A recent report from the Senate Permanent Subcommittee on Investigations attempts to point out the “complex structure, dubious transactions and legal fictions” corporations use to “shield profits”. This investigation, spearheaded by Senator Carl Levin (MI), points out what is obvious to many in the business world; the “complex” and “dubious” nature of the U.S. corporate tax structure needs a systematic overhaul.
The statement from Senator Levin for a September 20th briefing raises concern over a number of issues regarding ways international corporations keep profits overseas, saying that “hundreds of companies” take part in offshore manipulations to defer billions of dollars in U.S. taxes.
Without a doubt, the U.S. corporate taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code is overly complex and in need of an overhaul. It is also exceedingly punitive, particularly for multinational corporations, as it combines the industrialized world’s highest corporate rate with an antiquated system of international taxation that penalizes companies for doing business abroad and further penalizes them for bringing those foreign profits home.
Instead of punishing companies for their response to the incentives the tax system creates, we should reform the tax code. Our outdated system lacks transparency and leaves opportunities for things like transfer pricing, over which Senator Levin raises concern. It leaves the U.S. in an uphill battle against foreign competition.
For years, the countries of the world operated under the “worldwide” system of taxation that we still use today. But times do change. A vast majority of our major trading partners and competitors (27 of the 34 OECD countries) have moved to a “territorial” form of taxation from the “worldwide” system. Seventeen countries have made the move in the last decade alone.
The territorial system relieves the cost of compliance, and simplifies and clarifies the code, by recognizing that taxation ends at the border.
For more on the changing landscape of international taxation, and how the U.S. can once again become competitive, see our latest study.
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