How a new corporate minimum tax could reshape business investment

WASHINGTON – At the center of the new climate and tax package that Democrats appear on the verge of passing is one of the most significant changes to America’s tax code in decades: a new corporate minimum tax that could reshape how the federal government collects revenue and change how the country’s most profitable companies invest in their businesses.

The proposal is one of the last remaining tax increases in the package that Democrats aim to pass along party lines in the coming days. After months of bipartisan wrangling over whether to raise taxes on the wealthy or roll back some of the 2017 Republican tax cuts to fund their agenda, they have settled on a longstanding policy ambition to ensure that large and profitable corporations pay more than $0 in federal taxes.

To achieve this, Democrats have revived a policy last used in the 1980s: trying to capture tax revenue from companies that report a profit to shareholders on their accounts while racking up deductions to cut their tax bills .

The re-emergence of the corporate minimum tax, which would apply to what is known as the “booked income” that companies report on their accounts, has caused confusion and fierce lobby opposition since it was announced last month.

Some initially confused the measure with the 15 percent global minimum tax that Treasury Secretary Janet L. Yellen has been pushing as part of an international tax treaty. It is, however, a separate proposal, which in the US is still stalled in Congress, which will apply to US multinational companies’ foreign earnings.

Republicans have also misguidedly tried to seize on the tax hike as evidence that President Biden was ready to break his campaign promises and raise taxes on middle-class workers. And manufacturers have warned that it would impose new costs at a time of rapid inflation.

In a sign of the political power of lobbyists in Washington, the new tax had already been watered down by Thursday evening. At the urging of manufacturers, Sen. Kyrsten Sinema of Arizona persuaded her Democratic colleagues to preserve a valuable deduction, known as bonus depreciation, associated with purchases of machinery and equipment.

The new minimum tax of 15 percent will apply to companies reporting annual revenues of more than DKK 1 billion. USD to shareholders on their accounts, but use deductions, credits and other tax benefits to reduce their effective tax rates well below the statutory 21 percent. It was originally expected to raise $313 billion in tax revenue over a decade, though the final tally is likely to be $258 billion once the revised bill is finalized.

The new tax may also add a greater degree of complexity to the tax legislation and create challenges in implementing the law if it is adopted.

“In terms of implementation and just bandwidth to deal with the complexity, there’s no doubt that this regime is complex,” said Peter Richman, a senior legal adviser at the Tax Law Center at New York University’s law school. “This is a big change and the revenue numbers are big.”

Because of this complexity, the corporate minimum tax has been subject to considerable scepticism. It is less effective than simply removing deductions or raising corporate taxes and could open the door for businesses to find new ways to make their income appear lower in order to reduce their tax bills.

Similar versions of the idea have been brought up by Mr. Biden during his presidential campaign and by Senator Elizabeth Warren, Democrat of Massachusetts. They have been promoted as a way to restore fairness to a tax system that has allowed large corporations to dramatically lower their tax bills through deductions and other accounting measures.

According to an early estimate by the nonpartisan Joint Committee on Taxation, the tax will most likely apply to about 150 businesses annually, and the bulk of them will be manufacturers. That spurred an outcry from manufacturing companies and Republicans, who have opposed any policies that scale back the tax cuts they passed five years ago.

Although many Democrats acknowledge that the corporate minimum tax was not their first choice of tax hike, they have embraced it as a political winner. Sen. Ron Wyden of Oregon, the chairman of the Senate Finance Committee, shared data from the Joint Committee on Taxation on Thursday that indicated that in 2019, about 100 to 125 companies reported revenues above $1 billion. USD, but their effective tax rates were lower than 5 percent. The average income reported on annual accounts to shareholders was nearly $9 billion, but they paid an average effective tax rate of just 1.1 percent.

“Companies are paying rock-bottom prices while reporting record profits to their shareholders,” Mr. Widen.

The Ministry of Finance had reservations about the minimum tax idea last year due to its complexity. If passed, the Ministry of Finance will be responsible for drawing up a series of new rules and guidance for the new law and for ensuring that the tax authorities can control it properly.

Michael J. Graetz, a professor of tax law at Columbia University, acknowledged that calculating minimum taxes was complicated and that the introduction of a new tax base would add new challenges from a tax administration perspective, but he said he did not view those obstacles as disqualifying . He noted that the current system had created opportunities for tax havens and allowed companies to take tax losses that do not appear in their accounts.

“If the problem that Congress is addressing is that companies are reporting high book profits and low taxes, then the only way to align the two is to base taxes on book profits to some degree,” Mr. Graetz, a former deputy assistant secretary for tax policy at the Treasury Department, said.

A similar version of the tax was included in a tax overhaul in 1986 and was allowed to expire after three years. Skeptics of revisiting such a measure have warned that it could create new problems and opportunities for businesses to avoid the minimum tax.

“The evidence from the outcome studies surrounding the Tax Reform Act of 1986 suggests that companies responded to such a policy by changing how they report financial accounting income—companies deferred more income to future years,” Michelle Hanlon, an accounting professor at the Sloan School of Management at the Massachusetts Institute of Technology, told the Senate Finance Committee last year. “This behavioral response poses serious risks to financial accounting and capital markets.”

Other opponents of the new tax have expressed concern that it would give more control over the U.S. tax base to the Financial Accounting Standards Board, an independent organization that sets accounting rules.

“The potential politicization of the FASB is likely to lead to lower quality financial accounting standards and lower quality accounting earnings,” Ms. Hanlon and Jeffrey L. Hoopes, a professor at the University of North Carolina, in a letter to members of Congress. last year, which was signed by more than 260 accounting academics.

Business groups have pushed back hard against the proposal, pushing Ms. Sinema to block the tax entirely. The National Association of Manufacturers and the Arizona Chamber of Commerce and Industry released a poll of manufacturing workers, managers and advocates in the state Wednesday that showed a majority opposed the new tax.

“It will make it harder to hire more workers, raise wages and invest in our communities,” said Chad Moutray, chief economist for the manufacturing association. “Arizona’s manufacturing voters say clearly that this tax will hurt our economy.”

Mrs. Sinema has expressed opposition to raising tax rates and had reservations about a proposal to scale back the special tax treatment hedge fund managers and private equity executives receive for “carried interest.” The Democrats scrapped the proposal at her urging.

When an earlier version of a corporate minimum tax was proposed last October, Ms. Sinema an approving statement.

“This proposal represents a common-sense step toward ensuring that highly profitable businesses — which can sometimes avoid the current corporate tax rate — pay a fair minimum corporate tax on their profits, just as ordinary Arizonans and Arizona small businesses do,” she said . Announcing that she would support an amended version of the Climate and Tax Act on Thursday, Ms. Sinema noted that it would “protect advanced manufacturing.”

It won praise from business groups on Friday.

“Taxing capital expenditures — investments in new buildings, factories, equipment, etc. — is one of the most economically destructive ways you can raise taxes,” Neil Bradley, chief policy officer at the U.S. Chamber of Commerce, said in a statement. “As we look forward to reviewing the new proposed bill, Senator Sinema deserves credit for recognizing this and fighting for change.”

Emily Cochrane contributed with reporting.

Leave a Reply

Your email address will not be published.