If you’ve ever tried competing with the likes of Amazon, you know that their mammoth size is not only because their companies are run by smart executives, but because their tax burden is at least two times lower than your own. This gives them more money to invest and take over markets. Much of this is because they have offshored profits through subsidiaries in global tax havens. Few are investing locally.
In 2020, over 75% of pharmaceutical giant AbbVie’s sales were in the U.S. market, yet only 1% of AbbVie’s income was reported in the United States for tax purposes. AbbVie’s ability to exploit subsidiaries in offshore tax havens to avoid paying billions of dollars in taxes on U.S. prescription drug sales signals a clear need to reform the international tax code. AbbVie has continuously paid an effective tax rate that is less than half the U.S. corporate tax rate of 21%. In 2020, a CPA report showed that global multinational companies paid an effective tax rate of around 9% in 2019. – from Big Pharma Tax Avoidance: Senate Finance Committee Investigation Reveals Extent to Which Pharma Giant AbbVie Exploits Offshore Subsidiaries to Avoid Paying Taxes on U.S. Drug Sales, July 2022.
That could change. Global corporations are not happy about it because their taxes will go up if the Inflation Reduction Act becomes law. The bill is known mainly as a tax and incentives program for solar, electric vehicle infrastructure, and farms that produce biofuels and commit to lowering greenhouse gas emissions.
But included in the bill is the corporate alternative minimum tax (CAMT), which will put a fairly solid floor of 15% on what global corporations have to pay in federal income tax. Most of them pay well under that after write-offs. CAMT targets offshoring multinationals first and foremost.
Those who are against it include global corporations and some members of Congress like Senator Mike Crapo (R-ID) who argue that the CAMT will ‘hit manufacturers’ the hardest.
But what type of manufacturer, exactly? Only those making over $1 billion a year on average over a three-year period, mostly all of them global in nature, and many of them heavily dependent on contract manufacturing abroad. CAMT levels the playing field for those who manufacture at home, or who have the bulk of their business here in the U.S., rather than promoting a tax policy that benefits global giants who offshore and rely on global supply chains instead of domestic ones.
Using Idaho as an example, multinational chip maker Micron Technologies paid around 6.4% in taxes to the federal government in the third quarter of 2021.
David Morse, tax policy director for the Coalition for a Prosperous America, said the Inflation Reduction Act is not a perfect bill. It still has at least two allowable tax deductions that can get multinational tax rates below 15% of pre-tax profit. But it is a step in the right direction. It levels the playing field by getting big companies to pay a higher percentage in taxes than they do now.
CPA takes no position on the benefits or detriments of the full legislation.
Why would a domestic company like CAMT? What’s in it for them?
“If you’re the Albertsons Companies, which had over a billion dollars in income in 2021, and pays over 20% in Federal Corporate Income Taxes, this does not mean you will go down to 15% unless you can show you have the deductions to get you there. Seeing how they have not had those deductions to date, then they will probably not get to 15%. So what’s in it for Albertsons is that they have competition that has been using profit shifting and making deals overseas to reduce their effective tax rate. While they give up over 20% of their profits to the government, Amazon gives up about three times less even though in dollar values, of course, Amazon pays out more because it makes more money. What a company like Albertsons wants is for their competition to pay a tax rate closer to what they pay. It’s even more important for smaller shops on Main Street that try to compete with e-commerce companies with foreign manufacturing because again they are giving away more of their profits while the big corporations have less to give away to the IRS and can use that capital to take away market share. CAMT is not perfect as is, but these companies will have a better chance to compete the big global companies that have had a sweetheart deal from profit shifting and tax avoidance will then have less opportunity to do that. With less money to spend on gobbling up competitors, they have to compete without getting the same big tax advantage.”
If a domestic company wants to lower its tax burden, how could it be more like Amazon?
