Navigating Q2 2025: Essential Income Tax Accounting Insights

Legislative Environment

During the second quarter, both the House and Senate passed separate versions of the OBBBA, both of which include sweeping tax law changes. Just following quarter end, on July 3 the House passed the Senate version, which was subsequently signed into law by President Trump on July 4. Please refer to our recent article for more details on the OBBBA provisions.[1]

Below are the key tax provision impacts of the OBBBA:

A&M Tax Accounting Services Says:

The financial statement impact of the OBBBA should be accounted for in Q3, the period enacted into law. For Q2, companies that expect material impacts of this legislation should include a subsequent events disclosure with explanations of those impacts for those issuing financial statements after the bill was signed on July 4.

Tariffs

In the second quarter of 2025, tariffs continued to be a hot topic with the administration announcing broad tariffs on nearly every country in the world on April 2. As the U.S. enters negotiations with various trade partners over this topic, there has been uncertainty around the ultimate resolution and the future of these tariffs. As of this writing, broad tariffs are scheduled to take effect on August 1.

A&M Tax Accounting Services Says:

While tariffs are not considered taxes on income, income projections may be impacted, and businesses should consider related adverse financial statement impacts on valuation allowance assumptions. Reporting entities should monitor forecast sensitivities to determine if there could be a material impact on interim computations.

Accounting and Reporting

ASU 2023-09

In December 2023, the Financial Accounting Standards Board (FASB) released Accounting Standards Update (ASU) 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures,” which seeks to enhance income tax disclosures in financial statements. As discussed in our previous publication on this topic,[2] the ASU provides greater transparency into entities’ global operations and provides users with crucial information that helps investors.

Most significantly, the update introduces new quantitative and qualitative disclosure requirements. Reconciliations of effective tax rates will be required to report both percentages and reporting currency amounts for eight specific categories. Furthermore, some reconciling items would be required to be broken out to the extent the impact is greater than or equal to 5% of the amount computed by multiplying income (or loss) by the applicable statutory federal income tax rate. For entities parented in the U.S., this amount is effectively any item with an effect of 1.05% (21% U.S. federal corporate tax rate x 5%) or greater.

Public companies will be required to adopt the new standard for reporting periods beginning after December 15, 2024 (e.g., calendar year-end 2025).

A&M Tax Accounting Services Says:

With public company adoption rapidly approaching, SEC registrants should currently be assessing their reporting processes to ensure that there are proper systems in place to gather the required information in preparation for the first reporting year in which it is applicable. Additionally, companies must decide whether to provide for the optional retroactive application of the rules.

State

Legislation Enacted in the Second Quarter

Tax Rates Changes:

Georgia: Governor Brian Kemp (R) on April 15 reduced the Georgia corporate tax rate from 5.39% to 5.19% effective for tax years beginning on or after January 1, 2025. Further annual reductions of 0.1% would be possible starting in 2026, contingent on state revenue determinations.

Philadelphia: The city reduced both components of its business income and receipts tax. The business income tax rate will drop from 5.81% in 2024 tax year to 5.71% in 2025 tax year and is scheduled to be reduced further to 2.8% by 2038. The gross receipts component will decrease to 1.510 mill in 2025 from 1.415 mill, with a complete phase-out scheduled by 2038.

Illinois: On June 16, 2025, Illinois House Bill 2755, known as the Budget Act, was enacted into law. The tax-related provisions of the Budget Act, in pertinent part, include a transition from the Joyce to the Finnigan method for combined apportionment, the elimination of certain exemptions under the interest expense addback rules, 50% inclusion of Global Intangible Low-Taxed Income (GILTI) in the Illinois tax base, and various developments related to credits and incentives. These changes would be effective for tax years ending on or after December 31, 2025.

