U.S. could probably address this issue if they moved to a territorial tax regime. It would bring a lot of offshore cash back to the United States (especially in tech) that can later be redistributed back to investors and the economy via buybacks, dividends, and domestic M&A.
The United States currently has a "worldwide" tax system and taxes U.S. companies on income earned both domestically and abroad in foreign countries. The tax on foreign earnings usually isn't assessed until the company brings it back to the United States (you'll hear companies talk about getting hit with a repatriation tax if they bring their "trapped" offshore cash back onshore to the U.S.). Most U.S. companies will try to avoid paying repatriation tax and keep substantial portions of their foreign cash earnings overseas to "reinvest" indefinitely.
At this point, the United States is one of the few advanced economies that still taxes its companies on their active foreign earnings (I believe only 8 of the 34 OECD countries use worldwide tax system) and also has one of the highest tax rates. Most OECD countries use a territorial tax systems that largely exempts active foreign earnings from domestic taxation.
(1) stashing income derived in US somewhere offshore
(2) not repatriating income derived outside US back to US
If doing (2) entails additional taxes, why would rational multi-national corporation do that? Because America? The solution is to revise the tax code in such a way that income derived and taxed elsewhere would not be taxed again.
Take Apple for instance; they have a giant pile of cash that sits in bank accounts all over the world. Why should they move it back to US, pay huge taxes and let it sit in bank account back in US? That's irrational.
There are other issues involved: what are the actual tax rates companies are paying (too low!) and tax dodging all over the world (happens all the time! didn't Google just settle with EU?) but they are somewhat orthogonal.
The main issue is that US will tax one's profits again once they are moved back to US. Even if they profits are legally derived in another country and taxed in that country.
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.
Foreign income should be exempt from US taxation, similar to the way any other properly developed nation handles things. Punishing businesses to repatriate their foreign earnings is ridiculous. All it does is incentivise them to keep their money offshore and not invest it in the US. How is that good?
Second to that, Apple can pretty much borrow funds indefinitely to do buybacks and declare dividends. I don't know what their borrowing rate is, but say they pay between 2 to 4% on their bonds, then they shouldn't have a problem achieving a similar (or even higher) yield on their offshore cash, meaning it will cost them absolutely nothing to keep it all offshore.
The US government is forcing all companies to pay a mandatory tax of 15.5% on all overseas profit that was designated as "indefinitely reinvested" under the previous tax regime. This is a mandatory one-time tax as part of a shift to a territorial system. Multinationals can do whatever they want with the cash, but considering that they've been lobbying government on a repatriation bill for over a decade specifically to be able to do domestic M&A, pay dividends, or do share buybacks, it's pretty obvious that all of that cash is coming back to the US. A business that wants to reinvest all their cash internationally is free to do so (and in fact the previous tax regime incentivized it), but they're going to be paying US tax on what they've accumulated so far.
This discussion is missing context. The whole reason that Apple has to pay taxes on foreign income is because unlike almost every other developed nation the US has a worldwide tax system. Almost every other nation has a territorial tax system. The rest of the world with their territorial system taxes income earned within that country, the US rather taxes income worldwide, regardless of where it is earned.
For example, if a British company earns income in Germany, its pays German taxes on its German income. But if a US company earns income in Germany it pays both German taxes and US taxes.
What is little known about this tax bill is that it normalizes our tax system with the rest of the world by moving to a territorial tax system. This is not about Apple avoiding tax on profit earned in the US, they will continue to pay US taxes, they won't pay taxes on income earned outside of the US going forward. [0] That means that there won't be any more hordes of overseas profits. And means the end of those tax inversions or corporate inversions you have been hearing about. [1]
So now that foreign profits aren't going to be taxed, something needed to be done with all the profits generated under the old system. The 23% repatriation tax is a compromise between the new rate of effectively 0% and the old rate of 39%. This BTW happens to be very close to the OECD, the developed world's, average tax rate of 24%.
Edit:
As was astutely pointed out below the US only pays additional taxes to the US if their US tax bill was higher than their German one. And they paid the difference between to two to the US.
"The issue is profits hidden to the taxman that can still be paid out as profit to the investors. "
This is specifically an issue of international repatriation and has little to do with anything else really - and your OP doesn't really aim at that.
Amazon is a poor example because they're not in the business of fancy IP arbitrage: this is what Apple, Google and FB do. Less so Amazon.
But the problem is that US taxation with respect to repatriation is messed up.
1) US corporate tax is very high - the highest in the developed world.
2) US expects companies to pay 'full tax' when repatriated money, even already taxed money. Every other country just expects a 2-5% repatriation tax.
The US tax system is not designed for globalism.
What the US and the world need to do is find a new harmony which will entail:
1) Lower US corporate taxes
2) Close all the special loopholes
3) Get rid of double-taxation on remuneration
3) Especially for digital and IP - taxes need to be paid in the local state where business is done. FB is selling ads and consumers are consuming them in France, then a good chunk of taxes need to go there. Same for Google. The US is going to have to eat this or face punitive war forever from EU and other nations.
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.
That's a good point. There's also another issue - profits made outside of the US can't be used in the US without paying a separate US repatriation tax, which can be as high as 35%.
Multinational corporations hold cash in foreign subsidiaries to avoid paying taxes on profits, and would get taxed on those profits if they bring them back into the U.S. (repatriate the profits).
This study shows the following:
- Firms that face higher repatriation tax burdens hold higher levels of cash, hold this cash abroad, and
hold this cash in affiliates that trigger high tax costs when repatriating earnings.
