Under current law, companies with headquarters in Ireland can “strip” some of the profits earned by subsidiaries in the United States and send them back to the Ireland company as payment for things like the use of intellectual property, then deduct those payments from their American income taxes. The SHIELD plan would disallow those deductions for companies based in low-tax countries.
Push for a global agreement to end profit shifting
The Biden administration wants other countries to raise their corporate tax rates, too.
The tax plan emphasizes that the Treasury Department will continue to push for global coordination on an international tax rate that would apply to multinational corporations regardless of where they locate their headquarters. Such a global tax could help prevent the type of “race to the bottom” that has been underway, Treasury Secretary Janet Yellen has said, referring to countries trying to outdo one another by lowering tax rates in order to attract business.
Republican critics of the Biden tax plan have argued that the administration’s focus on a global minimum tax is evidence that it realizes that raising the U.S. corporate tax rate unilaterally would make American businesses less competitive around the world.
Replace fossil fuel tax subsidies with clean-energy incentives
The president’s plan would strip away longstanding subsidies for oil, gas and other fossil fuels and replace them with incentives for clean energy. The provisions are part of Mr. Biden’s efforts to transition the U.S. to “100 percent carbon pollution-free electricity” by 2035.
The plan includes a tax incentive for long-distance transmission lines, would expand incentives for electricity storage projects and would extend other existing clean-energy tax credits.
A Treasury Department report estimated that eliminating subsidies for fossil fuel companies would increase government tax receipts by over $35 billion in the coming decade.
“The main impact would be on oil and gas company profits,” the report said. “Research suggests little impact on gasoline or energy prices for U.S. consumers and little impact on our energy security.”
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.
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.
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.
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.”
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.”
Almost nine years ago, Bristol Myers Squibb filed paperwork in Ireland to create a new offshore subsidiary. By moving Bristol Myers’s profits through the subsidiary, the American drugmaker could substantially reduce its U.S. tax bill.
Years later, the Internal Revenue Service got wind of the arrangement, which it condemned as an “abusive” tax shelter. The move by Bristol Myers, the I.R.S. concluded, would cheat the United States out of about $1.4 billion in taxes.
That is a lot of money, even for a large company like Bristol Myers. But the dispute remained secret. The company, which denies wrongdoing, didn’t tell its investors that the U.S. government was claiming more than $1 billion in unpaid taxes. The I.R.S. didn’t make any public filings about it.
And then, ever so briefly last spring, the dispute became public. It was an accident, and almost no one noticed. The episode provided a fleeting glimpse into something that is common but rarely seen up close: how multinational companies, with the help of elite law and accounting firms and with only belated scrutiny from the I.R.S., dodge billions of dollars in taxes.
infrastructure plan that the White House unveiled on Wednesday proposed increasing the minimum overseas tax on multinational corporations, which would reduce the appeal of such arrangements.)
For the three years leading up to 2012, Bristol Myers’s tax rate was about 24 percent. The U.S. corporate income tax rate at the time was 35 percent. (It is now 21 percent.)
The company wanted to pay even less.
In 2012, it turned to PwC, the accounting, consulting and advisory firm, and a major law firm, White & Case, for help getting an elaborate tax-avoidance strategy off the ground. PwC had previously been Bristol Myers’s auditor, but it was dismissed in 2006 after an accounting scandal forced Bristol Myers to pay $150 million to the U.S. government. Now PwC, with a long history of setting up Irish tax shelters for multinational companies, returned to Bristol Myers’s good graces.
sided with the agency after it challenged a similar maneuver by General Electric using an offshore subsidiary called Castle Harbour. The I.R.S. also contested comparable setups by Merck and Dow Chemical.
The Bristol Myers arrangement “appears to be essentially a copycat shelter,” said Karen Burke, a tax law professor at the University of Florida. Since the I.R.S. was already fighting similar high-profile transactions, she said, “Bristol Myers’s behavior seems particularly aggressive and risky.”
The next January, the company announced its 2012 results. Its tax rate had plunged from nearly 25 percent in 2011 to negative 7 percent.
