May 2024 | Volume 15, Issue 10

Read the press release from the U.S. Department of Treasury.

The U.S. Department of the Treasury and Internal Revenue Service (IRS) have issued two Notices of Proposed Rulemaking (proposed regulations) on the stock buyback or “repurchase” excise tax included in President Biden’s Inflation Reduction Act, a key provision that helps ensure large corporations pay more of their fair share in taxes. As the tax code has favored stock buybacks, many companies have failed to reinvest profits in their workers, growth, and innovation. The stock buyback excise tax begins to change that.

“President Biden’s Inflation Reduction Act helps ensure that large corporations pay their fair share, just as American families do,” said U.S. Secretary of the Treasury Janet L. Yellen. “This proposed rule is a key part of the Biden Administration’s efforts to improve tax fairness and reduce the deficit by closing loopholes and ensuring wealthy individuals, large corporations, and complex partnerships pay taxes owed.”

The Details

The proposed regulations provide additional clarity to taxpayers and tax professionals on how to properly calculate and pay the new stock buyback excise tax on corporate stock buybacks, and largely adopt the framework of  Notice 2023-2, published on January 17, 2023.

The stock buyback excise tax applies at a rate of one percent of the fair market value (FMV) of any stock of a covered corporation that is repurchased by the corporation during its taxable year, minus the aggregate FMV of stock issued by the taxpayer during that year. The statute generally defines a “covered corporation” as a domestic corporation whose stock is publicly traded on an established securities market. An established securities market for this purpose includes U.S. national securities exchanges, certain foreign securities exchanges, regional or local exchanges, and certain interdealer quotation systems. “Repurchases” (or buybacks) include a corporation’s acquisition of any of its stock from a shareholder for property that qualifies as a redemption of the stock as defined in the tax code.

The Inflation Reduction Act also provides that a “repurchase” (buyback) includes any other transaction that the Secretary determines in regulations or other guidance to be “economically similar” to a redemption of stock. These economically similar transactions include buybacks of corporate stock that occur in connection with certain corporate mergers, separations, and other M&A transactions.  A “repurchase” also may include acquisitions of the corporation’s stock by certain specified affiliates.

The proposed regulations also provide a targeted anti-abuse rule to foreign-parented multinational corporations pay their fair share of the stock buyback excise tax, without ordinary course intercompany funding transactions among their corporate affiliates being inadvertently captured.

The Related IRS Forms

The proposed regulations would provide that the stock repurchase excise tax must be reported on the IRS Form 720, Quarterly Federal Excise Tax Return, with the Form 7208 attached. The Form 7208 would be used to figure the amount of stock repurchase excise tax owed. A draft version of the Form 7208 is currently accessible, and the final version of the form will be released prior to the first due date on which the stock repurchase excise tax must be reported and paid. 

As anticipated in Announcement 2023-18, the proposed regulations would establish that, for taxpayers with a taxable year ending after December 31, 2022, but before the publication of final regulations, any liability for the stock repurchase excise tax for the taxable year must be reported on the Form 720 that is due for the first full quarter after the date the final regulations are published, and that the deadline for payment of the tax is the same as the filing deadline.

Discussion Questions

  1. What is a federal excise tax?
    According to the Internal Revenue Service (IRS), a federal excise tax is imposed on the sale of specific goods or services, or on certain uses. A federal excise tax is usually imposed on the sale of things like fuel, airline tickets, heavy trucks and highway tractors, and other goods and services.

    Generally, businesses that are subject to a federal excise tax must file a Form 720, Quarterly Federal Excise Tax Return to report the tax to the IRS.

    Federal excise taxes are imposed on a wide variety of goods, services, and activities. The tax may be imposed at the time of import, sale by the manufacturer, sale by the retailer, or use by the manufacturer or consumer.

    Many excise taxes go into trust funds for projects related to the taxed product or service, such as highway and airport improvements. Excise taxes are independent of income taxes. Often, the retailer, manufacturer or importer must pay the excise tax to the IRS and file Form 720. They may pass the cost of the excise tax on to the buyer.

    Some excise taxes are collected by a third party. The third party then sends the tax to the IRS and files Form 720. For example, the tax on an airline ticket generally is paid by the purchaser and collected by the airline.
  2. The press release references the public policy goal of ensuring that corporations pay their “fair share” of taxes. What, specifically, does this mean?
    The term “public policy” refers to a set of actions the government takes to address issues within society. Public policy addresses problems over the long term, such as healthcare or gun control, and as such, it can take years to develop. Public policy addresses issues that affect a wider swath of society, rather than those about smaller groups.

    Corporate tax policy, and more specifically, the rate of corporate taxation, is public policy.

    The U.S. corporate income tax rate has undergone significant changes in recent years. Before 2017, the U.S. corporate tax rate was 35 percent. This rate was relatively high compared to other countries. The 2017 Tax Cut and Jobs Act (TCJA) reduced the top U.S. corporate tax rate to 21 percent. The average combined federal and state corporate tax rate decreased to 25.8 percent. As a result, the U.S. corporate tax rate became more competitive.

    As of 2023, the top U.S. corporate tax rate, including state and local tax rates, is 25 percent. This rate is lower than that of all other leading economies in the G7 (the so-called “Group of Seven Nations” that includes Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States), except for the United Kingdom. The U.S. rate is also slightly below the average rate for the 37 other Organization for Economic Cooperation and Development (OECD) countries combined, weighted by gross domestic product. It is essential to note that corporate income tax revenues in the United States as a share of gross domestic product have been lower than the average in other leading economies, even before the 2017 reduction in the U.S. corporate tax rate.

    Obviously, what constitutes a “fair share” of taxes is subjective. However, one thing is for sure—Federal revenue must come from somewhere, and for the most part, there are two revenue sources: (1) the corporate tax and (2) the individual income tax. Striking an appropriate balance between those two sources is a “work in progress,” and can depend significantly on the administration in power at any given time.
  3. The press release states that “(a)s the tax code has favored stock buybacks, many companies have failed to reinvest profits in their workers, growth, and innovation.” What, specifically, does this mean?
    Stock buybacks reflect the corporate strategy of increasing stock value. When a publicly traded corporation repurchases its stock, the company takes those shares out of circulation in the stock market, thereby reducing the supply of stock available. As a fundamental economic premise, reducing the supply of a commodity or security increases its price due to relative scarcity. Current stockholders can then capitalize on the increase in stock value by selling a portion (or even all) of their current holdings.

    Obviously, a stock buyback requires financial capital. This reduces the cash on hand that companies have available to pay their employees higher wages and salaries, invest in growth (for example, purchase a new production and operations system or a new facility), and invest in innovation through research and development.