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The Inflation Reduction Act's Tax Implications: Transcript

By: Kimberly Clausing, Cara Griffith, Rohit Kumar, and Watson M. McLeish

 

Congress recently passed the Inflation Reduction Act of 2022, which includes climate incentives and healthcare provisions, along with a 15 percent corporate minimum tax. What are the tax implications of the act, particularly of the minimum tax? What are the goals of the minimum tax? And how does it fit with international efforts previously agreed to at the OECD level, particularly the pillar 2 proposal?

 

In a September 22 "Taxing Issues" webinar, former Biden adminstration Treasury official Kimberly Clausing of UCLA School of Law, former senior Senate Republican aide Rohit Kumar of PwC, and Watson McLeish of the U.S. Chamber of Commerce shared different perspectives on the new minimum tax, as well as on the act's excise tax on stock buybacks. Tax Analysts President and CEO Cara Griffith moderated the discussion.

 

0:00:01.4 Cara Griffith: Welcome everyone. I'm Cara Griffith, the President and CEO of Tax Analysts. Thank you for joining us today for discussion about the tax implications of the Inflation Reduction Act. Today's event is another in Tax Analysts’ series of public discussions that we call Taxing Issues. We launched this series as another way for Tax Analysts to encourage the debate on tax issues. We've been bringing the tax community together with leading policy makers and experts for bipartisan discussions on the future of tax policy.

 

0:00:31.9 CG: We will be hosting in-person events on occasion, but we will primarily 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. You can send your feedback and suggestions to events@taxanalysts.org. We also welcome your questions for today's event. Thank you to those of you who emailed your questions in advance. Please use the chat feature to submit questions during today's event.

 

0:01:01.8 CG: For our panel discussion, I'll begin by asking a few questions and then I'll turn to questions from you, our audience, and I promise to get to as many of your questions as time permits. And now onto the topic at hand. August is often a very slow month in Washington, but not this year.

 

0:01:20.6 CG: This year in August, Congress passed, and President Biden signed, the Inflation Reduction Act or IRA. This sweeping legislation includes measures to address consumer energy costs and carbon emissions to extend certain benefits under the Affordable Care Act, to impose a 1 percent excise tax on corporate stock repurchases, and more to the point for today's discussions, to make some significant federal income tax changes. The IRA also includes a large funding increase for the IRS. This increase provides a historic opportunity for the IRS to improve tax administration. It's worthy of its own webinar. So for today, we're going to have to set that topic aside and we're going to focus on the tax changes.

 

0:02:05.3 CG: As you know, among the most significant of the tax changes is the creation of a 15 percent alternative minimum tax on the adjusted financial statement income, or AFSI, of corporations with at least a billion dollars in profits for any three-year period. Determining AFSI requires a calculation that's sort of similar to the one for determining book income. The new corporate AMT will raise an estimated $200 billion or so in tax revenue over the next 10 years.

 

0:02:33.0 CG: The estimate may be high, however, and it doesn't account for any behavior changes by corporations as they learn to better manage their AFSI. Like other alternative minimum taxes, this corporate AMT will require corporations to do two separate calculations of their tax liability and pay the greater of the two. Applicable corporations remain subject to the corporate AMT until they change ownership, excuse me, or their average AFSI does not exceed a billion [dollars] for a series of years.

 

0:03:03.4 CG: Treasury has discretion to determine when a corporation is no longer subject to AMT. Now, the rules are different for domestic corporation with a foreign parent. That corporation needs an average of just a million in AFSI, provided that its formed parented multinational group meets the $1 billion in AFSI threshold.

 

0:03:23.5 CG: But how long will the Inflation Reduction Act remain in its current form? Lawmakers from both parties are already talking about making changes, and taxpayers are demanding clarity on how the stock buyback tax and the corporate AMT will be applied. And because some of the provisions take effect in 2023, Treasury and the IRS are going to be burning the midnight oil, trying to issue regulations and guidance to ease compliance concerns.

 

0:03:48.6 CG: There is a lot to unpack and we have the perfect panel to do it. First, we have Kimberly Clausing, who holds the Eric M. Zolt chair in tax law and policy at the UCLA School of Law. She previously served as Treasury deputy assistant secretary for tax analysis under President Biden.

 

0:04:07.3 CG: Next we have Rohit Kumar, who's principal and co-leader of the Washington National Tax Services practice at PWC. He was previously the domestic policy director and deputy chief of staff for Senator Mitch McConnell. And last we have Watson McLeish, who is senior vice president of tax policy at the U.S. Chamber of Commerce. And he previously served as tax counsel at the Tax Executives Institute. I want to thank you all for joining us today, and I think this is going to be a fantastic discussion.

 

0:04:38.9 CG: So if I can, Professor Clausing, if I could start with you. I gave a very high level overview of the Inflation Reduction Act. Could you describe in more depth the tax implications of the legislation as well as their overall purpose?

 

0:04:51.7 Kimberly Clausing: Yes. Thanks Cara and thanks for having me. It's a pleasure to be here to talk about these really important issues. I think the place to start with this legislation is to remember first what it achieves. I think most importantly, the legislation provides more than $350 billion in clean energy tax credits, and these are really significant policy steps towards reducing carbon emissions. That's incredibly important given the threat of climate change, so I'm enormously encouraged by the fact that got done.

 

0:05:24.1 KC: Second, as you mentioned in your overview, the long overdue funding for the IRS is essential for taxpayer service and for making long overdue investments and at fair and more efficient tax administration. So that's incredibly important too. And even though it's not a tax matter, it's important to stop and appreciate that this legislation also takes important steps towards lowering healthcare costs by reducing prescription drug prices and by enabling more affordable health insurance. So those are all really important achievements.

 

0:05:56.0 KC: And of course, another really unusual and helpful part of this legislation is that it actually more than pays for the priorities that I just described and it achieves some deficit reduction on top of that by adequately increasing tax revenue. As you will notice when you look at other recent legislation, Congress has a very hard time paying for their priorities, much less reducing deficits in contrast to what we see in this legislation. So in my view, this legislation is an enormous success for all of those reasons.

