Inflation Reduction Act Book Minimum Tax: 5G Investment

As lawmakers debate reauthorizing the Federal Communications Commission to conduct spectrum auctions, they should not overlook TaxA tax is a compulsory payment or levy imposed by local, state, and national authorities on individuals or businesses to cover the costs of general government services, goods, and activities.
burden the inflationInflation occurs when the general prices of goods and services across the economy rise, thereby reducing the purchasing power of a currency and the value of certain assets. Fewer goods, services and bills can be paid for with the same salary. It is sometimes called a “hidden tax” because it leaves taxpayers with less wealth due to higher costs and “cold tax” while increasing the government’s purchasing power.
Neither the minimum tax imposed by the US Tax Reduction Act (IRA) on future spectrum purchases nor the other barriers that the tax system puts in the way of the US in the race for leadership in wireless communications and innovation.

When Congress debated a minimum tax, Book incomeBook income is the amount of income that companies publicly disclose to shareholders in their financial reports. This metric is useful for assessing a company’s financial health, but it often does not reflect economic reality and can make a company appear profitable even though it pays little or no income tax.
In 2022, the Inflation Reduction Act wrestled with the unintended consequence of taxing investments in wireless spectrum. Without explicit provisions to address this issue, imposing a minimum tax on book income would retroactively tax past spectrum purchases and increase the tax burden on future spectrum purchases. Congress exempted past spectrum purchases from the IRA’s book minimum tax, but the tax will continue to apply to new spectrum purchases.

In turn, the minimum sales tax could distort the value of future spectrum licenses and potentially slow the rollout of 5G technology as the U.S. races with other countries – moving in the opposite direction to countries like China that are actively subsidizing 5G rollout.

Spectrum, or radio waves, enables wireless communications through modern technology, and the federal government allocates and licenses various portions of it for non-federal purposes, often through auctions. Purchasing spectrum at auctions is a form of investment.

Due to strong demand for 5G technologies, telecommunications companies have paid the federal government record amounts for spectrum licenses – around $80 billion in 2021, for example. For tax purposes, however, the companies cannot deduct the spectrum costs immediately, but can write off the costs over 15 years in accordance with the amortization rules for intangible assets.

This means, for example, that a company that buys licenses worth $45 billion will have to deduct $3 billion annually for the next 15 years. Deferring deductions increases the cost of investment because a dollar in the future is worth less than a dollar today. Companies are therefore unable to fully recoup their investment costs in real terms.

The 15 percent minimum tax on IRA book income for companies with profits over $1 billion exacerbates this problem. Spectrum licenses are one of the few purchases that are not deductible as book income—companies spend the money, but when calculating their financial income, they do not include the expenditure because spectrum licenses are treated as indefinite-lived assets.

The different treatment of spectrum purchases creates a permanent difference between book revenues and taxable incomeTaxable income is the amount of taxable income after deductions and allowances have been made. For both individuals and businesses, taxable income is different from and lower than gross income.
For example, if a company purchased licenses worth $45 billion in 2024, it would have a Tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a one-time deduction with a fixed amount. Itemized deductions are popular with higher-income taxpayers who often have significant deductible expenses, such as state and local taxes paid, mortgage interest, and charitable contributions.
This would reduce their taxable income by $3 billion, but such a deduction would not be allowed in the calculation of book income.

Assuming the company was subject to the minimum book tax this year, it would be taxed on this $3 billion deduction, resulting in an increase in tax liability of $450 million.

In his fiscal year 2025 budget, President Biden proposed raising the minimum book tax from 15 percent to 21 percent. At a 21 percent minimum tax, the potential tax liability resulting from the disallowed deduction would increase to $630 million. Increasing the minimum rate would also subject a larger group of companies to the minimum tax, increasing distortions in companies’ decisions about the value and timing of investments.

