Dem Senators Split Over Corporate Tax Break Proposed for Stimulus Bill
Looks like a split is developing in the Senate Democratic ranks over the contentious question of using the stimulus bill to give "repatriation" tax benefits to corporations.
The idea is a simple one, though likely to alarm progressives: multinational companies with U.S. headquarters would be given a one-time discounted tax rate of 5.25% -- down from a normal rate of 35% -- if they declare their offshore earnings in this country.
Sens. Barbara Boxer (D-CA) and John Ensign (R-NV) are amassing support to add repatriation to the stimulus bill, and they've got at least a partial vote of confidence from the Senate Democratic No. 3 leader, Chuck Schumer (NY). But two fellow senior Dems, Carl Levin (MI) and Byron Dorgan (ND), are decrying what they call a business "lobbying blitz" to secure repatriation benefits.
Levin and Dorgan note that repatriation was attempted with questionable success in 2004, as part of George W. Bush's third tax-cut bill in four years. Democrats criticized the tax break at that time as unfairly skewed towards companies that outsource jobs.
"The facts simply don't support the claim that giving a tax holiday to companies with offshore profits will benefit the country and boost our economy," Dorgan said in a statement released with Levin. But can the duo convince other Democrats to beat back the Boxer-Ensign proposal this week? Here's a look at their complete argument against repatriation:
Impact on U.S. Jobs and Domestic Investment. Proponents assert that repatriation will result in an increase in U.S. jobs and domestic investment. Yet, according to [a] January 2009 CRS analysis, "While empirical evidence is clear that this provision resulted in a significant increase in repatriated earnings, empirical evidence is unable to show a corresponding increase in domestic investment or employment." Instead, as the CRS analysis shows, the top repatriating corporations closed down facilities and made massive job cuts. Another study found that many corporations who benefited from this tax break used the money to repurchase their own stock, which had no impact on job creation. Evidence is needed to show how a new round of repatriated funds would produce new jobs or domestic investment, since the last round failed to do so.Impact on U.S. Tax Revenues. Proponents assert that the $312 billion repatriated in 2005 represented funds that would not have otherwise been brought back into the United States and so produced new tax revenue. But, a Joint Committee on Taxation staff case study concluded that "the data belie this assertion." In addition, the score for the proposed repatriation provision is expected to project that it will cost the government billions of dollars in lost tax revenues.
Benefits Favor Corporations Engaged in Outsourcing. Data suggests that the 2004 repatriation tax holiday may have benefited only a narrow group of corporations that sent jobs, facilities, or funds offshore. In 2005, for example, five companies (Pfizer, Merck, Hewlett-Packard, Johnson & Johnson and IBM) brought back 28% of total $312 billion repatriated. The top 15 repatriating companies accounted for over half of that total. This data indicates that reduced-rate repatriations may unfairly benefit a small group of large corporations that conduct business offshore, while imposing a competitive disadvantage on companies that keep jobs, facilities, and earnings within the United States.
Supporting Offshore Tax Havens. Most of the funds repatriated under the 2005 holiday came from "tax haven" or low tax jurisdictions, including Bermuda, the Cayman Islands, Luxembourg, and the Netherlands. Research is needed to better understand the reasons why these jurisdictions were favored, and to determine whether repatriation tax holidays encourage U.S. companies to do business in and financially support offshore tax havens with secrecy laws and practices that impede U.S. tax enforcement.
Encouraging Offshore Profits. The January 2009 CRS analysis determined that multinational corporations are attributing their profits to tax havens at a far greater rate than before the 2004 repatriation provision [became law]. Research is needed to determine whether companies are reporting greater offshore profits due to expanded offshore operations or instead due to greater reliance on tax avoidance schemes such as aggressive transfer pricing, and whether repatriation tax holidays encourage U.S. companies to engage in more offshore business, more offshore tax abuses, or both.
Josh
Matt
Eric
Brian
The piracy continues. Corporatocracy.