 

0:06:27.0 KC: Now, as you mentioned, there are some really important pay-fors in the legislation I'm sure we're going to focus on today. Aside from the revenue gains that we expect from IRS funding, the two most important tax revenue pieces are the stock buybacks tax and the corporate alternative minimum tax.

 

0:06:44.4 KC: Now, today I'm speaking for myself here and not in my role as a former Treasury official, but I do think it's clear that the corporate alternative minimum tax is not your typical tax policy expert's favorite way to raise revenue from the corporate sector. Increasing the rate, or even better, achieving international tax reform that is consistent with the recent international tax agreement, those would both be better tax policy steps forward.

 

0:07:11.7 KC: In comparison with the international reforms, this corporate alternative minimum tax, while raising money from the corporate sector, it's less targeted towards specific and identifiable policy problems. However, I think it's important to know there's a reason that this tax ended up in the legislation, the corporate alternative minimum tax is quite popular politically, and I think it speaks to fundamental notions that people have regarding fairness.

 

0:07:36.3 KC: When you see large companies earning more than a billion dollars in financial profits, but yet paying tiny, if any, tax bills, that seems to many people looking at it from the outside like a very bad outcome, and that feeling of unfairness brings us to a larger political problem with solving that.

 

0:07:55.9 KC: Tax preferences are really easy to give away, to give a tax break for this for that, or to encourage this or that thing, but they're much harder to take back. And so when the tax code has many preferences, to raise revenue you have to take back several preferences and each individual action will engender enormous political opposition.

 

0:08:16.2 KC: So in the end, it might be more appealing and it might be an easier road to simply tell companies that if their tax rates are too low for whatever reason, that they should have to pay some minimum amount of tax, and that might be easier than trying to take back through a thousand little harms, a bunch of different tax preferences.

 

0:08:36.0 KC: All that said, there are a number of tax breaks that we do feel strongly are good ideas, and we want to make sure that they work regardless of this minimum tax. And so when Congress designed this minimum tax, they did that with that in mind. So that includes, for instance, the clean energy tax credits that I mentioned at the front. It also includes R&D, which we think has useful positive spillover effects for the economy as a whole.

 

0:09:00.5 KC: And given the important priorities that we place on those objectives, it would be silly to reward them with one part of the tax system while also taking away the benefits with another part of the tax system, so Congress made sure not to do that. In addition, you'll see this tax is designed explicitly to target only companies that are quite large. The JCT originally calculated to be about 150 companies, that number might even be less now with the last minute changes in the legislation.

 

0:09:28.2 KC: That too is a deliberate design decision to focus the effects of the tax on the largest and most profitable companies. And this is an important distinction because the U.S. economy, by all indications, is experiencing important increases in market power and our largest companies have become larger and more powerful over the past several decades.

 

0:09:51.6 KC: So it's important that the tax system make sure that very large profitable companies are paying adequate amounts of tax, in part to level the playing field between these big companies and smaller companies that may not be able to avail themselves of similarly sophisticated tax avoidance techniques.

 

0:10:05.3 KC: Subject to the constraints that we have to have with this type of corporate alternative minimum tax, I think those design features were good decisions, but I would have of course much preferred the Congress do international tax reform, and I hope that they will eventually use this tax as a bridge towards those sorts of necessary policy changes, which are themselves in my view, long overdue.

 

0:10:29.6 CG: Excellent, thank you. Rohit, I want to give you a chance to respond to what Kim said, and as well as provide your own opinion on the Inflation Reduction Act as a whole, and in particular, the corporate AMT and stock buyback tax?

 

0:10:45.3 Rohit Kumar: Yeah, so it's interesting. And so I was listening to Kim, Kim's presentation, I thought there's actually... There's a lot of stuff we don't necessarily agree on and international tax would be one in particular. But though I think we do agree on is, I think Kim, I'm not going to quote you exactly right but basically, this is not the favorite proposal of the tax policy wonk-o-sphere, as it were.

 

0:11:08.1 RK: That if you were just, you told people, "We're going to raise revenue. How would you do it?" I don't know if this is last on everybody's list, but it's last on most people's list in terms of ways in which you would go about doing it, because it takes something that is suited for one purpose, financial statement income, which is really targeted at giving information to the markets and investors in particular, and then repurposes it, and "repurposes" is a kind word here, for a different purpose, to try to insert tax liability or assess tax liability. And so...

 

0:11:42.2 RK: And you see the problem with this, and Kim points this out, in that to do this sort of on a pure basis would mean erasing a whole bunch of incentives that Congress would not want to erase, like incentives for low-income housing or investments in the historic tax credit or new markets tax credit in economic depressed areas or even R&D.

 

0:12:04.1 RK: And it actually makes me wonder, and we will know this maybe not for a couple of years, whether we will ultimately have proven successful in achieving the, what is the obvious political goal of companies that had a lot of financial statement income, but very little or no federal taxable income, or federal tax liability anyway, whether we've actually hit the mark.

 

0:12:22.8 RK: Or do we find that because we have... Because Congress has chosen to protect all of the general business credits to start and then the new ones that were enacted at the same time as a part of the reconciliation bill, do we still find ourselves with companies with a lot of financial statement income and perhaps little or no federal tax liability.

 

0:12:42.2 RK: I would be actually a little bit surprised if we didn't yet have companies that say, "Well look, I'm just doing a lot of R&D, and I'm investing a lot in low-income housing, and I'm doing a bunch of renewable energy work, all of which Congress wants me to do, and that reduces my tax liability. What's the issue here?"

 

0:12:58.5 RK: So to me, this is the ultimate triumph of politics over policy. Now, we make law through our political mechanism, we don't let a bunch of economists get together and design and enact tax law. You can debate whether that would be a better or worse way in which to make law, but it is not the way in which we do it. And so this is kind of what we have.

 

0:13:19.5 RK: I am curious to see maybe even borderline skeptical as to the durability of its proposal, because it is really using a tool ill-suited to the task. Financial statement income to assess tax liability raises a host of questions, many of which taxpayers are desperate for answers already, although they won't get them because Treasury does have to do the hard work of providing implementing guidance here.

