The Simple Fix to the Problem of How to Tax Multinational Corporations — Ending Deferral
http://www.epi.org/publication/how-to-tax-multinational-corporations/
Tax reform is deadlong live tax reform appears to be the message coming out of Washington these days. On Tuesday, February 25, Sen. Mitch McConnell appeared to close the book on tax reform in this Congress when he told reporters, I think we will not be able to finish the job. The next day, Rep. Dave Camp, the chairman of the House Ways and Means Committee, unveiled his long-awaited comprehensive tax reform proposal. Later in the day, House Speaker John Boehner was asked about the Camp tax reform plan and replied with blah, blah, blah, blah.
However, while comprehensive tax reform may be on hold for a few years, reform of business taxesthe corporate income taxis still being considered by the Obama administration and many in Congress. The contentious aspects of reforming the corporate income tax include even such basic issues as how to tax the profits of multinational corporations (MNCs). Some argue that the United States should adopt a territorial approach to taxing U.S. multinational corporationsthat is, not taxing the profits they earn from overseas operation (or, in the jargon, their active foreign-source income). Others argue that the U.S. should move to a pure worldwide system in which active foreign-source income is taxed at U.S. rates as it is earned. The current U.S. system is between these two approaches: Active income of foreign subsidiaries of U.S. parent multinational corporations is taxed only when it is repatriated or paid to the U.S. parent corporation as a dividend. Not imposing taxes on income held abroad is known as deferral in that taxes are deferred until the income is repatriated.
This issue brief examines this contentious issue. The principal findings are:
Rules to protect the U.S. corporate income tax base (that is, to ensure that corporate earnings are indeed subject to taxation), known as subpart F, have been weakened over the past several years by legislative and rule changes, shrinking the corporate income tax base and reducing revenue raised from corporate taxes.
About 60 percent of multinational corporations foreign-source earnings and profits come from countries in which the firms have little business activity, evidence that these MNCs are using tax havens to avoid paying the U.S. corporate income tax.