February 2, 2009 5:23 PM | Reply | Permalink
Washington is suffering from collective amnesia.
We tried eight years of tax cuts, and look where it got us.
Plus, the GAO recently determined that 2/3rds of American corporations paid zero in taxes over the course of the last decade or so. A full 94% of them paid 5% or less. Are they shooting for a permanent rebate scenario, regardless of profits?
Tax cuts for businesses don't create jobs. No company that wants to compete is going to base their decisions on tax rates in 2009. If they have a chance to make a deal worth a million dollars, for example, they aren't going to say no because their tax rates are this or that. X percent of zero is still zero. Cutting taxes just doesn't provide the incentive the Norquist crowd claims. Businesses are going to do their thing, with or without tax cuts. They have to. If they don't, they're going to lose the sale to the competition.
The stimulus package already has too many tax breaks. Collective amnesia has Washington in its grip.
February 2, 2009 5:46 PM | Reply | Permalink
Different issue. This bill is specifically aimed at large multinationals, who do pay taxes. The 94% statistic is misleading since many businesses are set up as partnerships or limited liability companies and pay no taxes (the owners pay), and many businesses are startups and don't earn a lot of money.
The repatriation is aimed at companies that have overseas earnings that are currently not taxed in the US. If the earnings were to be brought back, they would be taxed at the full corporate rate (currently capped at 35%). Most companies leave those earnings overseas because the US rate is higher than what they would pay in that foreign country.
This bill, by lowering the US rate for those earnings, gives the companies incentives to bring the foreign earnings back to the US and have them taxed here instead of in the foreign country. Why is that a bad thing?
February 2, 2009 5:56 PM | Reply | Permalink
If these companies have US owners (stockholders), then one way or another they HAVE to bring the earnings back to the US to distribute the profits in the form of dividends. It might be theoretically nice to have billions of dollars in a Dutch bank, but what good is it if you're here and you can't spend it?
February 2, 2009 6:07 PM | Reply | Permalink
Yes, but they can delay it for years, and with careful planning, it will never be taxed in the US. That money in a Dutch bank can be spent buying factories in Europe instead of the US.
Most multinationals have multiple layers of ownership, and the look-through rules take up pages of regulations. Money sent overseas is rarely owned directly by US companies or US shareholders.
By providing an incentive to do bring back the profits now, the taxes are paid in the US that much sooner.
February 2, 2009 6:34 PM | Reply | Permalink
Some companies never pay dividends. They just retain the earnings forever and let that cause their stock price to appreciate.
February 2, 2009 8:25 PM | Reply | Permalink
No major corporation ever, ever, ever pays that 35%. The effective tax rate for companies that actually do pay taxes is roughly 17.5%. But, again, the GAO report showed that a solid majority pay zero in taxes.
And, yeah, I know the repat thing is separate. But it fits a pattern: cutting taxes for the wealthy at the expense of this nation.
Pretty soon the only people paying taxes will literally be the middle class. That is, what's left of it. The gap between rich and poor keeps on growing and growing and growing, and we're losing the middle.
Another recent stat, brought to us courtesy of the IRS. The richest 400 Americans saw their wealth double under Bush, while their effective tax rates were cut by a third. They paid roughly 17.2%. My guess is that that number is all too generous. The IRS can only provide data on earnings it actually sees.
The vast majority of Americans have been played for suckers for a long, long time. Bush put this all into hyperdrive. But the bamboozling has been going on forever. It looks like Washington, again, is in the grip of collective amnesia. It didn't work. The tax cuts didn't work.
February 2, 2009 6:11 PM | Reply | Permalink
Beat me to it. That 35% crap is total crap and utter bullshit. I am sooooo sick of hearing that.
It should be a flat tax of 10% of gross for all corporations, period. If you can't pay 10% of gross for the privilege of doing business, you shouldn't be in business.
