Why should American corporations pay both foreign and US corporate tax on income made overseas? Almost no other country requires this of their companies and it's a major competitive disadvantage for American businesses.
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Edit: I'm rate-limited, but in response to below I'll reproduce what I've posted in prior discussions about this:
We’re really better off eliminating the corporate tax altogether. It’s a pretty small portion of tax revenue and the only reason it exists is to be a plank for politicians who want to tax the "greedy corporations." All corporate income is either paid as dividends, paid as salaries, or reinvested. When it is paid as dividends, it is taxed as capital gains. When it is paid as salaries, it is taxed as income. When it is reinvested, it is either lost, or eventually becomes income and capital gains. There is no need to have another layer of taxation that just makes a giant accounting mess and creates all sorts of ridiculous incentives to use tax shelters.
It seems that you're suggesting that we tax corporations on overseas income, even when reinvested overseas. That would put American companies at an extreme disadvantage compared to those from other countries, by forcing them to pay double taxes, US and foreign corporate taxes, on all income.
The logical solution is to get rid of the corporate tax altogether. The only reason why it exists is to be a plank for politicians who want to tax the "greedy corporations." All corporate income is either paid as dividends, paid as salaries, or reinvested. When it is paid as dividends, it is taxed as capital gains. When it is paid as salaries, it is taxed as income. When it is reinvested, it is either lost, or eventually becomes income and capital gains. There is no need to have another layer of taxation that just makes a giant accounting mess and creates all sorts of ridiculous incentives to use tax shelters.
The IRS really does not like that. I believe it's in litigation. Still if a citizen is subject to a tax on the difference between foreign taxes paid and US taxes owed, a corporation should be as well.
I don't see how taxing foreign income would work. A corporation would just spinoff foreign business to avoid it. If you tax those it'd just reincorporate offshore. The USA simply can't tax the foreign income of a foreign company.
US corporations should pay a global tax even if corporations abroad don't. That is because US corporations operate in a more beneficial corporate climate.
In what other country does the government fight so hard for its corporations' profits that it imposes treaties like the TPP on other countries? In what other civilized country can a corporation operate without giving workers vacation, or even a maternity leave? Only the US! That level of government support and exploitation allowance should have a global tax because it is unique in the civilized world.
What needs to be done is change the unique incentives for American companies to participate in such byzantine international tax avoidance schemes in the first place. The US is practically the only country that taxes profits internationally regardless of origin. It should remove all taxes on bringing foreign profits into the US and lower the overall corporate tax rate while closing the loopholes that render the 'headline rate' so ineffectual in the first place.
I'm not a tax lawyer either, but I did stay at a holiday inn last night... Which sadly is my only qualification to comment on this topic. In any case here is how I see it, not that I'm right.
Shareholders of international companies are better off if the company doesn't pay the tax penalties from repatriation. Those shareholders will pay taxes on dividends and capital gains, if nothing else. But the question is why would a company bring money back from China (for example) only to pay taxes on it before sending it back to China to pay for the next round of manufacturing? Also, international companies almost always are required to pay taxes on the profits in the country it was earned. There are games you can play to show the profit in your home country, but those are unethical. To understand why think about it from the point of view of each country a company operates.
When accounting decisions do come down to questions that could go either way, profit is shown on the books in the country that would incur the least tax expense. Its exactly what most individuals do. For example I love the big city I live near. However, I chose to live outside of city because a don't want to pay for the city government services when the little town I chose live in has similar services and lower tax rates. I pay for the city services I use through the city sales tax, but they are crazy if they think I'll start paying city property taxes on a house that I already pay property taxes on to another town. If I did own both a city home and a home in the smaller town, there is no way I would be OK with the city bring to tax me on both. Similarly Apple pays taxes on its US operations to the US but why should it pay the US taxes on foreign earned profits that it already pays foreign taxes on?
I have a hard time faulting a company for not paying anymore than the rules require. Unless every company can agree on how much extra they should pay above the minimum, a company not minimizing their tax burden is at a financial disadvantage and will lose marketshare and eventually be marginalized. The only way I know that you can obtain an agreement to the amount of taxes that should be paid is by changing the tax law. Want more capital brought back into the US economy? Lower the taxes below those of the countries the US is competing with for that capital. Want US companies to pay more taxes? Raise the base tax rate, and close loop holes. While I'm thinking of it... Loop holes are almost never what we think they are. The vast majority are not some shady accounting trick dreamed up in a darkly lit room by a weaselly accountant or tax lawyer. They are discounts on the tax rate voted on by congress, usually intended to produce some good like creating jobs.
Really though, if you think about it... It only makes sense to make it easy on companies to move money into the US. If a company wants its cash back in the US, there are only three thing I can think of it would do with it. 1. Put it in the banking system, which grows the economy and increases taxes. 2. Spend it, which grows the economy and increases taxes 3. Give it back to investors, who pay taxes on it and then do one of the other two things.
I agree with you, but playing devil's advocate, American Citizens pay US taxes on their income, regardless of where they live (http://americansabroad.org/issues/taxation/us-taxes-while-li...) - so why shouldn't US Corporations be required to Pay US Taxes on their income, wherever they make it?
Note - my answer to that is very, very quickly you would find that successful US companies re-incorporating in other countries, in much the same way wealthy Americans will sometimes give up their US citizenship.
Companies already get to reduce their US tax by the amount of tax they paid a foreign government. The issue here is that that they've moved the profits to places where little or no taxes are paid at all. This is not about double taxation.
The US is the only major country in the world that has such a ridiculous and distorting rule for corporate taxation as the repatriation rules. This single rule drives a very large portion of the global tax avoidance industry. It drives economic behaviour which results in misallocation of resources via situations like companies borrowing onshore US against their overseas cash horde and using the proceeds to return to shareholders.
They should abolish this silly rule and go with what everyone else does: either tax US corporates on global earnings and allow deductions for foreign taxes paid, or tax territorial earnings only.
> The board of an American company could perfectly well choose to repatriate all foreign income, pay U.S. taxes on it, and then pay out a dividend using the repatriated income.
Considering US corporate tax rate is among the highest in the world, Apple, GM and Coca-Cola have to pay a higher repatriation tax than Samsung, Toyota or Nestle. This seems to give foreign companies a strategic advantage as far as having larger R&D budgets, flexibility to drop prices, etc.
They don’t have free reign to report income where they want, everything has to be justifiable to accountants and tax auditors.
The US already taxes corporate worldwide income. Eliminating the deferral would cause every US multinational corporation to move its parent company overseas. The tax advantages would be humongous.
The US already has the worst corporate income tax structure, not only one of the highest rates, but also taxing worldwide income. We should be making it better to attract more capital/jobs, not worse.
Corporations do have to pay taxes on overseas earnings if they want to bring those earnings back to the US. As far as I'm aware, it's the same for US human citizens. (It's certainly the case for Australian citizens.)
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