WASHINGTON – Big companies like Apple and Bristol Myers Squibb have long used intricate maneuvers to reduce or eliminate their tax burdens by moving paper revenue between countries. The strategy has enriched accountants and shareholders while reducing corporate tax revenues for the federal government.
President Biden sees ending this practice as a key element of his $ 2 trillion infrastructure package by driving changes to tax legislation that his administration says should ensure that American companies bring in taxpayers’ money to break into roads, bridges, and water pipes and other parts of the country to invest economic agenda.
On Wednesday, Treasury released the 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. These include raising the corporate tax rate from 21 percent to 28 percent, imposing a tough new minimum tax on global profits, and harsh penalties for companies attempting to move profits overseas.
The plan also aims to prevent large companies that are profitable but not subject to federal income tax liability from paying taxes to the Treasury Department by imposing a 15 percent tax on the profits they report to investors. Such a change would affect about 45 companies, according to estimates by the Biden government, as it would be limited to companies making $ 2 billion or more per year.
“Corporations will not be able to hide their income in tax havens in places like the Cayman Islands and Bermuda,” said Biden on Wednesday during a speech at the White House. He defended the tax hikes as needed to fund the infrastructure investments America needed and to reduce the federal deficit in the long term.
Mr Biden’s proposals are a rejection of the last major tax overhaul in Washington – President Donald J. Trump’s 2017 tax cuts. Biden government officials say the bill has increased incentives for businesses to shift profits to low-tax countries while corporate tax revenues in the United States will be reduced to their lowest percentage of the economy since World War II.
Treasury Secretary Janet L. Yellen said on launching the plan it would end a global “race to the bottom” of corporate taxation that was destructive to the American economy and its workers.
“Our tax revenues are at their lowest level in generations,” said Ms. Yellen. “If they keep falling, we will have less money to invest in roads, bridges, broadband, and research and development.”
The plan is ambitious, but not easy to implement.
Some of the proposals, such as certain changes in the application of a global minimum tax on corporate income, could potentially be implemented by the finance department through regulation. Most, however, require congressional approval, including the increase in the corporate tax rate. Given the slim majority of Democrats in both the Senate and House of Representatives, this proposed rate could fall. West Virginia Senator Joe Manchin III, a key swing vote, has already said he would prefer a corporate rate of 25 percent.
Mr Biden said he was ready to negotiate and said: “Debates are welcome. Compromises are inevitable. Changes are safe. “But he added that” inaction is not an option. “
At the heart of the tax proposal is an attempt to rewrite decades of tax law provisions that have encouraged and rewarded companies that keep profits overseas.
This would increase the tax rate on what is essentially a minimum tax on money American businesses make overseas, and that tax would be applied to a much wider range of income. It would also eliminate lucrative tax deductions for foreign-owned companies based in low-tax countries like Bermuda or Ireland but operating in the United States through a new provision of tax law that Biden officials gave the comic-infused name “SHIELD.” “
“We’re pretty explicit: we don’t believe that profit shifting is beneficial from a US perspective,” said David Kamin, deputy director of the National Economic Council, in an interview. “It’s a big problem,” he said, adding that with the proposed changes, we have an opportunity to run the world.
The corporate tax rate in the United States is currently 21 percent, but many large American companies pay effective tax rates that are much lower. Companies operating in multiple countries often move assets or income – sometimes in physical form but sometimes simply on their accountants’ books – between countries in search of the lowest possible tax burden.
Companies also move jobs and investments between countries, but often for different reasons. In many cases they are pursuing lower labor costs or looking for customers in new markets to grow their business. The Biden Plan would create new tax incentives for companies to invest in manufacturing and research in the United States.
Previous administrations have tried to curb the offshoring of jobs and profits. Mr Trump’s tax cuts cut the company’s rate from 35 percent to 21 percent in hopes of encouraging more domestic investment. A global minimum tax has been set for US-based companies and related efforts to reduce profit shifting by overseas companies doing business in the country, although both provisions were weakened by later regulations from Mr. Trump’s finance department.
Conservative tax experts, including several who helped draft the 2017 law, said they saw no evidence that the law is tempting companies to move jobs overseas. Mr Biden has assembled a team of tax officials who claim the regulations have given companies new incentives to move investments and profits overseas.
Mr. Biden’s plan would increase Mr. Trump’s minimum tax rate and apply it more broadly to the income American companies earn overseas. These efforts would try to make it less attractive for companies to make profits in companies with lower taxes.
The SHIELD proposal is an attempt to discourage American companies from relocating their headquarters abroad for tax reasons, particularly through the practice known as “inversions” of merging companies from different countries and starting a new company based abroad.
Under current law, Irish-headquartered companies can “graze” some of their profits made by subsidiaries in the United States and return them to the Irish company as payments for things like the use of intellectual property, and then deduct those payments from their American income tax. The SHIELD plan would prohibit these deductions for companies based in low-tax countries.
Tax professionals say Mr Biden’s proposed changes to this law could be difficult to manage. Corporate groups say they can impede American companies in global competition.
Republicans denounced the plan as bad for the US economy. The House Ways and Means Committee lawmakers said that “their massive tax hikes are being borne by American workers and small businesses”.
However, Mr Biden’s team hopes that the proposals, coupled with the Organization for Economic Co-operation and Development’s efforts to broker a global agreement on minimum corporate taxation, will spark a global revolution in corporate and corporate taxation. This is partly because the Biden plans include measures to force other countries to introduce a new global minimum tax, for which Ms. Yellen announced her support on Monday.
Treasury officials in their report estimate that the proposed minimum tax changes and implementation of the SHIELD plan alone would raise an estimated $ 700 billion over 10 years.
Corporate groups warn that the government’s efforts will hamper American businesses and have asked Mr. Biden to wait for international negotiations to take place before making changes.
Members of the Business Roundtable, which represents corporate executives in Washington, said this week that Mr. Biden’s minimum tax “threatens to put the US at a major competitive disadvantage.” They called on the government to first reach a global agreement, adding that “any US minimum tax should be aligned with that agreed at the global level”.
However, some companies on Wednesday expressed their openness to some of the changes.
John Zimmer, the president and founder of Lyft, told CNN that he supported Mr Biden’s proposed corporate tax rate of 28 percent.
“I think it is important to invest in the country and the economy again,” said Zimmer. “And as the economy grows, so do jobs and people’s needs to get around.”