On a call with investors, executives fielded repeated questions about the drop in its tax rate. “Presumably, all drug companies try to optimize their legal entities to take their tax rate as low as they can, yet your rate is markedly lower than any of the other companies,” said Tim Anderson, an analyst at Sanford C. Bernstein & Company. “So I’m wondering why your tax rate might be unique in that regard?”
Charlie Bancroft, the company’s chief financial officer, wouldn’t say.
The more than $1 billion in tax savings came at an opportune moment: Bristol Myers was in the midst of repurchasing $6 billion worth of its own shares, an effort to lift its stock price. By January 2013, it had spent $4.2 billion. The cash freed up by the tax maneuver was enough to cover most of the remainder.
Tax Notes, a widely read trade publication, had also posted the document. When the I.R.S. provided a clean version, Tax Notes took down the original.
An I.R.S. spokesman declined to comment.
Cara Griffith, the chief executive of Tax Analysts, the publisher of Tax Notes, said the publication erred “on the side of not publishing confidential taxpayer information that was accidentally released through an error in redaction, unless it reaches a very high threshold of newsworthiness.”
David Weisbach, a former Treasury Department official who helped write the regulations governing the tax-code provision that Bristol Myers is accused of violating, agreed. PwC and White & Case “are giving you 138 pages of legalese that doesn’t address the core issue in the transaction,” he said. “But you can show the I.R.S. you got this big fat opinion letter, so it must be fancy and good.”
The current status of the tax dispute is not clear. Similar disputes have spent years winding through the I.R.S.’s appeals process before leading to settlements. Companies often agree to pay a small fraction of what the I.R.S. claims was owed.
“There is a real chance that a matter like this could be settled for as little as 30 percent” of the amount in dispute, said Bryan Skarlatos, a tax lawyer at Kostelanetz & Fink.
In that case, the allegedly abusive tax shelter would have saved Bristol Myers nearly $1 billion.
The Swiss bank also hired Mr. Wray, then a partner at King & Spalding in Washington who had served as the head of the Justice Department’s criminal division and oversaw the Enron task force. (Mr. Wray became the director of the F.B.I. three years after he negotiated the final plea deal for Credit Suisse.)
“It is a mystery to me why the U.S. government didn’t require as part of the agreement that the bank cough up some of the names of the U.S. clients with secret Swiss bank accounts,” Carl Levin, then a Michigan senator leading an investigation into offshore tax avoidance, said after the 2014 plea agreement.
In the interview, Mr. Neiman, the whistle-blower’s lawyer, said that in July 2014, after the plea deal was signed and as Credit Suisse awaited its final sentencing, he told officials at the tax division of the Justice Department and federal prosecutors who had worked on the case that his client had information that the bank had continued to cloak money held by some U.S. account holders. He gave them one name in particular — Dan Horsky, the retired business professor, who lived in Rochester, N.Y.
The tip checked out. The following year, federal agents arrested Mr. Horsky, who had amassed a $200 million fortune and hidden it with the help of Credit Suisse bankers using offshore shell companies, court documents show. The arrangement lasted for several months after the bank signed its plea deal.
It is unclear why the Justice Department did not notify the court and change the terms of its settlement with Credit Suisse based on the information from the whistle-blower — either before Credit Suisse’s final sentencing or after Mr. Horsky’s case became public. At the sentencing, lawyers for both sides told the court that they had no information to add that would affect the agreement.
Officials who would have had authority to make the decision to review the Credit Suisse case for possible breaches in 2014 and 2015 — including James Cole, who was then the deputy attorney general, and Dana Boente, the U.S. attorney in the Eastern District of Virginia — did not respond to requests for comment.
In 2015, Mr. Horsky pleaded guilty to defrauding the U.S. government and said that he would cooperate with prosecutors. In 2017, he was sentenced to seven months in prison. Some details of his sentencing are sealed, and a federal judge denied a request by Bloomberg News to unseal it. The judge said he denied the request after consulting with the Justice Department and Mr. Horsky’s lawyers.
Mr. Neiman’s client could be richly rewarded if prosecutors move to impose more fines on Credit Suisse. Under an I.R.S. rule, whistle blowers can get as much as 30 percent of the amount of any additional money the government gets. And, Mr. Neiman said, the whistle blower has more names of American account-holders beyond Mr. Horsky’s, although he wouldn’t say how many.
