Every year dozens of large multinational corporations make huge profits in the lucrative American consumer market. But thanks to clever profit shifting, they can avoid much of their US corporate tax obligations. In fact, a study by the Coalition for a Prosperous America (CPA) found that the US’s 500 largest publicly traded companies avoided paying around $ 97.8 billion in taxes to the US Treasury Department in 2019.
The European Union is facing similar problems – and is quite upset that Alphabet is going to go, -0.59%,
Amazon AMZN, + 0.22%,
and other large digital companies are constantly shifting their profits to tax havens.
In response, the Organization for Economic Co-operation and Development (OECD) is negotiating an agreement that requires a minimum global corporate tax of 15%. At the same time, the OECD is also calling for a “Pillar 1” tax shift, in which the 100 largest corporations in the world finally have to pay taxes in the countries in which they actually sell products.
Taxed where they sell
Essentially, the OECD relies on a system of “sales factor distribution” (SFA). This means that a company has to pay a fixed tax rate on its profits – and can no longer move any part of that profit to a tax haven. Pillar 1 may not be perfect, but it is the first approach in a long time that could actually help put domestic businesses on a more competitive footing.
It is good that Pillar 1 recognizes the shortcomings of the current international tax system. And it is responding by introducing a new tax approach based specifically on a company’s sales – and profits – that would destroy the effectiveness of tax havens for good.
Unfortunately, the latest version of the Pillar 1 proposal contains some unhelpful limits for its application to overseas and US multinationals. Specifically, the OECD proposes that Pillar 1 should only be imposed on multinational corporations with an annual turnover of over 20 billion euros – the equivalent of 23 billion US dollars.
This is unfortunate, because many companies that have outsourced their production to China are making massive profits – even if they generate less than 20 billion euros annually. In response, Georgia Republican MP Drew Ferguson interviewed Treasury Secretary Janet Yellen at a recent House Ways and Means Committee hearing. Ferguson wanted to know how American Pillar 1 multinationals would be affected compared to their Chinese counterparts.
Ferguson’s point of view is well taken. Congress should be concerned about any lack of reciprocity between US taxation of foreign companies and taxation of US companies by other countries. But Congress should be even more concerned that multinational corporations have been using tax havens for years – and paying a far lower effective tax rate than many hard-working domestic companies.
When the Coalition for a Prosperous America investigated corporate profit shifting, it found that multinational corporations only pay an effective corporate tax rate of 8.7%. That is far less than many domestic companies.
Such a large difference in effective tax rates has proven to be a serious disadvantage for local businesses that actually set factories and jobs in the United States. This is why a “sales factor” system – as negotiated by the OECD – would be such a turning point. It could finally put US firms on a more even footing with their massive multinational rivals.
Unfortunately, the current Pillar 1 proposal with multinational profits is still too generous. It gives too much leeway to the largest 100 companies, saying that only companies whose profits account for 10% or more of annual sales would be subject to Pillar 1 at 21% corporate income tax.
As Congress is considering the OECD’s proposal, it should insist on the full and widespread use of the “revenue factor allocation” – and not on an arbitrary Top 100. This could help reduce or eliminate loopholes for foreign companies. including those with similar “low profitability” that compete fairly successfully in the US market.
Congress must give priority to protecting domestic businesses – those that actually hire and employ US workers. As Washington is looking at Pillar 1, it should have a tax system that helps domestic businesses, not their multinational competitors.
The OECD’s Pillar 1 is not perfect, but it offers the first tangible step towards greater tax equity for US domestic companies that are constantly fighting a tough battle against global multinational corporations.
David Morse is a director of tax policy for the Coalition for a Prosperous America Education Fund. Follow him on Twitter @CentristinIdaho.
What a global minimum corporate tax rate of 15% means for the stock market
This is a now-or-never moment to make US manufacturing more competitive
The US must put the vital semiconductor industry above Wall Street’s interests