“Become a multinational, hire expert tax specialists that know how to use arcane terms like Transfer Pricing, be ready to overvalue and sell intellectual property and establish production overseas. But I’d rather we reward those domestic companies for being loyal. It is better for economic security and social cohesion when you have a strong manufacturing base at home.”
Multinationals will not like the doubling of their tax burden. Is it possible to convince them otherwise?
“Multinational corporations that pay above 15% effective tax rate regularly should love the opportunity to level market competition, but I can’t imagine any aggressive tax avoider happy to lose their tax advantage over their competitors.”
But CAMT says big companies will pay “at least” 15%. Does that mean it could be more?
“Unlikely, because the write-offs and deductions they have now are what is getting them to such a lower Federal income tax rate. Those exemptions will remain, only will stop at 15%. That’s the minimum they will pay. They can pay more in taxes overall if you consider state and municipal taxes. But for sure, every single one of the less than 15% corporations earning over one billion in profits annually over a three-year period will have a higher tax liability. The most important issue CAMT resolves in my view is profit shifting and accelerated depreciation. Domestic companies have a hard time getting below 15%; global corporations with offices and logos all around the world do not.”
Republicans need to stop defending corporate America. They are woke and wealthy.
Why fight to give them lower taxes? They aren’t with us….
— Richard Grenell (@RichardGrenell) August 2, 2022
Is this alternative minimum tax designed to make offshoring less interesting?
“Yes. This proposal has revived the question of who pays the corporate tax indirectly. This concept, known as tax incidence, is often allocated to labor. The argument follows that labor pays a chunk of the corporate tax. But if your corporate tax is lower for the types of corporations that offshore production, this tax incidence is better for those offshore production sites. Meaning, current effective tax rates through corporate tax incidence are higher on domestic labor than foreign labor. If you don’t tax equally, the one with the lower tax rate has the benefits, and the benefit goes to the ones who offshore labor, making the offshoring of manufactured goods more profitable because of taxation. Even companies who sell to the multinationals from here are competing against that company’s subsidiaries and overseas partners who already have lower overhead costs for many reasons – low regulations and lower labor costs being the two most obvious. Meanwhile, the domestic producer has higher costs, a higher tax burden, and that results in less money to invest in production.”
If passed, corporations earning $1 billion or more would have two types of write-offs left to get them below 15%. What are they?
“They’d still be allowed foreign tax credits for what they have paid in income taxes to foreign governments and a limited R&D tax credit. This could get them under 15% in some cases.”
According to a Morning Consult poll conducted between July 29 and 31, the corporate alternative minimum tax has a strong 64% support, with 38% saying they strongly support. The total opposition to the tax hike for billion dollar sales companies stands at 21%.
You said a recent study by Congress’s Joint Committee on Taxation failed to address a key point: that our current tax system rewards overseas producers at the expense of domestic U.S. firms. How so?
“We have been so busy trying to compete with foreign multinationals that we forget about domestic corporations and these corporations should not be paying a higher effective tax rate than the biggest companies in the world, in percentage terms. You have to stick to the percentage paid out in the effective tax rate and not the C-Corp statutory rate because this is what the company is actually paying out to the IRS after tax write-offs and deductions. A company like Amazon gets more tax write-offs than a local Barnes and Nobel because they can allocate their profits to their foreign subsidiaries that they control. The domestic companies cannot do this by default, because if you’re domestic your corporate headquarters are where your CEO sits and where your staff goes to work…not where your lawyer’s secretary sits in the Isle of Man.”
For too long, Washington has ignored this glaring disparity in effective tax rates between domestic corporations and global enterprises. This has been particularly troubling for smaller U.S. companies since they employ the bulk of the U.S. workforce while facing a particularly uneven tax environment compared to their overseas competitors.
The proposed legislation on a corporate alternative minimum tax will only require the country’s largest companies to pay 15% of their income to the Federal government. It will double the tax liability for many of them. But it moves those companies closer to what domestic U.S. companies are obligated to pay, including those with income streams of more than one billion dollars a year.