Over time, this tax burden may be partially reduced because companies receive minimum tax credits from the previous year that they can offset against the regular corporate tax liability. However, this would not fully offset it and would depend on whether and how the company moves into or out of the statutory minimum tax liability.

These higher tax costs for additional purchases add complexity to telecom companies’ decision-making processes and could reduce the amount companies are willing to pay for new spectrum licenses. This means that while the government may generate revenue by taxing the purchase under the minimum book tax, it loses revenue due to lower prices and thus lower auction proceeds. Depending on the timing of an auction and whether a company is subject to the minimum book tax this year or is expected to be in the next few years, this could also lead to unfair advantages for individual companies.

The minimum book tax is likely to impact complementary investments such as cell towers and other supporting infrastructure, as the rules for taxable income and book income vary across countries. depreciationDepreciation is a measure of the “useful life” of a business asset, such as a machine or a factory, to determine the multi-year period over which the cost of that asset can be deducted from taxable income. Rather than allowing businesses to deduct the cost of investments immediately (i.e., full cost accounting), depreciation requires deductions to be taken over a longer period of time, reducing their value and discouraging investment.
Deductions for other types of investments, such as machinery and equipment.

Doubling the minimum tax by increasing the tax rate to 21 percent would further exacerbate the already complicated and uncertain tax environment for investments in telecommunications. It has taken the Ministry of Finance almost two years to issue regulations and guidelines for the companies concerned. This reduces certainty about future returns and is likely to slow down investments.

Unfortunately, policymakers in the United States are not the only ones considering taxing book income to raise revenue. The international tax treaty of the Organisation for Economic Co-operation and Development (OECD) currently being implemented also relies heavily on financial statements as the starting point for its Tax baseThe tax base is the total amount of income, wealth, assets, consumption, transactions or other economic activities taxed by a tax authority. A narrow tax base is not neutral and is inefficient. A broad tax base reduces the cost of tax administration and allows for higher revenues at lower tax rates.
which raises similar concerns about permanent and time-related gaps between book and tax income.

In addition to these investment penalties, the Tax Cuts and Jobs Act (TCJA) limited the deduction of corporate interest expenses from 30 percent of earnings before interest, taxes, depreciation, and amortization (EBITDA) to 30 percent of earnings before interest and taxes (EBIT) starting in 2022. Depending on a company’s financing structure, the change could result in a tighter limit on interest deductibility and penalize companies that borrow to finance new investments, such as the buildout of 5G and future telecommunications networks.

Companies investing in spectrum also face other tax barriers to investment. Starting in 2022, the TCJA will require companies to amortize their R&D costs over five years rather than deducting them immediately each year, and starting in 2023, 100 percent Bonus depreciationBonus depreciation allows companies to deduct a larger portion of certain “short-lived” investments in new or improved technology, equipment or buildings in the first year. By allowing companies to depreciate more investments, it partially offsets a bias in the tax law and encourages companies to invest more, which in the long run increases worker productivity, raises wages and creates more jobs.
Investments in machinery and equipment gradually began to decline.

A higher tax burden on private infrastructure investments such as mobile communications, 5G technology and machinery and equipment exacerbates an existing problem – especially against the backdrop of open government subsidies in countries such as China. There, government support for telecommunications companies amounted to at least $75 billion between 2008 and 2018, about a third of which came in the form of tax incentives to promote technology.

The corporate tax rate in China is 25 percent, lower than the current combined average of 25.7 percent in the United States. In addition, China offers lower corporate tax rates for certain technology-related sectors. As for tax deductions, China tends to have faster and more generous policies for recovering the cost of investments. For example, intangible assets are deducted over 10 years (instead of 15 in the United States) and R&D expenses are eligible for special deductions.

While it would be unwise to copy China’s government approach – as this could well pose a threat to future growth and innovation – the United States should at least reduce its tax burden on investment and innovation and resist attempts to increase it.

share

Þjórsárden
LinkedIn
Facebook
E-mail