Corporate Tax 2014: The US has the highest headline corporate tax rate among member countries of the Organisation of Economic Co-Operation and Development (OECD) but companies with significant international activity (excluding oil exploration firms) tend to have much lower effective rates (actual tax payable as a ratio of earnings). To break the tax reform gridlock in Washington DC, Robert Pozen, a former vice chairman of Fidelity Investments, the financial services giant, and currently a lecturer at Harvard Business School, has proposed a 17% tax on foreign profits that mainly currently avoid US taxes.
The US headline rate is 39.1% (including local taxes) compared with a simple average of 25% in the OECD's mainly rich country club, with Ireland having the lowest rate of 12.5%.
Robert Pozen made his proposal this week in The Wall Street Journal, days after Ron Wyden, Democrat of Oregon, became the chairman of the Senate Finance Committee. The businessman turned academic says that even as a liberal Democrat, Wyden has supported two key goals of corporate tax reform: reducing the US corporate tax rate and repatriating corporate profits held abroad. Sen. Wyden's challenge will be implementing these goals without increasing the federal debt.
Pozen says that while there is widespread support for reducing the 35%
statutory federal corporate tax rate, the reduction cannot be financed by the plan
President Obama touted in his State of the Union address: closing tax
"loopholes." Congress would have to find $1.2tn in new tax revenue over the next
10 years to fund a 10% rate reduction. "But politicians can realistically repeal
only $200bn in tax loopholes, including the favourable tax treatment of
corporate jets, incentive fees and drilling costs."
As a compromise between Democratic and Republican positions, Pozen proposes a global competitiveness tax of roughly 17% on all foreign profits of US corporations. The tax could not be deferred. However, if a US corporation had already paid taxes of 17% or more to a foreign country, it would not be taxed again if these foreign profits were repatriated to the US.
For example, suppose Corporation X pays a 17% effective tax rate on its 2014 profits in the UK. Since Corporation X is already paying 17% in taxes to the UK, it would be allowed to move those profits anywhere in the world - - including the US - - without being taxed again. Suppose Corporation Y, on the other hand, pays 12% on its 2014 corporate profits earned in Ireland. Then Corporation Y would promptly have to pay the difference, owing 5% in US taxes on those Irish profits. After the company paid the tax, the foreign profits could be moved back to the US without any additional corporate taxes.
Robert Pozen says a transitional tax could be used to repatriate cash that is
technically overseas while additional revenues would fund a cut in the federal
tax rate to 30%.
US effective tax rates
Last year, the Government Accountability Office (GAO) reported that US corporations in 2010 paid an effective tax rate of 12.6% on domestic income and 17% on worldwide income-- reflecting once-off allowances/ tax preferences to counter the recession.
Bruce Bartlett, a senior policy roles in the Reagan and George H.W. Bush administrations, noted in The New York Times that the GAO economists "who conducted the original study acknowledged that averaging their results over several years and including foreign taxes, would raise the effective tax rate to 22.9%."
Andrew B. Lyon, a PricewaterhouseCoopers economist who served as deputy assistant secretary of the Treasury for tax analysis during the George W. Bush administration, published a study, which included companies with losses and thereby raised the aggregate effective tax rate by reducing aggregate profits. His estimate put the effective corporate tax rate at 36.2%
The New York Times reported last year how Pepsi and Coca-Cola reduce their tax bills by locating key facilities in Ireland and Singapore.
The newspaper wrote:
reported in 2013 that Apple's foreign tax rate in 2012 was 1.9% and Google's
was just over 4%. We calculated that US companies operating in Ireland, including those using Irish mailbox companies for tax purposes in island tax havens, had an effective tax rate of 2.5% in 2010.
Selection of Finfacts tax reports 2013/14:
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