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Are Biden's Ambitious Corporate Tax Plans Worth the Complexity?: Transcript

Posted on June 23, 2021

President Biden's corporate tax plans would make major revisions -- or outright reversals -- of several key provisions of the Tax Cuts and Jobs Act. Are the benefits worth the cost in terms of complexity?

In a June 16 "Taxing Issues" webinar, Tax Analysts President and CEO Cara Griffith spoke with Treasury assistant secretary Aruna Kalyanam, and then moderated a discussion of the proposals with panelists Michael Desmond of Gibson, Dunn, & Crutcher, Watson McLeish of the Tax Executives Institute, Robert Stack of Deloitte, Felicia Wong of the Roosevelt Institute, and Tax Notes contributing editor Benjamin M. Willis.

0:00:00.5 Cara Griffith: Welcome, everyone. I'm Cara Griffith, the president and CEO of Tax Analysts. I'm so pleased that you've joined us for a discussion and debate about the prospects for and the implications of President Biden's corporate tax proposals. Today is the 10th in Tax Analysts' series of public discussions that we call “Taxing Issues.” We launched this series in 2020 as part of our 50th anniversary celebration, and through it, we're bringing the tax community together with leading policymakers and experts for bipartisan discussions on the future of tax policy. While I believe we will be able to hold an in-person event later this year, for now, we will continue to hold these discussions in a virtual format, and we welcome your feedback on how we can make them more interactive. We also welcome your suggestions on future webinar topics. I appreciate those of you who responded to our recent survey on how we can continue to make our webinars interesting and also useful for your work. You can send any feedback and suggestions to events@taxanalysts.org.

0:01:02.1 CG: And now, on to the topic at hand. Ladies and gentlemen, President Biden's corporate tax proposals have become somewhat of a moving target. This spring, to help fund his investment proposals, and also to shift federal tax burdens more to wealthy individuals and corporations, the president proposed to raise the corporate income tax rate on wealthy individuals and corporations. The president proposed to raise the corporate tax rate from 21 to 28 percent to establish a 15 percent minimum tax on corporations with worldwide book income of more than $2 billion, raise the global intangible low-taxed income, or GILTI, tax rate from 10.5 to 21 percent, and repeal the deduction for foreign-derived and intangible income, or FDII. Then, on June 2nd, as he was seeking a deal with Senate Republicans over an infrastructure package, the president dropped all but one of his corporate tax proposals. His latest offer included only a 15 percent minimum tax on corporate book income and more funding for IRS enforcement. But, as White House officials acknowledged, the president wasn't abandoning the rest of his corporate tax agenda. He was merely setting it aside to fund his infrastructure package. The president was widely expected to resurrect his other corporate tax proposals as negotiations continued over not only infrastructure, but the rest of Biden's spending priorities for this year and beyond.

0:02:32.9 CG: Meanwhile, Republicans didn't seem inclined to sign on to any of Biden's corporate tax proposals. For one thing, they said they wouldn't undo the Tax Cuts and Jobs Act of 2017, which seems to rule out the main elements of Biden's corporate tax agenda, such as the proposed rate increase. For another thing, they expressed no enthusiasm for Biden's offer to fund his infrastructure plan through a corporate minimum book tax. Republicans generally view the minimum book tax as a backdoor way to create an alternative minimum tax. And they believe that a minimum book tax would discourage corporate investment and research and development while raising a host of policy and technical challenges. While the president received a cool reception from Republicans, his proposal for a global minimum tax of at least 15 percent received strong endorsement from British Prime Minister Boris Johnson. Biden and Johnson's support for global minimum tax comes as nearly 140 countries continue to negotiate corporate tax changes as part of the inclusive framework for base erosion and profit shifting. There are a lot of moving parts.

0:03:40.6 CG: We have an outstanding group of tax experts to drive our discussion today. We will begin with Ben Willis, contributing editor for Tax Notes International. Ben will take about 10 minutes to outline the Biden proposals. After Ben speaks, Aruna Kalyanam, the Treasury deputy, excuse me, assistant secretary for tax and budget, will take a few minutes to discuss the proposals and explain how the administration plans to secure support in Congress. Our debate will then follow. I will moderate the discussion with Ben and some distinguished guests. We have Mike Desmond, former IRS chief counsel and now a partner at Gibson, Dunn & Crutcher [LLP]; Felicia Wong, president and CEO of the Roosevelt Institute; Bob Stack, managing director in the Washington National Tax Office with Deloitte [Tax LLP]; and Watson McLeish, tax counsel with the Tax Executives Institute. As always, we welcome your questions. Thank you to those that submitted them in advance. During today's program, you can use the chat feature to post questions to our panel, and we'll get to as many as time permits. We have quite the lineup today, so let's get to it. Ben, I turn it over to you.

0:04:51.0 Benjamin Willis: Thank you so much, Cara. I appreciate that. Well, with roughly 10 minutes to cover the green book, we've got quite a bit, so let's do that together. Of course, we're gonna cover these green book proposals at a high level, the ones that are key and relate to corporate tax. I think we're gonna see a unique narrative here, expressing a paradigm shift in the way that the Biden administration would like to approach global competition, mainly the way we address tax havens and the race to the bottom. The lens that you and I are gonna look through these proposals are tax rates, and we're gonna focus on three themes in doing so. One, maximum rates; two, minimum taxes; and three, market jurisdictions, namely low-tax jurisdictions and tax havens. I think what we're gonna find when looking at these three themes is that they form a nice pyramid. At the top, we've got our high level headline corporate tax rates. In the middle, we have our minimum taxes, which we're gonna discuss in more detail. And then finally, at the foundation of our pyramid is ways to provide a protective foundation to ensure that we aren't eroding the tax base that our minimum taxes on our taxes are applied.