Kansas: House Bill 2231 changes the state’s tax apportionment formula from an equally weighted three-factor formula to a single sales factor formula starting January 1, 2027. It also shifts from a cost of performance sourcing methodology to a market-based sourcing methodology for sales other than tangible personal property beginning after December 31, 2026. Additionally, the bill includes provisions for future reductions in the corporate income tax rate, effective for taxable years starting after December 31, 2028, contingent upon certain conditions being met. These rate reductions will remain in effect unless further changes are made.

Arkansas: Starting January 1, 2026, S.B. 567 changes the sourcing of receipts from sales of intangible property from a cost of performance method to a market-based approach. However, taxpayers primarily engaged in telecommunications, internet access, cable television, community antenna television, or direct-to-home satellite TV services can choose to continue using the cost of performance method for these receipts until December 31, 2035. Additionally, S.B. 567 establishes that nonresident corporations or partnerships without a physical presence in Arkansas will have income tax nexus if their Arkansas receipts exceed $250,000 in the current or previous tax year.

A&M Tax Accounting Services Says:

Companies must reflect the impact on their current tax provision in the period in which it becomes effective, and the deferred tax provision in the period of enactment. This requires adjusting the tax provision to account for the new rates or rules for taxable income generated post-effective date. Companies should ensure that their systems and processes capture these changes promptly and that financial statement disclosures clearly explain the impact on current period tax expense and overall tax positions.

Other Developments

New York: On April 28, 2025, the New York Supreme Court, County of Albany, issued a ruling regarding the Department of Taxation and Finance’s regulation that implements Public Law 86-272. The court determined that this regulation does not violate federal law and is consistent with the precedent set by the U.S. Supreme Court’s decision in the Wayfair case. This decision affirms the Department’s authority to enforce the regulation under current legal standards; however, the court decided not to apply the regulation retroactively.

New Jersey: On June 16, 2025, New Jersey adopted final regulations that included certain changes including, in pertinent part, rewriting and providing additional reasonable approximation methods such as gross domestic product, global positioning system, internet protocol address location, etc. The final regulation also amends certain provision, noting the receipts factor should be determined consistent with the receipts included in the tax base and in accordance with the accounting method used for federal purposes. Finally, the new regulations provide a list of internet activities that may or may not exceed the protection of Public Law 86-272.

Tax Amnesty Programs: Indiana legislation (H.B. 1001, enacted on May 6, 2025) introduces the state’s first tax amnesty program in a decade, targeting taxpayers with unpaid tax liabilities for periods ending before January 1, 2023. Under the program, Indiana will abate and not collect any interest, penalties, collection fees, or costs otherwise applicable. The amnesty period will last no more than eight regular business weeks, concluding before the earlier date set by the DOR or January 1, 2027.

Similarly, Illinois has set up a general tax amnesty program for all taxes managed by the Illinois Department of Revenue. This program will be available from October 1, 2025, to November 15, 2025. Under the program, Illinois will waive any interest or penalties and will not pursue civil or criminal charges against taxpayers for the covered period.

A&M Tax Accounting Services says:

For anticipated tax law changes that are neither enacted nor effective, companies should monitor developments closely but refrain from reflecting any impact in their current ASC 740 calculations. Proactive scenario planning and open communication with stakeholders can help ensure readiness for potential adjustments while maintaining compliance with reporting standards.

State Impact of Federal Tax Reform

States typically align with IRC through either rolling conformity or fixed-date conformity. Approximately half of the states follow rolling conformity, while the other half adhere to fixed-date conformity, with some variations like selective conformity to certain federal provisions. Rolling conformity states automatically incorporate new and amended IRC provisions unless they explicitly choose to decouple from specific sections. In contrast, fixed-date conformity states adopt a version of the IRC as it existed on a particular date during their legislative sessions.

In the past three months, several states with fixed-date conformity have updated their alignment with the IRS. For example, Georgia adopted the IRC as of January 1, 2025, effective for tax years starting January 1, 2024, through legislation enacted on May 14, 2025. Hawaii updated its conformity to the IRC as of December 31, 2024, effective for tax years beginning after that date, with legislation passed on May 29, 2025. South Carolina updated its IRC conformity to December 31, 2024, effective immediately, through legislation enacted on May 22, 2025. Vermont also adopted conformity to the IRC as of December 31, 2024, retroactively applicable to tax years starting January 1, 2024, through legislation enacted on May 21, 2025.

