WASHINGTON – Large corporations such as Apple and Bristol Myers Squibb have long used complicated maneuvers to reduce or eliminate their tax bills by shifting paper-based revenues between countries. The strategy has enriched accountants and shareholders while reducing corporate tax revenues for the federal government.
President Biden sees ending that practice as a central part of his $ 2 trillion infrastructure package, making changes to the tax law that his administration says will cause US companies to contribute tax money to help invest in the roads, bridges, water pipes and in 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 as much as $ 2.5 trillion in 15 years to help fund the infrastructure proposal. That includes raising the corporate tax rate from 21 percent to 28 percent, imposing a strict new minimum tax on global profits, and cracking down on companies trying to move profits abroad.
The plan also aims to prevent large companies that are profitable but do not owe federal income tax 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 the Biden government’s estimates, as it would be limited to companies making $ 2 billion or more per year.
“Companies will not be able to hide their income in places like the Cayman Islands and Bermuda in tax havens,” Mr Biden said in a speech at the White House on Wednesday. He defended the tax increases necessary to pay for infrastructure investments America needs and to help reduce the long-term federal deficit.
Still, his 15 percent tax is a narrower version of the one he proposed in the 2020 campaign that would have applied to businesses with $ 100 million or more in profit per year.
Mr. Biden’s proposals are a rejection of Washington’s last major tax reform – President Donald J. Trump’s 2017 tax cuts. Biden government officials say the law has increased incentives for companies to send profits to lower tax countries. shift, while corporate tax income in the United States has dropped to the lowest level as a share of the economy since World War II.
Treasury Secretary Janet L. Yellen said in rolling out the plan that it would end a global “race to the bottom” of corporate taxation that has been destructive to the US economy and its workers.
“Our tax revenues are already at the lowest level in generations,” said Ms. Yellen. “If they keep falling lower, 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 enacted through regulation by the Treasury Department. But most need Congressional approval, including raising the corporate tax rate. Given the small majority of Democrats in the Senate and House, that proposed rate could drop. Senator Joe Manchin III of West Virginia, a pivotal swing vote, has already said he prefers a corporate rate of 25 percent.
Mr. Biden indicated his willingness to negotiate, saying, “Debate is welcome. Compromises are inevitable. Changes are certain. But he added that “doing nothing 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 depositing their profits abroad.
It would increase the rate of what is essentially a minimum tax on money that American companies earn abroad, and it would apply that tax to a much wider selection of income. It would also end lucrative tax deductions for foreign companies based in low-tax countries – such as Bermuda or Ireland – but operating in the United States.
“We’re pretty explicit: we don’t think profit shifting is beneficial from an American perspective,” David Kamin, the deputy director of the National Economic Council, said in an interview. “It’s a big deal,” he said, adding that with the proposed changes, we have the opportunity to lead 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 than that. Companies operating in multiple countries often move assets or income – sometimes in physical form, but sometimes just in their accountants’ books – between countries in search of the lowest possible tax bill.
Companies also move jobs and investments between countries, but often for different reasons. In many cases, they follow lower labor costs or seek clients in new markets to expand their business. The Biden Plan would create tax incentives for companies to invest in manufacturing and research in the United States.
Previous governments have tried to curb the offshoring of jobs and profits. Mr. Trump’s tax cuts cut the corporate rate from 35 percent to 21 percent in hopes of encouraging more domestic investment. It instituted a global minimum tax for United States-based companies and a related effort designed to reduce profit shifting by foreign companies with operations in the country, although both provisions were weakened by later regulations of the Mr. Trump.
Conservative tax experts, including several involved in the writing of the 2017 law, say they have seen no evidence that the law is pushing companies to move abroad. Mr. Biden has assembled a team of tax officials who claim the provisions have provided new incentives for companies to move investments and profits abroad.
Mr. Biden’s plan would increase Mr. Trump’s minimum tax rate and apply it more widely to earnings that U.S. companies earn abroad. Those efforts would try to make it less attractive for companies to make a profit in companies with lower taxes.
That includes discouraging US companies from relocating their headquarters overseas for tax purposes, particularly through the practice known as “inversions,” where companies from different countries merge and create a new foreign-based company.
Under current law, companies with headquarters in low-tax countries can move some of their profits earned by subsidiaries in the United States and return them to headquarters as payment for things like the use of intellectual property, and then deduct those payments from their American income. taxes. The Biden Plan wouldn’t allow those deductions for businesses located in low-tax countries.
Treasury officials estimate that the proposed changes to offshore taxation would generate about $ 700 billion over a 10-year period.
Companies defend their decisions to locate profits and operations offshore, saying they do so for a variety of reasons, including to compete globally.
Business groups overturned the proposal on Wednesday, saying that while they agreed that the United States should invest in infrastructure, the tax plan would put American businesses at a significant competitive disadvantage.
Neil Bradley, an executive vice president and chief policy officer of the US Chamber of Commerce, said in a statement Wednesday that the proposal would “ harm US companies and cost US jobs ” and that it would increase their ability to compete in a global economy. .
And members of the Business Roundtable, representing the chief executives of companies in Washington, said this week that Mr. Biden’s plan for a global minimum tax “threatens to put the US at a severe competitive disadvantage.”
Republican lawmakers also condemned the plan as bad for business, with some on the House Ways and Means Committee saying that “their massive tax increases will be borne by American workers and small businesses.”
Still, some companies indicated that they were open to certain tax increases.
John Zimmer, the president and a founder of Lyft, told CNN on Wednesday that he supported Mr. Biden’s proposed corporate tax rate of 28 percent.
“I think it is important to reinvest in the land and the economy,” said Mr Zimmer. “And as the economy grows, so does employment and people’s needs to get around.”
Mr. Biden’s team hopes that the proposals will eventually lead to a global change in how and where businesses are taxed, which could resolve some of the global competitiveness concerns.
The administration is supporting an effort through the Organization for Economic Co-operation and Development to reach an agreement on the development of a new global minimum tax. Ms. Yellen on Monday expressed support for that effort, and the Biden plan includes measures designed to force other countries to go along with that new tax. Global negotiators aim to reach an agreement in July.