Four Significant Tax Policies to Monitor in the Year 2024
As we welcome the new year, it's essential for individuals and businesses to stay abreast of developing tax policies and utilise technology to forecast the possible consequences.
In 2024, several critical tax issues will make headlines, including the implementation of the Organization for Economic Co-operation and Developments' (OECD) Pillar Two initiative, green tax credits, the corporate alternative minimum tax (CAMT), and energy and research and development (R&D) incentives. Let's delve into these four vital tax policy matters.
1. OECD's Pillar Two
The OECD's Pillar Two initiative is a global tax overhaul aiming to ensure multinational enterprises (MNEs) pay a minimum rate of 15% tax in every operating jurisdiction. If the minimum tax isn't paid in a jurisdiction, companies will need to make up the difference by paying a 'top-up tax.' To calculate the taxes in each jurisdiction, companies must navigate intricate and data-intensive rates based on a unique blend of tax and financial accounting concepts, essentially requiring them to maintain a third set of books.
Pillar Two has the potential to disrupt more than just the tax department – it will also impact finance and controllership functions significantly. Furthermore, time is running out, as some aspects of Pillar Two are scheduled to be implemented during the first quarter of 2024 and will affect MNEs with global revenues exceeding €750 million. Companies should start employing data and data analysis tools immediately to prepare for the upcoming changes.
2. Green Tax Credits
The passage of the Inflation Reduction Act (IRA) in August 2022 significantly boosted the range of projects eligible for green tax credits, creating new and enhanced chances for U.S. energy producers and investors to secure tax incentives. Notably, many credits can now be freely transferred between taxpayers, making it easier for a wider range of taxpayers to benefit from these incentives.
While guidance on specific elements has already been released, the emerging tax credit market remains in its infancy. As the market matures, companies should closely follow future developments of these credits and strategise to lessen risks and maximise the potential benefits of these new green incentives.
3. Corporate Alternative Minimum Tax (CAMT)
The CAMT, requiring a minimum tax based on financial statement income for 'applicable corporations,' was signed into law in August 2022 as part of the IRA. Effective for tax years beginning in 2023, the CAMT aims to prevent large corporations from reporting significant income on their financial statements while paying little or no income tax. It is estimated that the CAMT will raise approximately $222 billion in revenue over 10 years by imposing a 15% minimum tax on the adjusted financial statement income (AFSI) of qualified corporations.
While the details of this tax are yet to be worked out, one certainty is that the new regime will produce more complexities and burdens for affected companies in 2024.
4. R&D and Energy Incentives
U.S. tax policies have long encouraged and supported R&D, with both political parties agreeing on the importance of motivating companies to boost innovation for economic, job market, and wage benefits.
However, tax rules for R&D expenditures are becoming less taxpayer-friendly, with new rules set to force companies to amortize these costs. In early 2024, the IRS is expected to issue guidelines on how to amortize these R&D costs. Watching these guidelines and adapting investments accordingly will be crucial for success.
The upcoming year will bring a variety of tax policy trends that will affect the way leaders and companies do business. Staying informed and planning for potential scenarios is the key to success in the year to come.
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- In the upcoming year, companies must brace themselves for the complexities brought about by the OECD's Pillar Two initiative, which requires MNEs to pay a minimum tax of 15% in every jurisdiction, including a 'top-up tax' if the minimum isn't paid.
- The Inflation Reduction Act (IRA) has expanded the range of projects eligible for green tax credits, providing new opportunities for energy producers and investors, but companies should closely monitor future developments to mitigate risks and maximize benefits.
- The Corporate Alternative Minimum Tax (CAMT), scheduled to be implemented in 2023, aims to prevent large corporations from paying little or no income tax, but the new regime will create complexities and burdens for affected companies.
- R&D and energy incentives will continue to play a crucial role in encouraging innovation, but new rules for amortizing R&D costs may prove challenging for businesses in the coming years.
- The implementation of the OECD's Pillar Two will have far-reaching effects beyond the tax department, potentially impacting finance and controllership functions significantly.
- Companies should immediately start employing data and data analysis tools to prepare for the upcoming changes brought about by OECD's Pillar Two.
- The CAMT is estimated to raise a substantial amount of revenue over 10 years, but its impact on affected companies will be complex and burdensome.
- While U.S. tax policies have historically supported R&D, the new rules for amortizing these costs are expected to make it more difficult for companies to benefit from these incentives.