Freaking, gd, disgusting, right-wing propoganda machine fox entertainment hasn't paid a nickel in taxes in over 5 years. They make hundreds of millions of dollars and pay no taxes. Yet they keep spounting off the knowing falsehood about the 35% rate.
February 2, 2009 6:16 PM | Reply | Permalink
MichaelA says:
I agree. A number of years ago I got sick and tired of hearing Dick Armey babble about people paying 50% in taxes. Now since he was a U S Congressman, the insinuation was 50% Federal taxes.
At the time I was in the 28% bracket and I looked at my taxes for the prior year and here's what I found;
My wife and I had no large deduction and no dependents, so we took the standard deduction, saved a few bucks on IRA and Pension contributions (she had a little job with the school district) I'm retired on SS and a pension and we had some investment income, and in the end we paid 11% on our gross income which, if I remember was $63,000 at the time.
So forget Dick Armey's 50% babble, we didn't even pay the 28%.
February 3, 2009 9:05 AM | Reply | Permalink
I don't disagree. In fact, the 35% rate is the highest rate, so using the GAO statistic as a comparable is again misleading. It doesn't distinguish between companies who are in the 35% bracket and those that are in the lower brackets and have a lower statutory rate. People compare the GAO rate against the highest level corporate rate and assume that every company is getting a tax break. That's statistically invalid.
Conflating individual taxes with corporate taxes also is misleading. I agree that the tax code is hopelessly complicated, and people or companies with money can hire smart people to help lower their taxes. But this proposed addition to the stimulus has nothing to do with individual taxes.
February 2, 2009 6:40 PM | Reply | Permalink
You're making this needlessly complicated, and confusing yourself, IMO.
The GAO report looked at all American corporations and determined that 2/3rds paid zero taxes. It also concluded that 94% paid 5% or less. There is no possible way to spin that. The various tax categories don't mean a thing in that case. Most companies paid zero in taxes and just 6% of them paid more than 5%.
There are so many loopholes, subsidies, writeoffs and outright gifts in the system that America is easily the most business-friendly nation in existence. Republicans want to increase that lead. Dems seem willing to help them.
That's a scandal.
Another bit of proof. The percentage of the total tax pie held by corporate America is at its lowest percentage point, ever. Depending upon the sources used, that percentage runs from roughly 7-9%. Prior to the end of WWII, it was roughly responsible for 50% of the total tax pie.
Bush was able to shrink it considerably, and I'm guessing that trend will continue under Obama. Probably not at the same rate, but it will continue.
Again, pretty soon the only people paying taxes will be the middle class. The wealthiest individuals and corporations keep getting their tax burden slashed. The rest of us pay the price for that, along with future generations. Our Debt is nearing 12 trillion . . . and this country's infrastructure is falling apart.
We have nothing to show for those massive tax cuts. The wealthy do, of course. But we as a nation do not.
February 2, 2009 7:02 PM | Reply | Permalink
If the US is the most business-friendly country in the world, then why are so many earnings being sent overseas? If it is so business-friendly, then there is no need for this provision.
February 2, 2009 7:19 PM | Reply | Permalink
That's overly simplistic.
However, one of the biggest major impediments to business in this country is universal healthcare. Get universal healthcare and the jobs will start to return in some industries that were shipped overseas.
February 2, 2009 7:23 PM | Reply | Permalink
I guess I can't win. First I'm over-complicating the issue, then I'm being simplistic.
How would universal healthcare bring jobs back to the US? Has there been an economic study that tests that theory?
February 2, 2009 7:29 PM | Reply | Permalink
Yep,
For example, every car manufactured in the us has about a 2000 add on for healthcare costs, which japanese, german and other overseas companies do not have. Add in the healthcare costs for other products manufactured in the us and exported, what little there currently are. All of our competitors have universal healthcare, or in some instances no healthcare costs at all.
That one issue would help the us become more competitive overnight, increase exports and jobs. That's why corporate america is all for it.