0:06:12.4 BW: So let's go ahead and walk through these three themes. Well, with respect to maximum tax rates, I think we know, as Cara alluded to, that we've got a proposal to increase the corporate tax rate from 21 to 28 percent. We need to look at the historical perspective for just a tad to fully appreciate that. Now, from the 1950s to the '90s, we know that we paid a roughly maximum rate of 50 percent. And then in the early '90s to all the way to 2018, the tax rate was 35 percent. Now, the way that the TCJA dealt with global competition in . . .

0:06:50.8 BW: Through the Tax Cuts and Jobs Act was to reduce that 35 percent headline rate down to 21 percent. That was a 40 percent reduction. Biden believes through the green book, as expressed, that a 20 percent reduction is sufficient and would be more in line with the goals that he's trying to achieve. Now, let's step back for a moment and appreciate that these headline rates are not actually what's being paid here. The effective tax rates are much different. In fact, our long-standing 35 percent rate, while it was in place, corporations were paying, on average, in the mid-teens, and in fact, many extremely profitable corporations were paying taxes much lower than that, in the low single digits. And so that brings us nicely to our minimum tax theme of our pyramid structure here, and why the Biden administration believes that a productive foundation is needed to ensure that some real taxes are being paid, so that tax havens and other planning isn't being used to reduce taxes so low that they don't produce meaningful tax liabilities.

0:08:04.0 BW: So where do we start off with respect to minimum taxes? Well, I think Cara teed it up nicely with respect to the new minimum book tax, which is certainly getting a lot of attention here. This global minimum tax is a 15 percent tax on corporations with book income exceeding $2 billion. This is really designed to ensure that corporations who are reporting meaningful profits to their shareholders under financial accounting standards are paying meaningful tax liabilities, as well. Now, this brings us to the historic GILTI tax, or minimum tax, that has been in place since the Tax Cuts and Jobs Act, and that is currently set at a 10.5 percent rate. So what's interesting about the green book proposal is, GILTI was not listed as an acronym until another proposal signaling an effort to, in my opinion, really align with the international collaboration that 139 member states are looking for with respect to a global minimum tax.

0:09:13.9 BW: Now, this proposal includes increasing that 10.5 percent rate up to 21 percent by reducing the section 250 deduction from 50 percent to 25 percent for corporations. And when you combine that with your 21.8 percent rate, you're looking at your new minimum threshold of 21 percent. Then we move on to our QBAI exemption, our 10 percent exemption for qualified business asset investment. And what is that? That's really intangible . . . tangible property, depreciable tangible property that has been used to justify offshoring activities. In other words, corporations can increase their tangible property overseas and eliminate the possibility for any global minimum tax to be paid under the GILTI regime. And finally, with respect to the changes to the GILTI regime, we have what will lead nicely into our market and low-tax jurisdiction discussion, which is the elimination of global averaging. And what they're doing here is really focusing on a jurisdiction-by-jurisdiction approach in order to prevent the cross-crediting of taxes. So that corporations who have businesses and very high tax rate jurisdictions can't utilize tax havens and low-tax jurisdictions to average that rate such that there is no GILTI tax to be paid at all. I think it's important to note that inside of the GILTI proposal, they focused on collaboration with the OECD and the G-20. Pillar 2 of the BEPS is focused on a global minimum tax, and it's really gonna be instrumental in achieving a worldwide approach and regime for the U.S.'s involvement.

0:11:07.7 BW: So I think a lot hinges on that, and as we've seen in recent G-7 discussions and statements made by the Treasury secretary and others, there seems to be a desire to, again, change the paradigm by how we address tax havens. Are we going to continue to follow them in reducing our tax rates and increase competition in that means, or are we going to implement policies that will stop the ability of taxpayers to utilize these tax havens to benefit so much? So let's go ahead and dive into that third section, which is our market regime, and really the base of our pyramid, which is to protect from base erosion, from offshoring activities which have been going on. And then keep in mind that that has been a justification for a number of tax changes that have occurred over the years, including the lowering of the tax rate. So we've got a BEAT currently in place, the base erosion and anti-abuse tax.

0:12:14.2 BW: And that does not look to individual countries in order to respect their payments or deny their payments and deductions for them, with respect to whether or not they are high- or low-tax. There's a number of shortcomings of the BEAT, including the fact that countries view it as a unilateral measure, a discriminatory unilateral measure. And the Biden administration seeks to remedy some of the policies there that are preventing collaboration and causing frustration between the international countries who are looking at these proposals, by replacing it with a SHIELD. The SHIELD is the stopping harmful inversions in ending low-tax developments rule.

0:12:56.8 BW: Now, this is very key to market issues that we're focused on. These low-tax countries who are really giving the benefit to anybody who's willing to bring their activities there and engage in their new system, including with transfer pricing discrepancies and other mechanisms that can be used. And so how does the SHIELD go about preventing that? Well, it utilizes a system that separates between countries who are in accordance with our provisions and expectations with respect to a minimum tax, and they use low-tax jurisdictions, and that's based on a jurisdictional financial group basis in order to eliminate deductions that are paid to low-tax jurisdictions. Now here's where things get really interesting. How do you determine if a country is low-tax such that a payment to it should be disregarded, the deduction should be denied?

