WASHINGTON — Large companies like Apple and Bristol Myers Squibb have long employed complicated maneuvers to reduce or eliminate their tax bills by shifting income on paper between countries. The strategy has enriched accountants and shareholders, while driving down corporate tax receipts for the federal government.
President Joe Biden sees ending that practice as central to his $2 trillion infrastructure package, pushing changes to the tax code that his administration says will ensure American companies are contributing tax dollars to help invest in the country’s roads, bridges, water pipes and other parts of his economic agenda.
On Wednesday, the Treasury Department released the details of Biden’s tax plan, which aims to raise as much as $2.5 trillion over 15 years to help finance the infrastructure proposal. That includes bumping the corporate tax rate to 28% from 21%, imposing a strict new minimum tax on global profits and levying harsh penalties on companies that try to move profits offshore.
The plan also aims to stop big companies that are profitable but have no federal income tax liability from paying no taxes to the Treasury Department by imposing a 15% tax on the profits they report to investors. Such a change would affect about 45 corporations, according to the Biden administration’s estimates, because it would be limited to companies earning $2 billion or more per year.
“Companies aren’t going to be able to hide their income in places like the Cayman Islands and Bermuda in tax havens,” Biden said Wednesday during remarks at the White House. He defended the tax increases as necessary to pay for infrastructure investments that America needs and to help reduce the federal deficit over the long term.
Still, his 15% tax is a narrower version of the one he proposed in the 2020 campaign that would have applied to companies with $100 million or more in profits per year.
Biden’s proposals are a repudiation of Washington’s last big tax overhaul — President Donald Trump’s 2017 tax cuts. Biden administration officials say that law increased the incentives for companies to shift profits to lower-tax countries, while reducing corporate tax receipts in the United States to match their lowest levels as a share of the economy since World War II.
Treasury Secretary Janet Yellen, in rolling out the plan, said it would end a global “race to the bottom” of corporate taxation that has been destructive for the American economy and its workers.
“Our tax revenues are already at their lowest level in generations,” Yellen said. “If they continue to drop lower, we will have less money to invest in roads, bridges, broadband and R&D.”
The plan, while ambitious, will not be easy to enact.
Some of the proposals, like certain changes to how a global minimum tax is applied to corporate income, could possibly be put in place by the Treasury Department via regulation. But most will need the approval of Congress, including increasing the corporate tax rate. Given Democrats’ narrow majorities in both the Senate and the House, that proposed rate could drop. Already, Sen. Joe Manchin of West Virginia, a crucial swing vote, has said he would prefer a 25% corporate rate.
Biden indicated he was willing to negotiate, saying: “Debate is welcome. Compromise is inevitable. Changes are certain.” But he added that “inaction is not an option.”
At the core of the proposal is an attempt to rewrite decades of tax-code provisions that have encouraged and rewarded companies that stash profits overseas.
It would increase the rate of what is essentially a minimum tax on money American companies earn abroad, and it would apply that tax to a much broader selection of income. It would also eliminate lucrative tax deductions for foreign-owned companies that are based in low-tax countries — like Bermuda or Ireland — but have operations in the United States.”
“We are being quite explicit: We don’t think profit-shifting is advantageous from a U.S. perspective,” David Kamin, the deputy director of the National Economic Council, said in an interview. “It is a major problem,” he said, adding that with the proposed changes, “We have the opportunity to lead the world.”
The corporate income tax rate in the United States is currently 21%, but many large American companies pay effective tax rates that are much lower than that. Corporations that have operations in multiple countries often shift assets or income — sometimes in physical form, but other times, simply in their accountants’ books — between countries in search of the lowest possible tax bill.
Companies also shift jobs and investments between countries, but often for different reasons. In many cases, they are following lower labor costs or seeking customers in new markets to expand their businesses. The Biden plan would create new tax incentives for companies to invest in production and research in the United States.
Previous administrations have tried to curb the offshoring of jobs and profits. Trump’s tax cuts reduced the corporate rate to 21% from 35% in the hopes of encouraging more domestic investment. It established a global minimum tax for corporations based in the United States and a related effort meant to reduce profit-shifting by foreign companies with operations in the country, though both provisions were weakened by subsequent regulations issued by Trump’s Treasury Department.
Conservative tax experts, including several involved in writing the 2017 law, say they have seen no evidence of the law enticing companies to move jobs overseas. Biden has assembled a team of tax officials who contend the provisions have given companies new incentives to move investment and profits offshore.
Biden’s plan would raise the rate of Trump’s minimum tax and apply it more broadly to income that American companies earn overseas. Those efforts would try to make it less appealing for companies to book profits in lower-tax companies.
Treasury Department officials estimate the proposed changes to offshore taxation would raise about $700 billion over 10 years.
Companies defend their decisions to locate profits and operations offshore, saying they do so for a variety of reasons, including so that they can compete globally.
Business groups blasted the proposal on Wednesday, saying that while they agreed that the United States needed to invest in infrastructure, the tax plan would put American firms at a significant competitive disadvantage.
Republican lawmakers also denounced the plan as bad for business, with some on the House Ways and Means Committee saying that “their massive tax hikes will be shouldered by American workers and small businesses.”
Still, some companies expressed an openness to certain tax hikes.
John Zimmer, the president and a founder of Lyft, told CNN that he supported Biden’s proposed 28% corporate tax rate.
“I think it’s important to make investments again in the country and the economy,” Zimmer said. “And as the economy grows, so too does jobs and so too does people’s needs to get around.”