Competitive Tax Disadvantages Faced by U.S. Multinationals
Special Academic Paper
This study evaluates some of the various tax factors that might affect the United States’ ability to compete effectively with other industrialized nations. United States and foreign taxing authorities differ primarily with respect to the way foreign source income is taxed and the way tax incentives are granted. Many of the U.S. tax provisions affecting foreign source income of U.S. multinationals owe their genesis to the Revenue Act of 1962. But such provisions may have outlived their usefulness and may now be counterproductive in the economic environment of the 1990s. The areas of tax differences include the following:
2) Loans between a parent and its foreign affiliates;
3) Un-repatriated foreign earnings;
4) Federal tax burden on corporate earnings;
5) Research and experimentation (R&E) tax incentives;
6) Relative stability of revenue laws, and;
7) Rebates of excise taxes on exports.
The study illustrates that U.S. tax laws may put U.S.-owned foreign affiliates at a cash-flow disadvantage when compared to other industrialized nations such as Japan and West Germany. Even though such cash-flow differences will tend to even out over the long-run, real differences over the short-run may act as an economic impediment to U.S. competitiveness internationally.
To remedy counterproductive tax provisions, U .S. policymakers should:
1) Recognize tax sparing under applicable tax treaties;
2) Repeal dividend characterizations on loans to U.S. parents from U .S.-owned foreign affiliates;
3) Offer additional federal tax incentives to lower the after-tax cost of research and experimentation; and
4) Refrain from raising the effective corporate tax burden above that of our trading partners.