0:14:00.0 BW: Well, inside of the green book, the Biden administration explains that they're looking for the minimum rate that's determined under pillar 2. In other words, collaboration with the OECD and the G-20 and the 139 member states to implement this. And inside of that proposal is an effective date that's extended to 2022 and bakes in time for that agreement. And what really this does that is different from the BEAT is it begins respecting the payments that are made to countries who are aligned with the United States and international goals to increase collaboration and stop, conversely, the low-tax race to the bottom and ensure that countries have an incentive to adopt pillar 2's minimum tax, such that they will be able to receive these payments throughout their supply chains, stopping the economic frictions that are currently caused by not having that ability and fostering the collaboration and the minimum tax goals.

0:15:13.9 BW: So with that said, I'm getting close to time, but I do wanna mention three quick anti-offshoring proposals that fall within this market jurisdiction category, which is one, the repeal of the FDII, which many countries view as an illegal export subsidy. This is the 37.5 percent deduction that encourages and incentivizes exports. And then we have our deductions for jobs. So the proposals inside of the green book aim to eliminate deductions for offshoring jobs while providing a credit for bringing a U.S. trader business back to the United States. And then finally, we have our inversion rule, a historic inversion rule adopted by Congress in 2004. And under those rules, we currently have an 80 percent threshold for surrogate foreign corporations and a 60 percent threshold for corporations that will be treated as domestic in a combination transaction. The proposal seeks to adopt a more-than-50-percent threshold, which is very reminiscent, at least to me, of the original inversion rules found in the 367 regulations. And I think ending off with the inversion rules really is nice to come full circle to the top of our pyramid, which is to say, why have we been slashing corporate rates so much, and is that 40 percent necessary that occurred in the TCJA? Does America need to reduce its rates to compete with these tax havens in order to attract business and maintain our own tax base?

0:17:01.3 BW: Obviously, through the green book, we can see the Biden administration has a different tact, and they believe that we can implement rules, especially in coordination with the international tax community, to stop tax havens from pulling away businesses from other countries, and that's really the theme here that we can see. Now, just the proposals that I've mentioned would raise over $2 trillion, which, as Cara mentioned, is a big part of the infrastructure plan to invest in families and businesses here in the U.S. But the U.S. isn't the only one who's looking to raise revenue after the economic downturn following the coronavirus. And so, really, we're seeing a number of countries step into this negotiation, not only through the 90 countries who have agreed to BEPS action 13 with respect to country-by-country reporting and a willingness to provide this information and compliance, but also with respect to DSTs, digital service taxes, that many corporations are looking at right now, that countries are looking to impose if they don't believe a fair tax is reached. So with that said, I will pass my time back to Cara, and thank you all so much.

0:18:21.0 CG: Thanks so much, Ben. That was a wonderful overview and I think did a great job of setting the stage. Let's turn to Aruna and get her take and the administration's take on these proposals. Aruna?

0:18:33.1 Aruna Kalyanam: Great. Thank you. Thank you, Cara, and thank you so much for inviting me to join everyone here today. It's a real honor to be asked to join Cara, the whole group at Tax Analysts, and all the tax professionals on the other side of this Zoom. My name is Aruna Kalyanam, and I'm the deputy assistant secretary for tax and budget in the Office of Legislative Affairs at the Treasury Department. I just wanna do a quick reminder that my remarks are my own, and I don't appear on behalf of Treasury. I'm here today to give you a brief legislative outlook on the tax policy arena before you hear from some of my most favorite people I've had the privilege of working with in my prior career, Bob Stack and Mike Desmond, among others. But let me start with a few words about me. I'm brand new to the administration, having spent over two decades on Capitol Hill, the lion's share of which was at the Ways and Means Committee on the tax staff. For those of you familiar with the legislative process, I'm gonna tell you that I've had the pleasure of working on every major tax package since 2001, and yes, that means I remember a time when reconciliation packages were actually bipartisan. I started at Treasury on January 20th of this year, just a couple of hours after President Biden and Vice President Harris were sworn in.

0:19:46.2 AK: It is an honor and a privilege to serve in this administration and to work with Treasury Secretary Janet Yellen, Deputy Secretary Wally Adeyemo, and the extraordinarily talented career staff at the department. Truly, no one ever thinks you get to be a part of history, and I pinch myself whenever I think about how exciting it is to work for our nation's first woman secretary of the Treasury. The Biden-Harris administration hit the ground running in the domestic policy space, and worked with Congress to pass and sign into law the American Rescue Package after just about 50 days in office — a package that delivered critical economic relief to households across the country, as well as sizeable economic support to businesses and localities. But the work is not done. President Biden has recognized that our economic recovery needs more investment to shore up its foundations after being rocked by the pandemic, and he has wisely proposed investments to build back better and to clear a path for growing opportunity. Even before the pandemic, our economy left too many Americans struggling, and decades of increasing economic inequality meant that it was time to rethink how to lay the foundation for a more inclusive prosperity.

0:20:56.7 AK: Early this spring, President Biden presented the American Jobs Plan and the American Families Plan as his vision for how America should build back better. These packages include a combination of spending proposals and tax proposals focused on helping the middle class and hard-working Americans advance — not just pass the economic hardship that so many faced during the pandemic, but putting them on a steady glide path to opportunity over the coming decades. The proposals include robust investments in clean energy and efficiency, child care and pro-family tax reform, research and innovation, education and training, expanded access to affordable housing, and essential infrastructure investments, just to name a few.

