Corporate Taxation Updates – Changes and Implications
Not only were tax cuts for corporations not passed down to workers and communities, but corporate earnings have reached record and historically high levels. Numerous proposals to increase taxes on corporations get at this goal, whether through minimum book income taxes or new taxes on stock buybacks.
corporate taks would increase from 35 per cent under current law to 28 per cent under the presidential budget plus new taxes on cross-border transactions and foreign intangibles.
The TCJA
The TCJA’s largest inflation trigger was to replace the standard consumer price index (CPI) measuring inflation with chain-weighted CPI. Chain-weighting accelerates bracket creep because the way the IRS measures inflation as a share of purchasing power puts a greater burden on lower-income taxpayers. The Senate Internal Revenue (IRS) budget for FY23 provides an interesting comparison, as it reveals how much more (actually) wealthy people relish the prospect of using inflation to their advantage. The TCJA’s inflation traps benefit individuals who are also the wealthiest Americans. These are the major US indexes that are not tied to chained CPI (the House bill also provides structure for this purpose). Let’s examine the differences in nominal, inflation-adjusted, and real personal income for Judge Gorsuch and Breyer from 2001 to 2021. TCJA changed the deductibility of net interest paid or accrued by a corporation TCJA had a second, related impact on corporate capital structure. Simone and her coauthors assembled a dataset of employee benefits announcements starting from 1997 through 2019 and found that those firms that anticipated larger net tax benefits from the legislation were more likely to announce new employee benefits. Ultimately, the TCJA cut corporate tax revenues in 2018, but they’re increasing now as the economy grows and corporate profits rise. If Congress makes the expiring provisions permanent (like 100 per cent bonus depreciation or the 20 per cent qualified business income [QBI] deduction), it shouldn’t do so without preventing revenue from ending up in the hands of the federal government.
The Base Erosion and Anti-Abuse Tax (BEAT)
Established as a part of the international tax reform provisions of the Tax Cuts and Jobs Act of 2017 and effective since 2018, the purpose of BEAT is to disincentivise profit-shifting by multinationals to low-tax countries by applying a minimum tax that runs alongside corporate income taxes and denies the deduction (ie, disallowance, in tax accounting, of expenses that cannot be compensated or recovered) of ‘base erosion payments’. Three thresholds must be met for an ‘Applicable Taxpayer’. It must have annual gross receipts of over $500 million in any of three years prior, and it must have a significant portion of payments flowing through related parties in low-tax jurisdictions not commensurate with income earned. Yet, through a recent study, we’re finding BEAT may be declining in effectiveness, because of tactics MNEs use that allow them to circumvent it. Firms have been reclassifying BEAT payments as cost of goods sold (which are not structurally part of the BEAT calculation and would not incur tax liability).
The Corporate Alternative Minimum Tax (CAMT)
The IRA imposes a 15 per cent minimum tax on the adjusted financial statement income (AFSI) of large corporations through the Corporate Alternative Minimum Tax (CAMT), a tax parallel with some important differences from prior AMT regimes. Whereas prior AMT regimes assessed tax liability against taxable income, CAMT uses AFSI to determine tax liability. Profit calculated in this manner has to be ‘tax-adjusted’ because expenses in a firm’s financial statements are not accurately reflected in corporate income tax laws. Even the tax-adjusted profit calculation is different for an economically integrated domestic corporation compared with a foreign-parented multinational group. Moreover, tax compliance is difficult and tax resource use is labour-intensive; compliance activities, including monitoring, should be conducted efficiently and effective, and tax resource use requires tax managers to remain vigilant. In addition, the Notice provides valuable clarification regarding the deduction for the absorption of financial statement net operating losses (FSNOLs) for AFSI purposes. Unfortunately, though, insurers and other taxpayers will still be left with many open questions about mark-to-market accounting; the Treasury regulations should be forthcoming any day now.
The New York City Business Corporation Tax
More recently, Microsoft-driven tax commissions have been urging state and local governments to simplify and scale back needless complexity and burden, to facilitate business expansion. New York State’s 2014 corporate tax reform is a grand slam by the frontdoor blueprint: a dramatic flattening of both base rates and rate structures to make the system easier. Just last week, the governor of New York signed a bill to bring New York City into compliance with New York State’s corporate net income tax nexus standards through an economic nexus threshold that permits the city to impose its corporate net income tax upon corporations having at least $1 million of receipts generated within the city limits, as well as through provisions ensuring that the City will follow market-based sourcing rules. Further, the City amended its BCT provisions that allocate income to flow-through entities to mirror the State’s UBT which places receipts allocation based on where the performance occurred – not where the contract provision provides for payment – and allocation factors for partnership receipts altered to include revenue, payroll, and property owned or used within the City’s borders as three separate factors by which the income is allocated. The substance of this legislation presents several issues that taxpayers must be conscious of.
