The US is a pretty interesting place to live. After all, where in the world would you find a country that calls itself the land of the free while making it its mission to tax absolutely everything?
As if the country already didn’t have enough taxes, in August 2022, the Biden administration signed a law that imposes a 15% minimum corporate tax on big US corporations.
In this article, we discuss the minimum corporate tax law in detail, and what it could mean for high-net-worth US citizens.
However, this is not intended to be professional tax advice that’s tailored to your situation. If you’re looking for bespoke tax planning and asset protection strategies, feel free to reach out here.
A Business-Friendly Country?
You’ll find many taxes in the USA – federal income taxes, state taxes, and local taxes. The rates are high, the tax code is complicated, and the compliance is absolute.
No matter where you go, you must report to the mighty taxman each year – thanks to the country’s citizenship-based taxation system.
The US is not just called the land of the free – it’s also the land of opportunity. Many people have come to the US to make it big and realize their American Dream.
One would think that a country so focused on success and entrepreneurship would make it easy for its people to enjoy their wealth and create more opportunities if they ever do make it big. But that’s simply not the case.
The higher your assets grow, the higher your tax liability becomes. The government will hardly provide relief when you’re setting up a business or trying to make it profitable.
Still, the moment you cross a certain income threshold, they’ll come banging on your doors demanding their fair share.
One successful business year, and you’ll suddenly be considered a high-net-worth individual who can dole out thousands and millions of dollars in taxes.
So, where does that leave you? Back to square one, trying to make it all back.
“Tax the wealthy” seems to be the general public and government consensus, and the establishment has been doing just that.
With tax raises each year, the US has lost its appeal as a business-friendly country.
Corporate minimum tax is part of the Inflation Reduction Act that President Joe Biden signed into law on August 16, 2022.
The law also has significant reforms for climate control, healthcare, and the energy sector.
Let’s briefly discuss the Inflation Reduction Act and how it will affect US citizens and companies now that the House and the Senate have passed it.
The Inflation Reduction Act
The Inflation Reduction Act aims to reduce deficits, fight inflation, battle climate change, and improve healthcare benefits.
Although considerable, the 15% minimum corporate tax isn’t the only note-worthy aspect of the bill. Some notable points from the bill, including the minimum tax hike, are covered below.
Biggest Climate Bill in US History
The Inflation Reduction Act is the biggest climate bill ever passed in US history, with a $369 billion investment in the energy and climate change division. The new climate change policies are expected to cut carbon emissions by 40% by 2030.
The bill will reduce health insurance costs with an investment of $69 billion to extend the Affordable Care Act for three years. Moreover, under the new law, Medicare can negotiate prescription drug prices with drug companies.
The new Healthcare reforms are expected to raise $265 billion in revenue over the next decade.
15% Minimum Corporate Tax
According to the bill, corporations that report an annual income of $1 billion in their financial statements will be subjected to a 15% corporate minimum tax rate and a 1% fee on stock buybacks.
The Biden administration has also strengthened the IRS through this bill to conduct frequent audits on large corporations.
The tax reforms and IRS tax enforcement in the bill are expected to reduce the federal deficit by over $300 billion over the next decade.
The 15% Minimum Corporate Tax
The US’s new minimum tax rate has confused some people on a couple of grounds.
First, why would the US need a 15% minimum tax on corporations if the headline corporate income tax rate is already 21%?
Second, is this tax related to the global minimum tax rate that 136 countries agreed to last year?
The answer to the first question is a bit technical, and we will discuss it shortly. The answer to the second question is simply no. The global corporate minimum tax and the USA’s new minimum tax are two completely different taxes serving distinct purposes.
How Would the Minimum Corporate Tax Work?
Now that the bill with the new tax reforms has passed, the large corporations in the US with at least $1 billion in income will also have to consider their book income before calculating their annual tax liability.
The headline tax rate for US corporations is still 21% and is imposed on the corporate profits minus allowable deductions like wages, depreciation, interest, etc.
The 21% corporate tax applies to the income companies report to the IRS for tax purposes.
Corporate Tax per Book Income: Book income refers to the income that companies publicly report to their shareholders on their financial statements.
The 15% minimum tax applies to the corporations’ book income. After calculation, the corporations have to pay whichever tax is higher.
What was the Need for the Minimum Corporate Tax?
If companies were already paying a higher corporate tax at 21%, what was the need for another corporate tax rate?
The minimum tax serves two primary purposes, it:
- Allows the government to raise corporations’ taxes without increasing corporate tax rates.
- Aims to eliminate tax loopholes exploited by many large corporations.
Eliminating Tax Loopholes
According to the official site of the US Senate, the new minimum tax rate was designed to close tax loopholes used by the wealthy to offset their income and avoid paying what they owe. It aims to do that by taking the book income into account.