0:21:37.5 AK: And as you all know, the packages are fiscally responsible. New spending is offset by careful tax policy proposals that are good policy on their own merits, ensuring that the Americans who have done the best among us pay their fair share and that corporations compete globally on a level playing field — not one that is tilted towards the lowest tax jurisdictions. The proposals include significant investment in Internal Revenue Service, an agency that has been severely underfunded over decades, resulting in lower audit rates on the well-off, declining service, and a widening tax gap. President Biden's targeted investment will help create an IRS that is capable of managing tax administration in an increasingly complex economy, and it will help the hardworking IRS employees better carry out their mission.

0:22:24.0 AK: Giving the IRS both the resources and the information that it needs to better identify tax evaders is a key component of increasing tax compliance. Beyond increasing IRS funding, the president's proposals include provisions to increase financial reporting and provide a key lens into the opaque sources of income that too often evade tax obligations. The proposals will shield middle-class Americans from tax increases at a time that many can least afford them, while ensuring that the wealthy Americans pay their fair share. The president has pledged that his policies will not increase taxes on Americans with income below $400,000, and the policies in the budget reflect his commitment to that pledge. A core part of his tax policy agenda is the expansion in the child tax credit [CTC], child dependent care tax credit [CDCTC], and earned income tax credit. The important CTC expansions are estimated to actually cut child poverty in half, and both the EITC and CDCTC from economic security and labor force participation.

0:23:31.0 AK: Finally, the president has taken dramatic steps to change how multinational companies compete on the global stage. We've made an important first step towards a historic agreement that would reverse the race to the bottom and corporate tax rates. We are hopeful that progress toward this agreement at the G-7 will be followed by broader steps toward an agreement with the full set of more than 100 inclusive framework countries, and that agreements with the OECD and G-20 in the weeks ahead could solidify this progress. There remain serious issues to be worked out, as well as substantial technical work in the months ahead, but there's a lot to be gained for both the United States and the world through this agreement. This also makes the present moment a key time for international tax reform in the United States. Our reforms, alongside those in other countries, can end the profit-shifting pressures that erode the corporate tax base and eliminate the incentives for offshoring in current law, all while reducing the competitiveness concerns of the U.S. multinational company base. Further, we can lead the world to a more cooperative international tax regime, where countries compete based on economic fundamentals rather than who can charge the lowest tax rate.

0:24:39.9 AK: I'll be clear. I'm not naïve to think that any of this is going to be an easy lift. As I mentioned, I spent the first two decades in my career in the legislative branch of government, and I'm familiar with the work that it takes to advance serious and meaningful policy, let alone policy of the scope and magnitude that President Biden is proposing in the hope of laying a solid foundation for generations to come. Treasury and the administration have been working alongside the Congress to ensure that these shared priorities don't languish. The path forward is under discussion, but I don't know a single person who doesn't wanna seize the opportunities of the present moment to put in place good policy on both a domestic and international scale. Let me just say thank you one more time for inviting me to join you here today and turn it back to Cara.

0:25:28.3 CG: Thank you so much, we really genuinely appreciate that you've taken some time out of your very busy schedule right now to come and talk to us. Wish you all the best. And thanks, again. We appreciate it.

0:25:40.6 AK: Thanks, Cara.

0:25:41.5 CG: So let's move on now to our discussion and our debate. I think that we have a lot to talk about. I think following Aruna — Felicia, can I start with you? And a question for you. You run a think tank, and I'm assuming that you are in favor of the idea of asking corporations to pay more in taxes. So, assuming that I have that right, do you have any concerns about how higher taxes on corporations are going to affect the economy — in particular, an economy that is still digging itself out of what was a very challenging year?

0:26:18.3 Felicia Wong: Thank you, Cara, for inviting me to this conversation and for asking a very important question. As you said, I run the Roosevelt Institute, and we have long argued that, both raising corporate taxes — actually raising taxes on the wealthy more generally, but in this case, we're talking about corporate taxes — both raising corporate taxes and closing the kinds of international tax loopholes that everyone on this panel is talking about, this will actually be good for the economy as a whole, and I would say that given where the economy is right now, this is a win, win, win. First, we can definitely afford this level of tax increases. There is absolutely no economic evidence that these kinds of tax increases will diminish economic growth — the kinds of tax cuts that we saw under the TCJA did not actually increase either investment or economic growth — and therefore, it's fairly clear that we have at least the $4 trillion of revenues on the table — $4 trillion over 10 years — that could pay for the Biden proposals, the infrastructure proposals, the family proposals that are encapsulated in both the American Jobs Plan and the American Families Plan. So I would actually argue that these kinds of tax increases — raising rates and improving collections — these are an investment in our economic fundamentals. We cannot afford not to do that.

0:27:55.6 CG: So Watson, let me turn to you for a second. You work for an organization that represents a lot of . . . your members are corporations all around the country and around the world. What are they saying about President Biden's corporate tax proposals, and what is the general sense among corporations as they have looked at these proposals?

0:28:17.1 Watson McLeish: Thank you, Cara. On behalf of TEI, I thank you for including us in today's discussion. So TEI's members comprise just under 7,000 individuals around the world, our members are the in-house tax professionals that are responsible for administering the tax affairs of their organizations, so our members are the people, not the entities. And that said, their perspective is critical here because these are the folks who ultimately will have to sign the returns — they have to put the numbers on the page and stand behind them, and they have to report to their C-suite colleagues and ultimately to the shareholders of the organization, as well. And so it's critical that input of folks like TEI members is incorporated into the tax . . . the ongoing tax reform discussion, because it's gonna take collaboration with these folks and their partnership and buy-in to implement it successfully.