Throw in walmart, which gets healthcare subsidized by the us taxpayers, so that they can put all competitors out of business while paying their workers peanuts.
Healthcare is the number one priority for corporate america and workers.
On the earnings issue, it is complicated by a host of issues. Claiming that "why is the us so business friendly if so many earnings go overseas" really makes no sense. The US is incredibly business friendly and it is so business friendly that it lets companies shovel their profits overseas, while taking corporate welfare from the us taxpayers. How much more business friendly does the us have to be?
February 2, 2009 7:36 PM | Reply | Permalink
What part of:
"While empirical evidence is clear that this provision resulted in a significant increase in repatriated earnings, empirical evidence is unable to show a corresponding increase in domestic investment or employment." Instead, as the CRS analysis shows, the top repatriating corporations closed down facilities and made massive job cuts."
Or:
"In addition, the score for the proposed repatriation provision is expected to project that it will cost the government billions of dollars in lost tax revenues."
Or:
"Data suggests that the 2004 repatriation tax holiday may have benefited only a narrow group of corporations that sent jobs, facilities, or funds offshore."
Do you think makes this good policy?
February 2, 2009 7:51 PM | Reply | Permalink
I don't know yet if it is good policy or not. I don't have a good sense of how much the effective tax rate will be reduced for the multinationals by enacting this provision. I suspect it's a company-by-company decision because each company has a number of factors that can impact their analysis.
In theory, it's better for these earnings to be taxed in the US than in another country, and it's better that the dollars from these earnings are in the US economy. If we have to provide an incentive for companies to bring those earnings back, then I'm generally in favor of it.
Providing tax breaks isn't always a bad thing, if there is an overall benefit to the US. The previous attempt at repatriating earnings was not as successful as everyone had hoped.
I worked with companies who did the analysis to determine whether their net tax cost would be reduced by bringing earnings back at a lower rate. Some companies brought some money back, others determined that it was better for them economically to keep the earnings overseas. There were some companies who tried to bring the money back, but they got tangled up in some foreign regulations that they couldn't resolve before the deadline passed. Some countries have restrictions on how much money can be taken out of their country, so it was not possible to repatriate the earnings.
February 2, 2009 8:03 PM | Reply | Permalink
I don't agree with the concept, but common, barely 1/4 of corporations in the US pay ANY TAXES! Foreign and domestically based corporations don't have a 35% nominal tax rate when we already know their real tax rate is 0%!
I'd like to see some teeth in this. Allow the amnesty, then tell all the corporations if they don't participate, we'll audit them and they can make the full tax contribution for their offshore earnings. Or better yet, we'll lock up their senior and executive managers in maximum security prisons for only about 2 months, on theft charges.
February 2, 2009 5:47 PM | Reply | Permalink
Nearly all the multinationals (who are the beneficiaries under this proposal) are already under perpetual audit, so you won't change their behavior by threatening them with the IRS. Most of the domestic Fortune 1000 have permanent space for their IRS audit team, and every single year is audited.
February 2, 2009 6:42 PM | Reply | Permalink
First, let me start by saying that while I agree with the idea behind taxing the repatration of earnings, the time and effort to comply with Subpart F is awful. People have made careers out of mastering the ins and outs of just this one tax provision.
Like I mentioned, the concept is sound - tax earning that a company has off-shored when the company brings the cash back to the US. This is intended to discourage the use of the off-shore tax shelters because if you want the money in the US, there is not tax benefit and likely a higher rate because as others have mentioned, many companies are paying nothing and the flat 35% is a higher rate than most companies pay.
That said, a one time (ONLY) exemption to bring the cash back into the US during an economic downturn makes some sense. With the exemption being limited, it helps remove the incentive to offshore future profits because the Subpart F cost will still be there. Second, if the parent company is struggling with cash issues, I would rather see that cash be put to use to prop up the US company. If Bank of America brings the cash back and only uses it to prop up their balance sheet so that they need less TARP money - good. If it keeps the company making it's payroll - good. I'd rather help a company through a rough patch with tax dollars than pay for the unemployement for all their employees, not to mention the personal costs for the individuals to go through the trauma of the job loss.
