A Microsoft infographic

The US Congress should levy a 20% tax on United States corporate profits in any country with an effective corporate tax rate below, on average, 20%, according to a longtime investment executive, who is also a senior lecturer at Harvard Business School.

In an article in The New York Times on Tuesday (via Brookings Institution), Robert Pozen said corporations should no longer be allowed to indefinitely defer American taxes on profits in low-tax jurisdictions but the 20% levy should be reduced to reflect any taxes paid by United States multinationals in low-tax countries.

The Financial Times reported on Tuesday that the US securities regulator is pushing more companies to disclose how much cash they hold offshore, as attention focuses on the impact of tax rules that encourage US companies to keep earnings overseas.

The Securities and Exchanges Commission (SEC) has asked companies, including Dow Chemical, Fortune Brands, Caterpillar and CIT to increase the information they provide to investors about overseas earnings and cash.

Earlier this year, Microsoft explained to the SEC its declining effective tax rate (what it pays as a ratio of profits) by disclosing it was using Ireland, Puerto Rico and Singapore as regional sales centres for routing profits, because of their low-tax regimes.

According to a study by Moody’s, the rating agency, American companies late last year had almost half of their total liquid assets of $1.24trn overseas. Tech companies in particular have cash hoards abroad and Apple had cash of $76.2bn in June with $ 47.6bn or 62% abroad.

Pozen says profits are now subject to a 35% corporate tax rate, but the tax can be totally avoided as long as the United States corporations hold the profits in their accounts at foreign banks.

Few companies pay at the top rate in the US because of the many tax breaks that are available.

Pozen says Congress should exempt United States corporate profits earned in countries with effective corporate tax rates, on average, of 20% or higher. These countries include the UK, France and Japan. (This exemption would be subject to two exceptions: passive income like investment interest, and profits artificially transferred through complex transactions to countries exempt from United States tax.)

He says if a foreign subsidiary of an American corporation pays some tax in a low-tax jurisdiction, it should receive a tax credit for that amount against the 20% tax.  For example, if corporate profits in Ireland were taxed at 12.5%, they would be subject to an American tax of only 7.5% (20% minus 12.5%). 

Finally, he says Congress should allow American corporations to transfer foreign profits earned overseas before 2012 back to the United States at a low rate  -- say, 10% - - for the next two or three years. This rate would be part of a transition to a better permanent approach - - not a one-off repatriation holiday.