August 5, 2022
August 5, 2022
Note: This analysis does not incorporate the recent change that Senate Democrats have made to the minimum corporate tax provision to prevent it from limiting depreciation breaks. It is reported that this will have a small effect on the overall impact of the provision.
Apple, one of the largest corporations in the United States despite manufacturing most of its physical products offshore, would likely pay the corporate minimum tax that is included in the Inflation Reduction Act that the Senate is debating this week. 3M, a manufacturer that has about 40 percent of its workforce in the United States, likely would not pay the corporate minimum tax if current trends in the company’s profits and taxes continue, because it is already paying above 15 percent of its profits in taxes.
These figures are based on the profits and tax payments that both companies report in the 10-K that they submit to the Securities and Exchange Commission and make public. And they illustrate how two corporations characterized as manufacturers could be affected by the proposal.
The federal corporate income tax applies at a rate of 21 percent, but many companies effectively pay far less than that because of the special breaks and loopholes that litter the tax code, and many pay no income tax in some years. The IRA’s corporate minimum tax is meant to address this problem.
It would apply to companies with more than $1 billion in average global profits over three years. If such a company pays less than 15 percent of its global profits in income taxes (including both U.S. federal income taxes under the regular tax rules and foreign income taxes paid on offshore profits), then it would pay the difference under the proposed provision to bring its global effective tax rate up to 15 percent.
As illustrated in Table 1 below, Apple has reported global effective tax rates of less than 15 percent in two of the previous four years. 3M, on the other hand, has reported global effective tax rates of 19 to 21 percent during these years. If the corporate minimum tax had been in effect during this period, it therefore seems likely that it would have affected Apple but not 3M.
It is impossible to know this with certainty because the 10-K does not include all the information one would need to calculate the precise effects of the provision. And, the companies’ tax positions could change over time, meaning it is difficult to use this information to predict which corporations would or would not be affected by the provision in the future.
Republicans Cite the Provision’s Likely Effect on Manufacturing, but “Manufacturing” Can Mean Different Things
Last week, Sen. Mike Crapo, the top Republican on the Senate Finance Committee, released a statement arguing that the provision would “overwhelmingly hit American manufacturers and supply chains.”
As ITEP has explained elsewhere, Sen. Crapo’s statement relies on an incomplete analysis from Congress’s official revenue estimators at the Joint Committee on Taxation (JCT). It shows that of the $313 billion that would be raised over a decade by the corporate minimum tax, about half that amount ($156 billion) would be paid by corporations that describe themselves as mainly manufacturers. Crapo does not mention that the bill would spend $369 billion on energy and climate provisions that would increase manufacturing of electric cars, batteries, solar panels and other products in the United States.
The principle of the minimum tax – that all successful corporations should pay a reasonable amount of taxes to help finance the public investments that make their success possible – would logically seem to apply to all companies, regardless of sector.
Further, the JCT report cited by Crapo relies on a broad definition of “manufacturing” that corporations designate for themselves, and which includes companies like Apple that do not physically produce much of anything here in the United States. Apple’s physical products are made by suppliers it contracts with, including 338 suppliers in Asia (156 in China alone) and only 25 suppliers that are located primarily in the United States.
In fact, companies like Apple are precisely why the corporate minimum tax is needed. A 2013 Senate hearing exposed the convoluted accounting gimmicks the company used to claim profits were generated by subsidiaries in Ireland that were, for tax purposes, not resident of any country and thus not taxed. When, under international pressure, the Irish government began to crack down, Apple shifted its strategy to another tax haven, the tiny island of Jersey. This was revealed in the “Paradise Papers,” a trove of documents from the Bermuda-based law firm that helped Apple pull off this feat.
3M could not be more different from Apple. Most Americans probably know 3M as a manufacturer of tape, sandpaper and medical supplies, including masks worn to avoid Covid. 3M is a huge conglomerate but, with profits ranging from $5 billion to $7 billion in recent years, it seems small compared to Apple with its recent global profits exceeding $100 billion. As of 2020, 3M reported that it had 96,000 employees and that 39,000 of those, around 40 percent of the total, were in the United States.
There has been little, if any, attention paid by the media to 3M’s tax strategies. This is not to say that the company eschews tax avoidance for any altruistic or ethical reason. But the simple fact is that its global effective tax rate each year has been a bit higher than Apple’s and high enough to avoid paying under the IRA’s corporate minimum tax.
Table 2 below provides a more detailed version of the information in Table 1 above about the two companies’ profits and taxes.
 The federal income tax shown here for the companies does not include a transition tax they both paid in 2018 ($37.3 billion in the case of Apple, $97 million in the case of 3M) under the Tax Cuts and Jobs Act on offshore profits that they had reported in earlier years.
 The federal tax shown here is the “current” tax that the companies report for the tax year, which is their best estimate of what they will ultimately pay for the tax year. This is the most useful number reported in the 10-K to understand what companies pay for specific tax years. It does not include deferred taxes, which are taxes that companies expect and plan to pay in the future. The U.S. profits are taken from the 10-K and state income taxes are subtracted.