WASHINGTON Reuters - The primary revenue source in the U.S. Senate's tax, climate and drugs bill is a novel 15% corporate minimum tax that will stop large, profitable companies from gaming the Internal Revenue Service code to slash their tax bills to zero.
The Joint Committee on Taxation estimates that the new tax will add about $222 billion to U.S. government coffers over the next 10 years, down from a previous projection of $313 billion. It will apply to companies with more than $1 billion in book income, the profits they report to shareholders before the effects of tax deductions and credits.
Here are some key details on how it would work:
What is the corporate minimum tax?
Some companies report no income or negative income to the IRS despite reporting strong profits to shareholders because of the deductions, credits and loopholes in the federal tax code. Democratic President Joe Biden has repeatedly singled out Amazon.com Inc for paying little to no federal income tax despite billions of dollars in profits.
If enacted, the tax will serve as a corporate version of the Alternative Minimum Tax for individuals, which prevents the wealthiest Americans from zeroing out of their tax bills with investment losses and other deductions and credits.
According to the Joint Committee on Taxation, the tax would apply to around 150 of the world's largest companies. According to several think tanks that support the new tax, these include large pharmaceutical companies and major corporations like Amazon, Apple Inc, Exxon Mobil Corp and Nike Inc. Amazon didn't say anything about the potential tax increase. Apple, Exxon Mobil and Nike didn't respond to requests for comment.
Companies that meet this threshold must pay higher rates, as well as the 21% income tax regime and 15% corporate minimum tax regime.
The tax would take effect next year and affect companies that earned an average of $1 billion in book income for three consecutive years. It would apply to foreign companies that earn $100 million of book income in the United States.
What are the exceptions for companies?
Credits for foreign taxes paid are allowed under the minimum tax, as well as some regular corporate income tax credits and deductions. The carrying forward of prior-year losses to offset future income is also permitted, but only 80% can be applied to reducing taxable income. Credits for research and development expenses are also allowed, with 75% of the value being applied to reducing corporate minimum tax.
The provision to preserve deductions on capital investments such as machinery, vehicles and buildings was added at the urging of Democratic Senator Kyrsten Sinema. The exception would allow companies to offset costs against tax bills.
Under a last minute change to the legislation urged by Sinema, companies controlled by private equity firms are not subject to the corporate minimum tax if they make less than $1 billion of book income, even if the investment firm's combined portfolio of companies exceeds the threshold. Private equity firms may be able to move assets among companies in their portfolios so that each earns less than the $1 billion threshold to avoid the minimum tax.
The new tax may give companies an incentive to lower the book income they report, law firm Baker Hostetler said in a recent note that book income is calculated based on the income companies report to shareholders. A nonpartisan Congressional Research Service report showed how past efforts to levy taxes based on book income forced corporate taxpayers to manage their earnings and adjust book income to reduce taxes.
Large companies could try to lobby the Financial Accounting Standards Board for favorable changes to the rules for book income.