US corporate and global minimum tax measures clear House, debate moves to Senate

By Doug Connolly, MNE Tax

The US House of Representatives today approved a modified version of President Biden’s Build Back Better bill – including corporate and international tax changes – following protracted debates on the revenue and economic impacts of the provisions. The Senate will take up the bill sometime after the Thanksgiving holiday and will likely continue to tinker with provisions that remain contentious.

The bill includes several important international, corporate, and individual tax provisions. Among these, changes to the US international tax regime would aim to align it with the OECD global tax deal by modifying the global intangible low-taxed income provisions to adopt an increased rate and country-by-country calculation. The bill’s tax provisions also include the controversial corporate minimum tax based on book income for large corporations.

Corporate minimum tax controversy continues

Although Biden proposed a corporate minimum tax based on book income in his comprehensive early tax plan released in May, the idea did not gain much traction in Congress until moderate Senator Kyrsten Sinema (D-Ariz.) objected this fall to any increase in the corporate tax rate being included in the bill. As Democrats could not afford to lose a Senate vote, the corporate minimum tax was substituted for the rate hikes that most Democratic lawmakers preferred.

The concept has been championed by progressive Senator Elizabeth Warren (D-Mass.), who touted it in a November 18 release as a way of raising substantial revenue (more than USD 300 billion) by going after large, profitable corporations that in some years pay little to no income tax. She notes that last year alone more than 70 public corporations reported more than USD 1 billion in profits while paying effective tax rates less than 15% – and in some cases “even received net tax refunds.”

If the preference for a minimum corporate tax, as opposed to rate hikes, is based on a conception that rate hikes are worse for economic growth, that preference may be misguided, according to Tax Policy Center’s Thornton Matheson and Thomas Brosy. They contend in a November 18 article that the corporate minimum tax, by undermining the benefit of tax incentives designed to spur investment, would have more of a stifling effect on business investment than a moderate corporate rate hike would.

Other critics of the minimum tax include the American Institute of CPAs, who recently suggested the provision is overly complex and could lead companies to distort their book income, and Tax Foundation, which argues it could disproportionately and unintentionally affect certain industries.

Despite the critics, the provision remains politically popular, with a recent poll finding it enjoys “overwhelming bipartisan popularity” among voters.

Revenue debate settling

Concerns by moderate Democrats about revenue impacts seem to be subsiding as the Congressional Budget Office released its revenue estimates on November 18. The CBO predicted the bill would increase the deficit by USD 367 billion over 10 years – but that is before taking into account revenue gains from increased investments in IRS tax enforcement.

The US Treasury contended that the increased IRS enforcement in the bill would bring in additional revenues in the amount of USD 480 billion – netting USD 400 billion after accounting for the USD 80 billion cost of the investment. CBO was much more conservative, estimating the allocation to ramp up tax enforcement would only raise an additional USD 207 billion, netting USD 127 billion.

Some have contended that the CBO’s estimates are overly conservative. Former Treasury Secretary Larry Summers penned a Washington Post op-ed calling the CBO estimate “conservative to the point of implausibility.” Similarly, Senate Finance Committee Chairman Ron Wyden (D-Ore.) also tended to undermine the CBO estimate, saying in a statement following the CBO release, “I’m confident in the Treasury Department’s estimate, which is backed up by experts and IRS Commissioners appointed by Republican and Democratic presidents.” 

Only time will tell – assuming the final bill is adopted – whether Treasury’s or CBO’s estimate is more accurate. However, after revenue estimates for corporate and international tax measures in the bill were largely confirmed, moderate Democrats, in the House at least, seem to be giving the administration the benefit of the doubt.

“The combination of CBO’s scores over the last week, the Joint Committee on Taxation estimates, and Treasury analysis,” Treasury Secretary Janet Yellen said in a statement the night before the bill’s passage, “make it clear that Build Back Better is fully paid for.”