 

0:13:45.1 RK: But it's a real challenge to make this work, and we do have some history with this sort of proposal going back to 1986, the so-called BURP, it lasted about five years is my memory, and then ultimately replaced by what we used to have pre-2017, the corporate alternative minimum tax, which was used as an income tax-based measurement, not a financial statement-based measurement. And that to me is at least one possible future path here.

 

0:14:13.7 RK: There are others, and we can talk about that and some of them will be influenced by what happens around the rest of the world, and as Kim alluded to, is there some stuff that's happening in the international space where revised book minimum tax might look more like something that's been discussed around the rest of the world rather than the thing that we have before us.

 

0:14:32.6 CG: It's interesting. It's going to be fun to watch as this goes, and "fun" is probably not the right word, but it's going to be fascinating as this goes forward to see how it all plays out. So Watson I want to turn to you. You've got your ear being bent by a lot of the businesses. What are you hearing from businesses about this legislation? What are their pain points? What are their concerns? What's keeping them up at night?

 

0:15:00.3 Watson McLeish: Thank you, Cara. Thank you so much for having me back. It's great to be here. I don't... I see we only have about 45 minutes left, so that's a tough question to answer in that period of time, and I know folks want to hear more from Rohit and Professor Clausing. So I think the way I'd frame it is that across the industry spectrum, companies who suspect they're... If we're speaking specifically about the corporate alternative minimum tax, basically we have fundamental threshold questions of application and operation. So we're going to put this in perspective.

 

0:15:44.9 WM: Let's look at, let's look at the exercise we just completed with the Tax Cuts and Jobs [Act’s] fundamental comprehensive corporate, but mostly international tax reform, the tax Title 4 of the TCJA ran up 182 pages, and it contained among those 182 pages 79 delegations of regulatory authority. You can contrast that to the Inflation Reduction Act, which didn't have, technically didn't have a tax title, was a tax subtitle, subtitle A.

 

0:16:20.7 WM: That subtitle was 16 pages long, maybe even 14 if you discount the IRS funding section. And within those 14 pages, you have at least by my count, 21 delegations of regulatory authority. So long story short, Congress punted a lot to the Department of the Treasury and the Internal Revenue Service, and not just questions of application or interpretation, but they're the fundamental substantive, one can even say policy questions that they have delegated to the Treasury Department. And so that's...

 

0:17:01.6 WM: You asked me what were the pain points, it's really just the fundamental uncertainty in application and operation of these two brand new income tax regimes that were enacted in the Inflation Reduction Act. I would couple that with the fact that despite, one would say arguably an unprecedented large number of delegations of regulatory authority, both substantive and administrative, Congress was not quite as deferential when it came to the effective dates of these provisions.

 

0:17:40.9 WM: You mentioned earlier that both the alternative minimum tax and the excise tax on the repurchase of corporate stock, both applied taxable years beginning after December 31, 2022. And put that in perspective, when the corporate AMT provision was introduced and then passed the House in November of 2021, taxpayers, the IRS, Treasury, were looking at just over 13 months of lead time to prepare for— to implement its provisions.

 

0:18:18.1 WM: When Congress passed the IRA, President Biden signed it in mid-August, the time it had dwindled to just over five months, and as Rohit mentioned, there's not really a lot behind the legislation to guide taxpayers during this interim period, where they have to start thinking about for financial reporting purposes, estimated tax payment purposes and planning purposes, companies are now having to deal with, do these provisions apply to them? And if so, what is the impact?

 

0:18:56.4 WM: And doing so in a universe where we really have sort of barren legislative history and 14 pages of legislative text that delegate a lot to the executive branch, it's a tough row to hoe. I'll stop there. We can get into the nitty-gritty as we go on, I'm sure.

 

0:19:16.7 CG: So to follow up on what you were just saying, Kim, I know you can't really comment on this, but Rohit or Watson, do you have any sense of when we might start seeing guidance? And are we going to get formal guidance or is it going to be the strain of FAQs that we've seen before, that can be difficult in that it is not binding? I don't know if either of you have any insight into a timeline?

 

0:19:42.9 RK: I don't have a specific timeline in mind, I'm not sitting on a copy of the draft regs for example.


[chuckle]

 

0:19:49.8 CG: Oh come on, I wish you...

 

0:19:50.7 RK: It's an unusual development. But look, I would be surprised if we're getting FAQs with respect to the book minimum tax as a way of dealing with guidance. That might be at the margins, more likely on the energy side of the ledger, than it would be on the BMT side of the ledger. I do think we will get some initial guidance, a notice or something akin to that at some point in the next couple of months.

 

0:20:13.6 RK: Because I think, look to Treasury's credit, and I have a lot of sympathy for the tax legislative counsel who is going to have to manage all of this, I think they fully appreciate the urgent dire need by taxpayers to get some initial guidance to answer some of the threshold questions that Watson is hearing and I'm also hearing as I travel around the country talking to taxpayers...

 

0:20:35.8 RK:. . .That are really like almost binary, like this: Depending on how this question is answered I'm either in or I'm out. And if I'm out, all the other answers— All the other questions I don't really care the answer because I'm not in the first instance, but if I'm in then, if I answered in the affirmative, then I have 4,000 other questions that follow that will then ascertain amount of liability.

 

0:20:58.3 RK: And also, am I structurally a BMT taxpayer? Or is this like, there's going to be a year or two where I'm paying the book minimum tax, but I get a credit carry forward then I can earn out of it in the years to follow? So I think guidance, hopefully relatively soon, certainly something this calendar year, but obviously I would be very surprised since I think it's almost metaphysically impossible to have a final rule before the end of the calendar year.

 

0:21:27.7 CG: I think that's very fair, and it is one of those where I'm sure that no one's sitting on guidance, this is just a tight timeline to try to get at something turned around. So I agree with you in the sense that I feel for those that are trying to get out as much guidance as they can, but it is a challenging, challenging task. Watson, I want to ask you... Oh, go ahead.

 

0:21:49.4 WM: Yeah, so I said... I put some, I put the few anecdotes together here, just to put this in the challenge that Treasury is facing context. So back, let's rewind to late 2017, the Tax Cuts and Jobs Act gets enacted. The following month in January, then assistant deputy... Or sorry, deputy assistant secretary for tax policy, Dana Trier, was doing the rounds and he projected confidently that we'd see proposed regulations implementing the law's major international tax reform provisions by the end of the year.