I work with a small tax firm that has a handful of clients that would be able to take advantage of this. These are little family owned companies that have been investing their foreign income overseas rather than the US because of the added tax costs. Not to say that they would create more jobs if they could bring the cash back, it is very possible that the cash would go into the IRA of the owner, but my guess is that some companies need the cash to keep up payroll.
Long story short, I think the short term costs would seem to be worth it as long as it has a very short life. The time frame is very important because it is what keeps companies from thinking they can invest more overseas and just bring the money back again later. Problem with W's plan is that everyone kept expected the rates to stay down.
February 2, 2009 6:03 PM | Reply | Permalink
I think a bigger win would be to eliminate Subpart F altogether, although that would certainly not be a short-term fix! To me, Subpart F is one of the primary reasons the tax code is as complicated as it is, and we could get rid of a lot of tax headaches by just cutting it out of the Code.
The US is one of a very small number of countries that tax a company's world-wide earnings. Most countries only tax income earned within their borders. To eliminate any double-taxation, the Congress has allowed multinationals to credit their US taxes with the taxes paid to other countries (I'm guessing you know this already, so this is directed more at other readers). The foreign tax credit and the arbitrage with the US tax rates against those in other countries is a huge game that absorbs billions of dollars of time and effort.
If we were to eliminate Subpart F, the entire tax code could be restructured so that the revenue loss would be neutralized.
February 2, 2009 6:50 PM | Reply | Permalink
This is one of the reasons why I post comments, because I learn something.
I did not know that fact about worldwide taxation of US companies. Now, don't tell me that the us does not tax companies earning income in the us. That would be the kicker if true.
February 2, 2009 7:59 PM | Reply | Permalink
Heavens no! The US NEVER misses an opportunity to tax income:). Look at Tom Daschle! He's being taxed on non-cash income.
February 2, 2009 8:06 PM | Reply | Permalink
And the Dems cave on the tax-cut talk for corporations with a paticular bend toward favortism to companies that outsource jobs, WoW!
What is a "progressives" - it is a DLC Democrat that competes with Republicans for corporate lobbyist money. Dems compete for the crooked dollar. Their DINOs - Dems in name only. Obama is just another Bush. And here Obama has campaigned on NOT giving tax cuts to corporations. Just another FISA like bill trick now that he is savely elected to office.
February 2, 2009 6:12 PM | Reply | Permalink
Could you point me to the section of the tax code that rewards outsourcing with reduced taxes? I'm beginning to suspect this is a talking point that people have picked up without understanding the underlying law, because I can't find it. Help me understand how the tax code has a specific provision that favors outsourcing.
February 2, 2009 6:55 PM | Reply | Permalink
I've actually heard the same thing repeatedly. I am not a tax lawyer, but conceptually, a business wouldn't have to pay matching payroll taxes on an overseas worker, or healthcare benefits, or any other benefits, including over-time. Also, they could off-shore the entity in its entirety that controls the worker and have the work done, without a charge to the american corporation, while making profits off the work performed. In fact, they could set up a shell in a country with no taxes to funnel the profits through generated by the overseas worker. I'll think about some other theories.
However, you know damn well that if it wasn't a huge break to the corporations, they surely would not be outsourcing overseas. I still think there should be a major tax on overseas workers to help american workers be more competitive and to stop the outsourcing.
February 2, 2009 7:01 PM | Reply | Permalink
Aside from the tax code, there are also Commerce Department programs that actually pay American corporations to expand their businesses overseas. McDonalds, for instance, is paid to advertise its products internationally. As in, you and I pay for that. Obviously, that should be a normal part of their business expenses, and tax payers should not put up a single penny for it. But, that's not the case.
