Our tax system should end the discrimination against US domestic companies in favor of foreign or multinational businesses. A fair, territorial system based upon formulary apportionment will tax the profits of companies as the price of access to US consumers. American companies can export tax free. Tax haven abuse will be nearly eliminated. Our companies should not be taxed more than global companies with armies of accountants and lawyers. Sign our petition to tell Congress that we need a Sales Factor Apportionment for a truly America First tax system!
An Explanation of Sales Factor Apportionment
June 26, 2018 (Short Version Memorandum) Click here to view as PDF
Our tax system should benefit U.S. domestic companies. Or at the very least, it should never put our companies at a competitive disadvantage in world markets. In the last eight years, Congress finally recognized there was a problem. American Multinational Enterprises (MNEs) were using tax planning on a massive never-seen-before scale to keep up with foreign corporations. Domestic Corporations had few mechanisms to stay competitive. The Tax Cuts and Jobs Act (TCJA) reform of international taxation rules ended up being limited and complicated. But it set the opportunity for a better follow-up reform.
Sales Factor Apportionment is the method used by many states to tax the income of multi-state corporations. This same method should be part of a Destination-Based taxation model to streamline and simplify international taxation. The TCJA attempted but failed to significantly reduce tax avoidance. Income shifting to tax havens and other complicated loopholes remain tax strategies under the tax code. Destination-Based Sales Factor Apportionment (DBSFA) virtually eliminates unfair tax advantages harming domestic companies, achieves actual territorial tax and encourages U.S. investment, employment and exports.
- American Corporation sells $10 billion of its products to customers around the world.
- $6 billion of those sales (60% of total sales) are made to U.S. customers.
- American’s worldwide profit is $1 billion, therefore, $600 million of that profit would be taxed as U.S. profits.
- Where the company claims it earns its income would be irrelevant. U.S. taxable income would be determined solely by the percent of that company’s worldwide sales made to U.S. customers. Foreign MNEs would be taxed the same way on U.S. income, leveling the playing field between domestic firms and foreign and domestic MNEs.
Experts agree the TCJA international aspects are overwhelmingly problematic. DBSFA is a fundamental improvement because it would:
- Simplify the amount of corporate profit the U.S. taxes with a simple formula. Individual states would similarly benefit from this simplification and would stop crafting complicated legislation which achieves poorer results.
- Level the playing field between purely domestic businesses and multinational enterprises. Inversions would be pointless because the company would pay the same tax on profits regardless of tax planning. All other proposals allow the accounting method known as transfer pricing. Most practitioners view minimizing the taxes paid by the MNE as the goal of transfer pricing.
- This territorial system eliminates the tax incentives to locate jobs, factories, and corporate headquarters offshore, boosting employment, exports, and U.S. tax revenue.
- Estimated to increase revenue by $600 billion over ten years at the 21% rate. It would reduce the estimated increased deficit from about $1.1 trillion to perhaps as little as $500 million. Shifting to a sales-based single-factor formulary apportionment will raise revenue without raising rates because it will stop U.S. and foreign MNEs from being able to place their profits offshore to avoid U.S. taxes.
Currently, MNEs can still manipulate loopholes in our tax system to avoid paying U.S. taxes. This plan would provide a straightforward solution to this problem. Adopting SFA would make MNE avoidance of U.S. corporate tax nearly impossible because a company’s U.S. taxable income would be determined by the percent of its sales made in the U.S.
Destination-Based Sales Factor Apportionment is more straightforward and more effective than our new system which attempts — and fails — to tax the worldwide business activities of U.S. corporations with a quasi-territorial exemption. Companies can easily move certain business operations and assets out of the U.S., but few, if any, would be willing to give up sales to the world’s largest market. This system is not perfect, but it is far more equitable and efficient than the old system and greatly improves on the TCJA.
