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1 1 (August 5, 2022)

handle is hein.crs/goveifl0001 and id is 1 raw text is: Congressional Research Service Informing the legislative debate since 1914 Updated August 5, 2022 An Excise Tax on Stock Repurchases and Tax Advantages of Buybacks over Dividends The Build Back Better Act (H.R. 5376), as reported by the Committee on the Budget, includes a provision to impose a 1% excise tax on stock repurchases by publicly traded corporations. Stock repurchases are another way to distribute income to shareholders and, compared to dividends, have favorable tax treatment. News reports indicate that this provision will be included in the version of the bill, now called the Inflation Reduction Act of 2022, that is being considered in the Senate. What Is a Stock Repurchase? A stock repurchase or buy-back occurs when a firm buys its own shares. This repurchase can be made by a tender offer to shareholders, who can then indicate how many shares they wish to sell and at what price, or, more commonly, shares can be purchased on the open market. Stock repurchases have been increasing compared to dividends. (See CRS Legal Sidebar LSB 10266, Stock Buybacks: Background and Reform Proposals, by Jay B. Sykes.) Historically, dividends were the major form of distributing income and share repurchases were rare. Repurchases began to be more common in the mid-1990s, and by the early 2000s, dividends and repurchases were similar in magnitude. By 2004, annual share repurchases had typically begun to exceed dividends. Repurchases almost doubled in 2018 to more than $1 trillion, following the corporate tax cuts in the Tax Cuts and Jobs Act (P.L. 115-94), and remained high in 2019, although they fell in 2020. News articles indicate that almost $900 billion of repurchases have already occurred in 2021. Concerns about stock repurchases have led to both nontax (such as disallowing stock repurchases on the open market) and tax proposals. Tax approaches have included proposals to allocate share repurchases to shareholders and tax them as dividends or to impose excise taxes. Senator Brown has introduced legislation (S. 2758) to impose a 2% excise tax on stock repurchases. Why Are Stock Repurchases Tax F avoredI A dividend is subject to tax, although at a lower rate than ordinary income (a top rate of 20% compared to a top rate of 37% on ordinary income). Capital gains are also subject to the same tax rate, although the tax applies only to the sales price minus the basis (the amount originally paid for the stock). Therefore, a shareholder pays a larger amount of tax on a dividend distribution than on a sale of the share. Different types of shareholders have different preferences for repurchases compared to dividends. Stockholders who are tax exempt (such as pension plans and nonprofit organizations) will be indifferent to the tax treatment. Taxpayers who have a low basis (e.g., because they have held the stock for a long time or because the stock has appreciated significantly) will have a small preference for a repurchase because most of the sale price will be taxable. Taxpayers who have a high basis (e.g., if they recently bought the stock) would prefer a share repurchase because little of the sales price would be taxable. In addition to this tax differential, the firm's purchase of corporation stock can allow stockholders a choice about how or whether to receive distributions. Explnaton o ExiseTa Provision in A provision in H.R. 5376 would impose a 1% excise tax on the repurchase of stock by a publicly traded corporation. The amount subject to tax would be reduced by any new issues to the public or stock issued to employees. The tax would not apply if repurchases were less than $1 million or if contributed to an employee pension plan, an employee stock ownership plan, or other similar plans. The tax would not apply if repurchases were treated as a dividend. It would not apply to repurchases by regulated investment companies (RICs) or real estate investment trusts (REITs). It also would not apply to purchases by a dealer in securities in the ordinary course of business. The excise tax would apply to purchases of corporation stock by a subsidiary of the corporation (i.e., a corporation or partnership that is more than 50% owned by the parent corporation). The tax would also apply to purchases by a U.S. subsidiary of a foreign-parented firm. It would apply to newly inverted (after September 20, 2021) or surrogate firms (i.e., firms that merged to create a foreign parent with the former U.S. shareholders owning more than 60% of shares). In general, excise taxes can be deducted to determine profits subject to the corporate tax, so that the tax is reduced by the corporate tax rate (21%). That is, for a profitable corporation each dollar of excise tax reduces profits taxes by 21 cents. The language specifies that this tax would not be deductible, so there would be no corporate profits tax offset. Non-Tax Issues Whereas one factor favoring stock repurchases over dividends is the tax treatment, other concerns have been raised regarding stock repurchases that may be the motivation for discouraging these repurchases through an excise tax.

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