 

0:22:29.8 WM: So 12 months the sort of target for bringing out proposed regs on the major components or pillars of the TCJA, and then he followed up by saying that guidance work for the entire tax law will continue over an 18-month to two-year period. And as we know in hindsight, both of those projections were a little, I guess overly ambitious, you could say.

 

0:22:57.6 WM: There's a couple of, take the reports that just Treasury Inspector General for Tax Administration, in following Treasury and the IRS's progress in implementing and administering the TCJA's corporate international provisions. And in one of their reports in late 2019, this is a really interesting figure here, of the 51 planned final regulations to implement the TCJA's business international tax provisions, Treasury and the IRS ultimately issued only five within 18 months of the law's enactment.

 

0:23:38.3 WM: Now, obviously, it's a different scale of scope, right? Different range of... It's more multidisciplinary effort here, so broader in scope. But the Inflation Reduction Act arguably is a lot deeper, because we have two brand new regimes that the application and operation of which are highly dependent on how Treasury makes certain policy and administration calls. And that's setting aside all the things that, the mechanical things the IRS has to do, and these apply equally to corporate AMT and the excise tax.

 

0:24:13.9 WM: So beyond issuing regulations and other guidance, they have to come up, as I said earlier, with forms and instructions. Right now that's indeterminate. We don't know how many new forms will have to be in publications, will have to be created, nor do we know the number of existing or impacted existing forms of publications.

 

0:24:35.4 WM: Then obviously there's training, right? The IRS thankfully has resources to hire and retain more professionals and hopefully more subject matter professionals, and so they can increase their taxpayer practitioner assistance. They also have to update the revenue manual to guide their employees throughout the organization. So it's just a whole lot that has to occur and we're what, September 22nd, these provisions take effect January 1st, so it's quite daunting.

 

0:25:11.3 CG: Yeah, it is going to be a very, very busy fall without a doubt. One question that I wanted to pose to the entire group, and it's sort of the giant question that is in the room right now, and we want to keep our conversation focused today on the U.S. legislation, and there's a bunch of other topics that we'd like to get to as well.

 

0:25:28.8 CG: But we do have to acknowledge that we have an OECD effort going on. Pillar 2 also includes a 15 percent minimum tax. Would one of you want to explain briefly how you think the corporate AMT and the Inflation Reduction Act fits in with the international effort to advance pillar 2?

 

0:25:55.1 RK: That's an interesting one. Kim, do you want to take the first crack? Or you want to let me take a swing and you tell me what I get wrong?

 

0:26:00.9 KC: You can go first off. I'll sweep up after.


[chuckle]

 

0:26:05.0 RK: Okay. So we have now we have to think of this in the context of pillar 2, once you introduce that concept into the equation. There's pillar 2, the income inclusion regime, which is a 15 percent minimum tax that is due in every country in which a multinational has operations. So-called like "per country GILTI" was the version that was proposed by the House of Representatives.

 

0:26:28.9 RK: Then there is this concept of a qualified domestic minimum top-up tax, which is a, purely a feature of domestic law that says we will make sure that every company is paying at least 15 percent in our jurisdiction, in theory to avoid anyone having to pay under the IIR to a foreign headquarters, to a foreign treasury, 'cause we're going to guarantee that we're collecting 15 from everyone doing business here.

 

0:26:50.8 RK: And then you have the book minimum tax which is not a qualified domestic minimum top-up tax. For a very important and politically sensitive reason, which is, a true pillar 2-styled qualified domestic minimum top-up tax would not allow you to exclude from the calculation your general business credits, your R&D credits, your low income housing tax credits, the new renewable energy incentives that were put as a part of the reconciliation bill.

 

0:27:18.1 RK: If any of those things caused you to be paying less than 15, then you would owe residual top-up tax, if it was a QDMTT to the U.S., and if it were not in the U.S., then perhaps to someone else. And so you have three minimum taxes all at 15 percent, which is not at all confusing. One is a international kind of per country IIR, one is qualified domestic minimum top-up tax. And then the thing that Congress did that is not either of those.

 

0:27:44.1 RK: And I think the challenge on a sort of go-forward basis that will, that Capitol Hill will have to rest wrestle with is, should there come a time, and I think it's very much a, to me it's very much an open question of this will ever happen, but if you just for me anyway suspend disbelief, when we reach a point where Congress is like, "Yeah, we have to do a qualified domestic minimum top-up tax," you're going to have a whole host of issues to wrestle with in terms of how to redo the U.S. incentive regime, so that the incentive still exists, but not in a way that trips up the 15 percent QDMTT.

 

0:28:18.8 RK: Which again is not a BMT because the incentives are good for BMT purposes, but not for QDMTT, qualified domestic minimum top-up tax, QDMTT purposes. And so that that's sort of the, these are kind of three things in parallel. You could argue the QDMTT and the IIR kind of work in tandem, but BMT is like a cousin, a distant cousin twice removed, living in a different country, kind of thing that maybe one day could be converted into it, but not without crossing some pretty serious political hurdles of the sort that were manifest as Congress was drafting this version of a minimum tax where it said, "No, no, no, these incentives... "

 

0:28:58.6 RK: In fact as we saw, the initial cut of incentives was not good enough for Congress, they added some additional incentives on the Senate floor in order to have the votes, by adding protected additional incentives from the application of BMT, in order to have the votes to pass this thing earlier this year.

 

0:29:17.2 KC: Yeah. So I'll just emphasize a couple of those points and maybe add one thing as well. So from a policy perspective, I think the most crucial missing piece in the, what Congress did relative to what pillar 2 is trying to do, is the country-by-country minimum tax element.

 

0:29:39.4 KC: Because without that you will always have an incentive for low tax jurisdictions to go all the way to zero, because they can use income from higher tax jurisdictions together with those zero tax jurisdictions, blend it and get a better rate than they would get on their regular domestic income. So I think the only way to truly end that zero bottom and raise it to a 15 bottom is through that country-by-country mechanism. So that's the most important I think missing feature of this and the biggest change that would have to occur to make this more like pillar 2.

