Tuesday, May 10, 2011

U.S. speaker Boehner calls for territorial tax system

Corporations essentially face two types of international tax system: the 'territorial' system -- where countries don't tax income earned outside their borders -- and the 'worldwide' system, where companies are taxed on all income regardless of where in the world it is earned. (In practice, most countries have a mix of the two.)

Tax havens generally have highly 'territorial' systems, though many supposedly 'onshore' economies do too - and territorial systems generally make it easier for companies to cut their tax bills by shifting profits offshore under these systems. The UK government has recently been making highly aggressive moves in this direction, following the further corporate capture of tax policy-making there as outlined by Richard Brooks, George Monbiot and others. As Monbiot put it: "a kind of corporate coup d'etat is taking place." This is a symptom of the United Kingdom becoming ever more like a tax haven.

The U.S. runs essentially a 'worldwide' tax system (though it, too, is a hybrid, allowing tax on offshore profits to be 'deferred' - which frequently means never paid), but corporate lobbyists have long slavered over the possibility of a more territorial system. Now we have Citizens for Tax Justice weighing in with some action that is happening on this front. We think it's simplest to reproduce this in full:

Addressing the Economic Club of New York on Monday, Republican House Speaker John Boehner told reporters that Congress should be “looking seriously at a territorial tax code,” according to CQ Today.

Under a territorial system, the offshore profits of a U.S. corporation would be exempt from U.S. taxes.

A recent report from Citizens for Tax Justice explained that this would cause serious problems.

First, corporations would have a greater incentive to engage in profit-shifting, meaning practices used to disguise U.S. profits as foreign profits. A common example is the manipulation of transfer pricing to shift corporate profits into tax havens (countries that do not tax, or that barely tax, certain types of profits).

Second, corporations would have a greater incentive to shift actual operations — and jobs — to other countries.

Our current system already encourages these practices because U.S. corporations are allowed to “defer” their U.S. taxes on their offshore profits. But the incentives would be even greater under a territorial system, in which corporations would NEVER pay U.S. taxes on their offshore profits.

Other countries that have adopted territorial tax systems are experiencing these problems, and the European Union is considering adoption of a different system to allocate profits among EU member states.

As CTJ’s report explains, the best alternative would be for Congress to repeal the rule allowing U.S. corporations to “defer” their U.S. taxes on offshore profits. Corporations could continue to get a credit for any taxes paid to a foreign government (just as they do now) which prevents any profits from being taxed more than once.

Possible Amnesty for Corporate Tax Dodgers

Some corporate leaders have argued that if Congress does not permanently exempt their offshore profits, then lawmakers should temporarily exempt them with the sort of tax holiday for repatriated corporate profits that Congress enacted in 2004. Boehner expressed openness to this idea on Monday.

Several studies of the 2004 effort showed the repatriated profits went to shareholders and not to job-creation, despite the promises made by corporate lobbyists. An economist with the U.S. Chamber of Commerce recently admitted that any attempt by Congress to attach job-creation requirements to the tax holiday simply will not work.

Read more about the proposed repatriation tax holiday.

Calls for Slashing Public Services, But No Revenue Increase from Profitable Corporations

Speaker Boehner also said that the corporate tax should be reformed but should not raise any more revenue than it does today. This came during a speech in which Boehner demanded that “trillions” be cut from public services — a goal that would be impossible without sharply cutting Social Security, Medicare, and Medicaid — but refused to consider any revenue increases.

A recent report from CTJ explains why corporate tax reform should be “revenue-positive,” meaning we should raise more tax revenue from corporations than we do today.

Almost two-hundred organizations have signed onto a letter urging Congress to adopt a revenue-positive corporate tax reform.

The letter notes that a 2007 report from President Bush’s Treasury Department found that the share of profits paid in taxes is lower for U.S. corporations than the average for OECD countries.

Sign your organization onto the letter urging Congress to raise revenue by reforming the corporate tax. (Deadline: End of Friday)

Send a letter on your own behalf urging Congress to raise revenue by reforming the corporate tax.


Anonymous Nelson said...

They're leaving already--at least on paper. The only real option is to get rid of corporate income taxes altogether, so there's real incentive to keep them in America. Otherwise, why bother?! Most of these corporations now do more than 50% of their business "offshore." DC needs to realize that America is no longer an end-all. In fact, it's fast-becoming a has-been nation, and if you want jobs and industry to stay, you have to compete with other nations, just as corporations compete with one another.

1:54 pm  

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