As the above-mentioned states have updated their conformity to the IRC as of December 31, 2024, these states may be required to enact a subsequent update through a special legislative session to address federal tax reform. However, taxpayers should anticipate that most states may not pass relevant legislation until next year, requiring taxpayers to consider the state impact of federal tax reform on extensions and estimates.

Federal tax reform provisions that corporate taxpayers should consider for state purposes, include but not limited to: (1) Section 174 research and experimental expenses, (2) Section 163(j) interest expense limitations, and (3) Section 168(k) bonus depreciation.

A&M Tax Accounting Services Says: 

The implementation of OBBBA necessitates that businesses evaluate the impact of these federal changes on state tax laws. Since state conformity to the federal tax code differs significantly, it is essential to conduct a thorough analysis for each state individually. Some states and local jurisdictions automatically adopt changes IRC for income tax purposes, ensuring that their tax laws are in sync with federal modifications. However, many other states have fixed-date conformity, meaning they only adopt the IRC as it existed on a specific date and do not automatically incorporate subsequent federal changes. Therefore, businesses must carefully review the conformity rules of each state to understand how federal tax reform will influence their state tax obligations.

[1] Kevin M. Jacobs et al., “The OBBBA Passed … Now What?” Alvarez & Marsal, July 8, 2025, https://www.alvarezandmarsal.com/thought-leadership/the-obbba-passed-now-what

[2] Michael Noreman et al., “FASB Issues Income Tax Disclosure Standard,” Alvarez & Marsal, December 21, 2023, https://www.alvarezandmarsal.com/insights/fasb-issues-income-tax-disclosure-standard

The Western Australian (WA) Labor Government has handed down its ninth consecutive WA Budget (Budget) on June 19, 2025 . Please refer to our recent article [1] for more details.

[1] Robert Nguyen et al., “A View on the 2025/26 Western Australia State Budget,” Alvarez & Marsal, June 19, 2025, https://www.alvarezandmarsal.com/press-release/a-view-on-the-2025-26-western-australia-state-budget

Legislative Environment

The second quarter of 2025 has seen several significant developments in the German tax landscape: The draft law “Act for a Tax Investment Program” was passed on June 3, 2025, providing a tax relief of €2.5 billion in 2025, with further increases planned in subsequent years. The aim is to financially relieve companies, promote investments in modern technologies, and support sustainable growth. Key measures are:

• Gradual reduction of the corporate tax rate
  From January 1, 2028, the corporate tax rate in Germany will be gradually reduced from the current 15% to 10%. The reduction will occur in five annual steps of one percentage point each.
• Declining balance depreciation for investments in movable fixed assets made from July 1, 2025, to December 31, 2027, in the amount of 30%
• Expansion of the maximum assessment basis for the research allowance by €2 million to €12 million and introduction of a flat-rate overhead surcharge
• Promotion of e-mobility including an increase in the cap for the gross list price as well as degressive depreciation method

The minimum trade tax rate shall be raised from 7% to 9.8% in order to avoid so-called “sham relocations” to municipalities with a low trade tax rate.

A&M Tax Accounting Services says:

Organizations should closely monitor these developments and ensure that their financial statements and tax calculations accurately reflect the impact of the future changes once they are finally announced, which is expected in Q3 2025.

On December 31, 2024, the Indonesian Minister of Finance issued PMK-136/2024 to implement the Top-up Tax mechanism under the Global Anti-Base Erosion (GloBE) Rules. This regulation aligns with the framework developed by the OECD.