- Estimates indicate that a one standard deviation increase in the tax burden from repatriating foreign income is associated with a 7.9% increase in the ratio of cash to net assets.
As far as I'm aware, the revenue generated by a foreign subsidiary is not taxed again by the US until it enters the US economy. So long as it stays overseas we don't touch it. It's interesting to hear people note the record amounts of cash that US companies have on hand right now, but much of that is in foreign accounts and can't be brought into the US without paying a huge tax on it.
To avoid taxes many companies keep profits offshore in lower tax jurisdictions, only paying US taxes when money is repatriated. It is super common for companies to have billions offshore but to keep it there, take out US debt to und share buybacks or other US domestic initiatives and then only repatriate each year the amount needed to service that debt.
IMO, it’s a stupid loophole that legislators should close.
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.
It's so incredibly obvious that the best course of action is to let all these companies bring home all those foreign revenues so long as a significant portion of it is reinvested in the US is a reasonable period of time, excluding investments in financial instruments (stocks and bonds) and non-productive assets like land.
Any money that is stuck abroad will be reinvested abroad, making foreign economies more competitive relative to the US economy. Anyone arguing for taxing profits from abroad heavily I can only assume has a very poor understanding of macroeconomics.
Just because the tax rate is lowered doesn't mean companies will repatriate their money here. I think we need a law that penalizes companies for offshoring their money. If you want to be an American company, headquartered in America, then it should cost companies like Apple to offshore that money. Carrots and sticks should be used to bring that money back, but a lower corporate tax rate is a start, but not the solution.
Note that much of that foreign cash has already been taxed locally, so companies are weary to move it back to the states, especially if they can use it in the country where it was already taxed, or in other countries where it would be counted as foreign investment capital rather than income.
Taxes are freaking confusing with a lot of tax-twice situations, and I don't really blame companies for not wanting to pay taxes twice.
Repatriation is the only thing preventing us from losing every large multinational corporation. Other countries corporate income tax systems are so much more attractive to companies and investors already.
Just stop taxing corporate income, it’s a corrosive tax that makes us poorer by driving off investment.
What makes you think that taxes aren't already being paid in the foreign jurisdictions?
This is a big part of the disconnect: if you (say, as Apple) sell a phone in Munich, you're paying the VAT tax in that country already.
Generally speaking, when you take the profits from your German sales back to the USA, in many (most, save a few exception) cases, you're going to pay corporate taxes on those profits now that they are repatriated back in the USA. So companies are incentivized to keep those profits in overseas jurisdictions to defer the US tax and reinvest in their overseas operations. Considering how much of their actual sales come from overseas, it's no wonder that they pursue this strategy.
EVEN IF a company wanted to be a "good US corporate citizen" and pay more taxes to the government, they'd be at a financial disadvantage to overseas companies doing business in the USA because THOSE companies DON'T have to pay tax on their overseas profits. That's why you see all of these companies set up in "corporate tax havens" that don't tax a single penny of offshore income. For one thing: it's damn easy to do international business through these companies because you effectively have a neutral ground from the perspective of finance. For another: you save money on taxes, allowing you to offer better terms to your customers and partners.
This kind of stuff only matters to the biggest corporations with multinational operations because the regulatory minefield associated with keeping track of laws and regs in lots of different countries is a nightmare and only a few top accounting firms have the talent to master it. Another reason why the law of unintended consequences shifts the tax burden to the little guy: he's not big enough to care about shifting his income overseas. When you create incentives by way of regulatory/tax arbitrage, you make it worth the while of a big multinational to invest the time and effort structure their deals so they take place in offshore jurisdictions.
I'd like to know more about this since the global companies I have been involved with are all sneakily hiding profits offshore, hiding them from US and UK taxes. They can't re-patriate that money, either, so innovation has slowed. This is one reason why Trump proposed a sort of tax amnesty to get that money back on shore.
If I understood correctly, the problem is that the money made abroad, is made by using the intellectual property owned (and presumably gained) in the U.S and some people think the U.S. should get a share of those profits.
However:
1) while it's true that good part of the actual work has been done in the U.S., great part of the value comes from the effort (marketing, sales, R&D, ...) that happens in the subsidiaries; it's not easy to quantify, but certainly those people are actually doing something, aren't they?
2) as far as I understood, the U.S. income tax is not paid until that money gets back to the U.S.
In fact it stays abroad, deferring the tax payment. The subsidiary could use that money to invest and expand the foreign market, with indirect but substantial domestic benefits.
I believe the issue of tax loophole in the country where the actual subsidiary works, is a different matter; but I don't understand what's the problem per-se with having stashes of oversea money held by a foreign subsidiary of your company.
The United States currently has a "worldwide" tax system and taxes U.S. companies on income earned both domestically and abroad in foreign countries. The tax on foreign earnings usually isn't assessed until the company brings it back to the United States (you'll hear companies talk about getting hit with a repatriation tax if they bring their "trapped" offshore cash back onshore to the U.S.). Most U.S. companies will try to avoid paying repatriation tax and keep substantial portions of their foreign cash earnings overseas to "reinvest" indefinitely.
At this point, the United States is one of the few advanced economies that still taxes its companies on their active foreign earnings (I believe only 8 of the 34 OECD countries use worldwide tax system) and also has one of the highest tax rates. Most OECD countries use a territorial tax systems that largely exempts active foreign earnings from domestic taxation.
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