|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
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
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.
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%."
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
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
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
Corporate Tax 2014: UK's revenues plunge; France considers reform
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