WASHINGTON – Big companies like Apple and Bristol Myers Squibb have long used complicated maneuvers to reduce or eliminate their tax bills by shifting their paper-based income between countries. The strategy has enriched accountants and shareholders, while reducing corporate tax revenues for the federal government.
President Biden sees ending the practice a central part of his $ 2 trillion infrastructure package, pushing for changes to the tax code that his administration says will ensure American businesses contribute tax dollars to help. to invest in roads, bridges, water pipes and other parts of the country. its economic agenda.
On Wednesday, the Treasury Department released details of Mr Biden’s tax plan, which aims to raise up to $ 2.5 trillion over 15 years to help fund the infrastructure proposal. This includes lowering the corporate tax rate from 21% to 28%, imposing a new strict minimum tax on global profits and cracking down on companies that attempt to shift their profits overseas.
The plan also aims to prevent large companies that are profitable but without federal income tax from paying any tax to the Treasury Department by imposing a 15% tax on the profits they report to investors. Such a change would affect around 45 companies, according to the Biden administration’s estimates, as it would be limited to companies earning $ 2 billion or more per year.
“Businesses will not be able to hide their revenues in places like the Cayman Islands and Bermuda in tax havens,” Biden said Wednesday in a White House address. He championed tax increases as needed to pay for the infrastructure investments America needs and to help reduce the federal deficit in the long run.
Still, his 15% tax is a narrower version of the one he proposed in the 2020 campaign that would have been applied to companies with $ 100 million or more in profits per year.
Mr Biden’s proposals are a repudiation of Washington’s latest major tax overhaul – President Donald J. Trump’s 2017 tax cuts. Biden administration officials say the law has increased incentives for businesses shift their profits to low-tax countries, while reducing corporate tax revenues in the United States to match their lowest levels as a share of the economy since World War II.
Treasury Secretary Janet L. Yellen, by rolling out the plan, said it would end a global “race to the bottom” in corporate taxation that has been destructive to the US economy and its workers.
“Our tax revenues are already at their lowest level in generations,” Ms. Yellen said. “If they continue to decline, we will have less money to invest in roads, bridges, broadband and R&D.”
The plan, while ambitious, will not be easy to implement.
Some of the proposals, such as certain changes to the way a global minimum tax is applied to corporate income, could potentially be put in place by the Treasury Department through regulation. But most will need congressional approval, including raising the corporate tax rate. Given the slim majority of Democrats in the Senate and House, this proposed rate could drop. Already Senator Joe Manchin III of West Virginia, a crucial deciding vote, has said he would prefer a 25% corporate rate.
Mr Biden has indicated he is ready to negotiate, saying: “The debate is welcome. Compromise is inevitable. The changes are certain. But he added that “inaction is not an option”.
At the heart of the tax proposal is an attempt to rewrite decades of tax code provisions that have encouraged and rewarded companies that hide profits overseas.
This would raise the rate of what is essentially a minimum tax on the money American businesses earn abroad, and it would apply that tax to a much wider range of income. It would also eliminate lucrative tax deductions for foreign-invested companies that are based in low-tax countries – like Bermuda or Ireland – but have operations in the United States.
“We’re pretty explicit: we don’t think profit shifting is beneficial from a US perspective,” David Kamin, deputy director of the National Economic Council, said in an interview. “This is a major problem,” he said, adding that with the proposed changes, “we have the ability to run the world.”
The corporate tax rate in the United States is currently 21%, but many large American companies pay much lower effective tax rates. Companies that operate in multiple countries often transfer assets or income – sometimes in physical form, but other times just in their accountants’ books – between countries in search of the lowest possible tax bill. .
Businesses also move jobs and investment between countries, but often for different reasons. In many cases, they follow lower labor costs or seek customers in new markets to expand their business. The Biden plan would create tax incentives for companies to invest in production and research in the United States.
Previous administrations have attempted to curb the offshoring of jobs and profits. Mr Trump’s tax cuts cut the corporate rate to 21% from 35% in hopes of encouraging more domestic investment. It established a global minimum tax for US-based companies and a related effort to reduce profit shifting from foreign companies doing business in the country, although both provisions were weakened by subsequent regulations issued by Mr. Trump’s Treasury Department.
Conservative tax experts, including several involved in drafting the 2017 law, say they have seen no evidence of the law encouraging companies to move jobs overseas. Mr Biden has assembled a team of tax officials who argue the provisions have given companies new incentives to move investments and profits overseas.
Mr. Biden’s plan would raise Mr. Trump’s minimum tax rate and apply it more broadly to the income that American businesses earn abroad. These efforts would attempt to make it less attractive for companies to recognize profits in companies with low tax rates.
This includes discouraging US companies from moving their headquarters abroad for tax purposes, including through the practice known as “inversions,” where companies from different countries merge, creating a new established company. abroad.
Under applicable law, companies headquartered in low-tax countries can transfer a portion of their profits made by subsidiaries to the US and send them back to headquarters as payments for things. like the use of intellectual property, then deduct those payments from their US income. the taxes. The Biden plan would ban these deductions for companies based in low-tax countries.
Treasury Department officials estimate that the proposed offshore tax changes would bring in around $ 700 billion over 10 years.
Companies defend their decisions to locate profits and operations abroad, claiming that they do so for a variety of reasons, including to be able to compete globally.
Business groups lambasted the proposal on Wednesday, saying that if they agreed that the United States should invest in infrastructure, the tax plan would place American businesses in a significant competitive position.
Neil Bradley, executive vice president and policy director of the US Chamber of Commerce, said in a statement Wednesday that the proposal “would hurt US businesses and cost US jobs” and hamper their ability to be globally competitive. economy.
And members of the Business Roundtable, which represents business leaders in Washington, said this week that Mr. Biden’s plan for a global minimum tax “threatens to subject the United States to a major competitive disadvantage.”
Republican lawmakers have also denounced the plan as bad for business, with some members of the House Ways and Means Committee declaring that “their massive tax hikes will be borne by American workers and small businesses.”
However, some companies have expressed their openness to certain tax increases.
John Zimmer, president and founder of Lyft, told CNN on Wednesday that he supports the 28% corporate tax rate proposed by Mr Biden.
“I think it’s important to make investments again in the country and in the economy,” Zimmer said. “And as the economy grows, jobs also increase, as do people’s needs to travel.”
Mr Biden’s team hopes the proposals will ultimately lead to a global shift in how and where businesses are taxed, which could solve some of the problems of global competitiveness.
The administration is supporting an effort through the Organization for Economic Co-operation and Development to negotiate an agreement on the development of a new global minimum tax. Ms Yellen lent her support to the effort on Monday, and the Biden plan includes measures designed to force other countries to agree to the new tax. Global negotiators aim to reach a deal by July.