5 Points You Need to Know Ahead of the Ways and Means Hearing on Profit Shifting

June 12, 2013

Tomorrow, the full Ways and Means Committee will meet to discuss “Tax Havens, Base Erosion, and Profit-Shifting”

From the website:

“The hearing will examine different tax planning strategies used by multinational corporations to shift income out of the United States and into low-tax jurisdictions. The hearing also will consider when profit shifting truly is eroding the U.S. tax base and when companies are shifting profits amongst different foreign jurisdictions without affecting U.S. tax collections.”

Building on the discussions at the Apple hearings last month (more on Apple here, here and here), this hearing will further debate the issue of the taxation of multinational corporations.

Politicians have the tendency to over-simplify the issue of the taxation of multinational corporations and miss key facts.

Here is a list of things you should know before the hearing:

1. The United States has the highest statutory corporate income tax rate and one of the highest effective corporate income tax rates in the world

At 39.1 percent (federal plus state), the United States levies the highest corporate income tax rate in the world. This is 14 percentage points higher than the OECD average. And even though our tax system is cited as having many loopholes and deductions that lower the tax burden of corporations, we also have one of the highest effective tax rates at about 27 percent.

2. Corporations pay more than $100 billion dollars in taxes to foreign governments

Although both politicians and the press continually repeat the myth that corporations hide their income overseas to avoid taxation, in reality corporations pay a substantial amount of taxes to foreign governments. Plans to increase the taxes on this income further risks double-taxing these overseas profits.

3. Corporations not only pay taxes once, but twice on their foreign income

Corporations first pay income taxes to the countries in which their profits were earned. Then when they repatriate their income to the United States, they are taxed again at the U.S. corporate income tax rate (minus the foreign tax credit). For example, if a subsidiary of a U.S. firm earns $100 in profits in England, it pays the British income tax rate of 23 percent (or $23) on those profits. Then when the profits are brought back to the U.S., the firm is required to pay the difference between the U.S. rate of 35 percent and the British rate of 23 percent—$12. Between the two nations, the U.S. firm will have paid a total of 35 percent in taxes on those foreign profits.

4. The United States is one of only a few countries that taxes corporate income no matter where it is earned

The U.S. is one of the only countries left that taxes income on a world-wide basis. For the past couple of decades, realizing the economic benefits, countries throughout the world have been moving to a “territorial” tax system. A system that only taxes the income of corporations in the country they earned those profits.

5. The United States’ world-wide tax system traps an estimated $2 trillion in corporate income overseas

When corporations want to repatriate their income earned overseas, they have to pay the difference between the taxes paid in the foreign country and the taxes owed in the United States. This “toll charge” makes bringing profits back to the United States much more expensive than it otherwise would be, trapping capital overseas and preventing the free-flow of capital back to the U.S.


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