February 7, 2023

WASHINGTON — At the heart of the climate package and a new tax package that Democrats seem poised to pass is one of the most significant changes in US tax law in decades: a new corporate tax floor that could reshape the way the federal government collects revenue and change how businesses invest the most Profitability in the country in its business.

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 wrangling within the party about raising taxes on the wealthy or rolling back some of the 2017 Republican tax cuts to fund their agenda, they settled on a long-running political ambition to ensure large, profitable businesses pay more than $0 in federal taxes.

To achieve this, Democrats reformulated a policy last used in the 1980s: try to get tax returns from companies that report dividends to shareholders on their financial statements while increasing deductions to reduce their tax bills.

The re-emergence of the minimum corporate tax, which will apply to what is known as “written income” that companies report in their financial statements, has led to confusion and violent resistance to pressure since it was announced last month.

Some initially confused the measure with the 15 per cent global minimum tax that Treasury Secretary Janet L. Yellen was paying as part of an international tax deal. However, this is a separate proposal, which is still stalled in the US Congress, that would apply to foreign profits of US multinationals.

Republicans also misleadingly attempted to seize the tax increase as evidence that President Biden was willing to break his campaign promises and raise taxes on middle-class workers. Manufacturers have warned that it will impose new costs at a time of accelerating inflation.

In a sign of the political power of lobbyists in Washington, by Thursday evening, the new tax had already been relaxed. At the manufacturers’ urging, Senator Kirsten Senema of Arizona convinced fellow Democrats to maintain a valuable discount, known as bonus depreciation, which is associated with the purchase of machinery and equipment.

The new minimum tax of 15 percent will apply to companies that report more than $1 billion in annual income to shareholders on their financial statements but use deductions, credits and other preferential tax treatments to reduce their effective tax rates well below the statutory 21 percent. It was originally expected to collect $313 billion in tax revenue over a decade, though the bottom line is likely to be $258 billion once the revised bill is completed.

The new tax could also inject a greater degree of complexity into tax law, creating challenges in implementing the law if it is passed.

“In terms of implementation and fair bandwidth to deal with complexity, there is no doubt that this system is complex,” said Peter Richman, senior counsel for attorneys at the Tax Law Center at New York University School of Law. “This is a big change and the revenue number is big.”

Because of this complexity, the minimum corporate tax has faced great uncertainty. It’s less efficient than simply eliminating deductions or raising the corporate tax rate and could open the door for businesses to find new ways to make their income appear lower to reduce their tax bills.

Similar versions of the idea were floated by Mr. Biden during his presidential campaign and by Senator Elizabeth Warren, a Democrat from Massachusetts. It was promoted as a way to restore fairness to a tax system that allowed large corporations to significantly reduce their tax bills through deductions and other accounting measures.

According to an early estimate from the Nonpartisan Joint Committee on Taxation, the tax is likely to apply to about 150 companies annuallyMost of them will be from manufacturers. That sparked an outcry from manufacturers and Republicans, who opposed any policies that reduce the tax cuts they imposed five years ago.

Although many Democrats acknowledged that the minimum corporate tax was not their first choice for raising taxes, they embraced it as a political winner. Senator Ron Wyden of Oregon, Chairman of the Senate Finance Committee, shared data from the Joint Committee on Taxes Thursday, noting that in 2019, about 100 to 125 companies reported income in financial statements of more than $1 billion, yet tax rates were Actual less than 5 percent. The average income reported on the shareholders’ financial statements was nearly $9 billion, but they paid an average effective tax rate of just 1.1 percent.

“Companies are paying very low rates while reporting record profits to their shareholders,” Mr. Wyden said.

The Treasury had reservations about the idea of ​​a minimum tax last year because of its complexity. If enacted, the Treasury will be responsible for drafting a set of new regulations and directives for the new law and ensuring that the Internal Revenue Service can monitor them properly.

Michael J. Gretz, a professor of tax law at Columbia University, said that calculating minimum taxes is complex and that introducing a new tax rule would add new challenges from a tax administration perspective, but said he did not see these obstacles as exclusion. He pointed out that the current system created opportunities for tax shelters and allowed companies to incur losses for tax purposes that do not appear in their financial statements.

“If the problem Congress is addressing is that companies report high book profits and low taxes, the only way to reconcile those two is to tax book profits to some degree,” Mr. Gratz, a former deputy assistant secretary for tax policy at the Treasury, said. .

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

Evidence from findings studies on the Tax Reform Act of 1986 suggests that companies responded to such policy by changing the way they report financial accounting income — companies defer more income to future years, said Michelle Hanlon, professor of accounting at Sloan College. Management at the Massachusetts Institute of Technology, The Senate Finance Committee last year. “This behavioral response poses serious risks to the financial accounting and capital markets.”

Opponents of the new tax have expressed concerns that it would give more control over the US tax base to the Financial Accounting Standards Board, an independent organization that sets accounting rules.

“Potential politicization of the Financial Accounting Standards Board is likely to result in low-quality financial accounting standards and low-quality financial accounting profits,” Hanlon and Jeffrey L. Hobbs, a professor at the University of North Carolina, wrote in a letter to members of Congress. More than 260 accounting academics.

Business groups lobbied hard on the proposal and lobbied Ms. Senema to block the tax entirely. The National Association of Manufacturers and the Arizona Chamber of Commerce and Industry on Wednesday released a survey of manufacturing workers, managers and advocates in the state that showed a majority opposed the new tax.

“It will make it more difficult to hire more workers, raise wages and invest in our communities,” Chad Matari said. Chief Economist, Manufacturing Consortium. “Arizona’s industrial voters are clearly saying this tax will hurt our economy.”

Ms. Senema has expressed opposition to raising tax rates and has reservations about a proposal to reduce the special tax treatment that hedge fund managers and private equity executives receive in exchange for “interest charged”. Democrats scrapped the proposal at her request.

When an earlier version of the minimum corporate tax was proposed last October, Ms. Cinema issued a statement of approval.

“This proposal represents a logical step toward ensuring that highly profitable businesses – which can sometimes avoid the current corporate tax rate – pay a reasonable minimum corporate tax on their earnings, just as small businesses in Arizona and Arizona do daily,” she said. Announcing her support for a revised version of the climate and tax law on Thursday, Ms Sinema noted that it would “protect advanced manufacturing”.

This won the approval of business groups on Friday.

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

Emily Cochran Contribute to the preparation of reports.

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