0:29:18.4 WM: And so I think at a high level, the biggest concern among our members setting aside the fundamental policy decisions about what's the appropriate rate and so forth, it really is . . . We're coming off the heels of three years — I know I don't have to tell my friend Mike Desmond about this, but it's been a pretty busy three years of reinventing, or of living with this new U.S. international tax system and consuming those regulations, commenting on the rules, and then implementing them through the implementation, or development and implementation of new systems processes, hiring additional staff in the tax department — just a lot of administrative or compliance burden behind the scenes, and now, particularly with the administration's international proposals, the prospect of repeating that exercise is a little daunting, and there are . . .

0:30:18.8 WM: We can get into some of the interesting aspects of one proposal versus another, but by and large as a whole, I think our members are very leery of having to repeat this process and doing it quickly without the opportunity to weigh in and really, really influence how the rubber will meet the road, or at least ensure that all the ivory tower folks whom I love were right — the theorists, if you will, who are coming up with the policies, understand what the practical implications are, and we look forward to engaging in that discussion.

0:30:55.2 CG: Yeah, I think corporations are always looking for certainty and that even almost more so than a lower tax bill, they wanna know how they can comply and get it done, certainly. Mike, let's turn to you. You are just coming off of having been the IRS chief counsel. You've certainly witnessed a lot of challenges with the agency bases and enforcing tax laws. From your perspective, how much more of a challenge would these Biden proposals present if they were enacted?

0:31:24.9 Michael Desmond: Well, thank you, Cara, and I'll echo others in thanking you for hosting this program and having me here this afternoon. I'll pick up just on two points, on one you made Cara and one that Watson made as well, about the challenges that taxpayers face, because I think they're really reflected in the challenges that the IRS faces in administering the tax law.

0:31:45.2 MD: And something to keep in mind, I think that everyone on this call appreciates the initiative that the Biden administration has taken to fund the IRS for increased funding. I think there's almost universal recognition amongst tax practitioners that that's an important thing to do, and we all . . . again, I appreciate that, but I think right now, just to put this in perspective and the discussion and perspective from a tax administration point of view, the IRS is currently working to implement and administer a number of different sets of rules. We have pre-TCJA rules that are still at play in many examinations and enforcement contexts, the IRS is just starting to ramp up on its TCJA enforcement to take a look at 965, the transition tax, as well as all the other provisions that we will be talking about today under TCJA that affect international taxation, and even some modifications of that with the CARES Act, when Congress came in in response to the pandemic and modified some of the provisions in the Tax Cuts and Jobs Act, so we've got at least those three regimes that are at play right now from the administration and enforcement side that the IRS is challenged with, and we're looking at potentially more changes and very significant changes being made to the international tax regime.

0:33:00.2 MD: So one thing just to keep in mind as we talk about changes and modifications is the tax administration, and I do always say that any challenge that the taxpayer faces on the front end in getting numbers onto a tax return and complying with tax law will be shared by the IRS on the back end, on the enforcement side, so I think a mutual interest between taxpayers and the IRS in finding an administrable tax law.

0:33:26.1 MD: And I'll turn it back to you, Cara, but one point to talk about in our discussion also is the extent to which several of the proposals in the Biden administration green book do borrow from and look to a financial statement reporting provisions to apply the minimum tax we've talked about, and also the SHIELD has some linkage to financial statement taxes. So I think that's one we can talk about in particular that I think raises some challenges, really more for the IRS, which is not as experienced in working with financial statement reporting as perhaps taxpayers are, albeit outside their traditional tax functions. So again, just that perspective from tax administration, as Watson said, it is something that the IRS has spent the last three years on, in trying to implement to get a set of rules in place with the TCJA. So to keep that in mind as we talk about, at the policy level, what to do with some of the green book proposals is something that I think is important.

0:34:22.1 CG: Bob, one last sort of broad policy question, and then we'll kinda get into the nitty gritty of some of these proposals. You work for Deloitte, you represent a lot of corporate clients — do you think these proposals are gonna present big challenges for your clients in terms of compliance?

0:34:38.3 Robert Stack: Well, absolutely, if you look at just some of the technical nature of them — if you look at, for example, increasing the GILTI rate while doing things like retaining the foreign tax credit haircut or expense allocation — there's a great deal of complexity that this would entail . . . But I think that this is also an evolving — this is an evolving process where as the Congress realizes the revenue that it needs, I think you've got some, you've got the green book proposals, you've got Sen. [Ron] Wyden, [D-Ore.,] and some others have some proposals out there, and so I think we're gonna watch to see how these technical rules evolve as the legislative process is happening. And so, yes, there's always a lot of complexity, a lot of technical stuff in these rules that, as Watson and Mike both mentioned, companies are gonna have to deal with, and of course . . . obviously, they're concerned about that.

0:35:33.8 CG: Yeah, without a doubt, there's certainly a lot to unpack here. Let's go back to the minimum book tax and focus a little bit on that for a moment. I think, Mike, I'm gonna propose a question to you, and then I encourage anyone to respond to it. So you made mention that the minimum book tax is gonna be based on a corporation's financial income as opposed to their taxable income. So what are the implications of that? We've looked at and saying that, does that allow [the Financial Accounting Standards Board] to determine part of the tax base? How difficult will it be for the IRS to handle a different set of or a different number than what they might otherwise be used to? What do you think are the challenges with this minimum book tax?

