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Scholars Criticize International Tax CURRENT AND QUOTABLE (C) Tax Analysts 2015. All rights reserved. does not claim copyright in any public domain or third party content. tax notes™ Scholars Criticize International profits as a share of GDP — at 9.8% — are nearly at all-time highs.2 Their U.S. taxes as a share of GDP Tax Reform Proposals are just 1.9%, which are near all-time lows.3 [See Figure below] And U.S. corporate taxes as a share of federal revenue have plummeted from 32.1% in This letter to Congress from 24 international tax 4 experts expresses opposition to international tax 1952 to 10.6% last year. Finally, the number of reform proposals under consideration that would cross-border acquisitions involving U.S. and other establish a territorial tax system and a low deemed OECD countries has remained relatively constant repatriation tax rate of 14 percent on $2.1 trillion in over the last decade — U.S. firms acquired 324 existing offshore profits. The letter also summarizes OECD firms in 2006 and 238 in 2014 and OECD research showing that there is no factual basis for firms acquired 311 U.S. firms in 2006 and 226 in the assertion that U.S. multinationals cannot com- 2014.5 pete globally because of the U.S. tax system and U.S. tax rates. There is no factual basis for the assertion that U.S. multinationals cannot compete globally because of the U.S. tax system. The effective tax rates on their Dear Member of Congress: worldwide income, including U.S. taxes, are typi- As legal scholars, economists and practitioners cally far below the 35% statutory rate — at one-half who are experts on international tax issues, we are the 35% rate or even less, according to some esti- writing to express our opposition to current propos- mates. In sum, U.S. multinationals are unquestion- als for the creation of a territorial tax system ably the world’s leaders in global tax-avoidance through use of a ‘‘dividend exemption’’ regime and strategies, relying on profit shifting to foreign tax for a temporary highly-preferential rate of tax on havens and other tax-avoidance strategies. This the $2.1 trillion in untaxed foreign profits of U.S. gives them a big advantage over domestic U.S. multinational corporations. Such proposals would firms, many of which pay close to the statutory rate, simply exacerbate the problems of our current tax and it encourages the export of jobs and shifting of system, which encourages the export of jobs and profits. shifting of profits to low or no tax countries and An attachment to this letter summarizes some of the puts domestic companies at a competitive disad- best scholarly research to date showing how the current vantage with respect to U.S. multinationals. tax system enables U.S. firms to pay relatively low These matters have taken on a sense of urgency effective tax rates. as President Obama and some in Congress are hoping to use short-term revenue from taxing un- A U.S. Territorial Tax System Is Not the Answer repatriated foreign earnings to help address the Most OECD countries operate under a territorial recurring shortfall in the Highway Trust Fund. tax system, in which domestic corporations are Below are our significant concerns with the jus- tifications given for these international tax propos- als and with the proposals that have been floated so far, including the framework from Senators Rob Product [GDP],’’ retrieved from FRED, Federal Reserve Bank of Portman (R-OH) and Charles Schumer (D-NY). St. Louis, https://research.stlouisfed.org/fred2/series/CP/ GDP/. 2 U.S. Multinationals Are Highly Profitable and BEA, https://research.stlouisfed.org/fred2/graph/?g=1 Pik. Competitive Under the Current U.S. Tax System 3U.S. Office of Management and Budget (OMB), ‘‘Historical First, it is worth noting that U.S. corporations in Budget Tables, Table 2.3: Receipts by Source as Percentages of general have done very well in recent years. They GDP,’’ https://www.whitehouse.gov/omb/budget/Historica ls. are more profitable than ever, with $1.8 trillion in 4 1 OMB, ‘‘Historical Budget Tables, Table 2.2: Percentage Com- profits in the second quarter of 2015 alone. Their position of Receipts by Source 1934-2020,’’ https://www.white house.gov/omb/budget/Historicals 5Joint Committee on Taxation (JCT), Present Law And Selected Policy Issues In The U.S. Taxation Of Cross-Border Income (March 1U.S. Bureau of Economic Analysis (BEA), ‘‘Corporate Profits 16, 2015), Table 3 at 74, available at https://www.jct.gov/ After Tax (without IVA and CCAdj) [CP]/Gross Domestic publications.html?func=startdown&id=4742. (Footnote continued in next column.) TAX NOTES, October 5, 2015 149 For more Tax Notes content, please visit www.taxnotes.com. COMMENTARY / CURRENT AND QUOTABLE Corporate Profits vs. Taxes as Share of GDP (1952-2015/Q1) (C) Tax Analysts 