There are hundreds of similar programs.
Hugely profitable companies receive outright tax dollar gifts for doing what they should be doing themselves.
Exxon, which set and then broke its own highest profit records for three years in a row, received outright subsidies for drilling. No corporation in history has ever been as profitable, and they received money from you and me to do what they should do themselves. On their own dime.
The level of corporate welfare in America is scandalous. The regressive tax code makes that all the more unconscionable.
February 2, 2009 7:10 PM | Reply | Permalink
The corporate welfare really is outrageous. We need corporate welfare reform and hopefully obama's team is on this horrendous issue.
Also, no write-offs, period. Tax on gross revenues and that's it. You can't take a family of four to a stupid football or baseball game because of the corporate welfare that allows the corporations to write-off all the dollars funnelled into luxury boxes and such. No write-offs, 10% off the gross and that's it.
I still can't get over the fact that fox entertainment has paid zero dollars in taxes for years and years. How is that possible?
February 2, 2009 7:15 PM | Reply | Permalink
So I'm guessing that you would have supported Ronald Reagan's first submission to Congress for tax reform? That's exactly what he tried, including eliminating the deduction for mortgage interest. Individual taxes were capped at 20%, if I remember correctly, and all corporate and individual write-offs were eliminated.
But by the time the bill escaped Congress, we had the Tax Reform Act of 1986, with millions of provisions written in by members of Congress such as Dan Rostenkowski. He was famous for putting in exceptions for "corporations formed under the laws of Delaware on x date with a stock price of y on z date". I used to work for one of the companies that got a Rosty tax exception.
True corporate reform will never happen unless the lobbying industry is eliminated and members of Congress get the discipline to ignore their constituents. Won't happen.
February 2, 2009 7:35 PM | Reply | Permalink
Actually, I was, oh my gosh I hate to say it, a republican in the early 80's. I was all for tax reform and compassionate conservatism and all that stuff. I was holding my breath for bush I, because I thought the b-movie actor was an awful buffoon and bush I let me down on domestic policy. On foreign policy, he was great.
I actually am for a tax rate without deductions, commensurate with ability to pay. I would not cap at 20% on the highest incomes. As adam smith said, the people who earn the most from society should contribute more because they are benefiting more from the services provided by society.
I also agree on the elimination of the lobbying industry. Corporate america wants its elimination as well.
February 2, 2009 7:44 PM | Reply | Permalink
I was actually hopeful when TRA '86 was introduced. I tend to be more fiscally conservative, but I'm a raging social liberal so I couldn't stomach most of the current Republicans.
I think that railing against specific tax breaks is attacking the symptom and ignoring the underlying problem(s). The tax breaks occur because (totally IMO) (a) the US taxes income on a worldwide basis, (b) the necessities of the current election system prevent really good, normal people from running for office, so the people who do win are unable to exert any discipline because they are always looking to the next election, and (c) Congress uses the tax code as a social weapon to elicit "preferred" behavior and they can't keep their mitts off the tax laws when they want to manage behavior.
As you might have guessed, I work in the corporate tax area, so many of my perceptions about the business community are tainted toward the tax laws. I agree there are hundreds of other programs in different US agencies that provide incentives for companies to reduce their cost of doing business at the expense of the US worker. I got into this thread because it talked about a specific tax provision, but it is important to keep the bigger perspective in mind.
February 2, 2009 7:55 PM | Reply | Permalink
Companies outsource because the cost of labor is significantly reduced, not the taxes. Hourly wages outside the US is a fraction of what they are in the US. Health care is one factor in that, but most countries have some sort of a payroll tax.
The US tried to incent production of goods in the US and US territories through the now-defunct DISC and FSC laws. The World Trade Organization ruled them illegal, and the US had to change the tax code. If the US tried to change the tax code to prevent outsourcing, or overseas expansion, they would quickly run into trouble with the WTO. We can no longer operate as if we are the only economy that matters.
