US minimum tax on book income and Pillar 2

Find out what implications the introduction of the Inflation Reduction Act (IRA) could have for Pillar 2 and your business.

On 16 August 2022, President Biden signed into law - the Inflation Reduction Act (IRA). The IRA includes, amongst other measures, a new corporate alternative minimum tax (book minimum tax, or BMT). Broadly, the provision imposes a minimum tax equal to the excess of 15% of an applicable corporation’s adjusted financial statement income (AFSI) over its regular tax liability plus any base erosion and anti-abuse tax (BEAT) for the taxable year (PwC Insights).

The BMT applies to US-parented groups with average AFSI for the last three years exceeding USD1bn for the group. For foreign-parented groups, the BMT applies to groups with average AFSI for the last three years exceeding USD1bn for the group, and with average AFSI for its US subsidiaries for the last three years that is (in aggregate) at least USD100m. For foreign-parented groups, the BMT only applies to US taxpayers in the group (e.g. domestic US corporations or foreign corporations that are engaged in a US trade or business). The BMT will apply to financial years beginning on or after 31 December 2022.

Differences between the BMT and the Global Anti-Base Erosion Rules

In 2021, countries of the Inclusive Framework on BEPS (IF), including the US, agreed to introduce a country-level minimum tax system, the Global Anti-Base Erosion Rules (GloBE). Countries such as the UK and Korea have already published draft legislation to introduce the rules for financial years beginning on or after 31 December 2023. Hence, multinationals (MNEs) operating globally and in the US will need to understand whether the new BMT is a covered tax for the purpose of calculating the effective tax rate (ETR) under GloBE. They will then need to understand whether the BMT will be a qualified domestic minimum top-up tax and, if not, how GloBE and the BMT will interact.

The BMT is likely to be a covered tax for the purpose of the GloBE rules and hence, payments under the BMT will increase the GloBE ETR. Nonetheless, from the technical perspective, GloBE and the BMT differ substantially in some key aspects and hence, the BMT is unlikely to be a qualified domestic minimum top-up tax for the purpose of the GloBE rules. In particular, the GloBE rules design a country-level minimum tax system whilst the BMT only requires a minimum tax of 15% on the overall group’s AFSI. There are other important differences, e.g., with respect to scope, the calculation of the tax base and the role of different tax credits (see summary table below).

How will the two systems interact?

If for the purpose of GloBE, the BMT is neither a qualified Income Inclusion Rule (IIR) nor a qualified domestic minimum top-up tax (QMDTT), then the next question is - ‘will it be considered as a controlled foreign corporation (CFC) tax for the portion that relates to foreign earnings?’ Should the BMT be recognised as a CFC rule, then it is likely that, for the part related to foreign income, any top-up under the BMT will be considered as a covered tax for the purpose of the IIR and/or of the QMDTTs, although the ordering of the rules has not been officially confirmed yet. The IF will need to agree on a mechanism to allocate the BMT top-up back to the CFC. This same issue will need to be solved for the top-up under the US global intangible low-taxed income (GILTI) system, although not necessarily with the same allocation key. 

For US parented MNEs and without further modifications to GILTI, US income will not be covered by the treatment of CFC rules under GloBE and hence, it could remain exposed to the application of the under taxed payment rule (UTPR) if the US ETR is below 15% as calculated according to the GloBE rules. 

It is worth noting that if the BMT is not a QDMTT, then when applying the IIR or the UTPR, the US will obviously not be covered by a safe harbour based on QDMTTs. 

Summary of the main differences between the US BMT and the GloBE rules

  GloBE rules and qualified MDTT US minimum tax on book income
Minimum rate and calculations of the top-ups
Minimum rate 15% 15%
Min rate applied at the jurisdictional level? Yes No, it will only apply to the overall group’s AFSI
Reduction of the possible top-up to the minimum rate? Yes, via the substance based carve out Yes, via tax credits
Domestic tax credits   Domestic credits under the general business tax (such as the R&D credit) would be allowed to offset up to 75% of the combined regular and minimum tax.
Foreign tax credits   Foreign tax credits may be allowed based on the foreign taxes in a corporation’s financial statement, up to 15% of the relevant foreign income.
In-scope global threshold Turnover of at least EUR 750 million Net income of at least  USD 1 billion
Timeline of relevance for calculating the in-scope threshold Above the in-scope threshold In two out of four years preceding the tested year Average of USD 1bn over a three year testing period (without using loss carryforwards)
Applies only to US HQed groups? No No 
Excluded entities Governmental Entities, International Organisations, Non-profit Organisations, and Pension Funds as well as any Investment Fund or Real Estate Investment Vehicle that is the UPE of the MNE Group S-corporation, REITs, regulated investment companies
Tax base
Tax base Starting from Financial Accounting Profit of entities (although using accounting principles used for the consolidation), which will then be adjusted via a long list of adjustments Worldwide Book income — the amount reported in financial accounts (with various adjustments)
Loss-carry forwards No loss-carryforward allowed. Loss-carry forwards affect ETR through deferred taxes  Indefinite loss-carryforwards but loss carryovers limited to 80% of income (same as for tax purposes)
Depreciation/Amortisation for tangible assets Accounting amortisation used to calculate GloBE income  Tax depreciation schedule used to calculate AFSI
Creditability of the minimum tax
Creditability of top up taxes None, not even for past top-ups that turn out to be overpaid. A credit for additional minimum tax could be carried over to future years to offset regular tax when that tax is higher. 
Timeline of application Depending on the jurisdiction, probably not earlier than FY beginning on or after 31 December 2023 FYs beginning on or after December 31, 2022


Multinational groups with operations in the US will first need to understand whether the new BMT applies to them, bearing in mind that the rules will apply to financial years beginning on or after 31 December 2022. It should be noted that there are a number of adjustments to book income to determine AFSI, such that these adjustments need to be made not only for the operative rule but also for the USD1bn and USD100m threshold tests.

Where relevant, any modeling of the impact of GloBE will need to take the BMT into account. This is challenging for at least two reasons. Firstly, the rules governing the US BMT are different from the rules governing both the US corporate tax liability and the new GloBE rules. Secondly, the interaction between the BMT and GloBE is still unclear. Nonetheless, there are some scenarios that can be modeled. To discuss what these could mean for your business, please get in touch.

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Giorgia Maffini

Giorgia Maffini

Director, PwC United Kingdom

Tel: +44 (0)7483 378124

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