Corporate tax reform should help at home
To the Times: As tax reform becomes a major focus in Washington, Congress faces a unique opportunity to fix a situation that has long favored multinational corporations at the expense of U.S. companies. Doing so could level the playing field for American companies while also delivering an extra $1 trillion in tax revenue over the next decade.
Currently, domestic American corporations are required to pay U.S. taxes on all of their worldwide income. In a rather unfair contrast, however, multinational firms are only required to pay taxes on foreign income after their profits are brought into the United States. Unfortunately, taxation on “foreign” profits can be avoided for decades because large companies can still use the money without appearing to return it to the U.S.
It works like this: A factory in Germany makes shoes. En route to the United States, the shoes pass through a financing subsidiary in the Cayman Islands. And then the shoes are insured via another branch of the company in the Isle of Man. Then another subsidiary in Bermuda arranges for shipment with a transportation company. And finally, the shoes are shipped for sale in the U.S. Each of these steps allows the parent company to strip away the appearance of profit in the U.S. by allocating earnings to subsidiaries in lowtax countries.
As Washington ponders tax reform, it’s time to focus on taxing the profits that corporations earn from the actual sale of their product inside America’s borders. This is the way that most U.S. states now assess taxes on corporate profits. And it’s a sensible system, since it would eliminate the ability of companies to hide taxable income via intermediaries in low-tax countries.
The idea of taxing U.S.based sales – an approach often
referred to as “Sales Factor Apportionment” (SFA) – has been gaining traction of late. It calculates a tax obligation based on the percent of a company’s sales destined for customers in the United States. For example, a corporation sells 60 percent of its product to U.S. customers. If the company’s worldwide profit at year’s end comes to $1 billion, then $600 million (60 percent) would be taxed as U.S. income.
This “sales destination” approach would allow for a vast simplification of America’s corporate tax system, since taxable income would be determined solely by final sale in the U.S. None of the intermediate steps would be allowed to complicate or detract from the tax owed.
Multinational firms would