The income companies report for IRS tax purposes usually differs from their book income.
Companies use strategies like accelerated depreciation, tax credits, and stock options to downplay the amount of profit in their IRS financial reporting.
Accelerated depreciation is one of the most significant tax breaks in the US tax code, and numerous companies use this tactic to save millions and billions of dollars in taxes.
In comparison, book income is far more transparent and closer to the Generally Accepted Accounting Principles (GAAP).
Why’s That Important
In 2022, President Joe Biden cited a report by the Institute on Taxation and Economic Policy (ITEP) in his State of the Union address. It found that 55 of the largest corporations in the US paid $0 in federal taxes on their 2020 profits, despite earning considerable profits under the GAAP standards.
Not only did they not pay a dime, but they also received $3.5 billion in tax rebates.
But, here’s the thing – there’s a difference between tax avoidance and tax evasion. If done legally, there’s nothing wrong with wanting to reduce taxes.
That’s why the Biden administration decided to make the book income an unavoidable element of corporate tax collections.
Raising Corporate Taxes
The IRA isn’t popular among the Republicans – it never was. On August 7, the bill was passed by the Senate Democrats without a single favorable vote from the Republicans.
Even some of the Democrats weren’t a big fan of the original tax reforms in the IRA. Why? Because of the tax raises.
The IRA aims to raise taxes on corporations without increasing the 21% headline corporate tax, hoping to keep both sides happy.
“We never raised any taxes. We’re just saying close the loopholes and collect the taxes owed to the Treasury and the United States people,” said Senator Joe Manchin, a West Virginia Democrat.
With this bill, the government will raise more revenue without surpassing the headline tax rate for corporations.
It’s all as diplomatic as it can get.
Is 15% Minimum Corporate Tax Related to the Global Minimum Tax?
No, the two taxes are entirely distinct and serve two different purposes.
The USA’s minimum tax was designed to tax the wealthy without raising the headline tax rate.
In contrast, the global minimum tax deal was designed to control Base Erosion and Profit Shifting (BEPS) by discouraging multinational corporations from moving their operations offshore for lucrative tax incentives.
Many Fortune 500 companies have successfully reduced or eliminated their tax payments legally by moving overseas and utilizing foreign income tax incentives. The OECD estimated that the global tax deal would bring the participating countries $150 billion in annual tax revenues.
According to the Tax Foundation, although it’s been a year since more than 130 countries signed the global tax deal, the US is yet to figure out how it will incorporate the model rules in its tax code, which is so different from the rest of the world.
Minimum Corporate Tax: What the Future Holds
The 15% corporate minimum tax is another invention of the Biden administration to tax the wealthy. When it comes to large corporations in the US, the jobs they create, the non-corporate taxes they pay, the economic contribution they offer – nothing matters.
All that seemed to matter was that 55 companies paid no federal taxes back in 2020, and now all large corporations have to pay the price in the form of more taxes. The minimum tax targets billion-dollar companies currently, but who’s to say there won’t be more unfavorable provisions in the future?
It has happened before, and it can happen again.
Following are some significant concerns entrepreneurs and high-net-worth individuals must consider before doing business in the USA.
Complicated Tax Code
The US has a citizenship-based taxation system, unlike the rest of the world (except Eritrea).
As a result, the US tax code is complicated and almost impossible to align with the international tax codes.
There are other high-tax countries in the world, but no country chases their citizens to the ends of the earth, demanding their fair share.
Instead of working on the global minimum tax deal that has hit a snag, the US got too busy inventing their version of a corporate minimum tax which will only make the alignment with the rest of the world even messier.
Try running a multinational company from the US while considering an array of corporate tax rates and figuring out which applies to you and which doesn’t.
The Rise in Inflation
Inflation is rising. Many prominent economists have argued that the bill will only make the inflation problem worse than it already is.
With inflation rates climbing, who’s to say a billion won’t depreciate drastically in a couple of years? What happens then? Numerous regular businesses will have to pay taxes that never even should’ve been subjected to them in the first place.
The government has the absolute power to make or break your business. If you still doubt it, just look at what happened during the pandemic.
The CDC started rolling out moratoriums, essentially running people out of their businesses. All it takes is a new law, and you’ll be liable to pay millions, if not billions of dollars in taxes.
The US has been hostile toward high-net-worth individuals and their businesses for years.
We don’t recommend waiting for a silver lining because, by then, it may be too late.
Go Where You’re Treated Best
At Nomad Capitalist, we have always encouraged people to go where they are treated best.
With so many countries competing for your business, there’s no need to stay in a country that’s doing its best to snatch your profits.
No matter what the high tax countries tell you, if done legally, an offshore lifestyle could be the ultimate stepping stone to your success.
If you’re a US citizen and this article has struck a chord with you, you may want to explore your options. If so, you can reach out here.