0:36:13.7 MD: Yeah, I think those are all good points, Cara. And there will be challenges. I think historically, there's been a reluctance by tax policy — by Congress and others in the tax policy arena to reference financial statements because of the concerns that I talked about and that you mentioned, as well, that there are really different functions and purposes and goals behind financial statement reporting and tax accounting. And I think you look at cases like Thor Power Tool where the Supreme Court really articulates that and says, these are really two different regimes oriented toward two different purposes, one for shareholder or an investor and lender transparency, and the other one, obviously the tax system to raise revenue.

0:36:52.7 MD: And because of that, there are really very few provisions in the tax law that directly incorporate financial statement reporting into the tax base. I think there's been some recent experience — I know that the change to section 451-B that was made as part of the Tax Cuts and Jobs Act does to some extent look to financial statement reporting for the timing of income inclusion. That was a very challenging guidance project when I was chief counsel that the income tax and accounting folks struggled with, and continues to be a source of some issues in implementation, there's a set of rules out to you to do that right now. But I think that's just one small lesson in some of the challenges that can be faced when you've got an element of financial statement reporting that is incorporated into the tax code. And I think if you had a book minimum tax, it's on a much larger scale, and you do look really holistically to the financial statement reporting for what the tax consequence is — what is the amount of tax that you're gonna be paying — and you look to a set of rules that defines income in a very different way than the Internal Revenue Code does.

0:38:05.0 MD: And again, it's an area that the IRS has historically not had a lot of experience in because it hasn't had to have a lot of experience in — it's not something that's incorporated into the tax law, except in certain corners. So one other point, just to close on that book tax, I think there is a very important enforcement element to looking at book income reporting and book reporting in general — financial statement reporting — and historically, and certainly over the last decade and more, the IRS has done that on the enforcement side and has looked to incidences of disparities between book reporting and tax reporting. We have the Schedule M3, we have Schedule UTP — a number of years ago, we had the portable transaction regime that incorporated book tax different transactions, but those are all on the enforcement side, where, if there are concerns about disparities or discrepancies between book and tax reporting, the IRS can look into that — see if it's something that needs to be an area of concern and look at it from that perspective. But that's something very different from just pulling in the financial statement reporting of income and using that as a proxy for what the tax liability is.

0:39:15.2 MD: And then just one final point on that, as well — I guess a question for that. As I said, there will be some challenges for the IRS if that is enacted. You get up to speed on what financial statement reporting means and develop expertise in that area in order to administer it, but I also question whether that would require the IRS to go behind the financial statement reporting, or is it just a plug number that is taken for what it's worth, and that's the 15 percent minimum tax that just applies to that. Restatements of financial statements are not in any way unheard of. Is that something that the IRS would be required to go behind and check the financial statement reporting on top of its current job of looking at the tax reporting under the tax code? So some challenges there, and again, I think there's an important role for looking at financial statement reporting, but I think we need to be cautious about incorporating that more wholesale into a bottom-line computation of tax liability for the reasons that I mentioned.

0:40:11.7 CG: There's gonna be a lot there. Felicia, I'm gonna pose a policy question to you, and then we'll turn back to some technical stuff. Do you think the more important goal of the book tax for the Biden administration is raising revenue or curbing disparity between reported book income and taxable income? And a second part to that is, should a minimum book tax be applicable to more than the companies that have $2 billion in pre-tax book income? You've got only 120 companies there, so it's not a lot. Should that be broader? In terms of policy, what are you thinking on that?

0:40:52.1 FW: Right, well, first of all, I wanna say that all of the framing of this conversation, and in fact, everything that Bob and Michael and Watson are saying about the difficulties of implementing changes to the tax code — I'm deeply sympathetic to that. I do understand how difficult this is. I would just pose the question in return, what are the costs of not making these kinds of changes? Because when you look at the need for federal revenue, federal revenue for doing things that, I think all of us would agree need to be done, including investing in infrastructure and investing in new decarbonizing industries in the United States — these are things that absolutely require federal revenue to be done. And in 2019, federal revenue was at its lowest point in 50 years in large part because of the number of the kinds of corporate tax cuts that we saw in the TCJA.

0:42:00.3 FW: Federal revenue was less than 17 percent of GDP that year. And so it's just important, as we think about investing in our economic future, that we really focus on revenue raising. That was the first part of your question, Cara. I think also that it's important to note that reducing disparities and reducing the kinds of inequalities that have plagued our country over the last 30 or 40 years is also a very important role for changes in the tax code. As to questions about whether or not we should be broadening the base here, I think the answer is probably also yes. So, I would be looking to changes in the tax code to both raise revenue and to reduce inequality. I think both of these things are critically important. And again, these are very difficult things to accomplish, but the cost of not making these kinds of changes are — these are costs for our entire society. These are costs for our planet, and they're costs for our democracy. And I think we need to take the implications of not doing these things quite seriously.

0:43:14.6 CG: It's gonna be a challenge, it's gonna be a challenge regardless. I'm gonna move 'cause I've realized we got 15 minutes left, and the questions from the audience have been coming in pretty fast and furious there. So I'm gonna turn and try to address a few of those. We got one — and I'll just open these up to anyone that would like to answer — just got one which is, how do you compute corporate book income when a partnership is interposed, where partnerships don't have audited financial statements? And now when we did a brief call earlier, Mike, you had raised the issue of partnerships and wanting to bring that in. So, perhaps you could take a first on that, and then we can see what the others think.

