U.S. Needs to Join the Race for Multinationals’ Tax Revenue, Experts SayBy
GOP plan’s provisions on tax havens described as inadequate
Trump has said he wants legislation enacted by end of year
European Union regulators’ tax crackdown on Amazon.com Inc. -- like the EU’s case against Apple Inc. -- should spur U.S. policy makers to address companies’ aggressive offshore tax-avoidance strategies before it’s too late, experts said.
The EU on Wednesday said Luxembourg must collect 250 million euros ($294 million) from Amazon. Regulators found that Luxembourg had given the world’s largest online retailer special tax advantages that meant “almost three quarters of Amazon’s profits were not taxed,’’ EU competition commissioner Margrethe Vestager said.
In a statement, Amazon denied receiving special tax benefits.
Last year, in a similar finding, the EU ordered Ireland to collect as much as 13 billion euros ($15.3 billion) in back taxes from Apple. The company has challenged the findings. On Wednesday, the European Commission said it will sue Ireland for failing to collect that amount.
“Really, what we are seeing is a race by the different taxing jurisdictions to claim a share of the tax prize represented by the largely untaxed streams of income that U.S. multinationals have engineered for themselves,’’ said Ed Kleinbard, a professor at the University of Southern California and the former chief of staff for Congress’s Joint Committee on Taxation. “If the United States doesn’t join the race, it will just lose tax revenue to more aggressive host countries around the world.’’
The EU rulings “do make it clear that if we are not interested in protecting our corporate tax base, other countries will be more than happy to tax the income,’’ said Kimberly Clausing, a professor of economics at Reed College in Portland, Oregon.
The latest EU enforcement effort comes one week after congressional leaders and President Donald Trump released a nine-page framework for legislation to overhaul the U.S. tax code. The plan includes slashing the corporate tax rate to 20 percent from 35 percent and tax cuts for individuals.
The plan would also make a radical change in the U.S. approach to international taxation. Under current law, America taxes its corporations’ income globally, no matter where it’s earned. But that worldwide reach, which is unique among developed economies, comes with a quirk: Corporations can defer tax on their offshore earnings until they “repatriate’’ them, or return them to the U.S. parent.
As a result, U.S. companies have stockpiled an estimated $2.6 trillion offshore. The Republican framework for a tax overhaul would apply lower tax rates to that accumulated income -- allowing its return to the U.S. -- and end the global approach going forward to focus on U.S. profit.
But there’s still concern that some companies -- especially in the tech and pharmaceutical industries -- could shift much of their profit into tax havens, countries with tax rates far lower than the U.S. goal of 20 percent. Clausing, of Reed College, has estimated that the U.S. loses $100 billion a year to profit shifting by its multinationals.
Such shifting can be particularly acute for companies that derive their value from intellectual property, such as technology and pharmaceutical firms. Such companies can arrange to have their IP held by subsidiaries in tax havens, then pay royalties to those units in low-tax countries. Governments worldwide have grown impatient with such strategies, Kleinbard said.
“All the principal jurisdictions in which such firms do business, including EU member states as well as the United States, are fed up with the tax engineering through which these firms end up paying single digit tax rates on the income booked outside the United States,’’ he said.
Dean Garfield, president of the Information Technology Industry Council, a lobbying group whose members include Amazon, Microsoft Corp. and Facebook Inc., called the Amazon decision “another troubling departure from established channels of multilateral cooperation on tax policy in favor of a unilateral approach that undermines national sovereignty.” Garfield added: “It is critical that the U.S. government tackle tax reform that modernizes U.S. international tax rules, stimulates economic growth, and creates jobs.”
To try to prevent companies’ use of tax havens, the GOP tax framework contemplates a so-called “minimum foreign tax’’ on multinationals’ future earnings that would apply in cases where a company’s effective tax rate fell below a pre-determined threshold.
The rate and formula for that tax haven’t been set, but experts note that the framework calls for it to be applied “on a global basis,’’ minus credits for foreign taxes paid -- suggesting that companies could blend their results from high-tax countries like Germany with low-tax countries like Ireland to even out their global effective rates.
That wouldn’t do much to prevent profit shifting to tax havens, according to Harvard Law professor Stephen Shay, a former top U.S. Treasury Department official during the tax overhaul of 1986.
Instead, Shay said during an appearance before the Senate Finance Committee Tuesday that a minimum tax should be calculated on a per-country basis, preferably at 80 percent of the corporate rate. And foreign tax credits should be pro-rated to prevent companies from using them to erode the bite of a minimum tax, he said.
Still, a country-by-country approach would be complex, said Itai Grinberg, a Georgetown University law professor and former top Treasury tax official, and therefore “pretty unadministerable.’’
The debate over appropriate design will continue -- but the stakes are high and the time is short. “If not designed properly,’’ Shay said, a territorial system can drain tax revenues out of the U.S. tax base and “leave us worse off than today.’’
Some Republican leaders, including Trump, have set a goal of enacting their tax changes by the end of this year, meaning that proper design will have to happen soon. House Speaker Paul Ryan said Tuesday night that the House Ways and Means Committee will release a written bill within the next three weeks.
In the meantime, congressional Republicans appear to have gotten the message from Brussels.
EU regulators on U.S. multinationals shows that European states “wish to tap into the U.S. tax base,’’ Senator Orrin Hatch, chairman of the Senate Finance Committee, told his audience during Tuesday’s hearing.
“Other countries are not waiting on the U.S. in order to protect their own tax base, and we should not wait any longer to protect our own tax base,’’ said Bret Wells, a professor at the University of Houston Law Center, after Tuesday’s hearing.