This article appeared on Inside Sources on March 15, 2016.
As more American companies look to flee an uncompetitive tax code, there’s fairly widespread agreement among the political class that something must be done. Some want complicated new rules to prevent companies from leaving, but most seem to realize that addressing tax code fundamentals is the preferable approach. Lowering rates, closing loopholes, and moving to a territorial system are all rightly on the table. Yet if reformers truly hope to prepare the tax code for modern challenges, they must also include strong protections against the overreach of international tax collectors.
At a recent Congressional hearing on international tax reform before the House Ways & Means Committee, witnesses described a broken system. American companies are burdened by the highest corporate tax rate among industrialized nations, and are practically the only ones expected to pay that rate on a worldwide basis.
Contrary to the common sense notion that nations collect taxes only on income earned within their borders – known as a territorial system – the United States taxes income of its citizens and American-headquartered businesses even when earned in foreign jurisdictions. When combined with its excessive corporate rate, this means that U.S. businesses are unable to compete overseas on an equal footing with foreign competitors who pay lower rates despite operating in the same market.
When American businesses are prevented from expanding overseas, the costs are felt at home. It eliminates potential job opportunities for Americans both at home and abroad and reduces new investments into the domestic economy.
These problems can be solved through pro-growth tax reform, but another threat looms in the form of an attempted tax grab against U.S. companies by greedy foreign governments.
The recently completed Base Erosion and Profit-Shifting (BEPS) initiative by the European-dominated Organization for Economic Cooperation and Development (OECD) has rewritten global tax rules to punish successful multinational companies and make it easier for governments to increase their tax take. Even though corporate tax revenues have seen no real decline, BEPS proponents insist that multinationals are irresponsibly “shifting” income in order to avoid paying their “fair share.”
But the simple truth is that desperate politicians unwilling to implement responsible spending reforms are seeking to squeeze international commerce at the expense of the global economy. Of particular concern for American companies are the costly and invasive new “reporting” demands contained within the BEPS proposals, which require that multinationals report to each and every country in which they do business not only the relevant tax information for that jurisdiction, but the information for every such jurisdiction. Such proprietary information can be abused by unscrupulous governments that might favor their own state enterprises and further undermine U.S. competitiveness, and would also be considerably more vulnerable to exploit by hackers when in the hands of so many governments.
The OECD is no friend to the United States. It persistently argues for higher taxes on U.S. citizens and businesses, and for costly new spending programs that would put the next generation even further into debt. To add insult to injury, its bureaucrats agitate for these polices while receiving tax-free salaries subsidized by U.S. taxpayers.
BEPS is a direct attack on U.S. corporations and, similarly to our current anti-competitive tax code, a threat to American jobs. Despite this fact, the Obama administration has chosen not to lead or defend American interests and principles within the OECD. That means that any serious attempt by Congress to fix the broken corporate tax code must also deal with the targets placed on the backs of U.S. corporations by foreign governments. Otherwise, long awaited reforms could prove to be too little too late.
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Image credit: Vinícius Pimenta | Pexels License.
