TAXATION OF U.S.
MULTINATIONAL
CORPORATIONS
INTERNATIONAL TRADE RELATIONS
SPRING 2012
Marco Ibarra, Melissa Gonzalez, Jina Hong
OVERVIEW
• Federal corporate tax rate is 35%
• Tax rate is same for purely domestic firms and
for U.S. multinational corporations (MNCs) who
make profits abroad
• MNCs pay an additional state corporate tax rate
ranging from 4 to 6%
• Current U.S. corporate tax system takes a
worldwide approach
• All foreign subsidiaries are subject to US taxation
under the “worldwide income” concept
OVERVIEW
Therefore, U.S. MNCs:
• Re-invest large portions of their income abroad
in low-tax countries
• Repatriate only a limited percentage of total
income made in host countries
• Also obtain U.S. tax credits for the foreign
taxes paid on the total income made abroad
OVERVIEW
• Because of the shift to reporting income abroad, the U.S.
corporate tax base remains narrow and corporate tax
revenues as share of GDP low
• Total share of U.S. corporate tax revenues as percentage
of all tax receipts was 30% in 1950 and 6.6% in 2009
• U.S. corporate tax rate has not changed much since 1986
• Among OECD members, U.S. tax rate is considerably
higher than average rate; 2nd highest
• However, other OECD members raise more tax revenues
LEGISLATION
•
Tax credits
•
•
Firms are able to claim a tax credit for monies paid to
governments abroad on income they earned in the foreign
country (but only up to their U.S. tax liability on that income)
The U.S. attempted to mitigate this problem by granting
additional tax credits
•
•
•
The American Jobs Creation Act of 2004 replaced the tax
subsidies for exporting with new corporate tax benefits
Included a domestic production deduction- lowered the
corporate tax rate by 3 percentage points on income from the
domestic production activities of U.S. firms
And for 1 year the tax rate on dividend repatriations from lowtax countries was reduced to 5.25%
LEGISLATION
• Cross crediting
• Firms use excess credits from income earned in
high-tax countries to offset U.S. taxes due on
income earned in low-tax countries
• Active Financing Exception (aka Deferral)
• Firms are not taxed by the U.S. on its overseas
income until that income is remitted to the U.S.
parent firm as dividends
• Abuse of Transfer Pricing
MAJOR ISSUES
• U.S. Corporate Tax Rate
• Active Financing (GE Example)
CORPORATE TAX RATES
http://economix.blogs.nytimes.com/2011/04/08/the-logic-of-cutting-corporate-taxes/v
TAX LOOPHOLES
• Companies have a huge incentive to pretend that their
American operations pay too much or charge too little to
their foreign operations for goods and services (for tax
purposes only), thereby minimizing their U.S. taxable
income.
• Transfer prices shift income away from the U.S. and shift
deductible expenses into the U.S.
• Transferring ownership of long-lived, often intangible but
highly profitable assets, like patents and software to
overseas subsidiaries.
• Aggressive lobbying for tax breaks.
GENERAL ELECTRIC
• In 2010, GE reported profits of $14.2 billion, with $5.1
billion coming from operations in the U.S.
• Tax bill for 2010 = 0; claimed a tax benefit of $3.2 billion.
• Regulatory filings show that in the last 5 years, GE has
accumulated $26 billion in American profits and received a
net tax benefit from IRS of $4.1 billion, despite posting a
loss in 2009 as a result of the financial crisis.
• Fierce lobbying and “creative” accounting.
GENERAL ELECTRIC
FIERCE LOBBYING
•
In 2008, Congress threatened to
let one of the most lucrative tax
shelters expire. GE’s tax team
met with representative Charles
Rangel of the Ways and Means
Committee, who subsequently
reversed his opposition to the
tax break. The following month,
GE announced its foundation
would award $30 million to New
York City schools, including $11
million to schools in Rangel’s
district.
•
In the past 10 years, GE has
spent more that $200 million
lobbying on Capitol Hill.
CREATIVE
ACCOUNTING
• Consumer appliance
division accounts for just
6% of GE’s revenue.
• Industrial, commercial and
medical equipment like
power plant turbines and jet
engines account for 50%.
• Lobbying for changes in
tax laws – depreciation
schedules on jet engines
to “green energy” credits
for wind turbines.
• Lending, through GE
Capital, accounts for 30% Active Financing.
ACTIVE FINANCING
• Companies have long been allowed to defer taxes on
income from overseas subsidiaries, but financial activities
have traditionally been left out of this exemption because
such activities are too easy to shift offshore.
• Passed in 1997, active financing allows investment banks,
brokerage firms, auto and farm equipment companies, and
lenders like GE Capital to defer taxes on overseas profits,
if those profits were derived by “actively financing” some
activity or deal.
• In other words, as long as a company claims that it
intends to indefinitely invest profits outside of the U.S.,
they remain untaxed.
ACTIVE FINANCING
• Proponents of active financing claim that the exemption
helps “level the playing field” with foreign competitors by
ensuring the U.S. corporations aren’t taxed twice.
• Enhances competitiveness of U.S. corporations since
many other countries have a much lower corporate tax
rate and do not attempt to tax foreign income.
ACTIVE FINANCING
• Opponents claim that the tax break creates an enormous
tax shelter for companies who have lobbied it into law.
• It encourages companies to create jobs overseas instead
of in the United States.
• The Joint Committee on Taxation estimates that the
provision, which was extended for two years in 2010, will
cost $9.61 billion in the two years to 2011.
• Other countries have broadened their tax
base, which has allowed them to increase
tax revenue as a share of GDP
• Majority of other industrially advanced
countries have revised and lowered their
corporate tax rates
PROPOSAL
Lower U.S corporate rates
• White House Framework for Business
Tax Reform:
• Presented in Feb 2012.
• Lowering the top income-tax rate for
corporations from 35 percent to 28 percent .
REACTIONS
From multinational corporations:
• Strong support although they point out that
U.S. multinationals would still be paying
higher taxes than their foreign rivals
From liberal groups (opposing view):
• Need to eliminate corporate tax loopholes
but without reducing the rates since there is
a need for more revenue to address U.S
long-term budget crisis.
BENEFITS AND
IMPACT
• Promote higher long-term economic growth.
• Improve U.S. competitiveness.
• Lead to higher wages and living standards.
• Boost entrepreneurship, investment, and productivity.
• Can attract foreign direct investment (FDI).
• Lowers the tax burden on low-income taxpayers and
seniors.
• Lead to lower corporate debt and reduce the incentives for
income shifting.
• Reduce compliance costs.
PROPOSAL
Do not extend active financing provision
• The (FY) 2013 Budget propose extending
the active financing exceptions
REACTIONS
Opposing View:
•
This exception helps "competitiveness" or
"fairness“ for it allows US financial companies to
compete on a level playing field with their foreign
competitors when they go into overseas markets.
Proponents:
• As companies move abroad, they also move their
manufacturing bases abroad to be closer to home
as well as jobs.
• Costs taxpayers US$5 billion a year.
BENEFITS AND
IMPACT
• Its just another additional deficit to the U.S.
budget.
• Provides less of an incentive for
multinational corporation to allocate their
profits to foreign tax havens.
• Addresses the issue of how companies shift
income to other nations.