February 2, 2009 7:27 PM | Reply | Permalink
1. Not entirely correct on the outsourcing.
2. Ever hear of Non-tarrif barriers? They get shoved in our face all over the world, we just need to be more inventive.
3. Not entirely true on labor costs because you have to figure in transporation costs. I still for the life of me can't figure out how it is cheaper to make a towel in china or vietnam with a freaking machine no less and then ship it what 12,000 miles to the us and it is cheaper? How is that possible, other than if there is some bullshit going on that we really don't have a clue about. Same with socks and other textiles. They are all made by machines today and throw in the transportation costs? That just defies logic in my opinion.
February 2, 2009 7:48 PM | Reply | Permalink
I hear you on the non-tariff barriers. I think the US tried to use that argument with the WTO, but it didn't go anywhere. The US fought furiously for over 10 years to keep the DISC/FSC incentives, but no go. We weren't helped by the animosity the rest of the world feels toward the US economy (not entirely the fault of the Bush presidency).
I was thinking about the labor for back-office operations, IT and help-line support, development of intellectual property, and other jobs that don't produce anything tangible. Those outsouced jobs don't have to factor in much besides the labor and training costs. Office furniture, computers, etc. have to be purchased/leased whether the jobs are in the US or in Ireland, so there isn't a significant additional cost.
I agree about outsourced jobs that produce tangible goods - the transportation costs have to be factored in. Clearly most companies have determined that it is a better deal to have the work done outside the US.
February 2, 2009 8:15 PM | Reply | Permalink
There isn't anything specific that allows for a tax break for outsourcing. It has to do with the structure of the corp and, as you had noted, the worldwide taxation of the US. A company can save the tax dollars by making sure that the non-US company has all the income. If the non-US corp were to have US workers, they would have US earned (read taxable) income. Therefore, to save the US tax and save on labor costs, it's cheaper to move everything outside the US.
That was the whole point of Subpart F to begin with, to prevent US companies from selling their product/service to their sub at cost and having the non-US company take all the profits. The ease of outsourcing everything is just the current way around the tax law.
February 2, 2009 8:37 PM | Reply | Permalink
I agree. It's very tangled, and there are a lot of smart people who study every nuance of the tax law to find ways around it.
I need to think through your point that outsourcing is another way to avoid the Subpart F rules. I hadn't thought of that, and it's very intriguing.
Subpart F brings passive income back to the US through a deemed dividend, but income from active operations is deferred until it is paid in a real dividend or the foreign company dissolves. There might be something I've missed (I'm not expert in international tax), but outsourcing usually generates active income, so I haven't worked out how it gets around the Sub F rules. Maybe there's something in the Foreign Tax Credit rules that I'm not considering.
February 2, 2009 8:55 PM | Reply | Permalink
My point was that a company can use the outsourced labor to help avoid any active US income. If it is set up as an independent company, as long as the sub doesn't have permanent establishment (property, employees, etc) in the US, they are a non-US company and would avoid US tax. As long as that company is pricing the transactions back to the US co right, it would be like any other foreign company making sales to a US company without a US liability. The US taxable income comes from income created here, not necessarily sales made here. This has also given rise to a huge number of jobs in the transfer pricing industry so maybe there is some small US benefit to this craziness.
There are other ways to generate subF tainted income besides passive income (certain related party transactions, inter-foreign country sales among them). You are correct that the subF income is taxed as a deemed dividend, but it does not need to be all passive income.
I don't see much to have issue with in the Foreign Tax Credit rules. In my experience, most countries have similar FTC rules as we do in the US, it is just up to the local government on who they believe gets the right to tax the income. For example, if an employee is working in Mexico, both the US and Mexico agree that Mexico gets first crack at the taxes and the US gives credits for these taxes paid. There are also some exceptions, but what the local laws don't agree on is typically covered if the two countries have a tax treaty in place.
