Stopping tax avoidance without causing “flight”
And what would be the most important tool the U.S could use to reclaim the money lost to tax avoidance? “Really the big thing would be just to end the deferral of foreign source income and tax them for it,” Rep. Schakowsky said.
Hungerford recognized that ending deferral is, at least in this session of Congress, “kind of pie in the sky. I just don’t see any of this going through Congress at this time. But I think eventually [ending deferral] is probably the easiest thing to do…Then you just don’t have that problem.”
Double taxation?
Those who argue against ending deferral often invoke the specter of “double taxation.” Let’s Invest for Tomorrow America (LIFT America), a coalition of major multinational corporations and trade associations dedicated to advocating for a territorial tax system, including Cisco, HP, Intel, Pfizer, and the Coca-Cola Company, declares in its issue brief: “The problem is that U.S. companies are taxed here on their U.S. earnings, taxed abroad on their foreign earnings, and then taxed again when those foreign earnings are brought back home.”
Steve Wamhoff, however, said the claim of double taxation is simply false. “There is a foreign tax credit that exists under the current rules. Say you were a U.S. corporation and you didn’t want to defer…If you bring your profits back to the U.S., you get a credit for the taxes you pay to another government.” For example, he said, if a hypothetical foreign country has a 20 percent corporate tax rate, when a multinational brings its profits back from that country to the U.S., it will pay only 15 percent of the U.S.’s 35 percent federal corporate tax rate. Rep. Schakowsky confirmed that under her proposal for ending deferral, “We would still allow [corporations] to subtract the amount of money they paid to foreign countries for taxes.”
Remapping Debate asked those who oppose ending deferral whether the foreign tax credit nullifies the concern about double taxation. Kyle Pomerleau of the Tax Foundation at first said that companies are “taxed twice on [their] profits.” When we asked him about the foreign tax credit, he said, “That’s exactly what that foreign tax credit is there for. It’s meant to alleviate that double taxation…However, there are instances in which that foreign tax credit doesn’t account for the taxes paid overseas.”
As an example, he cited “dual capacity regulations,” which primarily affect multinational oil and gas companies. These regulations prohibit such companies from declaring payments paid by corporations to foreign governments in exchange for “a specific economic benefit” from receiving a foreign tax credit for those payments. We asked Pomerleau whether, as a rule, double taxation nevertheless does not take place. He responded, “It’s hard to know exactly where it happens or when it happens.”
Killing competition?
Claire Buchan Parker, a spokesperson for LIFT America, admitted that “it’s not double taxation” to tax overseas profits because of the foreign tax credit but said the U.S. does levy “an additional tax that the competitors don’t have to pay,” referring to the fact that most other countries treat multinational corporations more favorably by having only a territorial tax system. We also asked a spokesperson for the Alliance for Competitive Taxation (ACT) campaign, another coalition of major multinational corporations that has a significant overlap in membership with LIFT America, about double taxation. The campaign responded similarly: “While U.S. businesses get a foreign tax credit for most of their taxes paid elsewhere, because U.S. taxes are the highest among all countries in the world…U.S. companies in general face an additional tax when trying to invest foreign earnings back into the United States.”
Remapping Debate asked the office of Senator Rand Paul, who strongly objected to the tone of the Senate’s May hearings on corporate tax avoidance, for the Senator’s stance on ending deferral. Senator Paul’s spokesperson responded in an email that the United States’ high corporate tax rate “makes doing business [as a U.S. corporation]…more difficult than the rest of the world; ending deferral would only worsen the problem.” She described it as a measure that would make the U.S. tax code “less competitive” and would “increase the burden for American companies.”
It is true U.S. corporations that do not defer profits must supplement the taxes they have paid to foreign governments with taxes remitted to the U.S. Treasury. In that way, their combined payments are equivalent to what they would have paid if the profits had been earned in the U.S. That is an arrangement that does not exist in most countries.
“Other kinds of competitiveness”
When the need to “maintain a level playing field” is discussed, it is most often in the context of competition between U.S.-based corporations and corporations based in other countries. But Citizens for Tax Justice’s Steve Wamhoff believes that, “There are other kinds of competitiveness you have to think about.”
To illustrate, he cited the example of two competing companies in the U.S., one of which is multinational and the other strictly domestic. “The multinational one…is able to do all sorts of things to make its U.S. profits look like foreign profits and not pay any U.S. taxes on them, whereas the U.S. company that’s strictly domestic can’t engage in all those shenanigans. So you have a situation where the multinationals, which typically are probably going to be much bigger corporations, are going to have a competitive advantage for tax reasons over a company that is just domestic, which is likely to be a smaller business.”
Macdara Doyle, a communications officer for the Irish Congress of Trade Unions, believes the same problem affects Ireland. “The indigenous and local businesses on the street — maybe a retailer or maybe a local manufacturer — they don’t have the capacity to do the same kinds of lousy write-offs…That’s clearly not a free market operation. That’s unfair competition,” he said.
When we expressed Wamhoff’s and Doyle’s concerns to Claire Buchan Parker of LIFT America, she responded that a multinational corporation and a domestic company would pay the same tax on profits they make in the United States. “This debate isn’t about profits companies make in the United States,” she said. We pointed out that while that may be true in theory, it is widely known that companies attempt to manipulate the tax system to make domestic profits appear international on paper. She simply responded by saying, “The LIFT coalition believes that there need to be provisions in reform that prevent abuse.”