What People Are Saying About Sales Factor Apportionment:
“‘There are still large incentives and big possibilities for firms to shift profits to low-tax places,’ Mr. Zucman said in an interview.”...“Mr. Zucman said the research points toward a system that bases corporate income taxes on the location of sales.”— Rubin, Richard. Corporations Push Profits Into Tax Havens as Countries Struggle in Pursuit, Study Says, WSJ, June 10, 2018
“The authors of the (Tax Cut and Jobs Act)... said their bill would discourage the shifting of profits earned in the United States. But the principal anti-tax avoidance measures introduced still allow companies to benefit strongly from profit shifting.” — Erman, Michael, Bergin, Tom, How U.S. tax reform rewards companies that shift profit to tax havens. Reuters, June 18, 2018
“(Sales Factor Apportionment) is a far simpler and more effective way to counter income stripping because it avoids a destructive race to the bottom and is the most competitive tax system at any reasonable rate.” — Parks, Bill. A Better Alternative For Corporate Tax Reform. Tax Notes Vol. 127, No. 11, Dec. 11, 2017
“... advanced countries are underestimating economic growth and undercollecting corporate tax revenues, because they are missing the profits that have been shifted on paper by multinational corporations.” — Tankersley, Jim. Tax Havens Blunt Impact of Corporate Tax Cut, Economists Say. NY Times, June 10, 2018
“Because the GILTI provision (of TCJA) was layered on top of older tax laws, it operates like ‘a truck built on a car chassis,’ said Michael Graetz, a Columbia Law School professor and former Treasury” — Rubin, Richard. Proposed rules meant to prevent corporate disadvantages while also avoiding the opening up of new tax-reduction strategies, WSJ June 4, 2018
Congress did pass a comprehensive tax bill in December 2017. To their credit, Congress recognized the tax discrimination that our American domestic corporations are facing. Domestic corporations pay the full corporate tax burden while multinational and foreign companies can shift profits to tax havens to pay less. The Tax Cut and Jobs Act modestly reduced the problem but did not eliminate it. Companies still have significant incentives to move production or profits offshore. It also added complexity instead of simplifying the system.
The United States corporate tax system doesn’t treat businesses equally. The tax code does not deal well with international tax loopholes and has never fully addressed the issue of profit shifting.
Profit shifting is when a multinational corporation uses its subsidiaries in low tax or no tax countries to charge more for the product or services they provide. Even though they are supposed to operate as if they were a separate company for tax purposes, in reality, they are judged on a case by case basis. There is no effective standard. This lack of a standard gives foreign and American multinational corporations a massive advantage over their domestic competition.
Because corporations can usually make a reasonable argument why the subsidiary in the low tax jurisdiction can charge so much more to the U.S. based part of the corporation, most cases are considered to be reasonable. The new law attempted to address the issue but made a tactical error. To determine if a corporation is engaging in this practice unfairly, they designed an arbitrary calculation. By including overseas production as the denominator in the calculation to determine if additional tax is owed, it incentivized tax avoidance by moving production overseas.
No. Cash Flow Tax is a type of Destination-Based Taxation, but there are different types, such as Sales Factor Apportionment.
Destination-Based Taxation is tax associated with the final location of the product or service. This stands in contrast to Origin-based taxation which is defined with the source of the creation: Capital, Labor, Headquarters. While there is a philosophical debate as to where the value is created, as a practical matter, All origin-based taxation is subject to easy to move techniques to avoid tax. "Sales" stands in contrast as the customer is difficult to move. But taxing Sales directly creates other distortions and can harm retailers. Taxing profits based on sales is a Destination-Based Taxation model with the least distortions and the most simplicity.
If the local coffee shop and a multinational brand coffee make the same dollar of pre-tax profit off the coffee you bought yesterday but pay two different tax rates, the one with the lower rate will have the advantage. And the Multinational Corporation has the advantage by moving money around using its subsidiaries overseas. The American Domestic is usually paying an additional 50% in tax rate than the multinational corporation.
Many Multinational Enterprises (MNEs) can get their effective tax rate lower than domestic competitors. MNEs use their subsidiaries in tax haven countries as a means to move their money around.
