As we enter a new calendar year, it’s critical for individuals and businesses to stay informed about upcoming developments in tax policy and leverage technology to model the potential ramifications.
In 2024, several key items will top the tax agenda, including the implementation of the Organization for Economic Co-operation and Development (OECD)’s Pillar Two initiative, green tax credits, the corporate alternative minimum tax (CAMT), and energy and research and development (R&D) incentives. Let’s dive into these four key tax policy items.
1. Pillar Two
The OECD’s Pillar Two initiative is a globally coordinated tax regime aimed at ensuring large multinationals pay a minimum rate of tax of 15% in every operating jurisdiction. If that minimum tax rate has not been met in a jurisdiction, companies will need to make up the shortfall by paying a 'top-up tax.'
The rules require complex and data-intensive calculations of effective tax rate for each jurisdiction based on a unique hybrid of tax and financial accounting concepts, effectively requiring companies to maintain a third set of books.
Pillar Two is expected to disrupt more than just the tax function — it will also impact finance and controllership functions significantly. Moreover, the clock is ticking. Some aspects of Pillar Two are set to be implemented in the first quarter of 2024 and will have sweeping effects on in-scope companies. The time is now for these companies to begin leveraging data and data analysis tools to ensure they’re prepared for what’s to come.
2. Green Tax Credits
The passage of the Inflation Reduction Act (IRA) in August 2022 significantly expanded the range of projects eligible for green tax credits, creating new and enhanced opportunities for energy producers and investors in the United States to generate tax incentives. Perhaps most notably, the IRA made many of these credits freely transferrable between taxpayers, opening the door to a vast new group of taxpayers who may have previously viewed themselves as ineligible for these incentives.
While the Treasury has already released guidance on certain elements, the fledgling tax credit market is far from mature. It will be important for companies to keep an eye on the future of credits and to continue modeling and developing risk mitigation strategies to fully unlock the potential of these new green incentives.
3. Corporate Alternative Minimum Tax
The CAMT, a minimum tax based on financial statement income that applies to “applicable corporations,” was signed into law last August as part of the IRA.
Effective for tax years beginning in 2023, the tax was theoretically designed to prevent the largest corporations from reporting substantial income on their financial statements while paying little to no income tax. It is estimated to raise approximately $222 billion in revenue over 10 years by subjecting many corporations to a 15% minimum tax on their adjusted financial statement income (AFSI) — not to be confused with the 15% global minimum tax.
Computing this AFSI to assess the exact tax liability has proved daunting for many thus far and one thing remains certain: it’s debatable whether the CAMT as enacted goes much further than originally intended. What’s not debatable is that the new regime will continue to create complexities and burdens for companies next year.
4. R&D Incentives
A cornerstone of U.S. tax policy has been the encouragement and support of R&D, with policymakers on both sides of the aisle agreeing on the importance of incentivizing companies to bolster innovation, which benefits the economy, job market, and wages.
At the same time, however, the tax rules for R&D expenditures are becoming much less friendly, with a new rule forcing companies to amortize these costs. The IRS is expected to issue rules on how companies should amortize these R&D costs in early 2024. Monitoring these parameters, as well as how investments take shape to bolster the American economy, will be crucial.
The new year will bring a host of tax policy trends that have the potential to impact the way leaders and companies do business. Keeping a close eye on these developments and scenario planning is the best way to ensure success in the year ahead.
Rema Serafi is vice chair of tax at KPMG LLP.