How does rebuilding better taxes affect 5G competition?

An unintended consequence of the Build Back Better Act tax proposals is a higher potential burden for investments in wireless spectrum. Proposals such as imposing a minimum tax on book income would retroactively tax past spectrum purchases and increase the tax burden on future spectrum purchases. In turn, this could skew the prices companies are willing to pay for future spectrum licenses and potentially slow the development of 5G technology as the US struggles to compete with other countries, moving in the direction. opposite of countries like China that actively subsidize 5G. expansion.

Spectrum, or radio waves, enables wireless communication through modern technology, and the federal government allocates and licenses various parts for non-federal use, often by auction. Buying spectrum at auction is a form of investment.

Due to the strong demand for 5G technologies, telecommunications companies have paid the federal government record amounts for spectrum licenses – around $ 80 billion so far in 2021. For tax purposes, however, the companies do not benefit from an immediate deduction for spectrum expenses, but rather amortize the cost over 15 years according to the intangible amortization rules. This means, for example, that if a company bought $ 45 billion worth of licenses, it would deduct $ 3 billion per year over the next 15 years. Delaying deductions increases the cost of investments because a dollar in the future is worth less than a dollar today, so companies cannot fully recover their investment costs in real terms.

The 15% minimum tax on accounting income proposed by the Build Back Better Act for companies with profits over $ 1 billion would compound this problem. Spectrum licenses are one of the few purchases that do not receive any deduction for accounting revenue purposes – companies spend the money, but when calculating their financial income, they ignore these expenses because the licenses spectrum are treated as assets with an indefinite useful life.

The different treatment of spectrum purchases would create a permanent difference between accounting income and taxable income. For example, in 2023, a business would still have tax deductions for its $ 45 billion purchase from 2021. This would reduce its taxable income by $ 3 billion, but no such deduction would be allowed in calculating accounting income. . Assuming the company was subject to minimum accounting tax in that year, it would be subject to minimum tax on that deduction of $ 3 billion, which would result in an increase in tax payable of $ 450 million. .

Example of minimum tax burden on the purchase of spectrum
Purchase of spectrum from 2021$ 45 billion
Tax deduction in 2023 (1/15 of the purchase amount)$ 3 billion
Unauthorized tax deduction for minimum book tax in 2023$ 3 billion
Potential liability in terms of accounting revenue in 2023 due to the tax difference on the frequency books (15% of the unauthorized amount)$ 450 million

Source: author’s calculations.

Over time, this tax burden may be partially reduced because businesses receive minimum tax credits from the previous year which can be used against regular corporate tax; however, it would not be fully offset, and it would depend on whether and how the business enters and exits the minimum accounting tax.

The Tax Foundation’s accounting minimum tax model captures these dynamics of accounting minimum tax by using companies’ financial statements over time. Taking into account historical and recent spectrum sales, we estimate that these spectrum investments will increase the tax liabilities of these companies by $ 7.2 billion over the 10-year budget window, assuming no new sales. spectrum does not occur during the budget window.

The same tax increases would apply to future purchases of spectrum licenses, increasing the tax costs of additional purchases and complicating the decision-making process for telecommunications companies. The increased tax costs could reduce the amount that companies are willing to pay for new spectrum licenses, meaning the government can earn revenue by taxing the purchase as part of the minimum tax on books, but lose income due to lower prices and therefore lower auction products. It could also provide unfair advantages to all businesses depending on the timing of the auction and whether a business is subject to minimum book tax in that year or plans to be in the next few years.

The minimum accounting tax would also have an impact on complementary investments, such as cell phone towers and other supporting infrastructure, as the rules for taxable income and accounting income differ between depreciation allowances for other types of tax. ‘investments, such as machinery and equipment. And for companies with defined benefit pension plans, like many telecommunications companies, the minimum tax on the books could have an even bigger effect.

Unfortunately, policymakers in the United States are not the only ones considering taxing accounting income as a way to increase their income. The Organization for Economic Co-operation and Development (OECD) international tax agreement also relies heavily on financial statements as the starting point for its tax base, raising similar concerns about permanent and related spreads. the schedule between accounting and tax revenues.

Separately, the Build Back Better Act would create a new limitation on commercial interest charges that would be in addition to the limitations in the current law. In some years, this could lead to a tightening of the interest deductibility limit, penalizing companies that borrow to finance new investments, such as building 5G.

A higher tax burden for investments in private infrastructure such as wireless spectrum, 5G technology, and machinery and equipment compounds an existing problem, especially in the context of outright public subsidies in countries like China. There, state support for telecommunications companies reached at least $ 75 billion from 2008 to 2018, about a third of which was in the form of tax incentives to promote the technology.

The overall corporate tax rate in China is 25%, lower than the current combined federal-state average of 25.8% in the United States. Additionally, China offers lower corporate tax rates for certain tech-related industries. On the tax deduction side, China tends to have faster or more generous investment cost recovery policies. For example, intangible assets are deducted over 10 years (instead of 15 in the United States) and research and development (R&D) expenses receive an additional deduction of 75%. (In the US, R&D investment receives an immediate deduction, but that should change starting next year, unless the Build Back Better Act reverses or postpones the change.)

While it would be ill-advised to copy the state approach in China, which may well threaten future growth and innovation, the United States should at a minimum avoid adding new and complicated additional tax burdens to investments and American innovation.

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