A Basic Lesson on the U.S.’s Corporate Income Tax System
June 11, 2014
This week, Americans for Tax Fairness, released a report on how much they believe the U.S. government would lose in revenue over 5 years if Walgreens were to merge with a Swiss company and move their headquarters to Switzerland.
The report claims that the deal would save Walgreens $4 billion in taxes over five years it would have to pay to the U.S. government, but it worries that Walgreens “would continue to take full advantage of all the benefits it gets from operating in America, where almost all of its $72 billion in annual sales and nearly $2.5 billion in profit are generated.”
This concern is based on a misunderstanding of how the U.S. corporate income tax system works and how an inversion would affect Walgreens.
Under current law, corporations that are based in the United States pay the 35 percent corporate tax rate on their profits earned in the United States and earned overseas. Profits that U.S. corporations earn in the U.S. are taxed by the U.S. government in the year in which it was earned.
Overseas income is treated a little differently. First, the income is taxed by the foreign country in which it earned its profits. Those profits are taxed again by the U.S. government when those profits are brought back (repatriated) to the United States. Corporations can defer this additional tax indefinitely as long as that income is reinvested in ongoing overseas business activity.
For Walgreens, the expected tax savings comes from the treatment of overseas income, not its domestic income. Any income it earns in the United States as a Swiss company would continue to be taxed at the 35 percent U.S. corporate income tax rate. The inversion would only allow Walgreens to freely move its after-tax foreign profits throughout the world without triggering the additional ATF-estimated $4 billion tax charge by the U.S. government.
This estimated tax savings for Walgreens assumes that they were ever going to bring those earnings back to the United States at all. Walgreens could instead choose to build their international operations.
Either way, ATF does not have to worry; Walgreens will continue to pay the U.S. corporate income tax of 35 percent on its $2.5 billion in annual profit earned in the United States. It will also continue to pay its “fair share” to other countries in which it earns money as well.
More on the U.S.’s world-wide corporate tax system: here