US stock repurchase excise tax: proposed regulations
KPMG US initial analysis of the proposed regulations on the US stock repurchase excise tax
KPMG US initial analysis of the proposed regulations on the US stock repurchase excise tax
On 9 April 2024, the US Treasury department and Internal Revenue Service (IRS) released two sets of proposed regulations (REG-115710-22 and REG-118499-23) providing further guidance on the application, reporting and payment of the non-deductible 1 percent excise tax on repurchases of corporate stock (the Excise tax) made after 31 December 2022.
Inflation Reduction Act section 4501 and Notice 2023-2
By way of a reminder, the Excise tax was introduced by section 4501 of the Inflation Reduction Act. The statute generally imposes the Excise tax on the net value of share repurchases by a publicly traded domestic (i.e. US) corporation within a taxable year, effective with respect to repurchases made after 31 December 2022. The statute also applies to certain acquisitions of the stock of publicly traded foreign corporations by US affiliates.
On 27 December 2022, the US Treasury Department released Notice 2023-2 (the Notice) providing interim guidance on the Excise tax. Of particular interest to UK Multinational Groups were the ‘funding rule’ and ‘per se’ rule introduced by the Notice, that would significantly expand the scope of the Excise tax with respect to foreign corporations. There were numerous uncertainties regarding how the funding rule would operate in practice and concerns that it was too widely drafted given the limited application of the statute to foreign-parented groups.
The latest proposed regulations
The proposed regulations largely follow the approach of Notice 2023-2, but importantly provide rules for the application of the Excise tax to US subsidiaries of publicly traded foreign corporate parents that differ to those contemplated by Notice 2023-2.
Notice 2023-2 is now obsolete for repurchases, issuances and provisions of stock of a covered corporation occurring after 12 April 2024. Comments on the procedural package of the proposed regulations are due by 13 May 2024 and comments on the substantive rules due by 11 June 2024.
You can find more information in a report prepared by KPMG in the US which sets out their initial analysis of the proposed regulations. KPMG US have also produced a podcast (accessible via apple.com), exploring how the proposed regulations can impact foreign multinationals, including how they both limit and broaden the scope of the funding rule in the Notice and what foreign multinationals should be doing now to ready themselves for the Excise tax.
