Minimum Tax Proposal Would Create Complications for Investors and Companies, Tax Experts Say

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The House on Friday passed President Biden’s $2 trillion social spending plan that would, among other things, set a minimum 15% federal tax rate on large companies.

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The proposal’s sponsors hope to raise about $319 billion in tax revenue over a decade and ensure that companies with at least $1 billion of pretax income pay taxes in profitable years, without a series of credits and deductions. without reducing your income for tax purposes with. Its proponents argue that linking the minimum tax to publicly reported financial results would discourage companies from artificially reducing profits, as companies would be able to avoid the tax bill by engineering small profits or even lowering profits. That will not pass the risk to investors disappointed by the loss.

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“The most profitable companies in the world just don’t want to pay anything,” Sen. Ron Weiden (D., Ore.) said in a statement. “Our corporate minimum tax is a backstop to ensure that the most profitable megacorporations are paying no taxes when reporting record profits to their shareholders.”

Sponsors of the law say the measure will affect about 200 companies, most of which are the largest publicly traded corporations. Businesshala’s analysis of S&P 500 results found that nearly 236 companies met pretax income limits last year, and more than 60 reported effective tax rates of less than 15% in 2019 or 2020.

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Under the minimum tax, companies would continue to benefit from a range of normal business tax deductions and credits. The companies most affected will be in capital-intensive industries, where financial and tax income is often more dissimilar.

Critics call the offer a recipe for earnings manipulation and confusion. Companies say that this will increase costs and reduce business expenses. Accounting experts have warned that the measure will push financial accounting into new territory and encourage companies to distort their financial results to reduce their tax burden.

With Friday’s vote, the legislation heads into the Senate with $2 trillion in spending and tax cuts, as well as a similar amount in offsetting taxes and budgetary savings. Republicans are expected to oppose the package, leaving Democrats unable to lose a single vote in an evenly divided Senate.

Chicago communications equipment supplier Motorola Solutions Inc.,

Helen Carlier, the company’s global tax chief, said the company, which meets the income threshold and reported effective tax rates of 18.8% in 2020 and 13% in 2019, sees any minimum tax as adding work and cost. Is. But it would be easier to start with the company’s taxable income base rather than book income, she said. Book income is the income that companies report to shareholders, while taxable income is the amount that is taxed after deducting any allowable revenue to companies.

“If you’re going with a book income base as opposed to a variation of a taxable income model, which is remodeling an existing structure, you’re building from the ground up,” she said.

Houston Utility Centerpoint Energy Inc.

Chief financial officer Jason Wells said the proposal could force it to cut infrastructure investment by reducing the tax benefits of large equipment and other capital purchases. This is because there is a time difference for book and tax purposes on capital expenditures.

Financial statements of companies are typically designed to inform shareholders and allow comparisons across firms, while tax rules collect revenue and may encourage good behavior, says Assistant Accounting at the University of Illinois at Urbana-Champaign. Professor Michelle Hutchence said.

Accountants and investors said U.S. accounting rules leave companies more room for lower earnings than raising it — a common concern of investors — on a variety of estimates ranging from debt-loss and litigation reserves to accounts-receivable allowances and warranty estimates. Through. That means companies can push results down to reduce their exposure to the minimum tax, said Jack Sisilsky, owner of RG Associates Inc., an investment research firm and portfolio manager.

And if they can, at least some probably will, said David Zion, head of Zion Research Group, an accounting and tax research firm. Companies will likely push investors to non-standard financial measures, effectively encouraging the markets to see their formal results.

According to MyLogIQ, such “pro-forma” results have become more widespread in recent decades, with 91% of S&P 500 companies using at least one measure that conforms to generally accepted accounting principles in the US, or is not defined under GAAP, according to MyLogIQ, a data provider.

“It’s just another incentive, I think, to use so much more non-GAAP,” Mr. Zion said.

Proponents of the measure oppose that company’s auditors, financial-accounting rule-makers and ultimately the Securities and Exchange Commission — which regulates public-company disclosures — over all companies’ ability to mislead investors and tax officials. will limit.

Motorola’s Ms Carlier said she was not concerned that large public companies would manipulate financial results to reduce their exposure to minimum tax. “We have external auditors to make sure nothing like this happens,” she said.

Tying taxes more closely to financial accounting also risks undermining the independence of the Financial Accounting Standards Board, which sets GAAP, critics argue. Chairman Rich Jones said last week that the FASB may face political pressure to focus on increasing tax revenue rather than its mission of ensuring that companies accurately inform investors. “It will be an added pressure, no doubt, on our mission and what we do,” he said.

Others note that the non-profit body has already come under pressure from lawmakers from time to time, including most recently new rules on loan deficit estimation, which went into effect for large public companies in early 2020. Were.

“There are strict rules around financial accounting, and the Financial Accounting Standards Board has a long history of objective independence in the face of continued corporate lobbying,” said Sen. “I am sure the work will continue.”

write to Mark Maurer at [email protected] and Theo Francis at [email protected]

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