Corporate Alternative Minimum Tax (CAMT) generally does not apply to US corporations whose three-year average applicable year-end income is less than $1 billion. For example, calendar year companies are generally exempt from the 2023 CAMT if their average 2020, 2021, and 2022 AFSI does not exceed $1 billion.
AFSI is Generally Accepted Accounting Principles (GAAP) income before tax with certain adjustments, such as: B. The use of tax depreciation. Although 2021 gross revenue for Hilton Grand Vacations Inc., a major US timeshare seller, was $2.3 billion, the company has an average 2020, 2021 and 2022 GAAP pre-tax net income of approximately $100 million -dollars made. Going into 2023 and barring a major jump in profitability, HGV’s three-year average GAAP pre-tax net income appears poised to fall well below $1 billion for several years. The company does not appear to be a suitable candidate for upcoming exposure to CAMT.
A similar GAAP income-based size exemption from the CAMT appears to be available for some of HGV’s competitors, such as Travel & Leisure Inc. and Florida-based Bluegreen Vacation Holding Corp. Travel & Leisure, HGV’s larger competitor, had 2021 GAAP gross revenues of $3.0 billion and first half 2022 annualized 2022 GAAP pre-tax net income of $400 million. It had a 2021 GAAP pre-tax net income of $400 million and a 2020 GAAP pre-tax loss of $300 million.
Bluegreen had 2021 gross revenues of $800 million, annualized 2022 GAAP net income before tax of $100 million for the first half of 2022, 2021 GAAP net income before tax of $100 million and a 2020 GAAP loss before $100 million in taxes. Because CAMT has a very high GAAP net income threshold, and that threshold is a three-year average that still reflects the adverse impact of Covid-19 on the VOI industry, CAMT is not an issue in the short term.
Not all major VOI sellers fall below the $1 billion CAMT net income threshold in the near term. For example, Disney Vacation Resorts’ VOI sales business is owned by Walt Disney Co., which had 2022 annualized GAAP net income for the first half of 2022 of $8.4 billion. For each VOI seller, any jointly controlled entities that need to be aggregated must be identified and the necessary adjustments made from GAAP to AFSI to determine if the CAMT threshold is met.
CAMT Group-wide calculation
The CAMT is not a transaction-based tax, segment-based tax, or subsidiary-based tax; It applies on the basis of consolidated GAAP financial statements, making it less likely that some timeshare companies will be affected. This may depend on the existence of a large number of GAAP income items that are not included in taxable income. Selling VOIs on the installment plan results in significant GAAP overtax revenue. But HGV, Travel & Leisure, Bluegreen, and Disney also have large revenues from resort management fees and other revenues that don’t generate significant GAAP-overtax income. Additionally, the media business and Disney theme park operations business are far larger than the VOI sales business, and these businesses may or may not include material GAAP overtax income.
The CAMT does not apply if the regular tax of 21% on the consolidated group’s taxable income exceeds the interim alternative minimum tax of 15% on GAAP income. If a business segment with a large volume of GAAP over-tax items, such as tax excess, such as a resort management fee business, the corporate tax rate of more than 15% on the latter can offset the impact of the interim minimum tax rate of 15% on the former.
This phenomenon is particularly important when the GAAP over-tax excess is due to a reversible timing difference, such as B. VOI rate obligations, and if the comparatively GAAP profitable business, such as GAAP above-tax income. In this case, the preliminary CAMT tax rate of 15% GAAP over taxes is based significantly on the growth of that VOI sales business and not on the absolute volume of that VOI sales business. This is because collecting tax-advantaged VOI installment claims from prior year sales will trigger CAMT-creditable regular income tax and will not generate significant GAAP revenue. In contrast, the regular 21% tax credit on the CAMT for a resort management fee that remains fully taxed or other transactions is based on that total current net income.
On the other hand, the VOI seller group may have other GAAP non-taxable income items such as: B. Executive stock options and GILTI from resort management fees of foreign subsidiaries. Subject to future CAMT guidance, the points could result in the timeshare seller having a marginal CAMT accrual even if the GAAP excess tax revenue from the US VOI sale were compared only with the GAAP revenue from the US Resort Management Fee combined would not create CAMT liability. A comprehensive investigation of each covered VOI seller would be required to forecast their CAMT liability.
The second pillar of the OECD could impose a tax on the US group of US-based multinational corporations if their effective US tax rate was below 15%, even if their net income was below US$1 billion. The tax could be imposed by the U.S. parent company, such as through the qualified domestic minimum tax (QDMT) proposal included in the President’s fiscal year 2023 budget, or by the U.S. parent company’s foreign subsidiaries based on the Pillar Two Undertaxed Payment Rules (UTPR).
Pillar Two would generally only apply to a US-based multinational if gross sales exceed €750 million. The lower OECD Pillar 2 gross sales-based threshold would likely reach Disney and could also reach Travel & Leisure, HGV and maybe Bluegreen. However, Pillar Two has a temporary exception to the UTPR rules that may apply if the US group has subsidiaries in no more than five non-US jurisdictions and the total book value of the group’s non-US assets does not exceed €50 million .
The ability for all of these companies to combine higher-taxed pre-tax resort management fees and other higher-taxed income with the lower-taxed VOI rate obligation GAAP overtax income would be available under Pillar Two, as is the case under the CAMT. The calculation of the Pillar 2 tax base also excludes timing differences that reverse within five years. This would exclude a large portion of the deferred VOI rate gain from the QDMT and UTPR tax base. Unlike the CAMT, which will take effect in 2023, a US QDMT and foreign UTPRs have not yet taken effect and their effective date is uncertain.
Many US companies with segments that generate significant GAAP above-tax revenues, such as HGV’s VOI sales business, could escape CAMT in the near future due to the $1 billion AFSI threshold. Regarding the CAMT and Pillar 2, general application on a group-wide basis may allow other companies within the group to block the application of CAMT and Pillar 2 to the VOI sales business.
One might politically question whether the deferral of VOI installment sales permitted under Section 453(l)(2)(B) should be included in the CAMT tax base, and to the extent that such deferral is permitted over five years goes beyond what should be included as a Pillar 2 item – particularly with regard to Section 453(l)(3) deferred corporation tax liability. Perhaps the forthcoming IRS CAMT guidance, as issued under the Section 56A regulator, could offer some CAMT relief with respect to timing differences in general and VOI installment sales in particular.
This article does not necessarily represent the opinion of the Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Information about the author
Alan S. Lederman is a shareholder of Gunster, Yoakley & Stewart, PA in Fort Lauderdale, Florida.
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