February 2, 2009 9:21 PM | Reply | Permalink
Yes - I see your point now. I agree. Thanks for clarifying.
I wonder if this has gone full circle. If the US tax code can provide enough incentives to that company that is contemplating outsourcing, then other costs being equal, it is a good thing to provide that incentive. (I realize that other costs aren't equal, which is the point I made elsewhere that the overall cost has to be determined to make the go/no go decision to outsource).
But the US can't control the other costs that a company has to incur if they outsource jobs. They can control how the income is taxed, so this provision is intended to help in leveling the playing field. That seems like a fairly weak carrot to offer.
February 2, 2009 9:39 PM | Reply | Permalink
The Big Business lobby is still active, I see. Is there any particular facts in the recent past that would lend credence to the idea that Big Business will deal from the top of the deck?
I didn't think so.
February 2, 2009 6:21 PM | Reply | Permalink
5.25% -- down from a normal rate of 35%, give me break, even the working poor class citizens don't get this deal.
Why don't Dems just fix the tax loop holes, oh I guess because the Republicans would spit in their faces, but than again why did Obama say he would up taxes on business and lower then for middle class. Bush's tax cuts for the wealthy was quite the ugly ordeal that caused deficits and now we see how little that really means to Obama.
February 2, 2009 6:25 PM | Reply | Permalink
But if 94% of companies only pay at a 5% rate, how is this an incentive at all?
As others noted above, and I agree, 35% is a statutory rate, not the actual rate at which companies pay taxes.
I'm not sure the data is available, but I would like to know what is the effective federal tax rate for multinationals. Then I would want to compare that against the incentive rate that is in this proposal to see if it a true incentive or a tax give-away to corporations. Right now we're just picking up random numbers and comparing them to a different set of random numbers, then drawing conclusions.
February 2, 2009 7:41 PM | Reply | Permalink
Now, that I agree with. It appears to me to be another corporate give away.
February 2, 2009 7:51 PM | Reply | Permalink
Most liberal senator, hahahahahaha.
February 2, 2009 6:29 PM | Reply | Permalink
Show me the job, then you get the incentive.
February 2, 2009 7:01 PM | Reply | Permalink
People here are gonna hate me for saying this but, there is some truth to more jobs available if the corporate rate is lowered.
One way U.S. companies pay much less than the actual 35% is because they shelter through loopholes in the tax code their earnings by claiming them overseas in countries like those listed in the post.
Ireland has taken extreme scrutiny from many of the European countries because they gave corporations that set up shop there a rate of 10-12.5%. This brought to Ireland a huge influx of well paying jobs. They went from the poorest country in Europe to one of the wealthiest. This explanation of their growth is tough to argue against.
Here's what I would propose, any corporation willing to keep 90% of their workforce and subcontracted workforce in the U.S. would be offered a 5% minimum tax rate. They would need to think of every possible loophole and get it sealed shut before this thing got signed.
But......I wouldn't give this concession for nothing. Allow the Bush tax cuts on the wealthier and the estate tax to expire. Possibly even raise the upper rate by an additional 2-3%. Ireland's progressive tax rate is something like 20% for anyone under 24k euro and 43% for everyone else.
We might be in a world of hurt until the companies begin to relocate back to the U.S. as our income from corporate taxes would drop by about half if the GAO reports stating about 2/3rds of US companies don't pay taxes is true. This would be partially offset by the increase in personal tax liability and estate tax increase.
Anyways, it worked for the Irish. No reason we couldn't get our tech jobs back using a similar incentive.
February 2, 2009 8:52 PM | Reply | Permalink
Someone PLEASE explain to me WHY IN THE HELL we would include tax cuts that were already proven to NOT WORK.
February 2, 2009 10:38 PM | Reply | Permalink
Cutting of taxes for good.
March 15, 2011 4:03 AM | Reply | Permalink
promo sfr
March 15, 2011 4:09 AM | Reply | Permalink