 

0:30:16.0 KC: I do think that there are some elements of pillar 2 that are encouraging on the tax credit front. There's reasons to think the low income housing tax credit would be fine, because the way that it's structured there are green credits as have been designed here for clean energy would be protected already under pillar 2. So some of those conversions wouldn't be unthinkably difficult. The hope is that other countries will go forward and address this very serious corporate tax base erosion problem, and implement.

 

0:30:54.5 KC: And at that point, the U.S. Congress will have an important decision to make about whether it wants its companies to be subject to three minimum taxes [chuckle], or whether they'd like to get that number down. And one way that this alternative minimum tax might be a useful bridge to that new reality is you could say there are things about this tax that you may not like, but we have collected or plan to collect $200 billion-plus from the corporate community, from that source.

 

0:31:27.7 KC: Perhaps replacing that source of revenue is something that's more compliant with the what the rest of the world is doing. Especially if the world is already moving forward in that direction, might be an attractive trade for the business community. And I do think there's a lot for the business community in a stable international tax system where what the United States is doing and what other countries are doing looks similar.

 

0:31:49.2 KC: You have more certainty, you have less likelihood that you will end up in equilibria where countries resort to unilateral measures and trade wars because of hurt feelings from the unilateral measures. You have more certainty about the future and what the regime looks like. And you kind of demonstrate that we can work with countries to solve these vexing global collective action problems.

 

0:32:14.5 KC: That 135 countries came together and said, "This is like a way that we could solve the difficulty of taxing mobile capital in our global economy." There's a lot of other global collective action problems we have to work with other countries on, defending democracy here and abroad. Dealing with climate change, leaps to mind. Public health.

 

0:32:36.4 KC: So working together and collaboratively with our partners and following through on our commitments, I think would be really good not just for the world, but also for the business community that operates in the world, so that these other problems can be addressed and ensure the free flow of capital, ideas and people across borders.

 

0:32:54.8 RK: Yeah, look I... Look the taxpayers I talk to would love stability and consistency of administration across jurisdictions. I think they are, they take a different view than Kim does about whether pillar 2 model rules adopted across jurisdictions would actually yield that result, or if that would just add additional complexity to the regime.

 

0:33:19.1 RK: And that countries that were determined to raise more revenue out of U.S. headquartered multinationals, which I think for most U.S. lawmakers feels a lot like what's going on around the rest of the world, whether that would just find other ways to express itself through other creative mechanisms that don't technically violate whatever the rules were that were just adopted, but just are an add-on feature, because we need a lot more revenue, because we have slow growing economy and an aging population, it's easier to tax you than it is to tax our own folks.

 

0:33:47.4 RK: And while at the OECD anyway, 135 or so countries said, "Hey here's a way we could solve it," that was sort of a... Really, the OECD is just a standard-setting body, the OECD does not have an army, can't impose law change in the various member states. The rubber hits the road when the individual jurisdictions have to enact change in their own domestic law, and what we're discovering, perhaps not surprisingly, at least not to me, is saying, "Well, we could do it this way," is a far cry from saying, "We will or would actually do it this way."

 

0:34:22.9 RK: And witness the difficulty that even the EU is having perhaps amongst the most, of the various countries in the world, some of the most pro pillar 2 regions of the globe is having trouble... Well yes, having trouble is I think a fair characterisation, and getting unanimity on a directive to adopt it.

 

0:34:38.9 RK: Now we have had an announcement by five countries, "the G5", I'm calling them. That's not an official designation. That say, "We we're going to do this anyway." I think there are some real questions of EU law as to whether or not that will work, consistent with existing European Court of Justice precedence. I'm not an EU lawyer, but I've read enough to know that there's at least some serious questions about whether that would be valid under EU law. They will have to figure that out for themselves, of course.

 

0:35:08.0 KC: Yeah, I do think there's a nice dynamic that gets built in when some major countries adopt, and I know the UK is interested, I know Japan is interested, there are other countries that could adopt even outside of the EU. Or of course, the subset of the EU could adopt and there's an enhanced cooperation procedure they could pursue over a period of years. So this may not happen tomorrow, but once countries do adopt the UTPR, the undertaxed payment rule should provide... Or undertaxed profit rule, sorry.

 

0:35:35.9 CG: Profits, yeah.

 

0:35:37.1 KC: Should provide a natural incentive to encourage other countries to adopt. So one of the clever things about this agreement, which I think makes it a nice model for thinking about climate too, is that it has a built-in incentive to discourage people from free riding on the actions of other countries or from undermining their attempts to address this problem.

 

0:35:56.7 KC: So I think there's some hope that once you get the ball rolling, that there will be more widespread adoption. And of those 135 countries, I think there was wide recognition that ours is one of the most difficult ones to get things done in, simply because of the way Congress functions and we see the difficulty of getting any legislation through in our highly partisan model, which is a much more difficult than say, a parliamentary system might have with getting some things through.

 

0:36:28.7 CG: I think you make such an interesting point on saying how the... Yeah, corporate minimum tax that we’re dealing with now could be a bridge to get to something else. I've always thought we're going to end up in a situation where the OECD's project falls apart and everybody's just going in a unilateral way. I've never thought corporations want that, they want certainty, they want to know exactly what they're going to pay, but getting any sort of uniformity just doesn't happen.

 

0:37:01.9 CG: I did state and local tax for years. You know, there was always a pipe dream to think that you were going to get our 50 states, so thinking you're going to get 135 jurisdictions. . .. But it is an interesting idea that given what we have now, may be encouraging to the U.S. to come jump back on board. I think that's...

 

0:37:18.1 RK: Yeah, I think though, it speaks volumes that perhaps the most one could say about the current book minimum tax, is it might make something that... It just makes other things look less bad by comparison like this is the. . .. If you think this is the worst thing that we could have done, then anything else we might do is by definition better than the worst thing that we might have done.

 

0:37:39.6 RK: I'm not suggesting that Professor Clausing said that this is the worst thing that we could have done, but as we stipulated the outset, this is not the preferred tax policy of the tax policy wonk-dom, and so...