Elimination of the step-up rules could capture billions in taxes from the rich but hurt some people who do not have enormous wealth. Consider a hypothetical couple who bought their home 40 years ago for, say, $75,000, paid the mortgage, maintained the yard, made some upgrades and now find themselves with a house worth $300,000 or more. For many families, a house like that forms the basis of a modest estate to pass to heirs. Now, if heirs ever sell that house, they will be responsible only for gains above $300,000; if the step-up in basis were eliminated, they would owe taxes on any amount above the original $75,000.
The loss of a step-up in basis at death would change the calculus for real estate and any other highly appreciated asset. (Think of Apple stock bought in the 1980s, or Bitcoin from 10 years ago.)
“Most of America has their wealth concentrated in their home,” said Chris Bixby, senior wealth adviser at Mariner Wealth Advisors. “That would be subject to the step-up. I’m talking to people about gifting the house earlier to get it into their heir’s name, so the appreciation happens in their name, not yours.”
That may be a step too far for many people, who will want to retain ownership of their home.
There is also a broader equity issue.
Elimination of the step-up in basis could make it harder to bridge the racial wealth gap, said Calvin Williams Jr., chief executive and founder of Freeman Capital, a wealth management firm. He noted that the Brookings Institution has found that Black families, on average, have about one-tenth the wealth of white families — $17,150 versus $171,000. In addition, Brookings estimates that only 10 percent of Black families inherit any money, about $100,000 on average, compared with about 30 percent of white families, who receive about $200,000.
Elimination of the step-up rule would make it more difficult for Black families to pass on whatever wealth they have been able to accumulate, he said. “The fact that the inheritance gap has continued to grow, even as Black income is continuing to grow, shows just how much work needs to be done to close that gap,” he said.
It might be more equitable to create a cap on the step-up in basis that would exempt people below a certain amount of wealth, he said: A $500,000 exemption would provide relief to many middle-class families. This would be similar in spirit to another proposal under consideration by the Biden administration, an increase in capital gains taxes for people earning more than $1 million a year.
Still, the low-key response to Mr. Smith’s tax violations stands in contrast to how a scandal played out involving Leon Black, a fellow private equity billionaire and a co-founder of Apollo Global Management. After the revelation, also last fall, that Mr. Black had paid Jeffrey Epstein, the disgraced financier and registered sex offender, tens of millions of dollars for tax and estate planning services, Apollo had an outside review conducted at Mr. Black’s behest. In January, Apollo announced that Mr. Black, 69, had done nothing wrong but would step down as chief executive by this summer and introduced several corporate governance changes.
Although investors didn’t pull their money from Apollo funds, shares of the firm, which is publicly traded and much bigger than Vista, have since lagged the performance of its rivals Blackstone Group and KKR. Some Apollo investors expressed their reservations publicly. Mr. Black’s dealings also prompted calls in the art world to oust him as chairman of the Museum of Modern Art.
The scandal involving Mr. Smith raised different ethical issues for investors, since Mr. Black’s dealings were with a convicted sex offender. But another reason both Mr. Smith, 58, and Vista have appeared unscathed from the tax evasion episode is that the firm was quick to alert investors — who dislike surprises and value disclosure — that trouble was brewing.
By the time federal prosecutors said in October that Mr. Smith had engaged in a 15-year scheme to hide $200 million in income and “evade millions in taxes” through a network of offshore trusts and bank accounts, Vista’s investors had been bracing for bad news for roughly four years. The scheme came to light after a long investigation into the ties between Mr. Smith and Robert T. Brockman, a billionaire Texas businessman who helped Vista, which is based in Austin, get off the ground.
Mr. Smith, who is Vista’s chairman and chief executive, learned in the summer of 2016 that he was the subject of a criminal tax investigation involving Mr. Brockman. That fall, Vista began providing investors with periodic — if minimal — updates on the federal inquiry, five people briefed on the matter said. The firm provided at least 10 updates to investors, said a person briefed on the firm’s activities, who declined to be identified because the matters aren’t public. The person did not provide details of what those disclosures included.