If the corporation’s ships used to transport bananas from Brazil to the United States are registered as based in the Bahamas subsidiary, the Bahamas subsidiary can charge a little more per banana. They can’t charge too much as they are subject to some rules. But they can charge more from multiple subsidiaries. One subsidiary for accounting in Luxembourg, another for logistics in Jersey, one subsidiary in Ireland holds the official branding. Anything that can officially be based in overseas offices can charge a bit more per banana too. By the time this is all done, officially the profit per banana in the U.S. could be 1 cent for the MNE. Meanwhile, the Domestic company has to report the 10 cents of actual profit in The U.S. The Domestic company has no subsidiaries where they can move their profits.
Destination-based corporate taxation relies on a practical business reality that value is practically established when a buyer is willing to pay for the product. This viewpoint doesn’t discount the academic economic theories about where value is produced. Rather it recognizes that taxing based on where the buyer/user actually resides is far less open to manipulation.
Coupling a Destination-based corporate tax with a Sales Factor Apportionment protects American domestic companies.
Destination-based corporate taxation relies on a practical business reality that value is practically established when a buyer is willing to pay for the product. This viewpoint doesn’t discount the academic economic theories about where value is produced. Rather it recognizes that taxing based on where the buyer/user actually resides is far less open to manipulation. Coupling a Destination-based corporate tax with a Sales Factor Apportionment protects American domestic companies.
Sales Factor Apportionment is a corporate tax that only taxes corporate profit. It determines what profit is taxable in the U.S. by determining how much of the profit can be attributed to the U.S. Instead of relying on labor or capital which can be moved easily, the profit is compared to the sales which are hard to move. Any attempts to move sales is on paper and can be easily quashed.
To give up being taxed in the U.S., any corporation has to give up market share in the U.S. So the total profit of a corporation will be multiplied by the fraction of U.S. Sales as a part of total sales. This result is the corporate profit made in the U.S.
The basic components of sales of a company establish the percentage to be apportioned as taxable. The domestic sales of a company as a percentage of the total sales of the company establish that exact percentage. The exact percentage is then applied to total Profits of the company. The result is the amount of taxable income available to the U.S.
For example, foreign Pharmaceuticals Corporation (FPC) sells $10 billion of its products to customers around the world. $6 billion of those sales (60% of total sales) are made to U.S. customers. FPC’s worldwide profit is $1 billion, therefore, $600 million of that profit would be taxed as U.S. profits.
(a) no incentive to move profits or production offshore;
(b) eliminates domestic company discrimination;
(c) taxes foreign companies for access to US consumer market;
(d) incentivizes exports by not taxing profits from sale of US products that are exported.
These research articles include data and analysis relating to CPA's America First Tax Strategy....
By David Morse, Tax Policy Associate DirectorMultinational companies are on the verge of outmaneuvering small domestic companies in Oregon by avoiding the business taxes that domestic companies pay. Specifically, Nike is close to ensuring the Oregon Joint Committee on Student Success raises taxes on businesses using a gross receipts tax while failing to consider “Complete Reporting.” Although out-of-state and some multinational companies squirrel away profits in tax havens, domestic Oregon businesses will pay a higher effective tax rate by default. Complete Reporting would end that tax advantage.
By David Morse, Tax Policy Associate Director “There is not going to be a return to a golden age of tax, this is about change,” declared Will Morris, chair of the Business and Industry Advisory Committee to the OECD’s Committee on Taxation and Fiscal Policy.
The Coalition for a Prosperous America (CPA) appreciates the opportunity to provide testimony to the Committee on Ways and Means regarding the likely impact of tax reform on the US economy. CPA is a national, non-partisan organization focusing upon improving American trade performance, eliminating our persistent trade deficit, and growing domestic supply chains as a means to achieving broadly based prosperity in the US. Our members are organizations, companies and individuals involved in or representing manufacturing, agricultural and worker interests.
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