WASHINGTON — Large companies like Apple and Bristol Myers Squibb have long employed complicated maneuvers to reduce or eliminate their tax bills by shifting income on paper between countries. The strategy has enriched accountants and shareholders, while driving down corporate tax receipts for the federal government.
President Biden sees ending that practice as central to his $2 trillion infrastructure package, pushing changes to the tax code that his administration says will ensure American companies are contributing tax dollars to help invest in the country’s roads, bridges, water pipes and other parts of his economic agenda.
On Wednesday, the Treasury Department released the details of Mr. Biden’s tax plan, which aims to raise as much as $2.5 trillion over 15 years to help finance the infrastructure proposal. That includes bumping the corporate tax rate to 28 percent from 21 percent, imposing a strict new minimum tax on global profits and levying harsh penalties on companies that try to move profits offshore.
The plan also aims to stop big companies that are profitable but have no federal income tax liability from paying no taxes to the Treasury Department by imposing a 15 percent tax on the profits they report to investors. Such a change would affect about 45 corporations, according to the Biden administration’s estimates, because it would be limited to companies earning $2 billion or more per year.
“Companies aren’t going to be able to hide their income in places like the Cayman Islands and Bermuda in tax havens,” Mr. Biden said on Wednesday during remarks at the White House. He defended the tax increases as necessary to pay for infrastructure investments that America needs and to help reduce the federal deficit over the long term.
Mr. Biden’s proposals are a repudiation of Washington’s last big tax overhaul — President Donald J. Trump’s 2017 tax cuts. Biden administration officials say that law increased the incentives for companies to shift profits to lower-tax countries, while reducing corporate tax receipts in the United States to match their lowest levels as a share of the economy since World War II.
Treasury Secretary Janet L. Yellen, in rolling out the plan, said it would end a global “race to the bottom” of corporate taxation that has been destructive for the American economy and its workers.
“Our tax revenues are already at their lowest level in generations,” Ms. Yellen said. “If they continue to drop lower, we will have less money to invest in roads, bridges, broadband and R&D.”
The plan, while ambitious, will not be easy to enact.
Some of the proposals, like certain changes to how a global minimum tax is applied to corporate income, could possibly be put in place by the Treasury Department via regulation. But most will need the approval of Congress, including increasing the corporate tax rate. Given Democrats’ narrow majority in both the Senate and the House, that proposed rate could drop. Already, Senator Joe Manchin III of West Virginia, a crucial swing vote, has said he would prefer a 25 percent corporate rate.
Mr. Biden indicated he was willing to negotiate, saying: “Debate is welcome. Compromise is inevitable. Changes are certain.” But he added that “inaction is not an option.”
At the core of the tax proposal is an attempt to rewrite decades of tax-code provisions that have encouraged and rewarded companies who stash profits overseas.
It would increase the rate of what is essentially a minimum tax on money American companies earn abroad, and it would apply that tax to a much broader selection of income. It would also eliminate lucrative tax deductions for foreign-owned companies that are based in low-tax countries — like Bermuda or Ireland — but have operations in the United States through a new provision of the tax code that Biden officials have given the comic-book-infused name “S.H.I.E.L.D.”
“We are being quite explicit: We don’t think profit-shifting is advantageous from a U.S. perspective,” David Kamin, the deputy director of the National Economic Council, said in an interview. “It is a major problem,” he said, adding that with the proposed changes, “We have the opportunity to lead the world.”
The corporate income tax rate in the United States is currently 21 percent, but many large American companies pay effective tax rates that are much lower than that. Corporations that have operations in multiple countries often shift assets or income — sometimes in physical form, but other times, simply in their accountants’ books — between countries in search of the lowest possible tax bill.
Companies also shift jobs and investments between countries, but often for different reasons. In many cases, they are following lower labor costs or seeking customers in new markets to expand their businesses. The Biden plan would create new tax incentives for companies to invest in production and research in the United States.
Previous administrations have tried to curb the offshoring of jobs and profits. Mr. Trump’s tax cuts reduced the corporate rate to 21 percent from 35 percent in the hopes of encouraging more domestic investment. It established a global minimum tax for corporations based in the United States and a related effort meant to reduce profit-shifting by foreign companies with operations in the country, though both provisions were weakened by subsequent regulations issued by Mr. Trump’s Treasury Department.
Conservative tax experts, including several involved in writing the 2017 law, say they have seen no evidence of the law enticing companies to move jobs overseas. Mr. Biden has assembled a team of tax officials who contend the provisions have given companies new incentives to move investment and profits offshore.
Mr. Biden’s plan would raise the rate of Mr. Trump’s minimum tax and apply it more broadly to income that American companies earn overseas. Those efforts would try to make it less appealing for companies to book profits in lower-tax companies.
The S.H.I.E.L.D. proposal is an attempt to discourage American companies from moving their headquarters abroad for tax purposes, particularly through the practice known as “inversions,” where companies from different countries merge, creating a new foreign-located firm.
Under current law, companies with headquarters in Ireland can “strip” some of their profits earned by subsidiaries in the United States and send them back to the Ireland company as payments for things like the use of intellectual property, then deduct those payments from their American income taxes. The S.H.I.E.L.D. plan would disallow those deductions for companies based in low-tax countries.
Tax professionals say Mr. Biden’s proposed changes to that law could be difficult to administer. Business groups say they could hamper American companies as they compete on a global scale.
Republicans denounced the plan as bad for the United States economy, with lawmakers on the House Ways and Means Committee saying that “their massive tax hikes will be shouldered by American workers and small businesses.”
But Mr. Biden’s team hopes the proposals, when coupled with an effort through the Organization for Economic Cooperation and Development to broker a global agreement on minimum corporate taxation, will start a worldwide revolution in how and where companies are taxed. That is in part because the Biden plans include measures meant to force other countries to go along with a new global minimum tax that Ms. Yellen announced support for on Monday.
Treasury Department officials estimate in their report that the proposed changes to the minimum tax, and the implementation of the S.H.I.E.L.D. plan, would raise an estimated $700 billion over 10 years on their own.
Business groups warn the administration’s efforts will hamstring American companies, and they have urged Mr. Biden to wait for the international negotiations to play out before following through with any changes.
Members of the Business Roundtable, which represents corporate chief executives in Washington, said this week that Mr. Biden’s minimum tax “threatens to subject the U.S. to a major competitive disadvantage.” They urged the administration to first secure a global agreement, adding that “any U.S. minimum tax should be aligned with that agreed upon global level.”
However, some companies expressed an openness on Wednesday to some of the changes.
John Zimmer, the president and a founder of Lyft, told CNN that he supported Mr. Biden’s proposed 28 percent corporate tax rate.
“I think it’s important to make investments again in the country and the economy,” Mr. Zimmer said. “And as the economy grows, so too does jobs and so too does people’s needs to get around.”