Tax Provision in Reconciliation Bill would Limit Multinational Profit Shifting to Tax Havens

Yesterday, Senator Majority Leader Chuck Schumer (D-NY) and Senator Joe Manchin (D-WV) announced that they reached a deal on a reconciliation package that would change current U.S. tax law to benefit domestic American companies. The Inflation Reduction Act will implement a 15 percent Corporate Alternative Minimum Tax (CAMT) on foreign and American multinational companies with over $1 billion in profits. While the most prominent public companies paid an average federal tax rate of just 8.9 percent, U.S. domestic companies paid 15 to 18 percent in 2019. 

Under our current system, multinational companies have an inherent advantage over domestic American companies because they profit-shift money and jobs to tax havens, and use other tax avoidance techniques that put domestic firms at a distinct disadvantage. To date, American competition with foreign multinational tax advantages has not yielded positive results for domestic corporations. Currently, multinational corporations can negotiate between their own companies in the same ‘International Financial Reporting Group’ to their own tax advantage. Conversely, domestic companies have no foreign subsidiaries to hide profits in a tax haven by default.  

This new proposed reconciliation bill would be the first real step towards prioritizing our smaller domestic companies. The CAMT holds multinational corporate groups accountable by using the financial data they report to shareholders. Using this data means multinational corporations will be less likely to pay a lower tax rate than what is available to a domestic company. In short, the Inflation Reduction Act starts to protect domestic manufacturing and businesses.

For the CAMT to apply, a company must have over $1 billion in profits and pay less than 15 percent in effective taxes, according to their shareholder reports. And if the legislation reflects the previous work, foreign multinationals with enough presence in the U.S. will face similar taxes.

By holding these behemoth corporate financial groups accountable (not just looking at individual subsidiary companies), multinational corporate profit shifting can be significantly curtailed. These corporations are incentivized to report the most robust profit reports to shareholders. Therefore, using their financial accounting reports to determine a minimum tax liability in the range of domestic company average rates makes sense.

This Book income allows tax reduction to 15 percent, but not tax negation to below those numbers, with some R&D exceptions. While this proposal does not eliminate all tax avoidance, CPA is strongly supportive of this measure because actual American companies have a better chance to compete by limiting this gigantic tax gift to the biggest multinational companies in the world.