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Corporate Taxes

The Current State of International Corporate Taxation

Summer of this year, The New York Times published an excellent short article by David Leonhardt concerning the American corporate tax system and the potential for its reform in the near future. One of the key points in the piece is the remarkable variation in the corporate tax rates for businesses in different sectors. Businesses with easily mobile products, such as concentrate utilized to make sugary beverages, can easily shift operations to low-tax jurisdictions. Companies with intangible products like software manufacturing can structure their accounting so that revenues are reported in low-tax jurisdictions.

According to research from financial study company S&P Capital IQ (and mentioned by the New York Times), tax rate reports based on local, state, federal and even foreign rates on the following businesses were (in descending order): FedEx 23%, ebay 19%, Google 17%, G.E. 16%, Apple 14%, Boeing 7%, and Amazon with 6%. These tax rates are astoundingly low considering that the nominal U.S. corporate tax rate is currently 35%, a figure that excludes both local- and state-imposed taxes.

Conversely, companies with brick-and-mortar operations, typically sellers, pay higher gross tax rates: Wal-Mart, 31%; GAP, Best Buy, Whole Foods and CVS each ended up with rates nearing 40%. Exxon Mobil, due largely to rigid foreign tax rates, paid 37%. Small businesses that don’t have international operations are unable to acquire an advantageous tax rate by routing revenues to a low-tax jurisdiction, although they can of course select to integrate in a specific U.S. state to mitigate taxing.

The issue with the variation in what should be an invariable corporate tax rate is that the tax code is pretty much selecting winners and losers as opposed to leaving that choice to the free market. It is difficult to come up with an explanation for why the maker of soft drinks need to be taxed at a lower rate than the seller of soft drink. There is significant consensus throughout the political board that the nominal corporate tax rate ought to be less (maybe to 25%) and specific deductions and tax credits eliminated; although, whether that initiative should be revenue-neutral is going to be the topic of controversy.

While both parties support a new tax code among political leaders, lobbyists could possible complicate issues. A coalition of company groups called Let’s Invest for Tomorrow (LIFT), which consists of huge names such as Caterpillar, Coco-Cola, and Proctor & Gamble, wants to move the U.S. to a “territorial” tax system. Under this system, the U.S. would only tax the part of a business’s earnings that is received as a direct result of U.S. operations. Under the current “worldwide” method of taxation, the U.S. imposes tax law on American businesses based on their int’l income but will grant them credit for what they paid to overseas governments.

The issue with LIFT’s proposition is that it permits large entities to simply move their operations to low-tax foreign jurisdictions, while less prominent domestic businesses pay far higher rates. Obviously, convincing arguments about policy can be lower tax rates, but it is antithetical to progressive tax to tax large, U.S.-based international companies at lower rates than smaller sized ones with exclusively domestic operations, particularly when multinational companies heavily depend on benefits provided by the United States (a court system with well-known legal precedents and a vast, regulated safeties market, to name a few). The short article understands that a compromise is possible; the U.S. might enforce a territorial system but enforce a minimum tax on United States companies. So if an American soda-maker transfers their operation to Ireland and pays a tax rate of 3%, the U.S. can potentially enforce a tax on the company’s earnings to the point that the company pays a pointed out minimum rate (for example, 15%) on its international profits. Congressional leaders have indicated that tax reform may be an essential part of the agenda in 20

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