Stopping tax avoidance without causing “flight”
Parker asserted that this “punishes companies who want to bring their profits back home.” Pomerleau agreed, referring to this remainder as a “toll charge” which puts U.S. corporations at a “competitive disadvantage” against their overseas rivals. He said it is this toll charge that incentives corporations to keep their profits overseas and not repatriate them; deferral simply allows them to do so.
According to Nicole Tichon, however, “The idea that corporations are taxed in the U.S. at a higher rate, and they’re being treated unfairly somehow, is laughable. The effective tax rate for large corporations is at about 12 percent according to the Congressional Budget Office, and that’s a non-partisan statistic.” (Remapping Debate confirmed this figure as accurate as of 2012 data — the exact number is 12.1 percent). Though the U.S. has the highest statutory tax rate in the world, its average effective tax rate after the numerous tax breaks unique to the U.S. tax code is, as has been widely reported, significantly closer to the global average. The “additional tax” faced by U.S. multinationals who choose to repatriate their foreign profits, then, may not be much of a burden after all.
Furthermore, Steve Wamhoff said, ending all taxation on overseas profits, as Pomerleau, Parker, and the ACT campaign recommend, would only exacerbate the tax avoidance problem. “If allowing corporations to defer taxes on their offshore profits creates these incentives, then giving them a complete exemption on taxes on their offshore profits will logically increase these incentives,” he said. “They’ll have even more incentive to ship jobs offshore and shift profits to tax havens.” Ending deferral, he said, would be the only way to guarantee corporations pay the taxes they owe.
Rep. Schakowsky believes U.S. corporations have a responsibility to pay their U.S. taxes. “These are companies who can well afford to pay their taxes in the United States of America,” she said. “They are and they want to be American companies…It’s about corporate patriotism, in a way, that we’re calling on them to pay their fair share.”
Might companies simply pack up and move their headquarters overseas if subject to annual U.S. taxation of all of their profits? And if this is a genuine danger, how could the U.S. prevent it from happening?
Tom Hungerford told Remapping Debate there isn’t much cause for alarm. “We do have anti-inversion rules,” he said. “You can’t just pick up and move offshore costless.” Corporate inversion is defined as the act of moving a company’s headquarters overseas while leaving the bulk of its operations and employees in the United States. Under the most recent set of IRS rules, if 80 percent or more of the stock of the new overseas parent company is still held by the former shareholders of the U.S. company, the new foreign company (referred to as the “surrogate foreign corporation”) will be subject to U.S. taxes.
Steve Wamhoff agreed the concern about corporations moving overseas in the wake of ending deferral is “definitely a very, very exaggerated fear.” To further prevent it, however, he suggested the U.S. could pass management and control rules of the type proposed by Senator Carl Levin (D-Mich.). These rules would act as a stronger version of the IRS’ anti-inversion ones. As described in a press release from Sen. Levin’s office, they would “treat…foreign corporations that are publicly traded or have gross assets of $50 million or more and whose management and control occur primarily in the United States as U.S. domestic corporations for income tax purposes.” (The proposal does not specify exactly how it would determine whether a corporation’s management and control is “primarily in the United States,” instead leaving the exact contours to rules to be written later.)
If such rules were in place, Wamhoff said, the management of corporations would have to physically move in order to avoid U.S. taxes. “Now, do you believe that everybody running the corporation is going to get up and leave and move to Bermuda?” he asked. “Well, they can. I doubt that’s going to happen.”
If the U.S. ends its deferral policy, might corporations simply find other loopholes to exploit? Wamhoff agreed with the idea that even if they are able to find such loopholes, ending deferral would at the very least make their efforts to avoid taxation much more difficult. In fact, he seemed confident that there would be very few loopholes for them to find. “If you end deferral,” he said, “that dramatically cuts back the amount of abuses that they can do.”
Tom Hungerford, however, expressed concern about the ability of corporate lawyers to find loopholes in any tax regime. “Whatever you do, smart lawyers are going to come up with some kind of idea,” he said. He evoked President Franklin Delano Roosevelt, who said at a 1935 press conference, “There is a very great distinction between tax evasion and tax avoidance. Tax avoidance means that you hire a $250,000-fee lawyer, and he changes the word ‘evasion’ into the word ‘avoidance.’”
Eurodad’s Øygunn Sundsbø Brynildsen agreed that “those with a lot of resources that want to find loopholes will find loopholes.” Nevertheless, she said, “The issue is to make the loopholes smaller, and also to make it easier to find those who don’t obey the law, or those who behave in a very irresponsible manner.”
As another measure designed to prevent U.S.-based multinationals from moving their headquarters overseas, Tom Hungerford of the Economic Policy Institute suggested ending deferral could be paired with the implementation of “a large exit tax on firms who would move offshore.”
According to an IRS guidance document, the United States already levies an “expatriation tax” on individuals who choose to renounce their U.S. citizenship and have a net worth greater than $2 million or an average annual income (in the 5 years prior to expatriation) of “a specified amount that is adjusted for inflation.” This amount was $151,000 in 2012. If an individual qualifies for the expatriation tax, the IRS will calculate the fair market value of all property he owns, including bank and brokerage accounts. They will then treat the individual as though he sold that property and tax him on the “gains” he would have accrued if the sale were real at the current tax rate for capital gains (though as of 2012, the first $651,000 of gains are exempt from taxation).
There is precedent for similar laws that target corporations rather than individuals. Such laws are common in Europe, where the UK, Belgium, Denmark, and the Netherlands, among others, all have corporate exit taxes. In recent years, the European Commission has requested that these nations amend their laws to allow for deferred payment of exit taxes rather than the immediate payment originally required. The general principle of corporate exit taxes, however, has been upheld. By adopting a corporate exit tax, Tom Hungerford believes, the U.S. could create a strong incentive against corporate inversion.