0:43:53.2 MD: Sure, I guess as an initial response to that. I think given the narrow scope and the proposed application of the book minimum tax, you may not have that issue. Cara, you identified the 120 taxpayers that may be affected by that, given the income threshold. But I think putting that aside, if you were to expand that and you were to apply the minimum tax to a broader group of taxpayers, you would certainly have that issue. I think there are many provisions in the code. And the 451 is an example where you've got applicable financial statements being referenced. But certainly if you get beyond the largest publicly traded companies and into privately held companies and down into more of a middle market, where you don't have the same level or degree of financial statements, you're going to have those challenges. And I think maybe an easy answer right now is that perhaps the narrow application of this, or at least the narrow set of taxpayers that the book minimum tax would apply to, wouldn't raise that issue directly. But again, if you start to expand that pool of taxpayers, these issues will be ones that need to be considered.

0:45:05.4 CG: Yeah, for sure. Let's move on. Bob, I'm gonna pose this one to you. This also came as an audience question. The person suggested the minimum book tax is really just a new corporate AMT. Is it your opinion that the new G-7 agreement on the 15 percent global minimum tax will mirror that?

0:45:25.2 RS: No, actually. I think there's an unfortunate confusion of the 15 percent book tax as a minimum tax, and kind of what's happening in the rest of the world with the G-7 agreement. The

G-7 agreement, put simply, is really about trying to get countries to adopt something like our GILTI regime, which acts as a way for the top country to pop up for taxes that are not necessarily paid below. It's a way to force your income from your low-tax jurisdictions up onto your U.S. return and GILTI, whereas in the rest of the world, they're trying to just do a top up tax in the foreign parent jurisdiction. The book tax is a more domestic measure that is simply saying to companies, “Look, we want you to pay at least 15 percent of your book income in taxes with some adjustments for credits and the like." So, they're unfortunately similarly named, but the G-7 world is about making the rest of the world do GILTI, and the book tax proposal is really a domestic proposal that functions like an AMT-type regime.

0:46:37.5 CG: Thank you. I'm glad you made that distinction and offered that clarity. Watson, before we move on from the book tax conversation. I wanted to give you an opportunity to give some of your thoughts on challenges that you see in either implementation or compliance on this.

0:46:55.8 WM: Well, thank you. Certainly everything that Mike and Bob have mentioned about the minimum book tax proposal, I concur with. I think what we wanna keep in mind is that when the Senate contemplated for that brief moment back in 2017 retaining the corporate alternative minimum tax, there was a huge outpouring as to why that was not the appropriate path to take in the context of tax reform. And TEI weighed in on that — most major stakeholder organizations weighed in, and the common refrain was that this is a third level of burdening cost that is incurred by taxpayers. This is essentially requiring taxpayers to keep a third set of books for purposes of administering and complying with the minimum tax. And I can cite you legislative history since this concept was first proposed that really takes issue with the fact that is the most, one of the most far-reaching complexities of the Internal Revenue Code — to start with either book or tax income and tease out the appropriate base for this new tax, which by the way, is not gonna be static. It will be subject to addition and subtraction by future Congresses.

0:48:20.6 WM: And so it's just adding a whole [other] layer of complexity. And to Felicia's point earlier, certainly there are appropriate ways to make the needed investments in the U.S. infrastructure already, etc., but I wanna cite a figure that TEI has raised in our recent letter to the Hill, which is a study from the National Taxpayers Union Foundation, which estimated that in 2019, businesses — U.S. businesses — are estimated to have devoted a total of 3.4 billion man hours, amounting to $178 billion in tax compliance costs, business tax compliance costs. So there is a significant cost here that we are self-inflicting, and to the extent that the minimum tax or any of the other administration's proposals would significantly add to that, I think it's important that we proceed with caution.

0:49:20.9 CG: That's very interesting. So one question I will pose to the whole group that has gotten numerous upticks on our Q&A: Does anyone wanna speculate on the odds of the minimum 15 percent book tax actually sticking? Do we think this will be the one that makes it? No one is going to speculate. Well, we will have to see as we go. Let's move to the corporate tax rate. You know, there's been talk now — we're at 21 percent, are we gonna go to 25 percent? Are we gonna go to 28 percent? What's the likelihood that we will see a corporate tax rate increase, and what are the implications of that? Felicia, can I start with you?

0:50:05.5 FW: Yeah, it's so hard to answer these likelihood questions given, and I'm sure nobody really wants to weigh in to try that. None of us are gonna take bets on what we're gonna see on House side or the Senate side, much less talking about G-7 and G-20 negotiations. I'll just say this, the cost — again, I keep coming back to this theme, but the cost of not making some kind of increase in the corporate tax rate for our democracy is incredibly important. One of the interesting things when you look at the polling is that increasing corporate taxes is very popular, and it's not —about 70 percent of Americans would like to see corporate taxes raised. This is not just Democrats — this is also Independents, and it's also a bare minimum of Republicans.

0:50:56.3 FW: It's also notable that Biden's infrastructure bill — infrastructure proposals — support for them goes up almost 12 percent once you actually say that this is going to be paid for by corporate tax increases, and I think this is because the American public understands that the amount of human hours not withstanding and the cost of those human hours not withstanding to comply. Again, people understand that corporate tax rates are at a historic low and corporate tax revenues are at a historic low, and they see social and economic needs for public investment. So, I would just come back to one of the costs of not raising the rate in some way, will certainly be a cost to our democracy.

