Profit Shifting

Corporations have long used creative methods to shrink their tax bills. One of the most popular devices has been to shift profits to low-tax countries. These maneuvers involve paper transactions that allow companies to book profits on customer sales in places like Boston and Berlin as if they came from Bermuda, which has no corporate income tax. Unusual features of American tax law, such as avoiding levies on overseas earnings as long as they stay offshore, had been a big driver behind profit shifting. But now the U.S. has overhauled its system to try to take the profit out of profit shifting. The changes come amid a global crackdown against companies, including Caterpillar, Starbucks and Google parent Alphabet, which had gamed the world’s tax regimes and deprived governments of revenue. So does the biggest tax revision in a generation mean that profit shifting is about to disappear? Or will corporations find new loopholes to exploit?

The new U.S. law uses a mix of carrots and sticks to unwind the incentives for profit shifting and push companies to bring home about $3 trillion in untaxed profits stashed overseas. The law dramatically lowers the corporate tax rate to 21 percent from 35 percent, placing the U.S. just below the worldwide average of 22.5 percent. It moves the U.S. closer to a system that taxes companies only on what they earn domestically, and not on global income, in line with most of the world’s so-called territorial regimes. It imposes a one-time, 15.5 percent tax on previously accumulated foreign earnings held as cash, whether or not companies bring the money home. (Earnings invested in plants and equipment overseas will be taxed even lower, at 8 percent.) The new law creates a minimum tax on royalties in an effort to stop companies from moving payments for the use of know-how — generally patents, trademarks and copyrights — behind everything from blockbuster antidepressants to showroom design into the most tax-advantageous places. And to try to keep manufacturing jobs in the U.S., the law effectively lowers taxes on exports involving know-how to a relatively low 13.1 percent, in what some call an export subsidy. Weeks after Trump signed the tax bill, some companies announced investments, though it’s unclear if they were due to repatriated profits. Apple Inc. said it would pay about $38 billion in taxes on offshore profits (its overseas cash hoard exceeds $260 billion) and invest $30 billion over five years in U.S. land, buildings and equipment.