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’s 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 imposing severe penalties on companies that attempt to transfer 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.
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 that operate in the United States thanks to a new provision in the code. taxes that Biden officials gave to the comic. -name infused “SHIELD”
“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 new tax incentives to encourage 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.
The SHIELD proposal is an attempt to discourage US companies from moving their headquarters abroad for tax purposes, particularly through the practice known as “reversals,” where companies from different countries merge, creating a new company established abroad.
Under current law, companies headquartered in Ireland can ‘strip’ part of their profits made by subsidiaries in the United States and send them back to the Irish company as payments for things like use of intellectual property and then deduct those payments from their income taxes. The SHIELD plan would ban these deductions for companies based in low-tax countries.
Tax experts say Mr. Biden’s proposed changes to that law could be difficult to administer. Business groups say they could hinder U.S. companies as they compete globally.
Republicans denounced the plan as bad for the US economy, with lawmakers on the House Ways and Means Committee saying “their massive tax hikes will be borne by American workers and small businesses.”
But Mr Biden’s team is hoping the proposals, coupled with an effort by the Organization for Economic Co-operation and Development to negotiate a global agreement on minimum business taxation, will start a global revolution in how and where. corporate tax. This is in part because Biden’s plans include measures designed to force other countries to agree to a new global minimum tax for which Ms Yellen announced her support on Monday.
Treasury Department officials estimate in their report that the proposed minimum tax changes and the implementation of the SHIELD plan alone would raise about $ 700 billion over 10 years.
Business groups warn the administration’s efforts will hamper U.S. businesses and have urged Biden to wait for international negotiations to proceed before proceeding with any changes.
Members of the Business Roundtable, which represents business leaders in Washington, said this week that Mr. Biden’s minimum tax “threatens to subject the United States to a major competitive disadvantage.” They urged the administration to strike a global deal first, adding that “any US minimum tax should be aligned with the globally agreed one.”
However, some companies expressed openness to some of the changes on Wednesday.
John Zimmer, president and founder of Lyft, told CNN 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.”