Week in Insights: Philly’s Tax Measures Protect Small Businesses

Curated by Daniel Xu

A Pew Charitable Trusts report published this week has unveiled a substantial disparity in the tax burdens shouldered by businesses in Philadelphia: Large businesses have a significantly heavier burden than small businesses.

The analysis found the smaller the business in absolute gross receipts terms, the lower their tax burden. Very small businesses were taxed at an average rate of 0.8%, with very large businesses coming in at 7.1%. The median effective rate across the board was 3.5%.

The report looked at the city’s Business Income & Receipts Tax, which exempts the first $100,000 of gross receipts and thereafter is levied on gross receipts apportioned to Philadelphia at a rate of 0.1415%.

The BIRT then applied an income-level tax at rates ranging from 6.20% to 6.35% during the time studied by Pew, or 5.99% today. This, plus a net profits tax on unincorporated businesses, serves to meter out the tax burden on Philadelphia businesses progressively—and make it difficult for large corporations to engage in tax planning to reduce their bill.

The BIRT’s double-barreled nature means there was substantial difference across market sectors in terms of which tax accounted for the bulk of a business’s bill.

For instance, real estate businesses saw an average of 84% of their BIRT bill come from the income tax, as these are sectors with substantial profits. Meanwhile, restaurants and bars saw only an average of 40% of their BIRT bill result from the net income tax—the hospitality industry has notoriously slim margins.

Philadelphia may have illustrated a path forward for other cities looking to maximize their tax revenue without crushing small businesses. A broad base, with a mix of a small gross receipts tax and a higher net income tax, might just be the right recipe.

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Diners and vendors at the Reading Terminal Market in Philadelphia.

Photographer: Ed Jones/AFP via Getty Images

Federal Insights

Forvis Mazars’ Phil Laminack assesses Pillar Two tax accounting challenges, saying proactive planning and analysis will help companies avoid implementation issues.

ZMF Law’s Steven Miller, Matthew Reddington, and Janine Campanaro analyze a captive insurance dispute, saying the case likely previews more government use of Section 6700 to pursue what it views as abusive tax shelters.

Vanderbilt’s Beverly Moran says the tax code needs reform to ensure fairness, noting the child tax credit as one example of inequity against Black taxpayers.

AEI’s Kyle Pomerleau and Niskanen Center’s Shuting Pomerleau suggest a carbon tax as a revenue source to offset a potential TCJA extension, saying it would shift the tax base from income taxation to consumption taxation.

Stout’s Brad Burch says that preparing early and outsourcing work can help ensure the successful completion of financial statement audits.

Global Insights

Puente Sur’s Ignacio Gepp reviews tax technology changes, saying the informal economy and compliance are major considerations.

Crowe’s Sowmya Varadharajan and Samuel Taieb analyze challenges of applying the arm’s-length principle and how operational transfer pricing can support taxpayer compliance.

Baker McKenzie’s Imke Gerdes and Richard Fletcher examine the OECD’s new Amount B transfer pricing guidance, saying it confirms the rules’ fundamentals but doesn’t address optionality.

DEI Insights

JD-Next’s David Klieger recommends steps for law schools to further diversify admissions since the US Supreme Court’s decision killing affirmative action.

Olshan’s Frome Wolosky’s Adrienne Ward and Katherine Mateo explain how small and mid-sized firms can step up to advance DEI efforts and hire more people of color.

Columnist Corner

The IRS should hire more remote workers to attract talent in tax technology and reduce operating expenses, Andrew Leahey says in his latest Technically Speaking column.

In addition to making the agency more competitive on the job market, expanding telework would foster a diverse, regionally unbound workforce to “better meet the challenges the IRS faces as it modernizes its systems and enhances service offerings,” Andrew argues.

Career Moves

Christina D’Eramo Evans has joined partner Stephen Gariepy as national co-chair of Hahn Loeser’s trusts and estates practice group.

Ryan Leichsenring has joined Day Pitney as a tax partner in the Hartford, Conn., office.

Ryan Phelps has joined Holland & Knight as a partner in the tax, executive compensation, and benefits practice group in Houston.

Travis Logghe has joined Fredrikson & Byron as an officer in its business & tax planning, private equity, and mergers and acquisitions groups.

If you’re changing jobs or being promoted, email your submission to TaxMoves@bloombergindustry.com for consideration.

News Roundup

It’s been another busy week in tax news from state capitals to Washington. Here are some stories you might have missed from our Bloomberg Tax news team.

• The US Supreme Court ruling on a key foreign-income tax case allays the most dire fears that it could upset other parts of the tax code, but questions remain about what it may signal for a potential future wealth tax and other provisions.
• Canadian lawmakers passed a bill implementing over a dozen tax measures, including its digital services tax, and are closing in on approving legislation to implement the global minimum tax.
• Californians won’t get to vote on a measure asking if they want to make it harder to enact state and local taxes and fees, after a state Supreme Court ruling that kicked the initiative off the November ballot.
• The OECD released additional information on global rules meant to simplify transfer pricing methods for certain transactions.

Dolores Park in the Mission neighborhood of San Francisco.

Photographer: David Paul Morris/Bloomberg via Getty Images

Tax Journals

Tax Management International Journal

Artificial Intelligence in taxation is a double-edged sword that can’t eliminate human involvement, Lakshmikumaran & Sridharan’s Ravi Sawana and Neha Sharma say.

Recent guidance from the OECD/G20 Inclusive Framework fills gaps in the Amount B architecture and provides valuable insight into which jurisdictions may implement Amount B, KPMG’s Thomas Bettge, Jessie Coleman, Alistair Pepper, and Phil Roper say.

Tax Management Memorandum

Ryan’s Scott Stogsdill reports on recent Treasury guidance with regard to green energy tax credits shifting away from incentives focused on certain industries toward industry-neutral standards for reducing emissions.

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