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Your Take: New Tax Rules for Business’s with International Profits?

Posted By Jim On 07/27/2012 @ 7:11 am In Your Take | 13 Comments

The United States’s method of taxing worldwide income is clearly broken. Bloomberg [3] reported that U.S. companies added $187 billion in untaxed overseas profits over the last year, boosting the total profits abroad to around $1.2 trillion. The list of companies doing this is a who’s who of name brands – General Electric, Pfizer, Apple, Google, etc.

If you aren’t familiar with how this works today, it’s actually quite simple and obviously broken. The United States taxed corporate profits at 35% with a credit given for taxes paid to other governments. So if your company earned $100 abroad and you were taxed $10 in that country, the United States would only want $25 ($10 credit for amounts paid abroad). You would only owe taxes on that money if you were to bring it home and that’s where things break. If you keep the money abroad, you owe nothing. What do you think happens? They keep it abroad. If companies need cash, they just borrow it.

One clever way to shelter taxes is coined the “Double Irish With a Dutch Sandwich [4]” and it’s really clever.

You make it worse when you offer amnesty, as they did in 2004, because then corporations will stockpile until the next amnesty. It’s why it’s so important that we take a hard look at this and I’m not sure what we should do. Romney wants to, among other things, move to a territorial system, where we don’t tax on earning abroad and Obama wants to eliminate the deferral provision of the current tax rules. In a territorial system, the government would only tax businesses on income earned from sources within our territory, the United States. We currently have what’s known as a worldwide taxation system, where the United States collects taxes on income earned worldwide.

I’m not sure what we should do because there’s good arguments for both sides. I think that corporations should be taxed like people, so it should be worldwide, but the 35% tax rate seems punitive. When you read stories about how GE or Exxon paid 0% in taxes, it’s because of the strange ways in which international income is treated (and the tax breaks they get for things like oil exploration). I also understand that by taxing worldwide, rather than by territory, American businesses may be at a slight disadvantage… though you wouldn’t be able to notice it with the mega-corporations hoarding $1.2+ trillion.

What do you think should be done?


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[3] Bloomberg: http://www.bloomberg.com/news/2012-03-02/cash-horde-expands-by-187-billion-in-untaxed-offshore-accounts.html

[4] Double Irish With a Dutch Sandwich: http://www.nytimes.com/interactive/2012/04/28/business/Double-Irish-With-A-Dutch-Sandwich.html

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