Tax Reform in the United States: Alternative Minimum Tax on Corporations and repurchase of corporate stock

Considering the global influence of the economic decisions made by the United States, including its tax policy[1], it is of great interest to know the scope and fundamentals of the tax measures of the recently approved Inflation Reduction Act (IRA).

Corporate Alternative Minimum Tax (AMT)

The AMT creates a new minimum corporate income tax of 15% based on the modified financial statements (similar to accounting).

According to the senate Democratic caucus, as many as 125 corporations averaging $9 billion in profits paid effective tax rates of only 1.1 %[2], and 55 large corporations paid no tax in the fiscal year 2020[3], so the minimum tax tends to make them to pay their fair share.

The taxable base is the annual adjusted financial statement (AFSI) of those companies with revenues of USD 1 billion or higher on average annually for three years. The tax uses accounting concepts for the tax rules in order to determine that it is a taxable profit.

Corporations with a foreign parent are also subject to this tax, to the extent that the income of their international group exceeds USD 1 billion and the average AFSI of the corporation exceeds USD 100 million[4].

Excise “Tax on Repurchase of Corporate Stock” (-TRCS-)

It creates a non-deductible excise tax on stock repurchases of publicly traded corporations. The aliquot is 1% of the market value[5].

The tax applies to any repurchase by a corporation (or certain affiliates), as well as to repurchases of shares of publicly traded non-U.S. corporations by certain U.S. affiliates.

The need for its application results from the fact that at present buybacks are tax-free, and through them companies concentrate power (they obtain an artificial increase in shares) and reward their executives.

For these reasons, the buybacks in the US were illegal until 1982. The Securities and Exchange Commission lifted that ban after reasoning that companies sometimes needed to buy back shares for legitimate reasons, according to Will McBride[6].

Other tax measures

  • Personal Income Tax: The measures Extend the limitation on business loss carryforwards enacted by the Tax Cuts and Jobs Act (TCJA) of 2017 for two years through 2028 and the extended health insurance premium tax credits provided in the American Rescue Plan Act (ARPA).
  • Green energy: Modifies, extends, and creates a variety of tax credits for green energy and other efforts through 2031 or 2033. Increases the “superfund” tax on crude oil and imported oil to 16.4 cents per barrel (indexed to inflation) and increases other taxes and fees on the fossil fuel sector.
  • Tax penalty– of 95% to drug manufacturers to reduce their drug prices.
  •  Research and development: Increase by USD 250 thousand the amount of tax credit that can be claimed against payroll taxes for small businesses.[7].

Tax administration improvements (IRS)

Any reform must entail the necessary improvements in the tax administration so that it can implement it effectively. Many reforms have failed because tax policy makers have not taken into consideration the need to provide the tax agency with the necessary resources.

According to recent polls, almost three-quarters of Americans believe that the IRS should conduct more tax audits of large corporations and millionaires.

Therefore, it is noteworthy that this reform provides approximately USD 80 billion to the Internal Revenue Service (IRS-)[8] over a ten-year period for tax enforcement, compliance, operations support and modernization. According to the Senate Democratic caucus, these are funds needed to rebuild their aging systems.

Specifically, the IRA awards $3,180 million for taxpayer services, $45,640 million for execution, $25,330 million for operations support and $4,750 million for system modernization.

It also provides $15 million for the IRS to submit a report to Congress detailing the cost and feasibility, among other factors, of developing a free direct e-file tax return system.

The rule emphasizes that the IRS may not use any of the funds appropriated by the IRS to increase taxes on taxpayers with incomes below $400,000.

Tax revenue

According to TAX FOUNDATION[9], the House bill would raise about $324 billion in federal revenue from 2022 to 2031. The bill includes about $676 billion in gross revenue increases, comprised of about $213 billion in corporate tax increases, $54 billion in individual tax increases, $130 billion net of additional IRS tax enforcement, $278 billion of drug pricing provisions, and about $1.1 billion in net revenue from items qualified by the Joint Committee on Taxation (JCT).

Conclusion

The tax reform shows a strategic change in the US tax policy, placing the emphasis on taxing the income of large corporations with a minimum tax based on financial or accounting profits, to avoid taking advantage of the tax loopholes of the traditional Income Tax.

In addition, it includes taxing the repurchase of shares with a specific consumption tax to prevent them from concentrating their power and rewarding executives, instead of investing in the salary of their workers, lowering the price of products or investing in new technologies.

To protect the climate, it applies tax measures (among other tax credits for green energy and increased taxes and fees on fossil fuels).

With regard to health, it increases subsidies to lower-income sectors and applies tax penalties to pharmaceutical companies to lower drug prices.

This reform in the US means that large corporations will have to pay more and the middle class less[10]. It applies tax programs to combat climate change and reduce the cost of health (remedies and health insurance). In addition, the new revenues will be destined to reduce the public deficit by USD 224,000 million during the first decade[11].

[1] Reminding the Reform Act 1986.
[2]Inflation Reduction Act 2022 – Senate Democrats”.
[3] Roosevelt Foundation.
[4]The Inflation Reduction Act: Key Provisions Regarding the ITC and PTC,” Schurle, Roessler, Weisblat. FOLEY, Foley & Lardner LLP.
[5]The new Wall Street tax key to Democrats. Inflation Reduction Act,” Washington Post, August 2022.
[6] Vice-president of federal tax policy of the conservative think tank “Tax Foundation”.[7]The Inflation Reduction Act and Taxes: What You Should Know,” Kelley R. Taylor, Kiplinger.
[8] It also provides funding to the Office of Tax Policy, the U.S. Tax Courts, and the U.S. Treasury. Treasury and the Departmental Offices of the Treasury.
[9] “Details & Analysis of the Senate Inflation Reduction Act Tax Provisions,” Durante, Kallen, Huaqun, McBride, Watson, TAX FOUNDATION, August 2022.
[10]US Tax Bill Costs Corporations Nearly $300 Billion More, While Middle Class Pays Less“, Bloomberg.
[11] TAX FOUNDATION, art. cit.

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