Corporate Tax

Construct Again Higher corporate minimal tax is going through opposition

The inclusion of tax-free income in a proposed alternative minimum tax for federal companies in the Build Back Better bill may have been a “mistake,” urban market lobbyists say.

And even if the AMT eventually becomes law, its impact on ammo demand could be muted in an environment where many institutional buyers have already moved to the taxable market, buyers said.

The minimum corporation tax proposed in Build Back Better would be 15% of book income for companies with year-end profits greater than $ 1 billion. It should apply to around 200 companies. The provision is valued at around $ 320 billion and is one of the bill’s major sources of revenue. The effective date is 2023.

It is estimated that the AMT applies to institutional holders of Muni-Bonds, mainly banks and insurance companies, who hold nearly 25% of Muni-Bonds. It is feared that institutional demand for the tax exemption would dampen.

“We think it was a mistake,” said Emily Brock, the federal liaison office for the GFOA, which along with 27 issuer groups sent a letter to Congress asking it to work out tax-exempt income from the AMT. “They made a huge attack on all asset classes.”

The House of Representatives has announced that it will take the $ 1.75 trillion bill as early as this week, although the Congressional Budget Office won’t release a full score until Friday. If the bill is passed by the House of Representatives, it is likely to see significant changes when it lands in the Senate, and powerful corporate groups like the U.S. Chamber of Commerce and the Business Roundtable that oppose the corporate AMT are hoping for changes in the Senate version.

Most institutional buyers have already switched to taxable securities, Nick Venditti said, which would soften the impact of the proposed tax on the Muni market.

Even if the provision goes into effect, there could be some flexibility for tax-exempt income before it goes into effect in 2023, market participants said.

The proposal instructs the Treasury Department to issue regulations and guidance on several unresolved issues. Some hope that a window can crack. Morgan Stanley stated in a letter dated October 28 that the Treasury Department’s guidelines could “theoretically” clarify “that Muni interest is not considered taxable income.”

In an October 31 briefing on the Build Back Better Act, PWC also noted that the provision gives the Treasury Department “extensive powers” to address a number of issues. “As the CPMT will apply to tax years beginning after December 31, 2022, the Treasury Department is likely to issue guidance on many of these issues before the provision becomes applicable to affected taxpayers,” said PWC, adding that the proposal would overall “Significantly increase the complexity of corporate tax compliance and administration”.

It can go too far in hoping for action by the Treasury Department, said a public finance attorney.

“It may be that there are aspects of the provision that the Treasury Department needs guidance on, but whether it has the authority and is exercising the authority to exclude income such as tax-exempt income that is under statutory law” seems like one to me Overstretch, “said the lawyer, adding,” but stranger things have happened. “

Even if the tax becomes law, some buyers say it won’t have much of an impact on the market.

Since the Tax Cuts and Jobs Act of 2017, “most institutional buyers have already moved from the tax-exempt market to the taxable market,” said Nicholos Venditti, senior portfolio manager at Allspring Global Investments, which recently acquired Wells Fargo Asset Management. “I would expect institutional buyers to continue to prefer taxable paper to tax-exempt paper. From this perspective I have no real worries. “

The corporate AMT replaced a proposal to raise the highest corporate income tax rate, and the latest version of Build Back Better also dropped a plan to raise the highest individual income tax rate. Those decisions could have a bigger impact on the market than the AMT, Venditti said.

“Ultimately, one of the justifications the market has used to keep Muni bond prices at this high level is that investors only had their higher tax rates at the top,” he said. “Well, if tax rates don’t go up, some of the justification that Muni-bond prices are so high may be lost.”

The proposal will also be followed by the infrastructure investor community, said Tom Osborne, executive director of infrastructure at IFM Investors.

“Tax rules are being monitored very, very closely,” Osborne said. “It could increase the amount of taxes that infrastructure investors have to pay as lease and concession holders or as owners of private sector infrastructure. Higher taxes could affect the returns available to investors on owning these assets. “

In addition to corporate groups, the American Institute of CPAs is asking Congress to drop the proposal. The provision would “add significantly to the complexity of the IRS code,” the group said in an October 28 letter to Congress leaders.

The group called on Congress to at least amend the provision to include only current taxable income. The group had not heard any specific feedback on the letter, said a spokesman.

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