On June 17, 2024, the Treasury Department plans to implement measures aimed at reining in the regular depreciation of the same asset by large corporations, a common tax loophole. The move is designed with the goal of increasing federal revenues and fostering sustainable fiscal growth. Deputy Treasury Secretary Wally Adeyemo predicts that about $50 billion will be amassed over the next ten years as a result.
The regulations form part of the Biden administration’s wider strategy to curtail tax avoidance, particularly among huge corporations and high net-worth individuals. The government, by cracking down on tax evasion schemes, aims to foster financial integrity, increase revenue streams, and ensure fair tax payment across the board. The revenue increase could potentially fund infrastructure development, healthcare, and social programs for underprivileged communities.
The plan also involves reinforcing the Internal Revenue Service to diligently enforce these regulations.
Curbing corporate tax evasion for revenue growth
Discussions around the proposal have stirred, triggering legal, economic, and ethical debates on taxation.
The Department is intent on addressing ‘basis shifting’ – a tax planning tactic that allows businesses to sidestep taxes by seemingly transferring assets between entities. Deputy Secretary Adeyemo criticises these transactions for their lack of contribution to U.S. economic activity and their role in lowering tax charges. The intention is to ensure accurate valuation of transferred assets and fairness of the U.S. tax system.
Despite the reported annual increase of over $5 billion in tax revenue from partnerships for the next decade, the move has met with opposition. Critics caution that the rules could deter investments in partnerships and small businesses could disproportionately bear the brunt of these changes.
Several businesses utilise a “pass-through” structure to dodge corporate-level taxation. Some abuse this structure by depreciating the same asset repeatedly to change the basis of assets and evade taxes. Existing regulations require legitimate financial substance behind business transactions, intended to prevent potential abuse.
This regulation serves not only as a safeguard against artificial tax structures, but also reassures investors that transactions are legitimate and works towards ensuring equitable corporate tax policy.