 

0:37:52.9 KC: And I would just add that also that this time is kind of an interesting time for the business community to think about these alternatives, because one of the nice things about the pillar 2 approach is it really does answer the competitiveness problem that’ve so vexed this arena for so long, because whenever you say, "Let's try to actually tax the foreign profits of U.S. multinationals," you hear, "Well, we won't be able to compete with some other country where they're not going to do that." Right?

 

0:38:16.4 KC: So now you literally can bring 95 percent of world economy with you. It's a really great opportunity to try to solve that collective action problem. So I think that is another thing that we might lose if we just let this fall apart, because then if then the U.S. goes it alone, it can't be— It won't have that mechanism or that enforcement or that will in the other countries to kind of move along in a symmetric and compatible way.

 

0:38:41.3 RK: Yeah. I mean that obviously the challenge is the only way you solve a collective action problem is through collective action, and if collective action is the problem then the way I solve the problem is by not having the problem. Well yeah, if we could solve the collective action problem, we wouldn't have a collective action problem in the first instance. [chuckle]

 

0:38:58.3 KC: I'm just saying we're getting pretty close, 135 countries are agreeing in principle to these ideas, right?

 

0:39:06.0 RK: Yeah.

 

0:39:06.6 KC: But it's difficult with no one willing to lead, and the United States is a country that has been known for its leadership qualities but has failed to lead at this moment, and hopefully the EU and others will step up and call our bluff. Because then I think at that point, we've got some really interesting decisions to make about whether we want our company subject to multiple...

 

0:39:24.0 RK: Yeah. It's actually...

 

0:39:24.9 KC: Or whether we want to join the thing that we thought was a good idea ourselves.

 

0:39:30.4 RK: Well, the "we" here is perhaps not the full collective we. The administration, to be fair, the administration thought was a good idea. Republicans on Capitol Hill I think were fairly clear they were never fans of the exercise to begin with. It does raise though the hypothetical of the rest of the world does some pillar 2 version, right?

 

0:39:49.4 RK: And then Congress, Kim, you've referred to a couple times, Congress will have an interesting choice. To me, it is my experience on Capitol Hill anyway — that is where I more or less grew up — is Congress really doesn't appreciate being bullied by other jurisdictions. And when put in this hypothetical position, and I think it is, it's clearly hypothetical at the moment, it may be hypothetical for a while.

 

0:40:16.9 RK: When pressed by other jurisdictions who are threatening to tax U.S. headquartered multinationals, will Congress say, "Okay, fine. Checkmate, you got me. We'll make these changes that we otherwise didn't want to make."? Or might Congress react somewhat less compliantly and say, "No, wait, I don't like this. And I'm Congress. And I have lots of ways to express my unhappiness about being, by your attempt to push me around."?

 

0:40:44.2 RK: My experience with Congress is more the latter. Now maybe eventually, after stages of grief, you get to acceptance, but you go through a lot of anger on the way. And Congress acting in anger could yield a really difficult and interesting set of circumstances, whether that's tariffs or other retaliatory measures or the like, or defensive measures. "Fine. You want to tax U.S. headquartered multinationals because they're overusing U.S. incentives like the R&D credit? I have a separate solution for that."

 

0:41:12.9 KC: Well, we have the Chamber of Commerce here, right? So I mean, it strikes me that one thing the business community might want to think about is like which equilibrium is best for them, right? So in the equilibrium where other countries adopt and then we lash out with tariffs, that doesn't strike me as a great equilibrium for the business community.

 

0:41:32.8 KC: Compared to one where we mold this new international agreement to best suit the general problem that we've been facing for decades, which is it’s very hard to tax mobile capital as long as even one jurisdiction is willing to undercut, right? This agreement is designed to solve that problem by raising the bottom and by having a valid enforcement mechanism.

 

0:41:52.2 KC: And that enforcement mechanism does come at the cost that if you yourselves don't do it, there is a consequence, right? So I do think this is a good time to sort of think about these different paths and what's best for the future of capitalism.

 

0:42:04.9 CG: Watson, I want to... Well, one I want to give you the...

 

0:42:09.6 WM: Thanks for that plug there. First of all, obviously out of deference in respect to Cara who admonished us to keep this focused on the Inflation Reduction Act and where we've got 17 minutes left. So I think I'll just say, Professor Clausing, that I don't think we're, as Rohit had mentioned, we're not really at the stage where we're facing a binary choice.

 

0:42:29.8 WM: And I think there has been regrettably a, less enthusiasm recently among the Biden administration in securing buy-in from other constituencies, whether it be that the business community at large or both chambers of both parties in Congress, including within the Democratic Party as well. I mean there are concerns that cut across whether they're industry sector or geographic location or political party affiliation.

 

0:43:06.2 WM: Ultimately the concern is, is this the best deal for U.S. companies and competitive for the U.S. economy as a whole? And I think we need, those conversations need to have an earnest, and I certainly look forward to participating in those consultations in the months and potentially years ahead.

 

0:43:26.6 WM: I think we need to start with staff and members, and also have these meetings at Treasury and really get that conversation going. Until that happens, I think it's going to be tough to achieve that collective solution that you described.

 

0:43:42.8 KC: Well, my experience was it did you feel like there was a lot of consultation with these groups. But from the administration's standpoint you're thinking about the entire economy, like you mentioned, not just like what's best for this quarter's profits, right? So you have to think about the tax system as a whole, the alternative sources of revenue, are we raising enough revenue to meet our fiscal obligations?

 

0:44:13.3 KC: And then those do entail choices that often imply that we need to raise some tax revenue. And doing it in a context where we can be sensitive to the competitiveness concerns of companies, I think was a big achievement, as opposed to the going it alone version.

 

0:44:30.2 CG: So Watson I want to give you one question first, and then we'll try to jump to the stock buyback tax for just a few minutes before we close up. So the estimation was that the corporate AMT is supposed to, is going to affect 130 to 150-ish corporations, which is a relatively small number.

 

0:44:54.4 CG: I wanted to ask you in what you're hearing from the business community, is that in fact, true? Is this a really small number of corporations? Or is the way that the tax is designed, is it going to bring in smaller companies, your mid-size companies, is that number going to get bigger in terms of the number of businesses that are going to have to do these calculations?