The GloBE Rules aim to ensure a 15% minimum global tax rate for Multinational Enterprises (MNEs) operating in low-tax jurisdictions. Indonesia has adopted three mechanisms:

1. Domestic Minimum Top-up Tax (DMTT)If Indonesian effective tax rate is below 15%, domestic entities pay a top-up tax to reach 15% (qualified as QDMTT).
2. Income Inclusion Rule (IIR). Indonesian parent entities must pay top-up tax on low-taxed foreign subsidiaries.
3. Undertaxed Payment Rule (UTPR). Applies if low-taxed foreign profits aren’t fully covered by DMTT or IIR.

These rules apply starting FY 2025 for IIR and DMTT, and FY 2026 for UTPR. Fiscal Year (FY) refers to the year in which the GloBE Top-up Tax is assessed.

MNEs are required to:

1. Submit a GloBE Information Return (GIR) and Notification, covering group structure, effective tax rates, and Top-up Taxes (first deadline: June 30, 2027, for FY2025).
2. File annual tax returns (ATRs) to report and calculate Top-up Tax (first deadline: June 30, 2027, for FY2025).
3. Pay Top-up Tax by the end of the year following the relevant FY (e.g., by December 31 2026, for FY2025).

Further implementing regulations are expected to clarify administrative procedures.

Impact of The GloBE Rules:

1. For Low-Tax Jurisdictions

• Less attractive to MNEs due to the 15% minimum tax
• May lose investment and face pressure to reform tax policies

2. For MNEs

• Higher tax costs in low-tax countries due to Top-up Tax. The Indonesian tax holiday incentive may become much less attractive because of the local top-up tax that Indonesia may levy (if local effective tax rate falls below 15%).
• Increased compliance and reporting burden.
• May need to restructure operations or supply chains.

A&M Tax Accounting Services says:

To respond to GloBe Rules implementation in Indonesia, MNEs should first assess whether they meet the €750 million revenue threshold and determine if their Indonesian entities are subject to the QDMTT, IIR, or UTPR. It’s crucial to calculate the effective tax rate for each jurisdiction using GloBE rules, identify potential top-up tax exposures, and evaluate whether current structures and incentives (e.g., tax holidays benefits) are still effective under the new regime.

Businesses should also prepare for compliance by setting up data collection processes for the GloBE Information Return (GIR), annual tax returns, and payments. Staying updated on further implementing regulations from the Ministry of Finance and engaging tax advisors will help ensure a smooth transition while minimizing risk and optimizing group structures.

The National Assembly of Vietnam officially passed the new corporate income tax (CIT) law on June 14, 2025, which is set to take effect on October 1, 2025, and is applicable for the fiscal year 2025. The is part of Vietnam’s broader efforts to modernize its tax system and aims to provide a clear framework for corporate taxation in Vietnam, promoting compliance and encouraging investment while ensuring fair tax practices across different sectors and types of enterprises. Key provisions of the tax law include:

• Expanded taxpayer scope and introduction of digital PE: The new CIT law expanded the definition of taxable entities to include foreign corporates having e-commerce and digital platforms that derive income from Vietnam. As the new CIT law also considers these e-commerce and digital platforms as a PE for Vietnam tax purposes, it could adversely impact the tax treaty relief applications in Vietnam of such e-commerce players. Further guidance is expected via the upcoming guiding decree and circular.
• Capital gain tax: Earlier drafts proposed a 2% CIT on the transfer price of taxable capital disposals by foreign investors. Under the new law, while the principle of taxing the foreign corporate investors on the capital disposals on “transfer price” remains as passed, the 2% rate was removed. It is expected that the upcoming CIT decree should provide clarity on the following: applicable tax rates for both direct and indirect transfers of Vietnamese entities/assets by foreign corporate investors, determination of taxable transfer price for Vietnam tax purposes, filing and payment obligations, and exemptions or reliefs (if any) for treaty-protected investors. This may lead to additional tax liabilities even for cases that entail internal corporate restructurings or transfer of assets at loss.
• CIT incentives: Introduction of a streamlined approach to investment incentives, with notable changes: removal of industrial zones from the list of incentivized locations, introduction of tax incentives for AI, semiconductors, green energy, hi-tech and hi-tech-related investment, and R&D centers
• Offshore investment profits to be taxed on an earned basis: Profits from foreign investments (e.g., dividends or earnings from overseas subsidiaries) must be declared and taxed in Vietnam in the year they are earned, even if the profits are not repatriated to Vietnam. This marks a major shift from the current remittance-based approach and could accelerate tax liabilities for businesses and funds making overseas investments.
• Loss offset: While the five-year loss carry-forward rule remains unchanged, the new CIT law allows more flexibility to offset losses from business activities with other types of business income, including income from real estate transfers, investment transfers, or business (project) transfers. The new law only prohibits losses from real estate transfers, project transfers, or project participation rights to offset against income that benefits from CIT incentives. These changes are more favorable for businesses and investors in Vietnam.
• New deductible expenses introduced, including sustainability costs, digital transformation costs, public infrastructure co-investments. However, expenses that do not comply with sector-specific laws or lack proper documentation will be nondeductible.

