles—including the pro rata share rules under section 951(a)(2)—one may hope, however, that there will be some synergy between the allocation rules developed for purposes of the GILTI regime and those needed for the Book Minimum Tax.

What Can Taxpayers Expect if the Book Minimum Tax is a Qualifying CFC Tax Regime?

As noted above, under the GloBE model rules, a Book Minimum Tax imposed under a qualifying CFC Tax Regime on a U.S. shareholder with respect to its share of a CFC's income would be allocated back to the CFC for purposes of determining the CFC's covered taxes in a particular year. This allocation would be performed under the GloBE model rules before the CFC determines whether a Qualified Domestic Minimum Top-Up Tax ("QDMTT") applies in the CFC's country, and before a third country imposes its IIR or Undertaxed Payments Rule ("UTPR") with respect to the CFC's income. As a result, as with GILTI tax, Book Minimum Tax allocated back to a CFC may increase the effective rate in the CFC's country under the GloBE rules and reduce the incidence of a non-U.S. top-up tax imposed on such CFC's book income (whether imposed through a QDMTT, IIR or UTPR).

For completeness, we note that, while the GloBE model rules would account for a Book Minimum Tax allocated back to a CFC before the CFC determines any QDMTT in its country of residence, some OECD members are pressing to adjust the order of these rules—giving the CFC's country of residence the ability to impose a QDMTT without regard to taxes imposed under a CFC Tax Regime. In addition, the rules do not limit a residence country's ability to impose a domestic minimum tax that is not a QDMTT. In either case, taxpayers would need to consider whether such domestic minimum taxes are creditable against their Book Minimum Tax liability in the United States.

Book Minimum Tax and Creditable Foreign Income Taxes

On January 4, 2022, Treasury and the IRS published final FTC regulations, TD 9959 (the "Final FTC Regulations") narrowing requirements for a foreign tax to be creditable under sections 901 and 903. We consider below the relevance of the Final FTC Regulations in the context of the Book Minimum Tax.

The Final Regulations limit creditable foreign income taxes to those taxes that conform closely to general principles of U.S. tax law, unless the creditability of such taxes is otherwise required under an applicable income tax treaty. This limitation includes, among other rules, an "attribution requirement" that requires the foreign tax base to be determined pursuant to tax-nexus rules that are consistent with U.S. tax principles (i.e., similar to U.S. sourcing, ECI or FIRPTA rules) for a foreign tax to be creditable.5 Treasury and the IRS explained that the new FTC rules were intended to address the creditability of certain "novel extraterritorial taxes that diverge in significant respects from U.S. tax rules and traditional norms of international taxing jurisdiction," including, among others, so-called digital services taxes ("DSTs").6 Many countries have announced, proposed or enacted DSTs and other similar measures to address the digitalization of the global economy, and it may be only a matter of time until some of these taxes start being assessed.7 These foreign taxes, and many others, are not expected to be creditable under the Final FTC Regulations, raising a question about how these taxes might be treated under the Book Minimum Tax.

As discussed in our recent alert, the Bill provides that FTCs would be available to offset a domestic corporation's Book Minimum Tax liability—both with respect to directly imposed foreign taxes ("Direct Foreign Taxes") and a pro rata share of foreign taxes of a CFC that the domestic corporation is deemed to pay ("Deemed-Paid Foreign Taxes"). Significantly, in the case of both Direct Foreign Taxes and Deemed-Paid Foreign Taxes, the Book Minimum Tax defines such taxes as the amount of "income, war profits, and excess profits taxes (within the meaning of section 901)" imposed by a foreign country. By expressly referencing section 901—the starting point for determining FTCs for general U.S. tax purposes—it appears the Bill's drafters intended to incorporate the requirements that apply under the Final FTC Regulations to determine whether a foreign tax is creditable for U.S. tax purposes. Accordingly, the same foreign taxes that are not expected to be creditable for general U.S. tax purposes may not be creditable for purposes of the Book Minimum Tax. The sting of these non-creditable foreign taxes may therefore be felt even more acutely if the Book Minimum Tax is enacted, and particularly if other countries start imposing DST assessments.


1. As defined in section 957(a) of the Internal Revenue Code of 1986, as amended (the “Code”). All section references herein are to sections of the Code.

2. The GloBE rules define a CFC Tax Regime as a “set of tax rules (other than an IIR) under which a direct or indirect shareholder of a foreign entity (the controlled foreign company or CFC) is subject to current taxation on its share of part or all of the income earned by the CFC, irrespective of whether that income is distributed currently to the shareholder.” Tax Challenges Arising from the Digitilisation of the Economy Global Anti-Base Erosion Model Rules, Art. 10.1.1.

3. Providing support for this view, along with its release of draft Pillar 2 legislation last month, the United Kingdom issued a summary of responses to the public consultation, in which it said that it viewed current GILTI as a qualifying CFC Tax Regime. Specifically, the U.K. government stated: “In order to provide as much clarity as possible, the government's expectation . . . is that tax paid in the U.S. under the GILTI would be included in the adjusted covered taxes of a U.S. company's CFC for the purposes” of computing GloBE top-up taxes, though it acknowledged that there “would need to be rules to determine the additional U.S. tax that results from a GILTI inclusion, and how that should be allocated to the CFCs of Constituent Entities to which the GILTI inclusion relates.” HM Revenue & Customs, OECD Pillar 2 Consultation on Implementation: Summary of Responses, at ¶ 11.13.

4. It has been suggested that Treasury is evaluating a tracing approach or a more “simplified mechanical approach” as two options to allocate GILTI taxes back to CFCs for purposes of applying the GloBE rules to those CFCs. See M. Rapoport, “Treasury Mulls Ways to Allocate Minimum Tax If Fallback Needed”, Daily Tax Rep't: Int'l (June 28, 2022) (quoting Isaac Wood, an attorney-adviser in Treasury's Office of Tax Policy).

5. See Treas. Reg. Section 1.901-2(b)(5).

6. 87 Fed. Reg. 276, 285 (Jan. 4, 2022).

7. For example, while Austria, France, Italy, Spain and the United Kingdom agreed to hold off on applying their DSTs during an interim period before Pillar 1 becomes effective, the likelihood that Pillar 1 is ultimately adopted is still unclear. See Joint Statement from the United States, Austria, France, Italy, Spain, and the United Kingdom, Regarding a Compromise on a Transitional Approach to Existing Unilateral Measures During the Interim Period Before Pillar 1 is in Effect, U.S. Dep't Treasury, Oct. 21, 2021.

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