 

0:45:17.8 WM: That's a great question, Cara, and I think the answer is it all depends. I don't think... First of all, we can't answer that question because we don't really know the full contours of the law yet. I think there are some major threshold or gating decisions or policy calls that need to be made, that will give us better insight as to whether it's determining how you determine the members of a group of it's a foreign parented company, or how you determine adjusted financial statement income for multinationals with control of foreign corporations.

 

0:46:01.2 WM: There's a lot of different ways we can... Whether you're subject to the tax and then how much tax you pay, those are open questions right now. Obviously... Obviously, the devil will be in the details. But I think the question of who is legally liable for the tax or likely to be subject to tax misses the mark somewhat, and that is, there are potentially five or 10 times as many companies that will have to still develop and implement the systems and processes to gather requisite data and apply the rules, once we know what rules are, just to undertake this annual analysis, just to determine whether or not they're in, they're in or they're out.

 

0:46:47.8 WM: And then if they are in at some point, as Rohit mentioned, I think there's also this unanswered question: Once in, are you always in? And what are the criteria for that? There's just too many unanswered questions at this point. But I do think it is probably deceptively under-inclusive to just say that this is only going to affect 150 companies, 'cause it's clearly not, and there's potentially thousands of companies that are going to incur the sort of...

 

0:47:21.6 WM: I don't know what economists call it, but it's a deadweight loss of spending lots of... Understanding if they're... Or just substantiating if they're not subject to the tax. I question if that's the best use of that capital. That's a decision that's above my pay grade.

 

0:47:43.1 CG: Yeah, there's clearly going to be compliance costs for more than those companies that ultimately have to pay it. So let's switch over to the stock buyback tax for just a few minutes. I will say that for the readers of Tax Notes, this is generating a lot of buzz. People are very interested in it. The stories that are written are getting a lot of reads. I think people want to know more, they want to understand it.

 

0:48:12.6 CG: So for the panel, do you have any sense of what impact is this going to have, I think both on businesses in particular. Is this going to change business behavior, where we're going to see businesses switching to payout more dividends? What impact is this going to have overall?

 

0:48:33.5 KC: Who would you like to have start on that?


[chuckle]

 

0:48:36.8 CG: Why don't you start. [chuckle] We'll do the reverse this time.

 

0:48:41.6 KC: Okay, I will note that one interesting thing about this tax is that it reduces the distortion between different ways of returning income to shareholders. So when this tax first came up, it does leave one to bear in mind this dictum that once you have a distortion, adding another distortion doesn't necessarily increase the distortion if that distortion is lessening the relative distortion.

 

0:49:08.5 KC: So to clarify, dividends are not a tax preferred way to return money to shareholders relative to letting them hold the income until they feel like realizing the capital gain. With a buyback, of course you can... Some shareholders can elect to sell and others can keep and just enjoy the continued capital gain, as we saw in the wake of Tax Cuts and Jobs Act, but also the American Jobs Creation Act back in 2004, often our attempts to return money to corporations through dividend holidays or repatriation holiday in the case of American Jobs Creation Act or the big corporate tax cut, we often were disappointed not to see more investment, and instead there was a huge run-up in stock buybacks.

 

0:49:55.8 KC: And so this tax basically says, "Okay, if you're going to return the money to shareholders through the form of stock buybacks, you at least have to pay a modest tax." It's not enough to completely counter this tax disadvantage of dividends relative to capital gains, but by moving in that direction it does enhance the sort of efficiency of that choice and raises revenue on the side.

 

0:50:26.4 KC: It was kind of a novel and interesting tax that came seemingly out of nowhere, and then the next thing you know, it's law. But I think there are good reasons to think that it won't be. It'll be, in many respects efficiency-enhancing.

 

0:50:42.4 RK: Yeah, in my experience, having watched all the advocacy around the reconciliation pretty closely, this was the one that probably got the least attention. Now that might be because everything else that was on the table was so much more impactful to taxpayers that they just... With bandwidth issues they just couldn't engage on every possible topic, and this seemed... I don't know if it seemed less likely, I actually always thought it was likely to be included in some final, if there was ever an agreement, of some final agreement.

 

0:51:10.6 RK: One, because not a lot of dust was... People weren't kicking up a lot of dust about it. Although I don't agree as an economic matter, politically I think we can all stipulate that most folks, including some Republicans view stock buybacks as a self-evident evil, even though it's just another way to return value to shareholders.

 

0:51:30.6 RK: And if a company doesn't have a gangbuster investment, that they can use the corporate revenue for, then they ought to return it to shareholders so that shareholders can reallocate the capital into more efficient, invest in the next start-up or whatever it is they're going to do over.

 

0:51:46.7 RK: They're not... We act as if a stock buyback means the money is being put on a barge and set aflame, like it's just being wasted, but it goes to such entities as like teacher pension funds, things like that, which you don't think of as like, "Oh, that's a bad enemy. I wish harm upon them."

 

0:52:09.9 RK: But it just didn't get a lot of attention, and so since every tax bill is at some level, the squeaky wheel gets the oil, kind of exercise, the wheel isn't squeaking, doesn't get a lot of oil. The excise tax just didn't squeak much, and so as a result, it kind of made it in.

 

0:52:28.8 RK: In fact, I was a little bit surprised that it wasn't when Senator Schumer and Senator Manchin announced their original agreement. Or I guess the second. The original was [inaudible]. The second one that had the energy tax provisions in it, the excise tax was not included in the first pass, this got added later as an offset to address some of the concerns that Senator Sinema raised along the way. I was actually a bit surprised it didn't have to wait as long as it did to be included, just given what I saw or really didn't see, in terms of the way companies were acting on this.

 

0:52:57.7 RK: Now, that said, it is not without its inefficiencies. There are a whole host of corporate reorganizations that are potentially captured by this and perhaps not in an intended way, but without guidance, taxpayers just aren't sure. And so you've got a little bit of a, if not a freezing effect on the market, a little bit of uncertainty in the market, of run-of-the-mill organizations that now taxpayers have to stop and say, "Wait a second, is this now going to yield a whole bunch of tax liability that three months ago would not have been the case? Now I need to think differently about how I do this."