A&M Tax Accounting Services says:

Companies should:

• Evaluate the impact of new deductible expenses and loss offset flexibility on deferred taxes assets and liabilities.
• Assess the implications of digital PE on tax treaty benefits and potential changes in tax positions. Take into account the changes in CIT incentive schemes in your investment plan.
• Consider the removal of the 2% CIT rate and upcoming clarifications regarding the capital transfer by foreign corporate sellers in the CIT decree for accurate tax provision calculations.
• Adjust tax provisions to reflect the shift from remittance-based to earned-based taxation of foreign investment profits.

Proposed Reforms to UK Transfer Pricing

Draft legislation was published on April 28, 2025, in respect of a proposed reform to UK transfer pricing.

In addition, draft legislation was also published which seeks to:

• Clarify the local definition of a permanent establishment and attribution of profits to a permanent establishment to bring this in line with the latest international consensus
• Withdraw Diverted Profits Tax as a separate tax and bring a new Unassessed Transfer Pricing Profits (UTPP) as an extension to the existing transfer pricing rules

The updates aim to simplify and update existing rules, aligning it more closely with the OECD position. The draft legislation is under public consultation until July 7, 2025.

UK-to-UK Transactions

One of the proposed updates to transfer pricing is the introduction of an exemption to apply an arm’s length provision between two UK entities where there is no risk of tax loss. This will be a welcome change and will significantly reduce the compliance burden on low-risk domestic transactions. However, general principles state that tax deductions are available only where expenditure has been incurred wholly and exclusively for the purpose of a company’s trade, and a company is trading with a view to profit. Therefore, it will still be important to maintain an arm’s length basis on UK-to-UK transactions to reduce risk of challenge from tax authorities that deductions are “excessive” and therefore do not meet the wholly and exclusively test, or that a company is not trading with a view to profit.

Intangible Fixed Assets

Currently, cross-border transfers of intangible fixed assets between related parties require consideration of both the market value of the asset and the arm’s length price for the asset. Where the market value is higher, this higher amount is brought into account for tax purposes. The draft legislation intends to simplify this by requiring one valuation standard to be applied to intangible fixed asset transfers, being the arm’s length price (although the remaining market value or tax-neutral transfer rules will remain for UK-to-UK transfers). It remains the case that the “one-way street” principle applies, in that transfer pricing adjustments can only be made that favor the UK tax base, to increase UK profit or deny UK deductions.

On UK inbound business acquisitions involving intangible fixed assets, this may result in differences between the tax base (which will be based on an arm’s length price) and the accounting base (which would generally be based on fair value or market value which could be higher), giving rise to deferred tax liabilities on the excess of the market value over the arm’s length price unless specific exemptions (such as the initial recognition exemption) apply.

A&M Tax Accounting Services Says:

The proposed changes are still under consultation and are therefore neither enacted nor effective for financial reporting purposes. A&M will continue to keep companies updated as we monitor developments to the legislation following the outcome of the consultation.