As President Barack Obama renewed his criticism of tax laws that “reward companies that keep profits abroad,” the government he leads is taking a more subtle approach -- one that’s helping some of those companies.
The U.S. is working with other major economies to curb corporate tax avoidance, an issue that has become a popular political cause in the U.K. and France. The Obama administration wants to prevent U.S. companies from being singled out by European regulators and to ensure that the U.S. doesn’t miss out on any taxes its companies start paying.
Obama’s efforts to win congressional backing for his tax proposals have stalled. That stalemate has turned the attention of companies and countries to the Organization for Economic Cooperation and Development, a government-funded group in Paris seeking to combat what’s known as base erosion and profit shifting, or the movement of income to low-tax jurisdictions.
“We feel like Treasury has been doing a good job in representing U.S. interests,” said Catherine Schultz, vice president for tax policy at the National Foreign Trade Council, whose board of directors includes Google Inc. and Pfizer Inc. “We also feel like they’ve been doing a good job in making sure that the international tax norms are not turned upside down.”
In his sixth year in office, Obama can claim relatively few accomplishments on international taxation -- an issue he used as a populist applause line during his campaigns and as recently as his Jan. 28 State of the Union address.
Obama’s proposals would limit companies’ ability to defer U.S. taxes on some income they earn overseas, impose a minimum tax on international profits and raise taxes on profits generated from intangibles such as patents.
Even as his administration attempts to prevent companies from moving profits offshore, U.S.-based companies and the government have some shared interests at the OECD, said Robert Stack, the U.S. government’s primary negotiator.
“No one would really have designed the system where you can have the degree of stateless income or low-tax income that we have today,” said Stack, the Treasury Department’s deputy assistant secretary for international tax affairs.
Still, the U.S. doesn’t want hard-to-interpret rules that would lead to expensive tax disputes for U.S. companies or rules that would undercut the U.S. tax base, Stack said.
“There’s fundamental conflict between protecting your multinationals and preventing profit shifting, because it’s your multinationals that are doing most of the profit shifting,” said Martin Sullivan, chief economist at Tax Analysts, a non-profit based in Falls Church, Virginia. “The U.S. Treasury folks are getting pulled in two different directions. That’s a whole other dynamic from the White House talking about companies pushing profits offshore.”
Once the OECD settles on rules, countries would have to adopt laws reflecting the international consensus, a step that’s much easier in parliamentary democracies and tougher to envision with a U.S. Congress in which control is split between Democrats and Republicans. The U.S. Senate has also been unable to ratify bilateral tax treaties, including an agreement with Switzerland signed in 2009.
Few in Washington expect much action from the White House and Congress this year on what has become a priority in other countries: cracking down on how multinational corporations such as Google, Apple Inc., and Yahoo! Inc. avoid taxes by shifting profits into tax havens.
Those moves by companies often reduce income taxes by moving profits to jurisdictions without a corporate income tax, including the Cayman Islands and Bermuda.
Companies also can reduce U.S. taxes and the worldwide taxes they report to investors on earnings statements. U.S.- based companies owe the U.S. Treasury taxes at a 35 percent top rate on all the income they earn around the world, minus credits for foreign taxes.
They don’t have to pay the taxes until they repatriate the money, giving companies an incentive to pay as little as possible in corporate taxes and hold the money outside the U.S. Accounting rules allow companies to not count the U.S. taxes on those accumulated earnings, which now total about $2 trillion.
Obama has proposed requiring U.S. companies to pay a minimum tax on income they earn around the world as part of changes that would lower the corporate tax rate to 28 percent. He also proposed limits on the ability to defer taxes and called for a tax on excess returns associated with intangible assets such as patents, often used by technology companies.
U.S. lawmakers, including Republican Representative Dave Camp of Michigan, chairman of the House Ways and Means Committee, have proposed changes that would limit international profit shifting. Congress is deadlocked over details of the proposals and on whether the government should increase taxes for high-income individuals.
The OECD is drafting plans limiting how companies take deductions in one country without reporting profits in another, as well as making it harder to avoid tax by shifting intellectual property to offshore units.
“The U.S. doesn’t seem that involved in the project, so the question is: ’What do they want the project to achieve?’” said Chris Lenon, the International Chamber of Commerce’s liaison to the OECD’s project.
The U.S. has opposed public disclosure of the payments that companies make to each government and has resisted changes to what’s known as the arm’s length principle that governs intracompany transactions.
Under that rule, governments attempt to determine the fair market value of the transfer of a patent from a U.S. company to its foreign subsidiary, a technical and economic analysis that often leads to disputes.
Stack, speaking by telephone from Paris last week, described the U.S. as “supportive and thoroughly engaged” in the OECD’s work.
The Treasury Department has been in trying to reach a consensus at OECD, said Manal Corwin, national leader of the international tax practice at KPMG LLP in Washington. She was deputy assistant secretary for international tax affairs at Treasury earlier in the Obama administration.
“They are very focused on making sure that this isn’t a disproportionate attack on U.S. multinationals,” Corwin said. “The U.S. government does represent those interests and tries to make sure that U.S. multinationals don’t get inappropriately dragged in or dragged through for political gains by others.”
The U.S. has also been reluctant to make major changes through tax regulations, even as Obama talks about taking executive actions to sidestep Congress. In particular, he hasn’t repealed the so-called check-the-box rule, which effectively prevents the U.S. from taxing profits moved into haven subsidiaries, said Reuven Avi-Yonah, an international tax law professor at the University of Michigan.
The administration proposed repeal in 2009 and then dropped it after lobbying by companies including General Electric Co. and Johnson & Johnson. The Treasury Department could repeal the regulation without congressional action and hasn’t done so.
There is “no chance of that, so they are not serious,” Avi-Yonah said.
Stack said the administration’s legislative proposals go beyond what would be accomplished by repealing check-the-box. He said the administration is working on rules governing the transfer of intangibles, even while the OECD work continues.
“It’s a balancing of what they should do now to fix aspects of our system through regulation vs. what is more appropriately incorporated into broader tax reform,” Corwin said.
Corwin and Schultz said U.S. companies are particularly concerned about other countries making unilateral changes to their tax laws as the OECD project goes forward, throwing the international tax system into further disarray.
In December, for example, Italy passed a measure that requires Italian companies to purchase their Internet ads from local companies.
The measure has been nicknamed the “Google tax” because Google credits virtually all the revenue and subsequent profits from advertisements sold in Europe to an Irish subsidiary, which moves the profits to a second unit with headquarters in Bermuda. The strategy helps cut about $2 billion a year from the company’s taxes.
The Italian law is widely viewed as violating European Union laws regarding non-discrimination over commercial activity. The country has delayed the implementation of the new measure until July.
Mexico also recently passed a law limiting deductions paid by subsidiaries in that country to other affiliated companies outside Mexico.
“Countries are already unilaterally making changes,” Schultz said. “U.S. companies are getting very actively involved -- because they’re being forced to.”