0:51:46.2 CG: So another audience question that had come in . . . Oh, I'm sorry, did I interrupt somebody?

0:51:50.5 MD: I'm sorry, I was just gonna follow up on that. I think we made the point, or I made the point earlier, about also just trying to put the corporate income tax into the right context. And I think Felicia is absolutely correct in noting that in the last year or so, because of the pandemic and other considerations, federal tax revenue has certainly declined for obvious reasons and economic reasons, but the corporate income tax itself, I think we have to keep in mind is currently only about 7 percent of federal revenue. So I think sometimes the discussion and perception of it is that it has an outsized role in federal receipts in general, and I think much more important and broader sources of revenue are the personal income tax, and obviously the employment taxes and the like. So just to put that in context, and the drivers behind that are obviously the migration over many decades to passthrough entities, and much more of the business income in this country coming through passthrough entities. There are reasons, sort of macro reasons, why the corporate income tax does not play anywhere near the role that it used to in our economy, and we're not gonna change that. I think these proposals that just adjust the rate, don't necessarily address that. So I think we just need to keep a broader focus when we talk about the corporate tax rate.

0:53:04.0 FW: Well, I will certainly say, just to weigh in here a little bit, Biden ran on a suite of tax reforms, actually 10, that would have raised close to $4 trillion — $3.5 trillion over 10 years. And I think it's notable that most of this is tax on capital, because you've seen historically, the percentage of capital taxation as opposed to labor taxation has gone down very significantly, which is one of the drivers of the kind of inequality that we're seeing right now. So I would actually agree with you, Michael, that the corporate, the tax proposals need to be put into the context of this entire suite of proposals that does constitute the paradigm change that I think Ben referred to earlier. I think that we are talking about trying to reverse a race to the bottom, not just internationally, but also generally, domestically.

0:54:00.5 CG: So good points. Then the rate increase presents other challenges. We had a question that came in that practitioners are multinationals and complained for several years now that GILTI is too onerous and compliance is challenging. Would an increased rate exacerbate challenges?

0:54:17.3 WM: I'll chime in here, Cara. So the increase rate is the tip of the iceberg. What I'm hearing from TEI members across the country is that the proposal to apply GILTI on a country-by-country basis, and the foreign tax credit limitation with respect to GILTI, and now also the foreign branch basket on a country-by-country basis would — and I don't even know if exacerbate is the best word, but it would do violence to the current compliance and reporting regime. And just to offer an anecdote, I was talking to Mike about this yesterday, that I've had — I hear from members all the time about the difficulties they're having, whether it's staffing or finding the right provider to operate within their resource constraints. I had a member that recently painted a vivid picture, head of tax for a midsized — large midsized American company with a very simple single tier of [controlled foreign corporations], and she told me that quite frankly, working nonstop over six weeks, she ultimately had to forego claiming the foreign tax credit for 2018 and 2019, because there simply was not enough of a resource in people and software and etcetera, to complete the computations in the wake of the Tax Cuts and Jobs Act.

0:55:49.1 WM: So if you’re facing now the potential to apply them on a country-by-country basis, you're looking at a huge increase, an exponential increase in the number of Forms 1118 that would need to be filed, and quite frankly, you're looking at hiring more staff and so perhaps those are some of the jobs that are contemplated by the American Jobs Act, but it's a material amount of money and time and manpower, and the last thing I'd say is that these are not — these are nonproductive expenditures, or as people like to call them, deadweight loss. And so that money in of itself could be used for more productive purposes, so that's, I'd say GILTI, but those are the two biggest anxieties among my membership.

0:56:42.5 CG: So not to leave the GILTI topic too quickly, and I wanted to ask Bob a question, so we've got talks about a 15 percent global minimum tax, and then potentially a revised GILTI rate of 21. Is it sustainable for the U.S. to have a GILTI rate that is significantly higher than what would be a global minimum rate?

0:57:02.4 RS: Well, as of today — look, as of today, the Biden folks have gone out to the rest of the world and said, "We'd like a minimum rate of at least 15 percent." I understand that was the way the G-7 came at it. And, of course, the green book proposal is 21 percent. I think this is kind of a moving target in terms of what we can get the rest of the world to agree, and what ultimately Congress would go along with.

0:57:28.2 RS: Obviously, the goal of the administration is to kinda level the playing field through this min tax so that not just U.S. businesses pay it, but other businesses around the world have to pay it, as well. But you make a fair point that if the rate is different, you haven't leveled the playing field as much, and companies will say that. And also, in terms of technical matter, even if the U.S. GILTI was the same as what we're doing on the min tax globally, given some of the technical differences in how they're applied, the GILTI rate actually turns out to be substantially higher, things like the foreign tax credit, haircut expense allocation and the like, but these are the issues that I think will get sorted out in the political process, both at the G-7 and the inclusive framework, and also through Congress as these issues move forward.

0:58:14.2 CG: Yeah, I think it's gonna be a challenge. I had some additional questions on whether a global minimum tax is gonna be too fragile to last. I think it's always challenging when you try to have that many countries agree on something and then agree to implementation — there certainly are a lot of challenging issues there. Well, I have about 35 additional questions. I don't — unfortunately, we're not going to get to them in the last 15 seconds that we have of the webinar today, so I do believe we will need to have another. I'm sure any one of these different proposals we could dig into pretty hard. But I wanna thank you all for your time today and for providing us with your thoughts and your expertise. It certainly was a pleasure, and I look forward to the next one, and I hope to have you all back sometime soon, so thank you very much.

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