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U.S. Congressional Research Service Publishes Report on Minimum Taxes on Business Income — Orbitax Tax News & Alerts

The U.S. Congressional Research Services (CRS) has published a new report dated 25 August 2021 on Minimum Taxes on Business Income: Background and Policy Options. The report summary is as follows:


Minimum Taxes on Business Income: Background and Policy Options

Some large corporations pay little or no U.S. tax as they report significant profits to shareholders. In an effort to curb tax avoidance among the largest corporations, the Biden Administration has proposed a 15% minimum tax on worldwide book income for corporations with pretax net income of more than $2 billion. Multilateral organizations have also proposed a worldwide minimum tax, also based on book income. There are several proposals in the 117th Congress to either impose a minimum tax or modify existing minimum tax laws.

One reason some entities pay little in corporate income tax is the deliberate design of the U.S. tax system, which includes specific provisions that reduce corporate taxes, referred to as tax expenditures. These provisions produce a substantial revenue loss relative to the yield of the corporate tax. U.S. corporate taxes relative to worldwide income may also be low because some income is earned abroad, and thus subject to foreign taxes. Various measures are in place to prevent double taxation of that income, including a credit for foreign taxes paid. Income for tax purposes as compared to income reported to shareholders (i.e., book income) can also differ due to limits on the deduction of net operating losses.

Corporate income can be measured in different ways. Economic income is the sum of dividends and distributions paid and changes in the market value of a firm adjusted for inflation. Corporate profits as measured by the National Income and Product Accounts (NIPA) are close to economic income but exclude all or a significant part of foreign-source income and do not include capital gains. The NIPA data also include income from entities that do not pay the corporate income tax. Taxable income is income subject to the corporate income tax as determined by the tax code. Broadly, taxable income is receipts minus deductions with additional adjustments. Taxable income (also referred to as income subject to tax) cannot fall below zero. Book income (also referred to as financial income) is income reported in financial statements, which includes income and deductions guided by accounting standards. Numerous factors affect differences between tax and book income, including the point in the business cycle at which income is measured and the different treatment of many aspects of income and deductions (e.g., foreign-source income, tax-exempt interest, and depreciation).

Corporate profits measured in NIPA are generally higher than income subject to tax. For large corporations, the differences between book income adjusted for tax consolidation rules and tax income (income before net operating losses and special deductions, or exclusions for nontaxed entities), referred to as book-tax differences, vary with the business cycle. Although tax income is generally smaller, financial income can be lower during downturns. Book income has been greater than tax income in recent years.

Over time, corporate profits based on financial measures (adjusted for different consolidation rules about which parts of related firms are included) and tax income before net operating losses track closely, although relationships vary over the business cycle. There has, however, been a general downward trend in the share of corporate income subject to tax.

Effective tax rates measured against a base that is similar to economic income (NIPA) are considerably lower than the statutory rate, even when confined to domestic income tax on domestic income. Taxes are also lower on financial income based on aggregate data provided by the Internal Revenue Service and for studies of certain subsets of large corporations. However, some data on worldwide tax rates show higher rates relative to the statutory rate for large corporations after the 2017 tax cut.

In the past, minimum taxes were adopted by policymakers seeking to ensure that corporations paid at least some amount in corporate income tax. The corporate alternative minimum tax (AMT), prior to its repeal in 2017, created a modified tax base by adding preferences back to the regular income tax base. A portion of the AMT relied on book income in the late 1980s. A future minimum tax might be considered for a similar purpose, and to address ongoing concerns that some have raised about tax avoidance. The Biden Administration has proposed a 15% minimum tax on financial income of large firms. Recently, the United States has enacted minimum taxes that apply to multinational firms in the international context. Current minimum taxes include the tax on foreign-source intangible income (the tax on global intangible low-taxed income, or GILTI) and the alternative minimum tax, which adds back certain payments to related foreign corporations (the base erosion and anti-abuse tax, or BEAT). Multinational proposals for a global minimum tax would base the tax on financial income, aimed at addressing base erosion (Global Anti-Base Erosion, or GloBE). A key concern about minimum taxes, some say, is that they may reduce the effect of intended incentives in the tax code. Current minimum tax proposals would rely on financial income, raising concerns among some observers that such taxes could encourage the manipulation of book profits to avoid taxes.