Explainer: How could the new US corporate minimum tax affect companies? – Reuters | Vette Leader

WASHINGTON, Aug 10 (Reuters) – The key revenue stream of the US Senate’s newly passed tax, climate and drug bills is a novel 15% minimum corporate tax aimed at preventing large, profitable companies from breaking the Internal Revenue Service code to gamble to reduce their tax bills to zero.

The bipartisan Joint Committee on Taxation estimates the new tax will increase US government coffers by about $222 billion over the next 10 years, compared to a previous forecast of $313 billion following changes to the bill last year Minute. It applies to companies with more than $1 billion in “book earnings,” the earnings they report to shareholders before the impact of tax deductions and credits.

Here are some key details of how it would work:

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What is corporate income tax?

A plethora of deductions, credits, and loopholes in the federal tax code have allowed some companies to report no income or negative income to the IRS while reporting strong profits to shareholders. Democratic President Joe Biden has repeatedly singled out Amazon.com Inc (AMZN.O) for paying little to no federal income tax despite making billions in profits. Continue reading

When enacted, the tax will serve as the corporate version of the Alternative Minimum Tax for individuals, preventing the wealthiest Americans from balancing their tax bills with investment losses and other deductions and credits.

The tax would likely apply to around 150 of the world’s largest companies, according to an analysis by the Joint Committee on Taxation. These include big pharma and conglomerates such as Amazon (AMZN.O), Apple Inc (AAPL.O), Exxon Mobil Corp (XOM.N) and Nike Inc (NKE.N), according to several think tanks supporting the new VAT. Amazon declined to comment on a possible tax increase. Apple, Exxon Mobil and Nike did not respond to requests for comment.

Companies that hit that threshold must calculate their taxes under both the 21% personal income tax system and the 15% corporate tax system – and foot the higher bill.

The tax would go into effect next year and would affect companies that have earned an average of $1 billion in book revenue for three consecutive years. It would also apply to foreign companies that generate $100 million in book revenue in the United States.

What exceptions are there for companies?

Some regular corporate tax credits and deductions are still allowed under the minimum tax, including credits for foreign taxes paid. The loss carried forward from the previous year to offset future income is also permitted, but only up to 80% to reduce taxable income. Credits for research and development costs are also allowed, with 75% of the value used to reduce the corporate minimum tax.

At the urging of Democratic Senator Kyrsten Sinema, lawmakers added a provision to retain deductions on capital investments such as machinery, vehicles and buildings. The exemption would allow companies to claim those expenses for tax purposes more quickly.

Under another last-minute change in legislation Sinema is calling for, companies controlled by private equity firms will not be subject to the minimum corporate tax if they have less than $1 billion in book earnings, even if the combined Company portfolio of this investment firm exceeds the threshold. Some private equity firms may be able to move assets between companies in their portfolios so each earns less than the $1 billion threshold to avoid the minimum tax.

Accounting income will be calculated based on the income companies report to shareholders, and the new tax may give companies an incentive to lower the accounting income they report, law firm Baker Hostetler said in a recent statement. They pointed to an impartial report from the Congressional Research Service showing how previous efforts to collect taxes based on accounting receipts have forced corporate taxpayers to manage their revenue and adjust accounting receipts to lower taxes.

Large corporations may also try to lobby the nongovernmental Financial Accounting Standards Board for favorable changes to accounting revenue calculation rules.

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reporting by Rose Horowitch and David Lawder; Editing by Jonathan Oatis

Our standards: The Thomson Reuters Trust Principles.

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