US Economy
Corporate Tax 2014: US proposal of 17% rate for foreign profits
By Michael Hennigan, Finfacts founder and editor
Feb 20, 2014 - 6:19 AM

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President Obama welcomes François Hollande, French president, to the White House for the first state visit by a French president in nearly 20 years, Feb 12, 2014.

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."

He says rather than fighting about political untouchables, legislators should change the tax treatment of foreign profits of US corporations. Under current law, foreign profits are subject to a 35% US tax, but that tax may be deferred indefinitely if those profits are kept abroad. "US corporations are sheltering almost $2tn in profits abroad, according to Audit Analytics."

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.

Why 17%? This is the effective marginal rate paid, on average, by corporations in advanced industrial countries (excluding the US's exorbitant 35%). A global competitiveness tax would encourage US corporations to put foreign profits to use in the US, while removing the incentive for companies to transfer foreign profits to tax havens."

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%.

All companies in the US would gain from the change.

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:

Carnival, the cruise-ship company, paid a minuscule 0.6% of its earnings in taxes over the past five years, according to Capital IQ. Starwood Hotels and Resorts, which owns the St. Regis, Sheraton, and W chains, paid 8%.

Amazon.com paid 6%; Boeing, 7%; Apple, 14%; General Electric, 16%; Google, 17%; eBay, Eli Lilly and Raytheon, 19%; and FedEx, 23%."

Finfacts 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.

New York Times interactive graphic on the effective rates for member firms of the S&P 500

Selection of Finfacts tax reports 2013/14:

Irish Corporate Tax 2014: How official spin and distortion works - in short-term

Corporate Tax 2014: Obama running with the hare and hunting with the hounds

US company profits per Irish employee at $970,000; Tax paid in Ireland at $25,000

Corporate Tax 2014: Yahoo! joins “Double Irish Dutch Sandwich” club; IDA Ireland wants more members 

Corporate Tax: Kenny reassures Facebook but Ireland's rate is too high

Foreign government requests Bermuda to investigate Microsoft's Irish-linked subsidiaries

G-20 Australian presidency focuses on tax "leaking bucket"; Ireland still in denial?

Corporate tax reform and the biggest tech tax havens

Ireland's new International Tax Charter: More political kabuki

Ireland's tax man for Silicon Valley

Corporate Tax 2014: UK's revenues plunge; France considers reform

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