 

0:53:30.7 RK: And to Watson's comment, it creates some deadweight loss in the system because there's a lot of spinning of the wheels with a whole lot of scenario planning for scenarios that only one scenario will avail, but in the absence of information you have to scenario plan for any number of options that are available.

 

0:53:51.6 WM: Yeah, not the best way to run a railroad here. [chuckle] Yeah, I agree with everything Rohit just said. I think there are, your newspaper or publications have reported quite a bit on some of the fundamental questions that are unanswered, I think not quite as sexy, but the mechanical and operational questions.

 

0:54:19.6 WM: Like when does the tax have to be remitted? What's the process? Is it every day as it? Is it semi-monthly? Is it quarterly? What reporting requirements and records have to be kept in system? What does that look like? Then there's obviously questions of application.

 

0:54:39.1 WM: I've heard from a number of companies are concerned about potential application to prefer stock, in particular we don't... I think to Rohit's point about the purpose here, I don't know that we technically know what the purpose was other than raising revenue. Yes, there have been, I think Senator Wyden has made some statements in the past, but there's... From an official legislative history standpoint, I really don't know where we can point to what the legislative intent was.

 

0:55:08.3 WM: But assuming that it was something along the lines as what Rohit describe, then there's certainly some good arguments to be made to the extent that you have, let's just say involuntary redemptions or re-purchases where you might have oftentimes preferred stock 'cause contractual redemption provisions that pre-exist the enactment of the Inflation Reduction Act. Did Congress really mean to target or disrupt those arrangements?

 

0:55:43.2 WM: And then obviously there's all these other questions we won't get, well, when do you value the stock? And what about differences between issuance and redemption? There's just for options, there's a long list, almost innumerable number of open questions here that will be, we plan to raise with our friends at the Treasury Department.

 

0:56:02.7 RK: Well, I think there are, even though Congress attempted to ameliorate this, I think there's the risk of knock-on effects for the way in which employees are compensated.

 

0:56:11.1 WM: Right.

 

0:56:12.7 RK: So one of the things that the provision says is, "Well, it's net buyback." So if you're buying back stock to avoid dilution because you've granted shares to your employees, then that's where it doesn't count, to the net buyback calculation. But of course if we think about the way employee compensation works, so you grant options to your employees.

 

0:56:31.6 RK: When the stock is really high, like it's a 52-week high, that might be when employees decide, "Oh, now would be a good time to exercise my options. This option is substantially in the money, and so I'm going to get max value from the grant." But that is typically, a 52-week high is not typically when a company would want to re-buy its stock. You want to buy the lows, not the highs, and so you create this situation.

 

0:56:52.7 RK: In theory, it's like, "Oh, well it's just net, so employees are exercising options," so they're getting, they're getting... They're getting outright grants and you can buy back to net that out. But when you think about the market mechanics of how this plays out, I do worry a little bit that over time companies are going to say, "You know what? This sort of inclusive capitalism, we're going to give employees, a stake in the company, company does well, employee does well” — We're going to start to erode... Maybe inadvertently, I think inadvertently, erode that connection.

 

0:57:21.2 RK: Because the economic behaviors of employees versus companies are going to be motivated differently, not in a bad way, it's in an economically kind of an efficient way. And so I do think we'll have to see how this plays out over the next couple of years. This is such a novel concept in terms of tax policy, and so its — all of its intended and unintended consequences on taxpayer behavior are impossible to predict.

 

0:57:46.9 RK: But one, to me, that's immediately obvious is employees are going to exercise options when stock is really high. That is not when companies are going to want to re-buy their stock. And does it hit a low at some point in that taxable year for the company, such that they can go in and buy and net to zero? Or do they find themselves in a situation where they're not really effectively... They're not effectively able to avail themselves, that's the English version of that, of the sort of net calculation.

 

0:58:19.8 CG: That's interesting, I think... So we got one question in that was asking about special purpose acquisition companies and whether they would be subject to the stock buyback tax due to investors' ability to redeem shares, and the question really is, will Treasury provide guidance?

 

0:58:32.9 CG: I think we hope on all of these issues, we're going to get guidance from Treasury or we're going to see an application, what happens. Because I think there's a lot of... Right now with something like this, it's the "I don't know". This did seem like it came about quickly, and so I suspect that some of these scenarios have not been run and they will eventually be run and we hope that there will be guidance that gets issued, whether in advance or subsequent to it.

 

0:58:58.0 WM: Cara, on that point, I just want to emphasize that it really is important our counterparts at Treasury Office of Tax Policy, and Office of Chief Counsel really, really smart talented lawyers and economists and CPAs that work there, but not many of them have to the extent that we have in-house folks on this, watching this program today, not many of them have had to actually implement or apply the rules that they write, certainly not the ones to exist yet.

 

0:59:31.5 WM: But just generally have never had to contend with implementing and complying with tax regulations from a taxpayer perspective, certainly as an advisor. But it's a whole different ballgame. All these sort of practical considerations that Rohit just rattled off, it's important that you raise your voice and that you engage and that you participate when there's this proposed rule-making come out, that you take advantage of it.

 

0:59:56.6 WM: And you go in and see, whether it's through groups like the Chamber or Rohit's firm, or just as an individual taxpayer, it's really important. Because now a lot of the major policy decisions are going to be made over the next 18 months.

 

1:00:12.7 CG: Well, I think that was a fantastic way to close us out, Watson. That was perfect. You did way better than I would have done. I want to thank you guys...

 

1:00:21.1 WM: And read Tax Notes.

 

1:00:21.2 CG: That's right, always read Tax Notes.

 

[laughter]

 

1:00:27.3 CG: I want to thank you guys so much, this is incredibly informative and it was really interesting, and I wish we had another hour 'cause I need to learn more from all of you. So thank you again for your time and thank you to everyone that was listening, we appreciate it as always, and have a great rest of your day.

 

1:00:40.9 RK: Thank you.

 

1:00:41.5 KC: Thanks, Cara.

 

1:00:42.3 RK: Thank you, Cara.

Company Tax Notes
Category FREE CONTENT;ARTICLE / WHITEPAPER
Intended Audience CPA - small firm
CPA - medium firm
CPA - large firm
Published Date 09/28/2022

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