In October 2021, 136 countries including the U.S. came together through the OECD and agreed to enforce a corporate tax rate of 15%, aiming to create a fairer system of taxing profits where they are earned. For years, countries have been competing to house corporate headquarters because they promised jobs and investment, making it well worth the tax reductions offered. But today’s digital powerhouses no longer offer jobs, investments, or even bricks and mortar. Instead, they are moving to low tax jurisdictions to maximize profits. The global minimum tax aims to halt forum shopping and tax avoidance.
Reining in corporate forum shopping has shifted the domestic discussion here in the U.S., where the Institute of Taxation and Economic Policy reported that 55 profitable corporations paid NO federal income tax in 2020. Moreover, while companies pay different amounts year-to-year, most companies pay far less than the current 21% corporate rate.
To address this gap, the U.S. House of Representatives passed President Biden’s Build Back Better legislation, which included a 15% minimum corporate tax plan. While the Senate has not passed the House’s version of Build Back Better, several Senate Democrats unveiled a corporate minimum tax plan last November, which would apply to companies that publicly report more than $1 billion in annual profits, on average, over a three-year period. The Senate plan would impact about 200 American corporations and could result in those companies paying at least 15%. However, some corporations may still pay less, as the Senate legislation would preserve tax credits for corporations that promote investments in research and development, clean energy, and affordable housing. The Senate version also provides flexibility for corporations to carry forward losses and account for federal taxes paid.
According to the non-partisan Joint Committee on Taxation, the Senate minimum tax proposal would raise close to $320 billion over 10 years – an additional $32 billion a year. If the Senate version passes, President Biden has directed the additional revenue to pay for programs in his Build Back Better legislation including improvements in childcare and health care and efforts to reduce poverty.
How likely is it that corporations with profits exceeding $1 billion dollars will be subject to a 15% minimum tax next year? So far, the timing is unclear whether the Senate proposal will pass the Senate in 2022, but there are some opportunities for it to happen. While the entire Build Back Better proposal appears dead in the Senate, there will be an attempt to corral support for specific provisions of the legislation, and the tax proposal is one that remains top of mind for legislators.
Because of a procedure in the legislative process known as “reconciliation”, the Senate can pass legislation related to revenue and the budget with only 50 votes – but that means that ALL 50 Senate Democrats must agree. And that has proven to be a challenging, if not impossible task.
Immediately on the agenda for both the House and the Senate is to pass numerous appropriations bills so the U.S. government will be funded through the end of the fiscal year – September 30, 2022. – before current funding expires on February 18th. While appropriations discussions continue, there are sure to be more discussions about disaggregating Build Back Better and what can be achieved through reconciliation.