US tax plan shifts, with corporate minimum tax in, rate hikes out

By Doug Connolly, MNE Tax

Update October 28, 2021: Framework released. Confirms 15% corporate minimum tax and 15% global minimum tax on country-by-country basis. Billionaires’ tax is out, but adds surtax on individuals with income of more than USD 10 million.

Democrats appear poised to adopt for their budget bill a corporate minimum tax of 15% on the book income of the most profitable companies, with an updated proposal for such a tax released October 26 by Senators Elizabeth Warren (D-Mass.), Angus King (I-Maine), and Ron Wyden (D-Ore.).

Negotiations continue today on the final package for the bill, with the fate of several major tax and spending provisions still uncertain.

The book tax proposal has been floated before but got new traction due to objections by Senator Kyrsten Sinema (D-Ariz.) to any increase in the corporate tax rate. Biden and Democratic lawmakers cannot afford to lose a single vote in the Senate if they are to get their “Build Back Better” budget bill to squeak by. Accordingly, as a pay-for for their social policy agenda, they have limited options other than to swap a straightforward corporate rate increase for an ambitious but relatively untested policy idea.

The corporate alternative minimum tax has parallels to, but is different from, the global minimum tax agreed to in OECD Inclusive Framework negotiations earlier this month. Both set out a 15% minimum rate and would apply in some form to income determined under financial accounting principles.

However, while the global minimum tax would allow countries to impose “top-up” taxes to prevent corporations from shifting profits into tax havens, the corporate minimum tax would prevent companies from using tax credits, deductions, or “loopholes” to report low or no taxable income while reporting substantial profits to shareholders.

Corporate minimum tax

The updated corporate minimum tax proposal would not fully wipe out the ability of corporations to benefit from available tax benefits. It would retain various business credits, including for research and development (R&D), clean energy, housing, and foreign taxes paid. It would also allow companies to carry forward losses to offset liability for the minimum tax in future years.

Accordingly, the proposal would allow affected corporations more flexibility with the minimum tax on book income than they would have had under a similar proposal released by Senator Warren in August. The scope of the tax has also been pared down. Warren’s original plan would have applied to companies reporting more than USD 100 million in book income, which would have impacted about 1,300 public companies.

The new book income tax proposal is limited to very large companies – those reporting more than USD 1 billion in profits. That’s only about 200 companies.

Biden had proposed a minimum tax on book income in his Green Book tax plan released in May. His proposal would have applied a 15% tax on worldwide book income for corporations that have worldwide book income in excess of USD 2 billion.

Biden tried unsuccessfully to get moderate Republicans to sign onto the corporate minimum tax idea for a bipartisan bill this summer. Lead Democratic congressional tax writers also declined to endorse the idea, initially, in the August Senate draft bill and September House draft bill. Yet it lives.

Billionaires’ tax

The corporate minimum tax proposal arrives coupled with a parallel novel tax proposal directed at the wealthiest individuals. If adopted, the “Billionaires Income Tax” could serve as an alternative to increases in the individual income tax rate for high earners.

Proposed by Senate Finance Committee Chairman Wyden on October 27, the measure would tax the wealth of ultra-rich individuals through annual mark-to-market taxation of tradable assets and other provisions. It would only apply to individuals that have more than USD 1 billion in assets or USD 100 million in annual income for three consecutive years. That would limit its application to roughly 700 individuals.

The adoption of the billionaires’ tax proposal seems less likely than the corporate minimum tax. Initial comments regarding it from Senator Joe Manchin (D-W.Va.) – another essential moderate vote – have been critical, suggesting it’s overly complicated and too narrowly targeted.

Global minimum tax

Neither of the new proposals addresses the status of plans to adjust the global intangible low-taxed income (GILTI) provisions to align with the October 8 OECD deal. In general, the GILTI rate would have to be increased to at least 15% and the calculation moved to a country-by-country basis.

Biden had initially sought to increase the GILTI rate to 21%. However, last month’s House bill proposed a more modest increase, and there have been reports that Democrats might settle for even less – i.e., the bare minimum to align with the OECD deal. Still, enacting even a more modest GILTI modification to align with the OECD deal remains uncertain.

Nonetheless, after succeeding in reaching an international agreement on a global minimum tax on such a large scale, it seems unlikely that the Biden administration would easily let the provision slip from the final package for the US bill. The global minimum tax gained the endorsement of 136 countries earlier this month after the Biden Administration had been pushing for it since spring.

A clearer picture of the coming international tax landscape should emerge soon. Democrats aim to sort out this week – ideally, and possibly even today – the final framework for a budget deal between Biden and the party’s progressive and moderate wings.