2015. All rights reserved. does not claim copyright in any public domain or third party content. Corporate Profits as Corporate Taxes as a Percentage of GDP Percentage of GDP 9.8% 10 8 5.9% 6 4 Percentage 1.9% 2 0 1958 1968 1978 1988 1998 2008 1952 1962 1972 1982 1992 2002 2012 1956 1966 1976 1986 1996 2006 1960 1970 1980 1954 1990 1964 2000 1974 2010 1984 1994 2004 2014 Sources: Profits: U.S. Bureau of Economic Analysis (2015). Taxes: U.S. Office of Management and Budget (2015). exempted from paying taxes on most income gen- disposal to keep their profits offshore where they erated in countries other than where they are based. are indefinitely untaxed by the Treasury. This is a Conversely, the U.S. taxes the worldwide income of major reason why U.S. multinationals pay such low U.S.-resident corporations, allowing credits for for- effective tax rates. eign taxes paid to avoid double taxation. However, Senators Portman and Schumer, as well as Presi- the U.S. tax system includes a deferral regime, dent Obama and former Representative Dave which allows U.S. corporations to defer paying U.S. Camp, have all advanced proposals that would tax on their foreign earnings until that income is shift the United States much closer to a territorial repatriated. Deferral, including the costs of the tax system, mainly through some form of a divi- active financing exception tax break that applies to dend exemption regime. When U.S. multinationals profits from offshore banking and finance, at about do repatriate foreign earnings, they typically ac- $900 billion over 10 years is calculated to be the complish this through a dividend paid by the largest corporate tax expenditure in the Code, ac- foreign affiliate on the affiliate’s stock that is held by cording to government data.6 the U.S. parent. The U.S. parent company may Deferral essentially swallows up the general rule, invest the repatriated funds in its U.S. operations or because firms can leave profits outside the U.S. tax distribute them to its own shareholders. The last system for both cash tax and financial accounting time there was a repatriation tax holiday, despite purposes. As a result, deferral permits U.S. multi- specific statutory prohibitions, repatriated funds nationals to operate today under a hybrid or quasi- were used to buy back corporate stock, which territorial tax system. Firms take abundant artificially boosted share prices of the U.S. parent advantage of deferral, which is why they currently and resulted in large bonuses for executives.7 A carry on their financial books $2.1 trillion of un- number of the proposals noted above would ex- taxed foreign earnings. The U.S. tax code’s deferral empt from the U.S. parent’s income the majority of regime encourages firms to use every tactic at their the dividends received, effectively resulting in a single-digit rate of tax on that dividend income. 6The $900 billion figure is an average based on blended tax expenditure calculations by the Joint Committee on Taxation, 7Donald J. Marples and Jane G. Gravelle, Congressional Congressional Budget Office and Office of Management and Research Service (CRS), Tax Cuts on Repatriation Earnings as Budget, which ranged from $887 billion to $940 billion over 10 Economic Stimulus: An Economic Analysis (December 20, 2011). years. The calculation includes general foreign deferral and https://www.fas.org/sgp/crs/misc/R40178.pdf. U.S. Senate Perma- extending the exception under subpart F for active financing nent Subcommittee on Investigations Majority Staff Report, income, a tax extender that is regularly renewed. Data is Repatriating Offshore Funds: 2004 Tax Windfall for Select Multina- available at http://www.americansfortaxfairness.org/files/ tionals (October 11, 2011), http://www.gpo.gov/fdsys/pkg/ Deferral-Cost-Estimates-from-JCT-and-Treasury-FINAL.xls. CPRT-112SPRT70710/pdf/CPRT-112SPRT70710.pdf. 150 TAX NOTES, October 5, 2015 For more Tax Notes content, please visit www.taxnotes.com. COMMENTARY / CURRENT AND QUOTABLE Unfortunately, a territorial tax system would Valeant/Salix and Burger King/Tim Hortons trans- only increase incentives for companies to shift prof- actions is frequently cited for the proposition that (C) Tax Analysts 2015. All rights reserved. does not claim copyright in any public domain or third party content. its offshore and exacerbate the use of tax-avoidance the United States should adopt territoriality to strategies, thereby increasing their competitive ad- discourage such transactions.9 vantage over domestic companies that create jobs However, the PSI report does not support the and profits in America. This is because, once desig- case for territoriality. A lower foreign tax rate is not nated as foreign earnings, that income would never the principal tax attraction of inversions.
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